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Fact and fiction about attorney fees

April 17, 2012 5:19 PM

Brian T. Fitzpatrick

I am honored once again to be paired with Mr. Frank for a discussion of our class action system. As he anticipated, I agree with much of what he had to say. Like all humans, the participants in our class action system--class members, class action lawyers, defendants, judges--are self interested. As in all human endeavors, that self interest can be channeled for good or for bad. Which one we get depends on how carefully we design the system.

One of the biggest design concerns with the present system is the one Mr. Frank has spent so much time trying to ameliorate: the near total absence of adversarial testing of class action settlements. Without such testing, the self interest of all involved, as Mr. Frank noted, can lead to socially-detrimental outcomes. Although I do not agree with all of the objections to class action settlements that Mr. Frank has filed--I do not agree, for example, with his comments about the settlement in the Bank of America Overdraft Litigation, as I note below--I do appreciate the important role he serves as a devil's advocate.

Most of the objections Mr. Frank has filed--and most of the beefs he raised here--pertain to the attorney's fees that class action lawyers collect in settlements. He echoes the conventional wisdom that class members often get nothing and class action lawyers everything. There is no doubt that one can point to class action settlements or fee awards that should have been rejected. We all have our favorite marchers in the parade of horribles. But the question is whether these anecdotes are representative of the whole. I gather Mr. Frank thinks they are; he says that the problem is "wildly pervasive." On this point, I must dissent.

I have spent the last several years studying attorneys' fees in class action settlements. My study of the system has not been anecdotal; it has been empirical. In particular, I examined every class action settlement approved by a federal district court over a two-year period (2006 and 2007) and this is what I found. If you add up every dollar approved by courts in attorneys' fees and expenses over this period and divide it by every dollar those courts approved for the class, you find that attorneys took only 15% of the total. That's right: 15%. That's hardly a system where class action lawyers get everything. That's a fraction of what these lawyers would have received had these settlements come in individual litigation.

Why the dissonance between what lawyers actually receive and the common perception? I think much of it has to do with our natural tendency to focus on the colorful, outlier cases and ignore the boring, typical ones. I also think much of it has to do with the juxtaposition between the small recoveries each class member receives in many consumer fraud class actions--$ 5 or $10, for example--and the millions of dollars class action lawyers receive in the same cases. At first blush this wide disparity looks bad, but, upon reflection, of course, the disparity is easily explained: in many consumer fraud cases each class member had very little at stake to begin with.

I wonder if this juxtaposition has led Mr. Frank to his negative view of the settlement in the Bank of America Overdraft Litigation. I say this because I think it is difficult to oppose that settlement when all of the facts about it are known. The settlement was for $410 million and the lawyers were awarded slightly less than 30% of that sum in fees by the United States District Court for the Southern District of Florida. This award was right at the mean percentage in my study awarded by district courts in the Eleventh Circuit, even after controlling for settlement size. For this reason, I filed a declaration in support of the fee request.

Mr. Frank criticizes this settlement as one where the "defendant roll[ed] over immediately" and agreed to settle for "nine cents on the dollar." As such, he says, the lawyers should not have been rewarded so handsomely. But Mr. Frank is apparently unaware of what happened in this case. Bank of America did roll over. But it did not roll over in this case. It rolled over in a case involving the very same claims filed in a state court in California. The state court class action settled for $35 million. A group of lawyers filed objections to the settlement in California, and, while they were pending on appeal there, managed to persuade Bank of America to resettle the very same claims in the Southern District of Florida for $410 million.

Now if that isn't value added by a group of lawyers, I don't what is. Could the lawyers have gotten even more out of Bank of America had it not already settled the same claims in a different forum? Maybe; it is true that the same group of lawyers has sued other banks for similar practices and recovered even greater fractions of the class's theoretical damages. But, in light of the challenges they faced, turning $35 million into $410 million really ain't so bad.

 

 

 

FEATURED DISCUSSION ARCHIVE:


Obamacare Decision: Reactions, July 2012
Law School Faculty Diversity, May-June 2012
Class Actions, May 2012
Constitutionality of Individual Mandate, March 2012
Human Rights and International Law, February-March 2012
The constitutionality of President Obama's recess appointments, January 2012
Do caps on medical malpractice damages hurt consumers?, December 2011
Trial Lawyers Inc.: State Attorneys General, October 2011
Wal-Mart v. Dukes, April 2011
Kagan Supreme Court nomination, May-June 2010
Election roundtable, November-December 2006
Who's the boss, September 2006
Medical judgement, July 2006
Lawyer Licensing, May 2006
Contingent claims, April 2006
Smoking guns, July 2004

Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.