May 25, 2000
Excessive Legal Fees: Protecting Unsophisticated Consumers, Class Action Members, and Taxpayers
Panel Three: Fees in High Stakes Litigation: Class Actions and Suits by Government Agencies
MR. FRED BARNES: I’m delighted to be here. I’m going to play a very small role on this panel. I may ask a question or two, but I don’t claim to be an expert and all our panelists certainly are; it’s an unusually distinguished panel.
Our first panelist will be the Honorable Vaughan Walker, a federal judge in the Ninth Circuit U.S. District Court for the Northern District of California.
HONORABLE VAUGHN WALKER: I would like to talk about the nuts and bolts of attorney fee setting in class actions from a judge’s point of view; particularly, what judges have to work with in making these decisions.
We start with the basic premise that we have in this country about attorney fees, the so-called “American Rule.” Under the Rule, each party bears his own expenses of litigation, including attorney fees. A notable and longstanding exception has been in common fund cases, in which the attorney creates a fund that compensates both the lawyer who creates the fund and the victim. Attorney fee awards in those cases are predicated upon the old equitable doctrine against unjust enrichment.
Ironically, in America the doctrine against unjust enrichment has been turned on its head. The notion here is that the class bringing an action should not be unjustly enriched at the expense of the lawyer. It is a rather peculiar doctrine to apply in a situation where we are attempting to come up with a reasonable way to compensate lawyers for what is essentially an entrepreneurial activity; that is, to compensate lawyers for creating some benefit to the class. It’s rather like attempting to come up with a gratuity rule for good Samaritans. It does not fit the problem at hand.
Four methods have been used by judges to determine attorney fees in common fund cases: the lodestar, the percentage fee, the benchmark, and, as a few of us have tried, the auction.
The earliest federal cases relied upon the percentage fee. The notion was that there is some standard reasonable fee and that is some percentage of the amount of recovery. But, by the 1970’s it began to be clear to many commentators, and to many judges as well, that this percentage fee approach was resulting in extremely high fees.
In response, the lodestar system was conceived with the objective of compensating lawyers fairly for what they had done by taking the hours of work times a reasonable hourly rate, adjusted by a multiplier. The multiplier was to reflect the time and labor that was involved, the magnitude and complexity of the litigation, the risk of the litigation, the quality of the representation, the relation of the fee to the ultimate recovery, as well as public policy points of view. Naturally, if you take “reasonable hours” times a “reasonable hourly rate,” and then you add an imponderable factor such as a multiplier, you’ve got a highly unpredictable means of determining attorney compensation.
In the 20 years after the lodestar came into widespread use in common fund cases, it has become an incentive for lawyers to run the clock. It created enormous problems. Judges are now forced to analyze time records, which is difficult to do in any kind of a fair way. Judges, particularly federal judges, don’t like to think of themselves as time clerks, and understandably so.
In 1984 the Supreme Court, in Blum vs. Stenson, suggested that we should return to a percentage-based means of calculating attorney fees.21 The following year, the Third Circuit appointed a blue-ribbon task force that recommended a return to the percentage method, a recommendation that the court adopted in 1995 in the General Motors fuel tank litigation.
Today, most circuits approve of either a lodestar method or a percentage method, though the District of Columbia Circuit and the Eleventh Circuit generally mandate the exclusive use of the percentage method. And, of course, we have the Ninth Circuit. It used to be in law school that there was the majority rule, the minority rule and the Massachusetts rule. In the federal courts, these days there is the majority, the minority and the Ninth Circuit rules. The Ninth Circuit, putting its own spin on things, employs a 25% flat fee method, adjusted by the six or so factors that are used in the multiplier calculus of the lodestar.
Now what, if anything, is wrong with this picture from a judge’s standpoint? All of these methods essentially amount to the same thing: a standardless method of determining fees. Earlier, we heard a reference to the Goldberger decision from the Second Circuit.22 I commend it to your reading. It is a thoughtful analysis of this problem on appeal from a District Court that had allocated 4% of the common fund for attorney fees. The Second Circuit justified that 4% recovery.
On May 9, 2000, a very thoughtful judge in the Eastern District of Pennsylvania, Judge Katz, applied essentially the same methodology that the Second Circuit used in Goldberger. He arrived at a fee calculation of just under 30%. But the same method cannot possibly lead to two such disparate results if it is applied with any degree of rigor.
