Putting the plaintiff class' needs in the lead: reforming class action litigation by extending the lead plaintiff provision of the Private Securities Litigation Reform Act.

• Author: Langlois, Kendra S.

Imagine that you discover that you are a winner of a class action lawsuit and are due a modest damages award. You would be pleasantly surprised, right? Now suppose that upon further examination you discover that your claim was actually worth more than what you will recover under the settlement award, that the reward will come in the form of coupons that require you to buy more of the product that entitled you to damage awards in the first place, and that the fee award that the class attorney arranged as part of the settlement agreement will not only reduce your award, but will also force you to pay the class attorney more than the award amount you will receive! Given these additional insights, needless to say, you are not nearly as thrilled with the outcome of this settlement agreement.

Although the facts above are a bit extreme, such self-serving settlement agreements negotiated by class attorneys at the expense of class members actually do exist. For example, a settlement with General Mills over its use of an illegal pesticide on the oats used in its Cheerios resulted in class members receiving coupons that could be exchanged for more cereal while six law firms split almost $2 million in costs and fees, plus interest. (1) An even more perverse settlement agreement arose after lawyers brought a class action against Bank of Boston on behalf of 700,000 Bank customers who "claimed the bank was keeping too much of its customers' money by placing their funds in escrow accounts and denying them interest." (2) The judge approved a settlement that forced the Bank to pay $8.5 million in attorneys' fees and $10 to each customer. (3) In an interesting twist, however, the attorneys' fees amounted to $100 per customer and the agreement required the Bank to deduct the fees from each customer's account. (4) The lawsuit thus cost each class member $90!

Courts have long struggled to discover the mechanism to employ in class action litigation that will best enable class members to monitor their counsel and therefore prevent such egregiously unfavorable settlement awards. (5) The overarching goal of any method used to manage class action suits is to establish "monitoring mechanisms to substitute for the ordinary attorney-client relationship." (6) By simulating this relationship, the court, society, and the plaintiff class will be better assured that class counsel will make litigation decisions out of concern for the interests of the plaintiff class and not themselves. (7) In the typical attorney-client relationship, the client retains the power to accept or reject any settlement and has the power to negotiate the lawyer's compensation in advance. (8) These constraints, however, are not present in class action litigation: "Plaintiffs' attorneys typically do not rely on named plaintiffs for vital testimony, do not bargain with named plaintiffs over the fees they will be paid, and do not require named plaintiffs' approval of the terms on which they propose to settle class actions." (9) The conflicts of interest inherent in class actions have led critics to claim that class action attorneys are more interested in maximizing their fee when settling a case than in attaining a fair award for class members. (10)

The primary tool that courts use in class action litigation to simulate the traditional attorney-client relationship is the selection of both the class counsel and the class representative. Rule 23(a) of the Federal Rules of Civil Procedure requires the court to ensure that the "representative parties [lead plaintiff and lead counsel] will fairly and adequately protect the interests of the class." (11) Traditionally, the court has had discretion to choose the lead plaintiff and counsel, and judges either approve a private agreement among lawyers to determine who will represent the class, or in cases where there is no agreement, decide who should serve as lead counsel. (12) This selection process, however, has recently become subject to intense scrutiny because of the introduction of two new selection methods: judicial auctions and the "empowered plaintiff" provision of the Private Securities Litigation Reform Act of 1995 (PSLRA). (13) Both the Task Force on Selection of Class Counsel appointed by the United States Court of Appeals for the Third Circuit and the United States Judicial Conference Advisory Committee on Civil Rules have recently considered and evaluated different methods for selecting class representatives. (14)

Professors Elliott J. Weiss and John S. Beckerman proposed that one way to reduce the conflict of interest between class members and their counsel in securities class actions is to use market forces to encourage and appoint more qualified lead plaintiffs to oversee lead class counsel. (15) Congress implemented this strategy in the PSLRA. (16) Congress created a system in which the lead plaintiff would choose the counsel for the class, subject to review by the court. (17) The best choice for lead plaintiff is presumptively the member of the class who has the largest financial stake. (18) The theory, which Weiss and Beckermen argued and which Congress adopted, is that institutional investors, because of their large financial stake in the outcome of the litigation, will have an incentive to monitor lead counsel and will also "have or could readily develop the expertise necessary to assess whether plaintiffs' attorneys are acting as faithful champions for the plaintiff class." (19) This model appears to more closely align the interests of the plaintiffs' attorneys with the interests of the plaintiff class than traditional court-appointment methods.

