An "ongoing criminal investigation" by the Secret Service served search warrants on two law offices of Mikal Watts this month. The government is apparently looking into allegations that Watts exaggerated his client portfolio with falsified retainer agreements to work his way on the lucrative BP-litigation steering committee, first discussed by the New York Times in 2011 (see also at POL). [My San Antonio]

Watts is a longtime Overlawyered perennial, and we've covered him as well.

Plaintiffs had challenged the constitutionality of Mississippi's $1M cap on non-economic damages; the Fifth Circuit rejected the challenge in the long-awaited Learmouth v. Sears. More from Beck. Earlier. With this cloud removed from the cap, Mississippi residents and doctors should start seeing lower insurance rates, as insurers previously had to reserve for the possibility that the caps would disappear.

James R. Copland

Today, the Supreme Court will hear oral arguments in American Express v. Italian Colors, the latest in a string of recent cases in which the Court tackles arbitration and the class action device. To preview, react to, and assess the argument, we are happy to welcome Cardozo law professor Myriam Gilles alongside our own Ted Frank.

Italian Colors involves an asserted antitrust claim filed by a class of vendors against American Express, alleging that the AmEx "accept all cards" policy constitutes an illegal "tying arrangement" by linking the card company's less-desirable credit-card customers with its more desirable charge-card clientele. The Second Circuit determined that AmEx could not invoke its contractual arbitration clause because individual arbitrations would make the expert witness necessary to assert the antitrust claim cost-ineffective--in the court's view, denying the plaintiffs the ability to vindicate a federal statutory remedy. Five judges dissented from the denial of a rehearing in banc, led by Chief Judge Jacobs's blistering dissent, joined by Judges Cabranes and Livingston, which accused the panel of substituting its public-policy preferences for Supreme Court precedents on the enforceability of arbitration clauses' waiver of class-action remedies, most recently in AT&T Mobility v. Concepcion.

Professor Gilles--who teaches torts, advanced torts, class actions, and aggregate litigation--has criticized Concepcion, warning that "most class cases will not survive the impending tsunami of class action waivers" in the decision's wake. In contrast, Frank--the founder of the Center for Class Action Fairness as well as a Manhattan Institute adjunct fellow and editor of Point of Law--has argued that such concerns are "overwrought," and that post-Concepcion, "many forms of class action lawsuits will continue, and those that are replaced by individual arbitration will generally lead to greater consumer protection, not less." It is my pleasure to welcome Professor Gilles, and I trust that her discussion with Ted will prove illuminating.

Follow the discussion.

In Lane v. Facebook, Facebook settled its claim for $0 for the class and $3.2 million to the attorneys—and less than $6.3 million in illusory cy pres money to a charity established by Facebook. This plainly violated multiple Ninth Circuit precedents, but the district court approved the settlement, and a Ninth Circuit panel affirmed in a 2-1 decision, creating an intra-circuit split. Now the Ninth Circuit has refused to review the decision, leaving contradictory guidance for lower courts. Six judges dissented from the denial of rehearing en banc noting this "muddle"; as Public Citizen's Scott Nelson notes, all six were Republican-appointed judges, making one wonder whether the question of consumer protection in class-action settlements has become a partisan question—and one where liberal judges are on the side of the powerful against the weak. More: Fisher; Reuters; Trial Insider.

The objectors, I think, erred in failing to more explicitly ask the Ninth Circuit to consider the settlement under the Bluetooth framework. When Facebook pays the $6.5 million cy pres to itself to promote its own interests, it means that the real economic settlement is "$0 for class and $3 million for attorneys"; as Dennis v. Kellogg noted, cy pres payments that overlap with existing charitable donations are really just a shift in accounting entries rather than a class benefit. That's plain evidence of self-dealing. For this reason, I think Lane is distinguishable from the cy pres objections the Center for Class Action Fairness brings, because the Lane court did not consider the Bluetooth factors.

The question will arise again in the pending Fraley v. Facebook case in the Northern District of California. That settlement has been modified to provide payments to the class, unless there are too many claimants, in which case the whole amount goes to cy pres charities favorable to Facebook. The attorney-fee request is disproportionate, too, and the claims process oddly excludes many class members from recovery.