The problem with each of these methods is that the fees are not determined in an adversarial context. Judges are ill equipped to decide anything that is not presented as a clash of ideas. In addition, with each of these three methodologies, the principal-agent problems between the client and the lawyer are disguised.
Principal-agent problems are disguised because there is no real risk for the attorney until after the recovery has been obtained. The risk of litigation is assessed after the risk has passed. By the time a judge makes a decision on distributing attorney fees, a recovery is already on the table. The only thing standing between the judge and closing out the case is disposing of the attorney fee award. All of the pressure is in favor of closing out the case in a way that is satisfactory to the lawyers.
Lawyers are very good at reading a case in terms of how it develops. They are also quite good at reading the judge’s reaction, and they adjust their litigation calculus accordingly. The problem of the possible sellout settlement of a class, or the possibility of over-litigation, is something that is disguised. It is under the table, and it is under the table because the fees are determined after the fact rather than in advance.
This realization gave rise to the idea that creating a common fund on behalf of a class is really not different from any other kind of governmental service and therefore ought to be determined before any effort is undertaken. This places upon the lawyers, who are, after all, creating the litigation, the threat that they’re not going to succeed; this forces them to evaluate the case at the earliest possible point. In addition, an ex ante fee determination promotes competition. As in any other kind of a bidding process for a governmental service, you open up the process to people who can compete. You have real competition in an ex ante fee determination process undertaken at the beginning of a case, rather than at the end.
Finally, an ex ante determination of fees allows both lawyers and courts to consider and argue the effect of the fee arrangement.
There’s no panacea to the problem of setting fees in these cases. But I do believe that there is an institutional role that organizations such as those that are represented here can play. They can urge courts to look at the fee calculus at the very beginning of the case, before the litigation starts, rather than allowing this to be postponed until the end and to be determined by standardless methods.
This urging alone would bring forth many of the issues that we have discussed and would give judges an opportunity to think about these issues and to rule on them in a meaningful way.
MR. BARNES: The next panelist is Professor Roger Cramton of Cornell Law School, who has entitled his remarks, “Forestalling the Race to the Bottom: Providing Standards for Class Action Settlements.”
PROFESSOR Roger CRAMTON: My theme has a lot in common with what you’ve just heard, except that it will concern the process through which class action settlements are approved. The ideal result would bring some standards into what now is largely a void.
One caveat: I’m dealing only with large, complex class action settlements, usually of a mass tort character. I’m not dealing with garden variety small class actions that are not limited and that can go to trial, rather than simply being certified for purposes of settlement. For example, suppose 23 homeowners in a particular development have a common claim against the developer. The damages are somewhat different but they combine them in a class action. They hire an attorney. Their class representatives are likely to take a very active interest in the attorney’s behavior. The majority of the class is going to generally get what it wants in terms of accepting a settlement or going to trial. That’s a different animal entirely. I’m not dealing with that type of class action.
Three quotations set the stage for my remarks. The first is by Michael Jordan, an R.J. Reynolds attorney, boasting at a shareholders meeting in 1988 of company victories in smoking victim cases: “The aggressive posture we have taken regarding depositions and discovery continues to make these cases extremely burdensome and expensive for plaintiffs’ lawyers. To paraphrase General Patton, the way we won these cases was not by spending all of Reynolds’ money, but by making the other son-of-a-bitch spend all of his.”
The second is by Bill Lerach, one of the best known plaintiffs’ class action lawyers and a senior partner in Milberg, Weiss: “I am a very fortunate lawyer. I have no clients.”
The third is by a federal district judge who wrote, when approving a class action settlement: “In deciding whether to approve this settlement proposal, the Court starts from the familiar axiom that a bad settlement is almost always better than a good trial.”
What do these statements tell us about the current use and abuse of class actions today, especially in the tort context? First, the R.J. Reynolds comment. It surely was true about smoking victims’ cases in the 1980’s. In those years, asymmetries of representation often put individual small-firm plaintiffs’ lawyers against the powerful, enormously wealthy tobacco companies. These companies did in fact use every technique they could, including attorney-client privilege, to conceal documents in discovery that should not have been concealed, which led to unjust results in many cases. At that time, before the factual predicate was developed for fraud and deceit claims by smokers against the tobacco companies, the companies had a strong defense, still potent, that smokers had sufficient knowledge of smoking’s dangers and therefore assumed those risks.
