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Recently in Class Actions Category

Principles of reform

January 18, 2005 11:10 PM

Dear David,

You write:

The concerns you raise about demographic influences on verdicts are best examined through comparisons of counties, within and across states. What are tort awards like in the courts of wealthy suburbs with large concentrations of corporate executives and subscribers to those business magazines that continuously editorialize about what are alleged to be ´┐Żout of control´┐Ż jury awards?

This one I can answer pretty well.  I don't have data on subscribers to business magazines but let's take the ten-percent of counties with the highest per-capita income, the average award in those counties is $776,475.*  Now let's take the ten-percent of counties with the highest rate of poor blacks, the average award in those counties is $877,838.  Amazingly, it is better to sue in a very poor, probably rural, out-of-the-way county than in a wealthy, urban county where the typical injured person has much higher wages.  Now here is the real shocker, let's look at the average award in the top ten percent of counties with the highest rate of non-black, non-hispanic poor, it's just $389,601.

Like you, I am not very happy with tinkering with the system to produce a given result.  On the other hand, you write as if tort reformers are intent on upsetting a delicately balanced equilibrium.

I am perplexed at the zeal some have to...fundamentally change the very nature of our tort law. How are we to know where to start in making these adjustments and where to stop before the checks and balances no longer align and the playing field is no longer level?

But tort law has already undergone fundamental change and it is continuing to change today!  Even ten years ago a suit against McDonald's for making people fat would have been laughed out-of-court but that is no longer true (see, for example, the web page of banzai Banzhaf!).  Whatever you think about the virtues or vices of the current system it is not well described by checks and balances and level playing fields - think rather of howling winds, pounding rain and a storm-tossed ship nearly lost at sea.  Lawyers, judges, politicians, plaintiffs and professors battle to steer the ship but one way or another the ship is changing course no matter who is at the helm.

Your point about fairness being in the eye of the beholder and the difficulties of using social science research to design outcomes are well taken. I do think, however, that some principles of a good legal system can be defended without reference to awards or particular social groups.

Local issues decided locally and national issues decided nationally, for example, is a pretty good rule of thumb regardless of one's politics.  Thus, moving class actions to the federal courts seems justified to avoid the dictatorship of twelve problem.  Similarly, I am no fan of the FDA but, contra William F. Buckley, I prefer to be governed by FDA physicians and statisticians than be subject to the ill-informed whims of 12 of the randomly chosen unelect.  FDA approval ought to provide some form of safe-harbor for pharmaceutical manufacturers.   

I see that I have moved away from judicial selection. Let me return briefly before turning over the forum. Although I have suggested a greater role for federal judges in tort I do have trepidations when it comes to criminal law. Too many crimes have been federalized and I worry when those who preach federalism and state control suddenly forget those principles when it comes to say medical marijuana.



* Some information on the calculations above. I have data on 41 thousand winning awards from 1803 counties.  In each of the three cases that I examine I compute the mean from a relatively large sample of 3-5 thousand cases.


Your comments are typically thoughtful and lucid. I have so much to say, so I'm going to start with a very basic reaction to your post. I'll then post later today with more detailed thoughts about the empirical evidence you and Eric put together on this issue.

First, again, I'd like to emphasize where we do agree: that fee regulation is not inappropriate for class actions. That concession is actually a major step in the right direction. Class actions are a particular problem in that low probability claims very regularly have fairly high expected returns for the plaintiffs' attorneys working on a contingency fee merely due to the size of the class. As you note, in no way can we say that class members are actually able to negotiate at arms' length for fee contracts, since they're automatically in the class unless they choose to opt out. The lawyers drive the process. Securities class action lawyer Bill Lerach has noted that his legal practice is "the best" since it has "no clients."

I wonder if you'd also extend that position to mass tort claims? There, plaintiffs aren't automatically in the class, so you could say there's (in theory) some fee negotiation. But plaintiffs' attorneys advertise aggressively to pull together thousands of claims. Often, such claims wind up being manufactured. Courts are flooded. Again, the contingent fee is the primary driver in these cases because the aggregate nature of the claims makes speculative cases much more valuable. Television, internet, and radio advertisements trolling for clients wouldn't be nearly so effective if the clients weren't told "you pay nothing unless you win."

