Do class action lawyers make too little?

• Author: Fitzpatrick, Brian T.

INTRODUCTION I. FEE AWARDS IN CLASS ACTION LITIGATION: WHAT JUDGES DO II. FEE AWARDS IN CLASS ACTION LITIGATION: WHAT JUDGES SHOULD DO A. The Deterrence-Insurance Theory of Civil Litigation B. Deterrence-Insurance Theory and the Prior Proposals and Practices by Commentators and Courts C. How Deterrence-Insurance Theory Can Help Courts Award Fees in Class Actions III. THE PRACTICAL LIMITATIONS ON AWARDING FEES TO CLASS COUNSEL CONCLUSION INTRODUCTION

Class action lawyers are some of the most frequently derided players in our system of civil litigation. (1) The focus of this ire is usually the "take" that class action lawyers receive from class action settlements. (2) It is often asserted that class action lawyers take too much from settlements and leave too little for class members, that class actions are little more than a device for the lawyers to enrich themselves at the expense of the class. (3) These criticisms have inspired countless calls for reform of class action litigation, (4) and indeed, some of these calls have found their way into legislation. (5) In this Article, I argue that much of this criticism of class action lawyers is misguided. In particular, I assert that, in many cases, class action lawyers not only do not make too much, but actually make too little. Indeed, I argue that in perhaps the most common class action--the so-called "small stakes" class action--it is hard to see, as a theoretical matter, why the lawyers should not receive everything and leave nothing for class members at all.

Unlike in individual litigation, where lawyers and their clients can negotiate how they will split litigation proceeds, class action lawyers litigate on behalf of parties in absentia. As a result, third parties must decide how much to pay class action lawyers, and, in our system, these third parties are judges. According to empirical research I recently completed, judges are awarding class action lawyers some $2.5 billion in fees from the 300 or so class actions settled every year in federal court. (6) It is not known how much money class action lawyers receive in fees from class actions settled in state court, but I have estimated that this $2.5 billion from federal court settlements may be equivalent to 10% of the contingency fees lawyers collect in the entire American tort system every year. (7)

Although $2.5 billion sounds like a great deal of money to award class action lawyers in only 300 or so cases, my empirical research also shows that the settlements on which these fees were based totaled some $16 billion a year. (8) Thus, in the aggregate, class action lawyers appear to be taking only 15% of all of the money they recover for class members in federal court. This percentage take is much lower than the typical take of contingency-fee lawyers in individual litigation. (9)

It is true that especially large settlements drive down the aggregate percentage taken by class action lawyers; the judges who set the fees awarded to class action lawyers tend to award smaller fee percentages in large settlements than in small settlements. (10) Nonetheless, even when settlements are examined individually, my research has shown that, although the percentages taken by class action lawyers cover a broad range--in recent years, from 3% to 47%--the mean and median are only about 25%. (11) These mean and median numbers are, again, lower than the typical take in individual litigation.

Of course, one of the justifications for class action litigation is that it offers plaintiffs the same economies of scale that defendants enjoy. (12) Accordingly, lower fee percentages in class action litigation do not necessarily mean that class action lawyers are making too little; one might hope that the economies of scale are passed on to class members in the form of lower fee percentages. On the other hand, as I explain below, one might not hope that these economies are passed on for all types of class actions, and in particular, for small-stakes actions.

Nonetheless, judges who award fees to class action lawyers do not appear to be doing so in accordance with this justification or any other normative theory. Judges usually award fees according to what is known as the percentage-of-the-recovery method, which simply asks judges to award whatever fee percentage they deem reasonable." (13) In most jurisdictions, judges are asked to derive this reasonable fee using a multifactor test that is highly indeterminate. (14) As a result, judges appear more or less to pluck percentages out of thin air or to replicate the percentages plucked out of thin air in previous awards. (15) To my knowledge, neither judges nor commentators have offered a robust normative defense of the 25% figure around which fee awards have coalesced, let alone the broad range of fee awards above and below that figure.