The Financial Stability Oversight Council was created by Dodd-Frank to apply the collective wisdom of key financial regulators to identifying and averting threats to the financial system. The FSOC has a number of concrete responsibilities, including reporting annually to Congress on potential emerging threats and identifying non-bank financial companies to be specially regulated by the Fed. The FSOC also has the power to issue "recommendations to primary financial regulatory agencies to apply new or heightened standards and safeguards . . . for a financial activity or practice." An agency has three months to embrace the FSOC's recommendation or explain why it is not doing so. Dodd-Frank provides only the vaguest of constraints on the circumstances under which this power may be exercised and little guidance about how this recommendation process interacts with the notice-and-comment rulemaking process under the Administrative Procedure Act.

Most of the attention on Wednesday's argument is on the Voting Rights Act case, Shelby County v. Holder (see the Washington Post profile of Ed Blum), but I'm paying more attention to the undercard, American Express v. Italian Colors.

A Reuters report quotes me. Unfortunately, in a story this short, if you tell a reporter four things (like (paraphrasing) "arbitration actually works out better for consumers than class actions most of the time, so long as the clause permits vindication of the consumer right; the Chamber of Commerce brief refutes the false factual premise that this arbitration clause doesn't vindicate the consumer right; but Italian Colors attorney Paul Clement has very cleverly argued for affirmance on narrow grounds on a technicality that would preclude the Court from inquiring into the factual premise; if Italian Colors does prevail on those narrow grounds, future defendants can avoid losing by litigating the case differently than American Express did and slightly tweaking their arbitration clauses"), not all of that nuance is going to make its way into the article. For my more detailed arguments on the intersection of arbitration and class action waivers, see my recent Manhattan Institute report; the 700-word version was in Investors Business Daily last week.

Michael Greve's take on the case, and its larger role in federal-state relations and the scope of the Commerce Clause, is a must-read. More at Business Roundtable Blog.

Lots of people are talking about Baby Products, some of whom talked to me. [Fisher @ Forbes; Legal Intelligencer; Reuters; Washington Examiner; Litigation Daily ($) (calling me "Class Action Settlement Scourge Ted Frank," which I should print up on my business cards); WSJ Law Blog ($); Star-Ledger/Bloomberg News; Debevoise; Ballard Spahr; ABA; Findlaw; Blawgletter; UCL Practitioner; Petit (who seems mad at me, but can't bring himself to accurately represent my litigation or public-policy position); Mealey's ($); Law360 ($)]

A class action accusing local McDonald's in Dearborn County of falsely advertising its chicken as "halal" was settled. A class member, Majed Moughni, an attorney, wrote a Facebook post complaining, inter alia:

McDonald's was going to pay $700,000 for selling "Haram" chicken sandwiches and labeling it as "Halal". The current lawyer on the case wants the the [sic] majority of the money to go to a medical center ($275,000) and a museum ($150,000), that lawyer Kassem Daklallah, wants to pocket $230,000 and the plaintiff, Ahmed Ahmed will keep $20,000. We think the money should go to you, the people who were lied to and bought and ate "Haram" chicken sandwiches, not a medical center or a museum who were not injured. ...

This seems a reasonable criticism: after all, the class is relatively small (observant Muslims who ate at the particular McDonald's restaurant), so distributing $425,000 to claimants is feasible. And, as Baby Products and the American Law Institute confirm, cy pres should be the last resort (rather than opening gambit) in a settlement. If Daklallah, his law firm, McDonald's, or their attorneys have preexisting relationships with the cy pres recipients, that would be even worse, because then the cy pres would be illusory relief. A $20,000 proposed payment to the class representative in a $0 settlement is further evidence of self-dealing.

At plaintiff's request, the Michigan state court enjoined Moughni, and forced a change to the Facebook page to put forward Ahmed's preferred view of the case. This is a scary First Amendment violation, and that the court signed off on it makes one wonder whether the court can fairly adjudicate objections to the settlement. Public Citizen is on the right side in this one, and, along with the ACLU, is litigating in favor of the objector's rights. [Public Citizen; Dan Fisher @ Forbes; Detroit Free Press]

(Of course, there are certainly strong arguments against using the consumer fraud laws to mediate a religious dispute. If the lawsuit reflects a disagreement over what constitutes "halal," courts shouldn't be adjudicating the religious question. If the lawsuit reflects an objectively false claim that a particular organization certified the food as "halal," then that's a legitimate complaint. But even if the possibly fatal flaw in the lawsuit means the settlement is necessarily small, that is no excuse for the attorneys, class representative, and unrelated third parties to capture the entirety of the value of the settlement.)

