There has been a lot of coverage of the Federalist Society panel on attorneys' fees in class actions: Isaac @ POL, LNL, ATL. Unfortunately, the coverage often discusses my introductory and Professor Fitzpatrick's introductory remarks, they don't cover my response to the professor, and I'd like to expand on it here.
As an initial matter, Fitzpatrick draws a straw man when he accuses critics of fees to be really wanting to abolish class actions. I've said it before, and I'll say it again: the optimal number of class actions is greater than zero. It's likely smaller than the number of class actions we actually have, but my criticism of rubber-stamping settlements that overpay attorneys is not a backdoor attempt to abolish the class action.
Fitzpatrick defends the $123 million fee award in the Bank of America overdraft litigation, but he does so by accusing me of complaining that the class members got small amounts when there are many class members. Again, this is a straw man. If attorneys collect $10 a class member for four million class members, I have no objection to a multi-million dollar fee award. But what happened in the Bank of America case is that the attorneys took two depositions, litigated for five months, and then settled for nine cents on the dollar—virtually a nuisance settlement merely for bringing the complaint. That's a zero-risk proposition that does not merit an extraordinary payday of several times a multiplier of already-handsome lodestar rates. (Remember that "lodestar" can include as much as $400/hour for paralegals, which is almost entirely pure profit for law-firm partners that haven't lifted a finger.) The $123 million the attorneys are getting is at the expense of their clients, who are getting only $250 million. That's only possible because of a legal cartel: if that litigation had been put out to a market-based bid, the fees would be much closer to ten percent rather than a third.
Moreover, Fitzpatrick justifies all this through the value of "deterrence." But if attorneys' incentives are to bring "big" cases, rather than "high-merit" cases, that completely undermines any deterrence value. Bank of America gets sued because it's big, rather than because it did something wrong. And if Bank of America actually did something wrong, the attorneys willing to settle quick and cheap lets it get away with that—they've still made billions on something the attorneys claim was illegal. Why should the class attorneys make $123 million for enabling that? (Fitzpatrick doesn't mention that he was retained by the class attorneys in that case for several hundred dollars an hour (again, coming out of the class's pockets), though of course they retained him because of his previously-stated views; I don't believe he's defending that outrageous fee solely because he's been paid to do so.) When attorneys can profit from nuisance settlements against deep pockets because they don't have to ensure that their clients actually receive any proceeds, that hurts deterrence, because the good companies are getting taxed by the class action system almost as much as the bad actors are.
Fitzpatrick points to his study showing $5 billion of fees for $33 billion of recovery. But that analysis is flawed in several ways. First, most acknowledge that fees should be smaller for megafund cases, but when you add megafund cases to tiny cases, the effect of the megafund case is to overwhelm the overpayments in the smaller cases. If attorneys collected $4 billion for a $30 billion settlement, that would be too high: it's not 1000 times more difficult to bring a $30 billion case than a $30 million case; meanwhile the other $3 billion from several hundred cases would result in $1 billion of fees, which is also too high. So "only" 15% recovery may well be too high, depending on what the mix of cases looks like.
Second, the study mixes apples and oranges. Securities cases, which make up the larger share of class action settlements, generally have lower percentage fees than consumer-fraud class actions. That's because securities cases are more likely to have sophisticated lead plaintiffs, and better distribution of settlement funds to class members. That ends up supporting my argument more than Fitzpatrick's: securities cases are harder to bring, and are more likely to lose on a motion to dismiss because of higher pleading standards. Yet, with even the minimal constraints provided by the PSLRA, securities attorneys end up getting a much smaller percentage than consumer-class attorneys, showing how much the consumer-class attorneys are getting overpaid. But the securities attorneys are overpaid, too. First, the PSLRA requires fees to be a reasonable percentage of the amount actually paid to the class, but this statutory language is generally ignored by the settling parties and the courts: in the Franklin Templeton Mutual Fund settlement, the attorneys are asking for almost as much money as the amount that will actually be paid to the class, because they include payments to third-parties such as the settlement administrator in their denominator, against the express language of the PSLRA. Second, the PSLRA forbids courts from using the Vaughn Walker method of requiring class counsel to bid for lead-counsel status, but we know from experience that that market constraint results in multiple bids from experienced counsel that are much lower than what class counsel tend to get in securities cases today. So Fitzpatrick's study hides what how much attorneys are being overpaid.
Third, Fitzpatrick's study hides how much attorneys are being overpaid in another way, by exaggerating the denominator. That "$33 billion" figure is fictional: it includes "injunctive relief" that doesn't actually benefit the class. The Fitzpatrick study would count the Blessing v. Sirius XM settlement as worth $180 million, when it actually pays zero to the class. And in securities cases, much of the settlement fund is coming out of the pockets of class members who bought-and-held the defendant's shares: those payments from the right-hand pocket to the left-hand pocket are a loss, not a gain, for shareholders. (Such settlements really raise 23(a)(4) questions when they don't bring in new money from third parties.) But the full amount counts in the denominator, even though it didn't win the class anything.
The cases where the lawyers are abusing the system are not an anomaly. When the Center for Class Action Fairness is deciding whether to take a case, it's almost always deciding between cases where the attorneys are abusing the system a little, or whether they're abusing the system a lot.