One subject that almost never gets attention in major law-review articles is the attorney’s fee. Fees are the underbelly of the law, the bane of theory, the antithesis of high-minded and selfless lawyering, the grubby acknowledgement that lawyers need to eat — and that sometimes they eat very well, indeed. Of course, fees are also what make the legal world go ’round. Among their other effects, fees drive decisions about access to justice: if the lawyer cannot get paid, the lawyer is unlikely to pursue a claim. When a lawyer brings a claim, concerns about fees can affect the lawyer’s decisions about whether and when to settle, and which claims to file or abandon. In particular, the contingency fee is an especially critical component in ensuring both access and law enforcement in a legal system that operates without effective legal aid in civil cases but relies heavily on private enforcement of rights (i.e., the American legal system).
Frank discussion about “the critical role that profit, capital, and risk … play in setting the terms of justice” are, as Tyler Hill points out in his impressive student note, few and far between. The conversation is perhaps most advanced in the field of aggregate litigation. The picture that legal ethicists and law-and-economics scholars often paint is not a pretty one. The divergence between the interests of a group of plaintiffs and the lawyer who represents them can be great. The fear — borne out more by a few anecdotes of near-mythic proportion than by hard empirical evidence — is that lawyers will collude with defendants and sell out the interests of a class in return for a fat fee. Even without collusion, however, the lawyer is usually the largest stakeholder in class-action or other aggregate litigation; to believe that lawyers’ concerns over the collectability and size of their contingency fee have no impact on lawyers’ conduct during litigation is to expect that lawyers possess a level of virtue that even Diogenes would have found admirable.
The attempt to avoid this “agency cost” — this pursuit of the agent’s (the lawyer’s) self-interest over the interest of the principal (the represented group) —has shaped aggregation doctrine. It explains, for instance, requiring that the claims of class representatives and members be common and typical and that there be adequate representation of class members’ claims at all times. It has affected the law surrounding courts’ awards of attorneys’ fees to lawyers who obtain recovery for the class. And it has affected the big-picture storyline about the value of aggregate litigation. The perceived horror of lawyers unhinged from their clients and running amok served, for example, as a foundational premise for the jurisdictional changes in the Class Action Fairness Act, as well as recent Supreme Court decisions reining in the breadth of Rule 23 and barring most class arbitration.
Of course, counteracting this storyline is another one: that class-action and other aggregate litigation performs two critical tasks. The first is to compensate to victims, especially those who would be unable to afford to bring suit on an individual basis because the costs of doing so are so high that they would eat up most or all of an individual recovery. Pooling cases achieves economies of scale that make litigation worthwhile. The second is to ensure adequate deterrence. Without a realistic threat of litigation and with limited regulatory oversight, wrongdoers have an incentive to cheat large numbers of people out of small amounts of money. Aggregating claims creates the necessary threat and evens up the incentives of victims and wrongdoers to invest in the litigation.
Hill’s note starts from this latter story: that class actions perform important compensatory and regulatory functions and should therefore be encouraged. But present fee structures, he points out, limit the capacity of class actions to achieve their promise. Hill’s beginning point, however, is not the usual agency-cost tale. Instead, he shows how the typical fee arrangement (a contingency fee) creates incentives for plaintiffs’ lawyers to select or deselect certain types of class actions. The contingency fee is paid out at the end of the litigation, often after years of struggle. A lawyer contemplating taking on such a case must, therefore, consider not only the size of the ultimate fee and the risk of non-recovery, but also the capital that the lawyer must invest to achieve this fee (i.e., the forsaken hourly fees that hypothetically could have been earned on other legal work) and the cost of that capital (the relevant interest rate).1 Only when the expected fee from class-action litigation exceeds the time-value of the capital that the lawyer invests — in other words, when the lawyer can expect to earn a profit — will the lawyer take on the class’s representation. But at the time that the lawyer must make this decision, many variables are uncertain — not the least of which is how large a fee the court will ultimately award to the lawyer if the class action is successful. As a result, Hill argues, lawyers naturally gravitate to clear winners, which have a more certain chance of fee recovery. This behavior leaves victims with viable but risky cases without legal representation and drives up the benchmark for fees in future cases —consequences that in turn limit the capacity of victims to obtain compensation (and of wrongdoers to be deterred).
Hill’s theoretically elegant solution is to permit lawyers to seek out lenders to invest in the litigation in return for all (or a portion) of the lawyer’s fee. The mechanism for raising this capital is an auction, in which the investor with the lowest bid wins. The winning bidder is responsible for paying the lawyer’s hourly fees and expenses, and then deducts from the proceeds of the class settlement or judgment the amount called for in the bid (including the cost of capital). As an example, Hill describes a case with an expected value of $30 million with recovery expected after two years of litigation. The winning bidder takes a half-interest in the fee, which is estimated to be $4 million. The investor wants a 12% return on the capital to account for the cost of money and the risk of non-recovery. Therefore, the investor would receive $2.5 million at the successful conclusion of the case two years later (the half-fee of $2 million, as increased by two years of compound 12% interest).