Public Citizen and the ACLU are taking no position on the fairness of the settlement, which makes sense for the strategic purpose of focusing on the First Amendment issues. Since I'm not involved in the case, and will not be representing any clients in the Michigan proceedings, I hope that even the attorneys who negotiated this awful settlement will concede I have the right to speak about what I think is a breach of fiduciary duty to their clients.

The National Law Journal ranks law schools by the percentage of graduates who end up in BigLaw jobs right out of law school, but the computation is misleading. For example, I had an offer to join Kirkland & Ellis out of law school, but also for a one-year clerkship with a federal judge. That clerkship was plainly more competitive than a BigLaw offer; K&E even gave me financial incentives to defer starting for them so I could have the clerkship. But I wouldn't have been counted in the NLJ employment statistics, reducing the score of my law school. For schools like Yale, Harvard, Stanford, and Chicago, large percentages of students could have BigLaw offers if they chose, but instead take jobs that are tougher to get, often more prestigious, and often would not preclude (and often would even help) a BigLaw career. A better study would provide those percentages of graduates as well. Prospective law students should not think that Penn provides twice the opportunity of a Yale: many Penn grads are in BigLaw because they could not get the clerkships and DOJ fellowships that other law school graduates are receiving.

Last week, at her first Senate Banking Committee Hearing, Senator Elizabeth Warren excoriated regulators for entering into settlements with big banks rather than bringing them to trial. Also last week, Ms. Warren called for a vote to confirm Richard Cordray as director of the Consumer Financial Protection Bureau, a role in which he is already serving by virtue of a recess appointment of questionable legality.

Setting aside the senator's odd emphasis on trials as the only means to punish banks, the juxtaposition of these two events is interesting. On the one hand, Ms. Warren clearly relishes her new oversight role. On the other hand, she is insisting on the enshrinement of a regulator over whom she will not be able to exert effective oversight. If Mr. Cordray doesn't embrace the litigate-because-it-looks-tough approach--and so far he too has entered into settlements with big banks--there will be little she can do to hold him accountable besides public shaming. Under the institutional design blessed by Ms. Warren, the CFPB director has a free hand to do whatever he wants to do, even over the objections of members of Congress, the president, and the American people.

Jim Copland, director of Manhattan Institute's Center for Legal Policy, discusses shareholder activism with Pimm Fox on Bloomberg Television.

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In a newly released legal policy report, "Class Actions, Arbitration, and Consumer Rights: Why Concepcion is a Pro-Consumer Decision," Ted Frank, adjunct fellow with the Manhattan Institute's Center for Legal Policy and editor of Point of Law, outlines why fears of the effects of pro-arbitration rulings are overstated. Arbitration agreements and the Supreme Court's endorsement of freedom of contract is a benefit to consumers. Recent decisions will not end the class action, and consumer advocates would be better off working to end the abuse of class actions that benefit attorneys at the expense of consumers, rather than fighting arbitration agreements that consumers would prefer ex ante.

On February 27, 2013, the Supreme Court will hold oral arguments in American Express Co. v. Italian Colors Restaurant. Like the Court's 2011 decision in AT&T Mobility v. Concepcion, Italian Colors involves the intersection of two mechanisms for resolving legal disputes not easily handled by high-cost individually filed lawsuits: arbitration and class action litigation.

In class action litigation, similarly situated legal claims are aggregated under a single lawsuit. Given the cost of litigation, class action suits can be efficient mechanisms for resolving large numbers of relatively low-dollar claims, but they also can enrich lawyers at legitimate claimants' expense because such lawsuits' low value to individual plaintiffs reduces the incentive for any plaintiff to monitor the lawyers handling the claim.

Arbitration, a form of dispute resolution outside the courts, involves imposing as legally binding and enforceable the decision of a third party, typically specified in advance in contracts. Arbitration is generally favored and enforceable under federal law, through the 1925 Federal Arbitration Act (FAA). Potential corporate defendants have sought to use mandatory arbitration clauses to avoid the expense of class actions. The trial bar and allies in the legal academy criticized such clauses as "anticonsumer" and, for years, had success, particularly in California state court, in obtaining judicial rulings finding the clauses unenforceable, notwithstanding the language of the FAA.