Taking television advertising as an entry point, let's look at why I don't buy your argument that contingency fees "have been around for well over a hundred years -- thus they cannot be responsible for problems in the tort system that have developed over the past several decades." Yes, contingent fees -- like the "American rule," like civil juries, like elected judges, like so many other features of American law -- are deeply rooted. But it simply does not follow that such entrenched features of our legal system are not related to the litigation explosion merely because they've been around a long time; it only follows that such features are not solely responsible. 100 years ago, there were no aggregate claims like today's class actions and mass torts; tort claims were much more restricted by substance and procedure (indeed, there wasn't any products liability law to speak of -- see Richard Epstein's discussion of the evolution of products liability law here); federal courts weren't bound to apply state law under Erie v. Tompkins; transportation costs were much higher (making forum shopping much more difficult); there was no television, radio, and internet; and attorneys were not permitted to advertise.

The real question is whether any of these changes, interacting with deeply rooted features of American law (like the contingency fee, no fee-shifting, elected judges, civil juries, federalism, etc.), have contributed to the increase in litigation costs. My claim is yes. And it's not because the changes are necessarily all bad; rather, we may need to look at the long-standing rules as well. For instance, a free speech purist like myself agrees with the Supreme Court that attorneys have the right to advertise commercially. But there's no question that such a right changes attorney behavior. When attorneys can aggregate mass tort claims on a contingent fee, the payoffs are huge. Folks who may or may not be sick are happy to sign up when there are "no fees unless we win."

Private Contracts and Contingent Fees

I, like you, am generally a big fan of private contracting. But "spider-sense" isn't infallible, at least in those of us who can't climb walls. So, here too, I want to take issue with a couple of points.

I think it's important to remember that contingency plaintiffs, in general, are not only liquidity constrained but relatively unsophisticated. Yes, that's one reason contingency fees can be useful: when lawyers are only paid if they win, it pays them to be careful about the cases they take and to be cautious about rejecting settlement and proceeding to trial. But the "screening function" in which the lawyer evaluates the merits of the case cuts both ways. Because an unsophisticated plaintiff is unable to evaluate the merits of his case, he has no idea if, for instance, it's a "slam dunk" that the insurance company is certain to settle for the policy limit. The lawyer does typically know that and is happy to take the case, on a standard contingency fee of 33 percent, to score a windfall at the plaintiff's expense. This potential for abuse is at the root of the contingency fee reforms that are focused on plaintiff protection -- admittedly different from the "blunt instrument" caps we're discussing. (Yes, I agree with you that percentile fee caps are a crude reform measure, as I said before. So are damage caps. But that doesn't mean they can't be effective.)

What we have when it comes to contingency fees is a market failure. Unsophisticated plaintiffs can't value their cases and therefore can't bargain with their attorneys over price. They can't shop on price -- they're too unsophisticated to know a good attorney from a bad one, and might indeed be suspicious that a "cheaper" attorney isn't as good, whether that's the case or not. Thus, as Lester Brickman has shown, there isn't really any price competition over contingency fees. Now I disagree with Lester's claim that the lack of price competition is likely due to collusion; as those of us with training in economics are well aware, collusive arrangements are very difficult to maintain and would be virtually impossible to maintain for a group as broad and varied as contingency fee lawyers. It's the very fact that plaintiffs in contingency fee cases have too little information and understanding to shop and negotiate on price that leads contingency fees to be set at a standard level.

So, there are ethical reasons to question the contingency fee, from the plaintiff's perspective. Unlike Professor Brickman, I tend to approach most of these questions from a law and economics rather than an ethical perspective, but the above-normal windfall from noncompetitively priced contingency fees almost certainly helps drive excess litigation.

Why is that? Well, let's start with Lester's seminal study concluding that contingency fee lawyers, on average, make above normal profits relative to their hourly brethren, even after adjusting for risk. I view that paper similarly to yours and Eric's on contingency fees: very useful work, but the wrong analysis. (I know I haven't yet laid out in detail why I think that is for your paper, but I will in my next post, as I said at the outset. I just want to get the main theoretical debate on the table first.) I find it hard to believe that contingency fee plaintiffs' lawyers, on average, make a risk-adjusted return higher than hourly attorneys, because if that were the case, hourly attorneys would switch to contingency work.

And that, I think, is just what has happened. Lester's study, importantly, looks at the top quartile of contingency fee lawyers. Some of those lawyers are indeed getting paid handsomely for risk, luck, or performance. Others are exploiting the information imbalance between plaintiffs and lawyers to get extra cash based on the absence of price competition over fees. But among the lawyers not in the top quartile, a lot are doing worse than hourly lawyers. They're often less skilled, in courtroom work, in preparation, in case screening, or even in advertising strategy. Still, they stick around chasing the big payoffs, at least as long as they can. The absence of price competition over contingency fees leads directly to more contingency fee lawyers -- and more lawsuits and cost to society.

