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"The End of Objector Blackmail?"

Professor Brian Fitzpatrick has an interesting piece in the Vanderbilt Law Review on the holdout problem in class action objections, and efforts by plaintiffs' attorneys to get around it:

Courts and commentators have long been concerned with holdout problems in the law. This Article focuses on a holdout problem in class action litigation known as objector "blackmail." Objector blackmail occurs when individual class members delay the final resolution of class action settlements by filing meritless appeals in the hope of inducing class counsel to pay them a side settlement to drop their appeals. It is thought that class counsel pay these side settlements because they cannot receive their fee awards until all appeals from the settlement are resolved. Although several solutions to the blackmail problem have been proposed, both courts and commentators appear unaware that class counsel have quietly devised their own solution: class action settlement provisions (known as "quick-pay" provisions) that permit them to receive their fees even before appeals from the settlements are resolved. Drawing on an original data set of all class action settlements approved by federal judges in 2006, I show that over one-third of all settlements already have quick-pay provisions, including the vast majority of securities settlements. This Article both brings to light quick-pay provisions and evaluates whether they are a better solution to the blackmail problem than those proposed by courts and commentators. Although quick-pay provisions can mitigate much of the blackmail threat without the collateral damage caused by other proposed solutions, the provisions have several serious limitations. Instead, I propose a new solution to the blackmail problem: an inalienability rule that prohibits objectors from settling appeals unless their settlements include a modification of the underlying class action settlement agreements.

I liked the paper, but I think Fitzpatrick is too sanguine about the effect of a quick-pay provision. First, it's pretty clear as a matter of economics that a quick-pay provision increases expected costs to defendants--and given that every dollar coming out of a defendant's pocket going to class lawyers isn't going to the class, one would expect class members to come out behind, ceteris paribus. Second, to the extent that judges evaluate attorneys' fees based on a percentage of class recovery, and to the extent that those same judges fail to account for the net present value of the difference between when the class gets its money and when the attorneys do, it means that class attorneys will be systematically overcompensated vis-a-vis their clients. Has any judge ever discounted the quick-pay when determining the fair attorneys' fee? Third, there's a basic ethical issue that the paper fails to consider: class attorneys have a fiduciary duty to their clients, and attorneys negotiating a quick-pay provision to themselves means that they are putting their own interests ahead of their clients--and to the extent appeals happen anyway, it means that class members can expect to be paid, on average, later than they would have otherwise, because their attorneys have no incentive to settle sooner rather than later.

Footnote 81 and Table 1 of the paper misses a substantial source of leakage in blackmail data. While Rule 23(e)(5) requires disclosure of side payments to withdraw an objection, there remains the thirty or more days between final approval and final judgment, and the due date for the notice of appeal (which requires a non-trivial $450 filing fee in federal court) for the parties to negotiate settlement. I can reveal that CCAF has been offered (and refused) a quid pro quo agreement that would have required me to agree not to file a notice of appeal. This hole creates a problem with Fitzpatrick's proposed solution: I would presume that if one put the squeeze on the professional objectors at the appellate stage, it would simply create a game of chicken in that short post-judgment window without resolving the objector blackmail problem.

Nevertheless, I like the inalienability idea, and it would certainly be an improvement over the status quo. It's a mystery to me why it wasn't added to the FRAP in 2003--I was naively surprised the first time a class attorney suggested paying me off to drop an appeal that I wouldn't need any third-party approval to do so.

The paper is especially good on the issue of punitive appeal bonds; CCAF cited it in its recent briefing in the Bachman case.

(CCAF is not affiliated with the Manhattan Institute.)

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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.