What a tremendous reversal of fortune since then. A group of plaintiffs’ lawyers, who became multi-millionaires from the asbestos wars or other victories, invested their resources in targeting the tobacco companies. They wielded political power and got favorable legislation passed in some states that eradicated the assumption of risk defense. Discovery in these later cases produced documents that suggested an industry-wide conspiracy to suppress evidence and possibly commit fraud.
Now it seems that the asymmetry is working the other way. The cost to the plaintiffs is relatively low in a situation where the defendant faces thousands of lawsuits, both individual and class actions, in multiple jurisdictions, which threaten the very solvency of the tobacco companies. This is a situation where the unfairness is reversed from earlier cases. It’s almost impossible to litigate and defend this multitude of lawsuits, so the companies are forced to settle. What we have, as a result, is a corrupt and collusive national settlement, violating constitutional norms of representative democracy and federal supremacy, not to mention the export/import clause and the commerce clause.
The plaintiffs’ lawyers have made an unbelievably profitable investment in the tobacco wars as a result of the master settlement agreement now adopted by every state. The question now is what will these lawyers do after they’ve each bought their Lear jet and yacht? What new targets will they pursue with their wealth? It’s instructive that on the day that plaintiffs’ attorney Richard Scruggs said he was targeting HMO’s, $12 billion in value was lost in HMO stocks.
A corporate defendant facing a large number of individual and class action cases has litigation costs and risks that are much larger than those of the plaintiffs’ lawyers. Collusive class action deals with one or more of these plaintiffs’ lawyers may well be their best strategy.
My second point concerns Bill Lerach’s remark that, as a plaintiffs’ class action lawyer, he doesn’t have any clients. That’s an accurate statement of today’s reality; this is the age of mass tort and consumer class actions. These actions are created, in every respect, by lawyers. Lawyers develop the facts, develop the legal theory, and seek out class representatives, who are often token figures who tend to know nothing about the case. The lawyers then bring lawsuits in one or in multiple forums. They make deals with other class action lawyers to fight off competitors or to gain lead counsel status, and they decide when and for what to strike a deal with the defendant companies.
These class action lawyers act as entrepreneurs. They consider themselves (like all of us consider ourselves) as white knights doing the good work of the world. They’re bringing wrongdoers to justice, deterring corporate misconduct, and the like. But even with the best of motives, they’re in a very difficult situation, which some of them will reveal if you talk to them candidly. If they don’t strike a deal with the defendant, the defendant will seek out another plaintiff’s lawyer and strike a global deal in another forum that will bind the whole class. This deprives the first lawyer of any return on the work he has done. This process is fairly characterized as a race to the bottom. The structural incentives and awards in this system are off balance and wrong.
Everyone agrees that a large class has no motivation or opportunity to monitor the actions of class counsel. In the vast majority of these cases, the plaintiffs’ lawyers are acting as rational entrepreneurs and the defendants and their lawyers are ready with attractive deals. Consequently, what often emerges is a generous attorney fee and a paltry recovery for the class action plaintiffs. The dangers of this self-serving behavior are aggravated by lawyer-shopping and forum-shopping problems.
The lawyer shopping problem has already been mentioned: if a particular lawyer is making a very good case against the defendants and the settlement seems likely to come at too high a price, the defendants seek out another lawyer in another forum with whom they make a secret deal. This settlement is then presented to the court, along with the filing of the class action, and includes, of course, a handsome attorney fee provision.
The forum shopping problem occurs when a defendant shops for a forum, be it a state where the law is somewhat more favorable or a federal court that is known to be friendly in particular matters. In essence, we have a reverse auction where competing class lawyers underbid each other in order to settle their own action first, foreclose the others, and be the only lawyer to capture the attorney fee award.
What about the process features of class actions and the role of the judge? Do they vindicate the rule of law? Rule 23 requires the court to approve a class action settlement, give other class members notice and the right to object or opt out, and provide judicial review of attorneys’ fees and the other aspects of the fairness hearing. The rule also requires that class counsel fairly and adequately protect the interests of the class.
My third quote states the reality here. “A bad settlement is almost always better than a good trial.” Judges are self-interested actors whose major desire is to remove cases, especially complex ones, from their dockets.