Of course, the mere fact that there's a market failure need not imply a regulatory response. Far too often, those with too little respect for limited government ignore the cautions of public choice theory and the law of unintended consequences and rush to "correct" market imperfections with cures that are worse than the disease.

But so too is it the case that merely because we generally respect the law of contracts -- and indeed think that the substitution of the law of tort for that of contracts over time is a major underpinning of overlitigation -- we need accept every contractual arrangement. You admit as much in saying "we don't enforce contracts against the public interest." My argument is that contingent fee contracts, at least in some cases, can be just that, as I'll explain further in my next post.

Point of Law has been following the gigantic Dukes v. Wal-Mart litigation for years, and the recent Supreme Court argument certainly does nothing to lessen its importance for issues of class action certification, aggregate litigation, employment litigation, punitive damages, the use of statistical evidence by courts, and even the politicization of the judiciary. We have brought together a fascinating group of scholars and practitioners to discuss the case in this featured discussion, and are looking forward to it. In alphabetical order:

  • Lester Brickman is a Manhattan Institute visiting scholar and a professor of law at the Benjamin N. Cardozo School of Law at Yeshiva University. He is the author of the recently released Lawyer Barons.

  • R. Matthew Cairns is a shareholder/director at Gallagher, Callahan & Gartrell and the 2011 president of DRI.

  • Jim Copland is the director of the Manhattan Institute's Center for Legal Policy.

  • Richard Epstein is a Manhattan Institute visiting scholar and was appointed the Laurence A. Tisch Professor of Law at New York University School of Law in 2010. He is also a senior lecturer at the University of Chicago, where he was on the regular faculty until his retirement at the end of 2010.

  • I'm Ted Frank, an adjunct fellow with the Manhattan Institute, and the founder of the Center for Class Action Fairness.

  • Myriam Gilles is a a professor of law at the Benjamin N. Cardozo School of Law at Yeshiva University.

  • Russell Jackson is a partner at Skadden. His blog is Consumer Class Actions & Mass Torts.

  • Andrew Trask is counsel at McGuireWoods and the co-author of The Class Action Playbook. He blogs at Class Action Countermeasures.

We hope to have others join us as the discussion goes on. To start things off, let me point to Richard Epstein's essay on the case for the Hoover Institution, "Wal-Mart's Class Action Conundrum". What do others think?

Opening thoughts and questions

April 13, 2011 6:08 AM

I'm  excited to see what some of our guests have to say on the pending Supreme Court case, Wal-Mart v. Dukes, which is in essence the mother of all employment-law class actions. Richard's piece is a good start, fleshing out how two areas of law -- employment discrimination law and class actions -- come together here. I'll start with a few questions, pulling out the key issues as I see them:

  1. The class action rule at play. When I wrote about this case after initial reports that it was certified at the trial-court level, I noted how it didn't fit under a traditional 23(b)(3) schema. Of course, as is now obvious, the certification rule at play isn't (b)(3) but rather (b)(2). It would seem to me that using (b)(2) here is disingenuous. To begin with, it's hard for me to see how the damages at issue here don't force this case into a (b)(3) framework. Even Justice Ginsburg -- hardly a critic of litigation generally or employment-discrimination litigation specifically -- seemed to recognize in oral argument that there's a pretty serious issue about how to handle the damages phase in a way that doesn't adversely affect the interests of many (realistically thousands or hundreds of thousands) of class plaintiffs. Doesn't using (b)(2) here swallow the (b)(3) rule? And if so, wouldn't (b)(3) be somewhat superfluous, at least in similar types of cases? And even under a (b)(2) rationale, the injunctive remedy isn't at all clear here; it's a far cry from the nuisance abatement scenario Richard describes, and short of Wal-Mart completely centralizing and reconstructing its hiring practices, under court supervision, how exactly is an injunction supposed to work?   I'd be very interested in hearing more about these issues from some of our experts more versed in class-action practice.
  2. Expert evidence at the class certification stage. A key question before the Court is of course the degree to which it's proper to rely on the plaintiffs' expert evidence to establish their theory of the case, both to establish that discrimination exists and to tie it somehow back to Wal-Mart, with respect to all of its female employees. If Daubert review isn't appropriate at the class-certification stage, I don't see how any court could evaluate claims in a case like this: effectively, any employer likely has some gender or race or other disparity in its hiring or promotion patterns, and it's always possible to concoct some theory to explain such disparities. Don't we have to have some standard to evaluate such claims before launching a class-action claim that could leave an employer's hiring practices under court control?
  3. How this case intersects with "disparate impact" in employment discrimination cases. I think Richard is right to focus on disparate impact here. As some of the justices suggested at oral argument, there's some tension in the plaintiffs' theory: on the one hand, Wal-Mart is responsible for gender disparities in promotion and pay across all its stores nationwide; but it's responsible under the theory that its promotion and pay practices are too decentralized, leaving decisions up to individuals who are, at least in some cases, likely to be governed by prejudice. Isn't this rationale just a backdoor way to solidify a disparate-impact standard -- requiring that large employers centralize decision-making to avoid disparities in hiring, pay, and promotions? How does the theory here jibe with the Supreme Court's rulings on disparate impact, such as the recent (race) case Ricci v. DeStefano?

