Every year, class action settlements bring $10-$20 billion into federal courts, and every year, federal judges award billions of these dollars to plaintiffs’ attorneys in payment of fees and reimbursement of expenses. But can we be sure those awards are set correctly? And, if they aren’t, what are the consequences for plaintiffs, attorneys, judges, and those companies committing securities fraud?
Professors Lynn Baker and Charles Silver, along with their co-author, Michael Perino, of St. John’s University School of Law, completed a detailed study of 431 securities class actions that settled in federal district courts from 2007 through 2012—the first time anyone has looked closely at the “black box” of how judges determine fee awards. The resulting article, which appeared in October’s Columbia Law Review (Lynn A. Baker, Michael A. Perino & Charles Silver, Is the Price Right? An Empirical Study of Fee-Setting in Securities Class Actions, 115 Colum. L. Rev. 1371,) has profound implications for the marketplace of class action lawsuits.
Among their findings:
- Federal judges routinely deviate from the Private Securities Litigation Reform Act of 1995, a Congressional path with broad bipartisan support designed to ensure right-sizing of fee awards;
- The fees are set rather capriciously, with high-volume districts typically seeing lower fees, and low-volume districts seeing higher fees; and,
- That so-called “lodestar cross-checks” have unintended effects: all else equal, fee awards are significantly higher when fee requests include cross-checks than when lawyers use only the percentage-of-the-fund method.
“Is The Price Right?” is the latest substantive contribution of Professors Baker and Silver to the larger body of work of the Center for Lawyers, Civil Justice, and the Media. The Center has as its mission “the creation and broad dissemination of rigorous empirical studies of civil litigation and related subjects,” and its work comprises extensive, data-driven analyses of securities and securities fraud, mass torts and mass tort litigation, and medical malpractice issues and proposed medical tort reforms.
The attorney’s fees analyzed in “Is The Price Right?” are essential to incentivize the waging of class actions. These actions—which entail enormous commitments of time and financial resources–would disappear without them. By rewarding lawyers for litigating class actions successfully, federal judges enable millions of people to obtain access to justice each year. This article may, one hopes, draw attention to this crucial matter. In Baker’s words, “(Our) proposed set of procedural reforms, which courts could easily adopt, to make fee-setting in securities class actions more transparent, more compatible with the PSLRA’s normative goals, and more predictable, would encourage lawyers to invest in class actions at more appropriate levels, with salutary effects for plaintiffs and the integrity of the financial markets.”