A Practitioner's Perspective on the Selection of Class Counsel, page 5

A PRACTITIONER'S PERSPECTIVE (continued)

Page 5

Incentives and Markets

In the past decade's academic literature on attorneys' fees and auctions, legal scholars have devoted herculean efforts to identifying the rational economic incentives that are thought to govern the behavior of plaintiffs' lawyers in class actions. They have devised elegant systems to exploit and manipulate such incentives, for the economic benefit of clients and classes, by fine tuning the auction process, and specifying the actual components of competing bids. Thus we are treated to the endless debate over whether percentages should ascend, or descend, as the recovery increases; whether percentages should rise, fall, or remain constant as time passes; and whether out-of-pocket costs ought to be separately accessed, or included in the percentage fees. Compare Coffee, "Securities Class Actions" The National Law Journal, p. 130 (Sept. 14, 1998) (prefering ascending structure) with In re Quintus Securities Litigation, No. C00-4263 VRW (N.D. Cal.) April 12, 2000) (Walker J.) (preferring descending percentages).

My own view is that a larger settlement, achieved sooner, deserves a bonus, either in the form of an enhanced percentage, or an additional award, because smaller absolute recoveries generally reflect a smaller percentage recovery of the class loss, and larger absolute recoveries generally represent a larger percentage recovery as well. Thus, even with an enhanced percentage award, the net recovery, as a percentage of the original loss, is greater.

Additionally, any settlement at a specified amount, achieved sooner rather than later, is of greater utility to the class, because it returns money to them for the reinvestment or other use of their choice, and also promotes judicial efficiency and economy.

That's about as far as I get in the law and economics analysis because, subjectively, I am not at all sure that plaintiffs' lawyers' actual behavior is governed by any of the variables that enchant academics. Plaintiffs' lawyers can, generally speaking, pick and choose their cases, and the selection of a case to which to devote considerable resources, in terms of time and energy, has the most to do with the subjective appeal of the case. Plaintiffs' lawyers will risk more to become involved in cases they perceive as especially interesting and worthwhile. Once engaged, they will devote the time, energy, and money necessary to produce a success. They will not recalibrate and rachet down their efforts as the case passes particular milestones, because they tend to equate their clients' interests with their own professional reputations. That is why cases in which plaintiffs' counsel tenaciously persevere in difficult and protracted cases, and ultimately receive "negative multipliers" of their lodestar, are not uncommon.

A case that goes up on multiple appeals, becomes morassed in necessary, but tedious discovery, and/or requires a lengthy trial may generate a substantial, positive result for the class, and an unspectacular fee for its counsel. The great benefit of the percentage-of-recovery methodology, whether put in place at the beginning of a case, or applied at its end, is that the jurisprudence has long recognized an historical range of percentage awards (e.g., 20% to 30%) that transcended substantive areas of the law, and was applied to recoveries of all magnitudes. If, at the end of a particularly long and grueling case, the application of a 30% award meant a negative multiplier in terms of the lodestar expended, so be it. If, at the end of a speedily resolved case, the application of the same award resulted in a multiplier of 3 x or 4 x, so be it.

1 | 2 | 3 | 4 | 5 | 6 | 7