Recent studies and cases show that institutional investors are beginning to take a more active role in securities class actions under the PSLRA and are achieving higher settlement amounts. (20) In light of this development, this Note argues that the provisions of the PSLRA requiring (1) that the lead plaintiff be more credible and involved in the litigation and (2) that the lead plaintiff choose lead counsel create a better framework for ensuring adequate class representation in Rule 23(b)(2) class action lawsuits for money damages than allowing the court to directly appoint class counsel or conduct auctions. (21)

For class actions such as mass tort and small claims litigation in which the lead plaintiff provision will not be more effective, many reform alternatives exist that will improve the class' ability to monitor its counsel. Mass tort class litigation could be improved by increasing the opportunity for class members to opt out in response to an inadequate settlement agreement. Small claims class actions would benefit from (1) providing judges with more information with which to review settlement agreements, (2) employing a loser-pays fee shifting mechanism, (3) imposing sanctions on class counsel who enter into abusive settlement agreements, and (4) subjecting settlement agreements to greater scrutiny by the public.

This Note critically analyzes current class action reform proposals and the probable outcome of employing the lead plaintiff provision in more types of class action litigation. By way of background, Part I provides insight into the rationale for class action litigation and the challenges it presents. Part II discusses and evaluates the PSLRA and current class action reform proposals. Part III discusses successful elements of the lead plaintiff provision in securities class actions and the types of class actions in which the provision can be most successfully employed, namely antitrust actions. Having proved that the lead plaintiff provision can be extended to some class actions, Part IV provides some insights into alternative reform measures for those areas in which it cannot be similarly extended.

1. HISTORY AND SCOPE OF CLASS ACTIONS UNDER RULE 23 OF THE FEDERAL RULES OF CML PROCEDURE

   Although the exact motivation behind the drafting of Rule 23 of the Federal Rules of Civil Procedure remains unclear, (22) it has effectively allowed class members to pursue litigation and receive damages for claims that involve such small losses that they could not realistically be pursued individually. (23) Some argue that the original intent of the drafters was to "enable litigation that could not be brought on an individual basis, in pursuit of larger social goals such as enforcing government regulations and deterring unsafe behavior." (24) The reality, however, is that the majority of class actions, and those which are the focus of this Note, involve damage class actions brought under Rule 23(b)(3) rather than social reform actions seeking injunctions pursuant to Rule 23(b)(2). (25) Damages class actions typically involve the areas of (1) consumer cases alleging fraudulent business practices or antitrust violations, (2) mass tort claims, and (3) securities class action suits. (26) Indeed, in 2000, "almost one-third of the class actions pending in federal courts were securities cases" commanding "more judicial time than any other category of class action." (27)

   Rule 23 requires "large numbers of parties (often termed the `numerosity' requirement), brought together by common issues of law or fact (`commonality'), represented by individuals or entities whose claims or defenses are typical of those they represent (`typicality'), and who may be relied on to protect the interests of the latter (`representativeness')." (28) Historically, private attorneys have assumed the role of finding legal violations, identifying individuals to serve as lead plaintiffs, and filing class actions on behalf of the group. (29) This role has evolved because of (1) the lack of incentive and resources individuals who suffer small harms have to bring a suit individually or to fred others who have suffered similar harms to bring an action collectively and (2) a strong incentive for attorneys to bring the suits because of the fees that they will receive if their suit is...