Empirical studies show that over 90% of class action settlements are approved by federal courts, and an even higher percentage by state courts after so-called fairness hearings that often last 20 or 30 minutes.23 There are rarely any objecting parties who contest these settlements. The only information the judge has is the information given to him by the settling parties, who have no obligation to be candid about the fee allocation between the various lawyers, the deficiencies in the settlement, conflicts of interest involved, or what goes into calculating the fee. By and large, judges do not go out of their way to ask hard questions or pursue possible problems.
I think there’s wide agreement among scholars and observers in this area that what I’ve said is largely true, although most people would not put it as strongly. I’m not arguing for the abolition of the class action device; indeed it’s very necessary. As evidenced by recent cases, however, it’s in bad shape and needs to be reformed. The rest of my remarks concern what we can do to improve the process standards under Rule 23, to encourage judges to be more stringent in examining these settlements, and to give them sufficient information to do so.
We need to do three things. First, in large cases, we must ensure that the fairness hearing takes on the safeguards of an adversary proceeding, rather than an ex parte one, with adequate discovery, a complete record, and elaborate findings by the judge. Having a complete record is the only way to vindicate the appellate process.
Second, in all cases we must encourage or require the production of information that will fully inform the judge and complete the record for appeal. Third, we must require class counsel to actually do the work that would justify the large fees they routinely get.
Returning to Judge Keenan’s remark that a bad class action settlement is almost always better than a good trial, we must ask: better for whom? Certainly not for the absent members of the class, whose legal claims have been erased. Certainly not for democratic institutions, which have been largely displaced by privately created legislative schemes that operate without public participation of any kind by elected officials.
In these settlements, the only people who benefit are class counsel. Defendants get the benefit of paltry settlements, and the judges are relieved of doing the honest-to-God work of trying class actions and deciding legal questions on their merits.
What should we do? We need to introduce the adversarial process in large-scale class actions, and we should do it by statute or rule. We should set an arbitrary dollar amount. For example, if the settlement is $100 million or more, the court must appoint a guardian ad litem who is funded by the settling parties out of the amount of the award. This guardian would be a devil’s advocate, charged with producing information relevant under the law to the fairness and adequacy of the proposed settlement and the reasonableness of the attorneys’ fees. Neither of the parties will like it, nor will the judge. But it’s the only way to do justice in this area.
We generally adhere to the adversarial system in our judicial process, but what we have here is a charade. Judges can only deal with the information presented to them and all they currently hear from the settling parties is, “This is a wonderful deal.” They hear all the good things and none of the bad things.
Second, a statute or court rule should impose on the settling parties the same obligations of candor with the court that are imposed on a lawyer in an ex parte proceeding: A duty, under Rule 3.3(d) of the Rules of Professional Conduct, “to inform the tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse.” The absent class members should be treated the same way as absent parties in an ex parte proceeding.
Third, Rule 23 needs to be modified and amended to require more specific findings by the trial judge on a number of appropriate matters. Judge William Schwarzer, who’s had tremendous experience in this field, has written a series of articles on class actions. He wrote a very good piece that recommends eleven findings that should be required by judges when they pass on a Rule 23 settlement, under Rule 23(e). We need this reform because it requires judges to explore questions regarding conflicts of interest or future claimants being treated adequately.
Fourth, with respect to attorney fees, the Goldberger mentioned earlier sheds some light on the way we ought to go.24 We should implement a percentage fee method, but require that the class counsel provide full hourly data and essentially meet lodestar procedural requirements. The method should normally be based on a percentage fee, except where the calculated fee egregiously departs from the worth of the hourly time the lawyers put in, in which case it should be modified to some proportionate relationship.
You have to remember that in the class action settlements we’re discussing, cases are certified only for settlement. They cannot be tried. The lawyers who are settling do not have the leverage of saying, “We are going to go to trial unless you give us a better deal.” They are always worried that another lawyer is going to settle with these same defendants in another venue and deprive them of their fees. These are special situations and they need special provisions.
Now, the coupon settlements are an extraordinary scandal. But they could be taken care of easily. All we have to do is establish, by rule, that the class action lawyers only get paid if the benefits are paid to the class, rather than lawyers offering class members a free airline ticket which only one half or one third of the class ultimately uses. In such cases, the value that the parties set on the benefits of the settlement for purposes of calculating the attorney fee is always inflated.