Read The Full Report

The McDonough v. Toys'R'Us settlement paid less than $3M to the class, but the attorneys collected $14M, a figure they justified by pointing to as-yet-undetermined cy pres recipients that would receive a chunk of money (the size of which hasn't been disclosed, either). Center for Class Action Fairness attorneys represented an objector unhappy with the disproportionate distribution, and, after the district court signed off on the settlement without inquiry into what the class would receive, took the case up on appeal. The Third Circuit has reversed and vacated the settlement approval:

Young's overarching concern, and ours as well, is that the settlement has resulted in a troubling and, according to counsel for the parties, surprising allocation of the settlement fund. Cy pres distributions, while in our view permissible, are inferior to direct distributions to the class because they only imperfectly serve the purpose of the underlying causes of action--to compensate class members. Though the parties contemplated that excess funds would be distributed to charity after the bulk of the settlement fund was distributed to class members through an exhaustive claims process, it appears the actual allocation will be just the opposite. Defendants paid $35,500,000 into a settlement fund. About $14,000,000 will go to class counsel in attorneys' fees and expenses. Of the remainder, it is expected that roughly $3,000,000 will be distributed to class members, while the rest--approximately $18,500,000 less administrative expenses--will be distributed to one or more cy pres recipients.

We vacate the District Court's approval of the settlement because the Court was apparently unaware of the amount of the fund that would be distributed to cy pres beneficiaries rather than being distributed directly to the class. On remand, the Court should consider whether this or any alternative settlement provides sufficient direct benefit to the class before giving its approval. ...

We add today that one of the additional inquiries for a thorough analysis of settlement terms is the degree of direct benefit provided to the class. In making this determination, a district court may consider, among other things, the number of individual awards compared to both the number of claims and the estimated number of class members, the size of the individual awards compared to claimants' estimated damages, and the claims process used to determine individual awards. Barring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds. ...

We vacate the District Court's orders approving the settlement and the fund allocation plan because it did not have the factual basis necessary to determine whether the settlement was fair to the entire class. Most importantly, it did not know the amount of compensation that will be distributed directly to the class. Removing attorneys' fees and expenses, approximately $21,500,000 (less costs of administration) of the settlement were designated for the class, but only around $3,000,000 of that amount actually will be distributed to class members, with the remainder going to cy pres recipients after expenses relating to the administration of the fund are paid. ...

Though the claims period had concluded, counsel did not provide this information to the Court, preventing it from properly assessing whether the settlement was in the best interest of the class as a whole. ...

In this case, class counsel, and not their client, may be the foremost beneficiaries of the settlement. Some class actions are based on so-called negative value claims, that is, claims that could not be brought on an individual basis because the transaction costs of bringing an individual action exceed the potential relief. While aggregating these claims in a class action may have an important deterrent value, there is a concern that those actions are brought primarily to benefit class counsel, and awarding disproportionate class counsel fees only incentivizes that behavior. Cy pres awards--by ensuring that a settlement fund is sufficiently large to command a substantial attorneys' fee--can exacerbate this problem. See Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 784-85 (7th Cir. 2004); Martin H. Redish et al., Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 Fla. L. Rev. 617, 621-22, 649 (2010). Although, as noted, this class action had the potential to compensate class members significantly, the current distribution of settlement funds arguably overcompensates class counsel at the expense of the class.

I'll update this post with any press coverage that arises. Earlier: briefing; oral argument (WMA file). The case is In re Baby Products Litigation, No. 12-1165, 1166, 1167 (3d Cir. Feb. 19, 2013).

(CCAF is not affiliated with the Manhattan Institute.)

Update: lots of people talking about the case, some of whom talked to me. [Fisher @ Forbes; Legal Intelligencer; Reuters; Washington Examiner; Litigation Daily ($) (calling me "Class Action Settlement Scourge Ted Frank," which I should print up on my business cards); WSJ Law Blog ($); Star-Ledger/Bloomberg News; Debevoise; Ballard Spahr; ABA; Findlaw; Blawgletter; UCL Practitioner; Petit (who seems mad at me, but can't bring himself to accurately represent my litigation or public-policy position); Mealey's ($); Law360 ($)]

No update to the settlement website as of February 23.