Using such a market solution, Hill argues, ensures that lawyers receive the market value of their services and limits the lawyer’s risk to a level that the lawyer finds comfortable. The judge’s task in setting the fee becomes simpler: approving the basic investment arrangement in advance and then checking its fairness (and making necessary adjustments) if a class award results. Most important, lawyers will have an incentive to take on viable-but-risky class litigation, thus advancing compensation and deterrence goals.
This proposal, which Hill spells out in detail, is a cousin of other class-auction proposals, the most famous of which is the proposal by Jonathan Macey and Geoffrey Miller to auction the class’s claims, distribute the proceeds to the class, and allow the winning bidder to pursue the wrongdoer. As Hill points out, these other auction ideas could be used in tandem with his, but his proposal — to auction off just the class counsel’s fee — is unique and stands on its own two feet. Hill defends the proposal against various objections, the most obvious of which is that the investor, as the lawyer’s quartermaster, will now control the class litigation — thus further entrenching the agency-cost problem. As the note points out, however, the agency-cost problem already exists, and substituting the return-hungry investor for the fee-hungry lawyer as the focal point of the problem does nothing to exacerbate it, while solving certain other difficulties. True enough, although turning class counsel into an hourly-fee lawyer creates a new type of agency cost; the self-interested desire of the hourly-fee lawyer to overwork a case is well-known, and it will be costly for the investor to monitor class counsel closely enough to prevent overbilling. The new layer of the investor would also further insulate the lawyer from the interests of the class. And Hill’s proposal also encounters many of the same defects as the courts’ now-defunct experiment with auctioning the position of lead counsel in securities class actions suffered from certain defects, such as variation in bids that made it hard to compare the apples of one bid to the oranges of another.
Whatever its potential flaws, Hill’s note represents another in a series of recent proposals that have crafted creative solutions to overcome some of the seemingly intransigent problems of class and aggregate representation.2 A very few cases have made tentative nods in the direction of these proposals, but the emphasis is on very few.3 Some of these solutions deserve a chance to prove themselves in the marketplace. That, however, requires a more adventurous spirit on the part of judges and lawyers than seems possible in this time of class-action retrenchment. The negative image of the class action — as a device to browbeat upstanding defendants into blackmail settlements that provide no benefit to class members and serve to enrich only the lawyers who bring the action — still holds sway.
Is it possible to change this image? On one point, Hill is surely right. Class actions are sometimes necessary to provide deterrence against broad-based wrongdoing and to deliver a modicum of compensation to those harmed. Crafting a rule that ensures fair compensation for class counsel is a central — perhaps the central — task necessary to deliver on the class action’s promise.4 Until we face this reality and design a fee structure that shapes and aligns the incentives of class counsel with those of the class, the negative stereotype of class actions will prevail.
We have the means to improve class actions and to reduce their negative side effects. And Hill’s note shows that we have the ideas. We need only the will.
- Hill includes recoverable expenses, in addition to fees, as part of the value of the capital. For simplicity of description, I omitted consideration of expenses in the text. [↩]
- These include proposals in the American Law Institute’s Principles of Aggregate Litigation, and in articles by Luke McCloud & David Rosenberg and by Geoffrey Miller. I have tossed in a few wacky proposals of my own (here and here), one of which Hill kindly addresses in his note. [↩]
- See Forsythe v. ESC Fund Mgmt. Co., C.A. No. 1091–VCL, 2013 WL 458373 (Del. Ch. Feb. 6, 2013) (entertaining but ultimately rejecting a proposal from objectors and their third-party financiers to pay the class members the agreed-on (but allegedly inadequate) settlement amount in return for the right to continue the litigation against the defendant). The classic example, albeit shot down by a unanimous Supreme Court in Wal-Mart Stores, Inc. v. Dukes, is Hilao v. Estate of Marcos, 103 F.3d 767 (9th Cir. 1996) (approving the use of trial by statistics). [↩]
- I have always been persuaded that the fee structure proposed many years ago by Kevin Clermont and his student John Currivan came the closest to achieving this goal. They proposed a contingency fee that relies on a combination of an hourly rate and a percentage of the recovery. This would be an ex post award. Hill’s ex ante attempt to set the market rate for attorney compensation also has great merit. Whether the two ideas could be combined is a matter worthy of consideration. [↩]