So, at the outset, I have lots of questions. I look forward to fleshing them out.

James R. Copland
Director of Manhattan Institute's Center for Legal Policy

We're proud to have Ted Frank as a Manhattan Institute adjunct fellow and editor of Point of Law, but most of our readers also know that Ted's primary job these days is running the Center for Class Action Fairness, a non-profit entity Ted founded that challenges class action settlements that, in Ted's view, unfairly compensate plaintiffs' counsel at the expense of the class. Scholars at the Manhattan Institute's Center for Legal Policy (CLP) have long worried about abuses of the modern American class action, which have become ubiquitous since Rule 23 of the Federal Rules of Civil Procedure was changed in 1966 to treat all potential class members as class litigants unless they affirmatively opted out of litigation.

In 2002, CLP visiting scholar Richard Epstein, now of NYU law school, articulated the merits and pitfalls of class action practice in a Civil Justice Report and concluded that "we cannot make a uniform assessment of the overall effects of class action practices," since they are "benevolent in some cases and harmful in others." In his 2010 book Lawyer Barons, CLP visiting scholar Lester Brickman, of Cardozo Law School, discussed in depth the degree to which class counsel, operating without a true client, can collude with defendant companies to expropriate unjust fees in class action settlements, in many cases negotiating away plaintiffs' legitimate legal rights.

Like Professor Epstein, Ted is not opposed to all class actions, but he's particularly concerned about the fee abuses Professor Brickman highlights. Other legal scholars, however, have defended current class action practice, including fee awards, as essential to deterring corporate misconduct. Foremost among these academics is Brian Fitzpatrick of Vanderbilt Law School, who has argued that class counsel should receive as much as 100% of awards as fees in small stakes cases. Ted and Brian have been sparring about this issue recently in many live forums, and we are happy to welcome Professor Fitzpatrick to Point of Law to debate the issue here, with our editor.

Ted Frank

As Judge Posner once said, "class actions are rife with potential conflicts of interest between class counsel and class members." This comes into play most often at the class action settlement stage.

Defendants want to minimize the amount they pay. Class counsel wants to maximize the amount they receive, but they're also negotiating on behalf of their clients in the same negotiation. It's all too easy for parties at the table, explicitly or tacitly, to freeze out the absent class members—especially when a professional mediator is pushing them to settlement without considering the interests of parties not at the bargaining table.

For this reason, Rule 23(e) and state analogues requires a fairness hearing where the court ensures that the settlement is fairly treating the class. But judges have their own perverse incentives: approving a settlement (often presented to the court ex parte without any well-crafted objections helpful to the court's consideration) is easy, and reduces a court's workload by taking a complicated case off the docket; scrutinizing or rejecting a settlement requires hard work, and adds to the court's workload.

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.

Ted Frank

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 statistical 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 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. (I'm filing a reply brief in the Second Circuit in that case.) 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.

More facts on attorney fees

April 19, 2012 8:25 AM | No Comments

Brian T. Fitzpatrick

It is true, as Mr. Frank notes, that courts generally award smaller fee percentages in bigger settlements, but, even still, the data do not support the conventional wisdom that the lawyers are making out with everything: the mean and median fee awards in class action settlements are only 25%, and the highest fee percentage awarded in any case over the two years in my study was 47%. Even 47%--which was an outlier by any measure--is far from everything.

