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Tallying fees

April 20, 2012 8:22 AM

Ted Frank

(As an initial matter, I just want to say that I wrote my first two posts before I saw the debate framing asking "rife with abuse or an important legal safeguard?" I'd answer "both": class actions are an important legal safeguard and they're rife with abuse.)

When Professor Fitzpatrick says his study didn't find a single class action in two years where the fee percentage was over 47%, I have to question the methodology of the study. I could double the number of lawyers working for CCAF, and we'd still have to turn away class actions where consumers come to us complaining that the attorneys are collecting more than 47%. In the first thirty cases where we filed objections, twenty-six of them involved cases where the attorneys intended to receive more than their putative clients and, like I said, we're confronted with more unfair class actions than we have the opportunity to object to. Sometimes it's much more, in the 90-100% range of total recovery: I have cases on appeal in the Second, Sixth, and Ninth Circuits where judges rubber-stamped settlements where attorneys ended up with over 90% of the recovery.

I suspect the problem is that Professor Fitzpatrick is not collecting accurate data. Most class actions don't report how much class members are actually collecting in settlements; settling parties suffer no consequences when they exaggerate recovery in their papers. Thus, in the first Classmates.com settlement, it was widely reported in the press that the class would receive $9.5 million; the actual number would have been $0.1 million if the court had not honored our objection. In the pending Brazil v. Dell, the parties reported in preliminary settlement papers that the settlement made $18 million available to the class, justifying a $7 million payout to the attorneys; in fact, enough barriers were placed in the claims-made settlement that the class will receive only $0.5 million, a figure that never would have been made public if we hadn't objected. In McDonough v. Toys R Us, the number that the class is to receive still isn't public after final judgment, other than that we can tell mathematically from what little has been disclosed that it will almost certainly be less than half of what the attorneys are getting. Settling parties suffer no consequences for exaggerating settlement value to courts, and those exaggerated values end up in Fitzpatrick's study's denominators; the real values remain known only to settlement administrators (who will not disclose them if asked) and rarely end up public. Professor Lester Brickman writes about this, too.

Returning to the Bank of America overdraft case, we see right away the difference between reality and study denominators. Professor Fitzpatrick characterizes the settlement as for $410 million; in fact, terms of the settlement call for as much as $60 million of this amount to go to third parties, rather than class members. The $123 million award to the attorneys is not only more than twice the typical percentage for a settlement larger than $150 million (a fact that the district court fails to acknowledge in its opinion), but works out to thousands of dollars an hour for a case that was barely litigated and immediately settled for nine cents on the dollar—and where nearly all of the legal research has application in numerous other cookie-cutter cases. (The main risk the attorneys identify was that the majority of their claims had been waived by previous class action attorneys who had accepted an $8 million payoff.) I have no objection to attorneys getting a multiple of lodestar when they take on risk, but settling a multi-billion dollar lawsuit for pennies on the dollar is the essence of a relatively riskless proposition. (The fact that the attorneys were not even willing to admit to a lodestar amount to demonstrate the fairness of the award in a cross-check is a fairly strong negative pregnant that the lodestar multiplier was in the double-digits.) That's not rewarding attorneys for success, it's rewarding them for going after big defendants. To add insult to injury, the MDL court signed off on the parties' agreement to make it nearly impossible for class members to object to this ripoff, demonstrating class counsel's fear of scrutiny—which is ironic, given their propensity for objecting to other overdraft settlements (and accepting a buyout in the Trombley v. National Bank case, where the victorious class attorneys collected a 28% fee after settling on Docket Entry #6, with class counsel being compensated for paralegals' work at about $3000/hour).

Because the Overdraft MDL was not subjected to a market test by, say, putting out the lucrative litigation for bid, there was a wealth transfer of tens of millions of dollars from consumers below median incomes to very wealthy trial lawyers, who would have been excited to litigate the case for, say, three times their lodestar, even though that would be a fraction of what they actually received. And by all accounts, the settlement would have been even higher if previous class counsel hadn't walked away with $8 million by agreeing to an even more unfair class action settlement. It's hard to see how that's good for anyone.

 

 

 

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

Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

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