Colin Hedrick
Legal Intern, Manhattan Institute's Center for Legal Policy

In the past twenty years, the United States has seen an unprecedented drop in crime rates in almost every jurisdiction nationwide. However, going hand in hand with that drop has been a dramatic increase in mass incarceration in most jurisdictions. The natural conclusion is that increased incarceration is the cause of, or at least a necessary result of lower crime rates. The major exception to this conclusion is New York. The city's crime rate has experienced a longer and deeper decrease than the country at large, all the while the state's correctional population has decreased considerably. A new report released by the Vera Institute and the Brennan Center for Justice examines "Broken Windows" and the New York trends and concludes the mass incarceration isn't the answer or a necessary result.

The "Broken Windows" thesis was published by James Wilson and George Kelling in 1982 and posited that there was a connection between disorder, fear, crime and the urban decay that had been playing out in America's cities for decades. Their proposed solution called for controlling disorderly behavior in public places generally, thereby significantly dropping more serious crime.

Amongst other things, the Vera Institute report, authored by criminologists James Austin and Michael Jacobson, focuses on the somewhat counterintuitive idea that "Broken Windows" leads to a lower overall correctional population. This conclusion is counterintuitive to the extent that "Broken Windows" calls for a higher level of misdemeanor arrests and enforcement. One would think that this would in turn increase the correctional population, however, the real gains are made in that the increase in misdemeanor arrests lead to a decrease in felony arrests. Low level enforcement reduces felony level crime, so while overall arrests may be up, the total stay in the correctional system is drastically reduced because the long term felony level crimes are much less common.

This report serves as reminder that policies like "Broken Windows" and "stop-and-frisk," while controversial do have a measurable effect on crime rates all the while helping to decrease the mass incarceration that is often decried as a regrettable side effect of current lower crime rates.

Jack Lew's hearing before the Senate Finance Committee took place this morning. The job he is trying to get--Treasury Secretary--is, as the Senators reminded him, a very difficult one that has many facets. Along with questions about the budget and his time at Citigroup, Mr. Lew fielded inquiries about regulatory policy. His most notable response in the regulatory area was his assertion that Dodd-Frank has dealt with too big to fail. It depends what one means by dealing with too big to fail. If dealing with too big to fail means embracing it, Dodd-Frank dealt with too big to fail. If it means broadening the problem to encompass a whole new set of institutions, Dodd-Frank did that too. If, however, dealing with too big to fail means making it indisputably clear to creditors and shareholders that they are responsible for handling financial firm failures and associated losses, Dodd-Frank has fallen far short. If Mr. Lew is confirmed, he should take a second look at whether Dodd-Frank has effectively dealt with too big to fail. When he discovers that it has not, he should propose effective solutions that rely on market discipline rather than the vigilance and discretion of regulators.

Charles Hugh-Smith and Jim Geraghty note that if an employee cannot generate revenue to cover his or her wages plus overhead costs, he or she won't be hired. This is absolutely true, but both understate the problem, and the degree to which the Obama administration has made it worse, and is planning on exacerbating it.

One of the biggest overhead expenses is the expected litigation expense of an employee. Employees have a wide variety of rights under federal and state law to sue their employer—not just for the hiring and firing decision, but for promotions or work conditions. A dishonest employee can impose a great deal of cost on an employer by bringing a meritless suit; whether the employer takes a hard line or pays the Danegeld, these are very real expenses. (For example, defending against the notorious meritless Jamie Leigh Jones suit cost KBR $2 million.) It's little surprise that California, where employees can sue for a variety of technicalities in a lawyer-friendly litigation environment, has a much higher unemployment rate than the rest of the nation, despite a dynamic technology industry and being so attractive to millionaires that the state thinks it can raise revenue rather than drive away taxpayers with a 13.3% tax rate.

That overhead cost isn't just awards to plaintiffs with meritorious, or even plaintiffs with unmeritorious, grievances. It's the lawyers, on both plaintiffs' and defense sides, who collectively receive more than employees take home from litigation victories and settlements. But it's also the (as-far-as-I-know yet-unmeasured) compliance costs: the vast human resources bureaucracy that keeps track of these laws and maintains the paperwork to protect the company in the event of future litigation. The compliance costs can have non-monetary effects as well. But take, for example, something as simple as employee appearance. Even something as simple as "It's not good for the corporate image to have someone with a Maori face tattoo interacting with customers" has an litigation minefield overlay, including EEOC litigation. That costs money, and that money comes at the expense of hiring.

