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Debating attorneys' fees in class actions

The Federalist Society's Litigation Practice Group hosted a panel on "Attorneys Fees in Class Actions" during the 2011 National Lawyers Convention. PointofLaw's own Ted Frank and Manhattan Institute Visiting Scholar Lester Brickman, both participated in the panel.

During his comments Ted Frank explained,

The adjudication of attorneys' fees in class action settlements is one that presents obvious conflicts of interest. The same attorneys that are negotiating benefits for the class are negotiating their own fees. One often suggested solution is a bifurcated settlement negotiation, but that does not solve this problem because attorneys on both sides are rational economic actors with rational expectations. Nobody is unaware in the first part of the negotiations that part two of the negotiations will discuss fees. So everyone knows that every dollar going to the class will be a dollar unavailable to the attorneys later and vice versa. And you can show with game theory that the class will end up getting less in a bifurcated negotiation. The defendants aren't looking after the interests of the class, they just want out as cheaply as possible and they're generally indifferent about who gets the money. So that leaves the courts to police attorneys' fees. Unfortunately, the incentives for the courts are perverse. Approving a settlement that shelters disproportionate attorneys' fees gets a complex time consuming case off of a crowded docket while insisting on fairness requires additional work up front and more work if the settlement gets rejected.

Brian Fitzpatrick of Vanderbilt University Law School responded by arguing a different perspective,

There are basically two reasons why there's a divergence between perception and reality. Reason number one is you know there are some people in society for whom the optimal number of class action cases is zero; businesses. ...But, I don't agree that the optimal number of class actions is zero. Just because it's good for business to get rid of the class action doesn't mean it's good for society. And I think the people with a vested interest in seeing zero class actions have made things sound a little bit worse than they really are when it comes to class action lawyers. ...Secondly, I think this divergence can be explained by the fact that a lot of class action settlements are small stakes settlements where each class member has been injured a small amount and each class member has very little at stake. So what happens, the class action settles, the lawyers get $120 million as they did in this Bank of America settlement that Ted Frank mentioned and each class member gets $30. So that looks bad, the class member gets $30, the lawyer gets $120 million. But the perception there, as bad is as it looks, is not really a substantive comment about whether the settlement is bad. The class members had very little injury to begin with, of course each of them is not going to have as substantial a sum as the class action lawyers are getting. ...In small stakes cases in any event, the purpose really is to deter the defendant. It really matters less who is paid in these small stakes cases. What really matters the most is that the defendant is paying someone.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.