Mr. Frank claims that these numbers are misleading, but I think his criticisms miss the mark. He says that my numbers are driven down by securities fraud settlements because courts tend to award lower percentages in those settlements; he suggests that the numbers are "much" higher in other areas. My study did show that percentages in securities cases are lower than the percentages in some of the other subject areas, but the percentages are not "much" different: as Tables 8 and 12 of my study show, the percentages in other areas are only two or three points higher. (Mr. Frank thinks that even this is perverse because he thinks securities fraud class actions are much more difficult to bring in light of their stricter pleading standards. But Mr. Frank forgets that it is much easier to certify a securities fraud class action than it is to certify most other class actions due, among other things, to the fraud-on-the-market presumption of reliance. Overall, I suspect it is actually less risky to bring a securities fraud class action.)

Mr. Frank also claims that my numbers are misleading because they are based on exaggerated denominators: class action lawyers, he says, ask for a percentage of the value of the injunctive relief they win as well as the cash they recover, and the values they place on these injunctions are not real. Class action lawyers may ask for it, but my study did not give it to them: my study included valuations of injunctions in the denominator only when the valuations were by courts rather than lawyers (and this was not very often). All told, only 4% of the $33 billion denominator in my study comes from valuations of non-cash relief. Even if this amount is thrown out, the share taken by class action lawyers barely budges: it is still right around 15%.

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 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.

The final word on fees

April 23, 2012 8:20 AM | No Comments

Brian T. Fitzpatrick

Mr. Frank criticized the methodology in my study because it is based on settlement amounts approved by district courts rather than settlement amounts actually distributed to class members. He's right about that, but, again, it turns out not to make much of a difference to the portion that attorney's take from settlements. The vast majority of the money approved by courts is distributed pro rata--meaning it is all distributed, and how much each class member gets depends on how many others submit claims. Thus, even if we were to ask what portion of distributed money goes to class action lawyers, the answer would be about the same.

This is not to say that there aren't isolated examples where the only ones defendants end up paying are the lawyers. But it is to say that these cases are not representative. It is almost unheard of for undistributed settlements to revert back to defendants these days. If they cannot be distributed to class members, they at least go to third parties like charities; either way, the deterrence gained is the same.

Mr. Frank returned to the Bank of America settlement, but, again, I do not understand why. In one breath, he says the lawyers there did not take on any risk, but in the next he acknowledges that Bank of America had already settled the same claims for a fraction of a cent on the dollar. The fact that the new lawyers managed to persuade Back of America to resettle the case for over ten times the original amount is not just good lawyering, it is remarkable lawyering. They deserved to be paid handsomely. So what if they made a multiple of their hourly rate? The lodestar method fell into disfavor in class action litigation previously because it rewarded lawyers for dragging things out rather than getting results. The percentage method rewards results, and remarkable results should be rewarded with remarkable fees.

I will close on one point on which Mr. Frank and I agree. The optimal method for awarding fees is not to do so ex post by trying to divide some fair percentage of the settlement. It is to do so ex ante by auction. But until courts warm up to that, we will continue with the second best. And that is the percentage method, not the lodestar

James R. Copland

On Wednesday, February 27, 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.

By Myriam Gilles

After seven years of appellate litigation, including three rounds at the Second Circuit and two trips to the Supreme Court, in the final footnote of its Reply Brief, American Express has abandoned - stunningly - its primary policy argument. Amex has consistently argued that a ruling for the merchants would open the floodgates to a torrent of challenges to its and other companies' arbitration clauses, and that an "Amex exception" would swallow the "Concepcion rule." The merchants, meanwhile, have said "No, the floodgates are already slamming shut as companies enact liberal, vindication-enabling arbitration agreements - and especially, agreements that allow prevailing arbitral claimants to shift the cost of expert witnesses."

Now, in footnote 8 of Amex's Reply Brief on the merits, comes the bombshell: Amex has just recently promulgated a new version of its merchant agreement with an arbitration provision that shifts the costs of expert witnesses in favor of a prevailing arbitral claimant. Never again can a merchant complain (as the merchants here do) that the unavailability of both collective action and cost-shifting, combined with proscriptions against sharing information across arbitrations, precludes them from being able to vindicate their rights in arbitration. While footnote 8 makes clear that "Petitioners do not rely on this amendment in their challenge to the decision below," the fact is that in future cases the Amex clause will allow cost-shifting. The merchants' proffered test is whether the proven non-recoupable costs exceed the recovery sought. If all costs are recoupable, the inquiry is over before it starts. For this corporate defendant, the floodgate is closed.




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.