So it's worth noting that these laws, on balance, hurt the average employee. Plaintiffs' attorneys' fees often outstrip the returns to the clients; add to that the defense attorneys' cost, and the cost of a human resources apparatus to ensure compliance, and the vast majority of the benefits of employment litigation is going to white-collar professionals, and most of that going to attorneys in the top decile, or even the top 1%. That overhead cost may add up to more than 10 percent of wages: a $30/hour employee is, instead of being paid $33/hour, getting a $3+/hour "benefits" package, most of which ends up in the pockets of people wealthier than him or her. Now, perhaps we as a society are willing to accept these costs to vindicate the relatively rare cases where a bigot or predator unfairly treats an employee and management acts against the company's interest in letting qualified employees be chased away. (One of the silliest things about the Wal-Mart employment litigation was the premise that the most aggressive cost-cutting company in the world would systematically choose to throw money out the window just to discriminate against qualified women in promotion decisions.) But these costs are rarely ever acknowledged in the policy debates in the first place.

And, even as structural unemployment rises to scary levels, this administration has sought to increase these overhead expenses to make hiring more expensive. The Lilly Ledbetter Fair Pay Act makes it easier to bring meritless suits by obliterating the statute of limitations. (Statutes of limitations are important for justice. Without a statute of limitations, someone can sue for very old alleged injuries, and a defendant would not have a fair chance to defend herself. (Ledbetter sued over her pay after she was retired!) Memories fade, evidentiary documents are discarded, people change employers. If an employee can wait until a middle manager of years ago died before accusing the company of discrimination, justice is impossible.) The EEOC has become increasingly intrusive. Though courts have largely rejected the move as arbitrary and capricious, Obama's NLRB appointments have sought to abolish arbitration agreements as an unfair labor practice. All in the supposed name of increasing workers' rights, but with the effect of exacerbating inequality and unemployment.

The State of the Union bodes more of the same. Not just the proposed minimum wage increase from $7.25 to $9, which will fall disproportionately upon unskilled workers who already have a double-digit unemployment rate. But the administration is reiterating its proposal for a "Paycheck Fairness Act that will surely increase unemployment as well. (More from Hans Bader.)

The Commodity Futures Trading Commission this week brought its latest LIBOR enforcement action. Its targets were the Royal Bank of Scotland and RBS Securities Japan. The CFTC's enforcement order is largely a rendition of snippets from numerous electronic and telephonic conversations between traders and employees responsible for making rate submissions used to determine Yen and Swiss Franc LIBOR. The traders cajoled--usually without much effort--the submitters into raising or lowering rates to benefit their trading positions. The order leaves the reader wondering whether the efforts by traders with an interest in seeing rates driven down were being offset by the equally unseemly efforts of other traders trying to drive them up. Another question worth pondering is whether--particularly in the wake of the CFTC's MF Global and Peregrine debacles--the CFTC ought to be using its resources to pursue this type of behavior, most of which occurred outside the U.S. LIBOR is a benchmark set by a private, non-U.S. organization, but the CFTC hangs its jurisdictional hat on the effect that LIBOR submissions based on "impermissible and illegitimate factors" had on commodities in interstate commerce. Is the CFTC really the regulator best suited to dictate where bank employees in London sit and how frequently supervisors in Romania and Indonesia are monitoring employees, which are two of the many issues addressed by the CFTC's order? Pulling in a $325 million penalty is a tempting feather for the CFTC's cap, but the CFTC might not be the right policeman for this beat.

The late Sen. Daniel Patrick Moynihan (D-N.Y.) famously remarked, "Everyone is entitled to his own opinion, but not to his own facts." Tell that to the leaders of the social-investing funds Domini Social Investments and Green Century Capital Management, who along with Public Citizen's Lisa Gilbert, made the following claim in Politico: "The five largest U.S. mutual fund families supported [shareholder proposals seeking corporate political transparency] more than 80 percent of the time during the 2012 proxy season."