In this Article, I perform a normative examination of fee percentages in class action litigation. I argue that in small-stakes class actions, lawyers are undercompensated. At least from a social-welfarist utilitarian perspective, there is no reason to pass on to class members the economies of aggregate litigation in these class actions. In order to maximize social welfare, it is often thought that litigation should both deter defendants from causing harm and insure plaintiffs against those harms when defendants are not deterred. This is what I call the "deterrence-insurance" theory of civil litigation. But small-stakes class actions serve no insurance function. Rather, the only function they serve is deterrence. As a result, I assert that we should not be concerned about compensating class members in small-stakes class actions and, instead, should be concerned only with fully incentivizing class action lawyers to bring as many cost-justified actions as possible. That is, the deterrence-insurance theory of civil litigation suggests that the optimal award of fees to class action lawyers in small-stakes actions is 100% of judgments. It is for this reason that I believe class action lawyers are not only not making too much, but, rather, making too little--far too little.

In light of the cost of providing deterrence through litigation and the lack of need to provide injured parties with insurance for small-stakes harms, a utilitarian might ask whether there is a better mechanism than class action litigation to deter defendants from causing small-stakes harms--such as, perhaps, qui tam--like proceedings or administrative proceedings initiated by public officials. Although I am skeptical that such public-sector proceedings can match either the incentives or resources available in the private sector to bring defendants to account for their activities, (16) it is beyond the scope of this Article to compare other regulatory mechanisms to litigation. Rather, in this Article, I take the regulatory system as I find it and ask how it can be optimized using the normative principles of utilitarianism. As I have already noted, in my view these principles suggest that class action lawyers should be awarded all of small-stakes settlements.

Of course, it is unlikely that judges in the current political climate, where opinion runs so strongly against class action lawyers, will feel comfortable awarding class action lawyers fees equal to 100% of settlements. Moreover, it is not entirely clear that judges have the legal authority to award fees at such a level. In many states, statutes or rules of professional responsibility cap contingency-fee percentages. (17) On the other hand, few of these caps explicitly apply to class action litigation. Moreover, with respect to federal judges, there is a plausible argument that Federal Rule of Civil Procedure 23, which authorizes federal judges to award "reasonable" fees in class actions, (18) overrides any state contingency-fee caps. (19) But, even if judges cannot award 100% of settlements to class action lawyers due to political or legal constraints, deterrence-insurance theory nonetheless suggests that they should award fee percentages as high as they can. By any measure, this is much more than they are awarding now.

Thus, in my view, judges ought to seek out opportunities to shift a greater portion of small-stakes settlements to class action lawyers. Beyond simply raising fee percentages, judges might consider giving to lawyers class action proceeds that, for various reasons, cannot be distributed to class members. (20) Many district courts currently distribute such proceeds to charities under the so-called "cy pres" doctrine. (21) Sometimes these charities have only the most tenuous connection to the case at hand, and some district courts have received severe public criticism for their charitable decisions. (22) Deterrence-insurance theory suggests that the better course might be to award leftover settlement proceeds to class counsel.

Deterrence-insurance theory can only supply so much normative guidance to judges who make fee awards, however. In contrast to small-stakes class actions, large-stakes actions may serve an insurance purpose. That is, every dollar that a court awards to class counsel rather than the class to further the deterrence goals of civil litigation may come at the expense of the insurance goals of civil litigation. As such, it is difficult to say, as a theoretical matter, how class counsel and class members should split either large-stakes class actions or "mixed" class actions in which both small- and large-stakes elements are present. On the other hand, at least in large-stakes class actions, it is arguably less imperative to supply judges with a normative theory of fee awards because it has become difficult to certify class actions when claims are individually viable. (23) Especially in the mass tort area, individually viable claims must be prosecuted separately, (24) and, unlike class actions, they will be governed by fee-award contracts negotiated between plaintiffs and their lawyers. To the...