Whatever one's thoughts about corporate disclosure of political spending--about which I have written elsewhere--this claim is wildly inaccurate. In 2012, the seven largest mutual fund families--Vanguard, BlackRock, State Street, Fidelity, Capital World Investors, Capital Research Global Investors, and T. Rowe Price--supported only 3.6 percent of proposals calling for increased disclosure of corporate political spending, as is evident from a review of Form N-PX proxy filings publicly available from the Securities and Exchange Commission.

How could Public Citizen and the social-investing funds be so far off? Well, I don't know for sure--and Public Citizen has a long track record of playing fast and loose with the facts--but the claim probably originated with a February 3 Financial Times piece by Sarah Murray, which stated, "The five largest US mutual fund families supported corporate political disclosure more than 80 per cent of the time in 2012, according to the Center for Political Accountability (CPA), a Washington-based advocacy organisation."

The problem is, the CPA makes no such claim. To the contrary, in its December 2012 analysis of last year's proxy season, CPA states, "As in previous years, the three largest mutual fund families in the United States failed to support a single political spending disclosure resolution." Figure 2 on page 3 of that report does show five U.S. mutual fund families that supported more than 80 percent of such proposals--MFS, Alliance Bernstein, Morgan Stanley, Wells Fargo, and DWS--but those are hardly the five largest mutual fund families. (In terms of equity assets under management, MFS and Alliance Bernstein aren't in the top 10, Morgan Stanley isn't in the top 20, Wells Fargo isn't in the top 40, and DWS isn't in the top 50.)

One would think such an obvious error--in which FT's attributed fact is contradicted by a published account from its own purported source--would warrant a quick and clear correction. But when I brought the matter to the attention of Politico's editor-at-large, Bill Nichols, he replied, "The writers of the response have provided documentation which, while I'm sure arguable in your view, does not allow me to put my thumb on the scale one way or the other."

As Moynihan notes, opinions are arguable, but facts are facts. Given the inability of press "fact checkers" to tell the difference between the two, I understand Nichols' decision not to "put his thumb on the scale," but this is really cut and dried, and his choice is disappointing.

(The Financial Times has yet to respond to my request for a correction.)

The Manhattan Institute's Margaret M. O'Keefe, manager of the ProxyMonitor.org database, contributed to the above discussion.

Fewer than 20,000 class members have bothered to go through the arduous claim procedures in the Bayer Corp. class action, which caps recovery for most of those class members at $4 unless they saved several-year-old receipts for aspirin products. But the attorneys—led by Hagens Berman—are asking for $5.1 million for themselves.

The fee is supposedly justified because about $8-$9 million will end up in the hands of cy pres recipients such as the American Heart Association. Of course, Bayer already gives money to the AHA (and the AHA returns the favor by endorsing Bayer aspirin over other brands of aspirin), so this is really just a change in accounting entries rather than any sort of class benefit.

I'm a class member and I have objected through my pro bono attorney Adam Schulman of the Center for Class Action Fairness (which, as always, is not affiliated with the Manhattan Institute).

The case is In re Bayer Corp. Combination Aspirin Prods. Mktg. & Sales Pract. Lit., No. 09-md-2023 (BMC) (E.D.N.Y.).

By Richard A. Epstein

In dealing with Supreme Court decisions it is dangerous to allow the questions that the Court deems worthy of review to set the intellectual agenda. That conclusion is especially true in property rights cases, where the Court is prisoner to its own defective jurisprudence, which all too often turns somersaults in order to steer clear of fundamental questions.

Just that pattern emerged clearly in the oral arguments made before the Supreme Court this past January 15, 2013 in Koontz v. St. John's Water Management District. As my earlier posts on Koontz have noted, the factual pattern in the case raises this fundamental issue: how sound is the doctrine of environmental mitigation? That doctrine, it will be recalled, allows the federal or state government to condition the grant of a development permit on the willingness of the landowner to "mitigate" perceived environmental damage stemming, we are told, from the construction itself, by providing some explicit collateral benefit to the government. That benefit could take the form of setting aside in perpetuity other lands owned by the developer as an environmental sanctuary. It could require a landowner to purchase for the state land that he does not own for exactly the same purpose. It could require that he either make repairs or otherwise pay money for environmental causes to which the government attaches positive value.

The use of these environmental easements is in most instances a no-lose situation for environmentalists. Accept the attached conditions and the government acquired something for nothing. Reject the condition and the status quo of no development takes place. This Hobson's choice should elicit all sorts of concerns on the simple question of whether real estate development should be regarded as a wrong that needs mitigation, or whether that doctrine should be understood as the largest and most unremarked land grab ever, which produces, as most land grabs do, serious social dislocations

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The courts of the Second Circuit, like most federal courts, do a "lodestar crosscheck" to determine whether the percentage of the fund in a settlement is reasonable: does the reasonable hourly rate times the number of hours spent times a "multiplier" correspond to the request for fees? But what is a reasonable multiplier in a PSLRA case, where most cases settle, and attorneys face very little risk?

Leave aside for the moment cases like Citigroup where the hourly rates are exaggerated to produce an exaggerated lodestar. The idea of the crosscheck is to ensure that class counsel isn't worse off for bringing contingent litigation when they could have been billing paying clients by the hour. (Thus, it is particularly unfair to the class to be billing temporary attorneys doing low-level work and who can be dismissed at no expense as if they are highly-skilled associates on a partnership track. If a $32/hour attorney had the skills such that a law firm could sell his work for $550/hour to a paying client, he wouldn't be a $32/hour attorney; but, again, leave that aside.)

The theory of the multiplier is that the risk of non-payment requires a multiplier of the lodestar rate to incentivize class counsel to bring litigation. This contradicts the Supreme Court's holding in Kenny A. v. Perdue that unmultiplied lodestar by itself is a reasonable fee, but we'll leave that aside. Assume a multiplier is legal, even in unexceptional nuisance settlements for pennies on the dollar. What multiplier would compensate PSLRA attorneys enough to bring meritorious but risky litigation?

As noted, most PSLRA cases settle, so the attorneys get paid. Moreover, risk is spread across a portfolio of cases, reducing variance. No firm has its eggs in one basket, but has several securities cases proceeding in parallel. So, for example, if 60% of all cases settle, and all hours are evenly distributed across meritorious and unmeritorious cases, then a firm that brings average-quality securities litigation needs only a 1.67 multiplier to average their lodestar rates. (And firms that average their lodestar are quite profitable: not only are the partners receiving $600-$900/hour, but they're making substantial profits on their associates and paralegals, who are lucky if they are receiving salaries 30% of their hourly rate.) Yet firms are regularly asking for multipliers well in excess of the 1.67 figure.

But even that 1,67 multiplier understates the risk: the cases that don't settle are the cases that get dismissed early in the process before the attorneys have run up large numbers of uncompensated hours. (Under the PSLRA, there is a discovery stay until the motion to dismiss is resolved. This benefits defendants and their shareholders, who aren't forced to expend millions while they're waiting to see if a complaint can meet minimum PSLRA requirements, but it also benefits class counsel, who minimizes downside risk.) And it's not like class counsel doesn't have a sense which mega-cases can have tens of thousands of hours safely thrown at them, and which should be settled quickly before a summary judgment motion is brought. Once plaintiffs get past a motion to dismiss, over 80% of cases settle. A multiplier a bit above 1.2 for the hours spent once the motion to dismiss is decided—the vast bulk of the hours invested in litigation—would be enough to ensure firms are fully compensated.

One way to ensure that firms make enough money to be fully compensated without realizing windfalls at the class's expense is to put the lead-counsel spot up for competitive bid. If firms are forced to compete on price, they would disclose what rates a competitive marketplace would pay to attract law firms to bring securities actions and would no longer realize windfalls at the expense of the class. One would suspect that we'd see multipliers even below 1.2.

But until that day, courts need to scrutinize requests more closely, and not tolerate requests for a 4.2x multiplier—as was made in the recent Wyeth securities litigation, City of Livonia Employees Retirement Sys. v. Wyeth, No. 07-cv-10329-RJS (S.D.N.Y.). Plaintiffs' counsel claims that their lodestar was $3.9 million; even assuming that that is not exaggerated, the $16.2 million request for

The Center for Class Action Fairness has objected on behalf of a shareholder to this multiplier using data from the Cornerstone report on the percentage of cases that settle. We don't think a multiplier is appropriate in nuisance settlements, but if the court is to apply a multiplier, it should be one related to the actual risk class counsel faces. We've asked plaintiffs' counsel, Robbins Geller, to disclose their portfolio recovery in PSLRA cases, if they are going to dispute our figures. Dan Fisher covers at Forbes.

The Center is not affiliated with the Manhattan Institute.