What we should do is make the class counsel earn their pay by monitoring the settlement, encouraging class members to use the benefit, and compensating attorneys only for the group that claim the benefit. Lawyers would get paid over time, rather than up-front and never thereafter following up to provide data on how many class members actually received a payment or benefit.
Finally, and perhaps most importantly, the current position of American judges is that members of a class do not have the right that all other clients have once representation is over. They can not bring a separate suit charging their lawyer with breach of fiduciary duty or professional malpractice. They should have that right. It’s an illusion to think that the habitual finding that the class was adequately represented is enough. This is never a fully litigated determination of whether or not class counsel behaved competently and ethically during proceedings. Members of the class, if they did not opt out, should have a right to bring separate malpractice actions.
If these changes were made, Bill Lerach and his firm might have to purchase malpractice insurance. One interesting aside—maybe it’s some poetic justice—when Fischel and Lexicon hit the Milberg Weiss firm with a third party action potentially worth hundreds of millions of dollars in damages, Milberg Weiss settled for $50 million. It turned out they had no malpractice insurance. They believed Bill Lerach’s logic and thought, “We have no clients.” Therefore, we don’t need malpractice insurance. The firm members had to cough up the $50 million.
PROFESSOR CHARLES SILVER: I’ve decided to use multimedia and to give you something to look at.
I’m going to advance two arguments in my talk, which is entitled “Much Ado About What? Where is the Evidence of Excessive Attorney Compensation?” First, there is no rigorous empirical evidence that attorneys are frequently overpaid in private representations, class actions or state tobacco cases. Second, there is some evidence that attorneys who handle class actions often are underpaid. They’re paid too little, despite the fact that they’re earning millions and billions of dollars. I do not expect this to be a popular position to take in front of this audience.
One of the things that has bothered me about most of the debate here so far is that it’s theory deprived. Nobody has started out by telling you what you would expect to see in the way of attorneys’ fees in a perfectly competitive market.
In labor market equilibrium, we would expect to see that differences in the level of compensation for service providers would reflect real differences in those service providers’ contributions. That is, real differences in the costs they’re bearing, in the skills they’re bringing to the task, and in the risks that they’re taking.
Why is it that we expect differences in compensation to reflect differences in levels of service? Because if there were excessive compensation available, then other service providers would have an incentive to enter those practice areas and compete away the profits being made in the form of excess compensation. If we have freedom of access to the legal markets and freedom of movement laterally among the specific practice areas of the legal market, we should not expect to see significant profits being collected. These stipulations beg the question: are there barriers to entry to the legal market? There used to be. In the grand old days of legal ethics there used to be many barriers to entry. But guess what? There aren’t anymore.
I have two quotations for you. The first is from Richard Abel’s The Transformation of the American Legal Profession: “The entry barriers that lawyers painfully constructed over half a century have failed to withstand the assaults by the growing numbers aspiring to become lawyers. This should not be surprising. Supply control in a capitalist economy can never be more than temporary. Its very success engenders more vigorous attacks.”25
In the second quotation, Robert Nelson and David Truebeck say roughly the same thing, but you don’t need to read them. Just remember Dan Quayle. There are too many lawyers in this country. America has 70% of the world’s attorneys and we’re getting close to the one million-lawyer mark. It is not possible for the bar to have swelled to such a size and still maintain that there are significant barriers to entry into the legal profession.
There is a growing population of lawyers that, in my opinion, reflects the growth of our economy. If you don’t believe me, take a look at my article in the current Yale Law Journal entitled, What’s Not to Like About Being a Lawyer.26 It contains cites and data about the positive correlation between economic growth and the growth of the legal profession, both in this country and others.
What has happened as a result of the demise of barriers? The answer is exactly what you would expect in a competitive market: the prices of legal services and lawyers’ salaries have fallen. A quotation from Sander and Williams supports this contention: “From 1970 to 1985 the price of legal services fell by 10%. From 1972 to ’82, partner income fell 15%, and incomes of sole proprietors fell a remarkable 46%.”27 Richard Posner, that noted liberal, explains another result of lawyer proliferation: “The increase in competition that has occurred since the 1960’s has forced lawyers to serve their clients better and so to rely less on mystique and more on specialized knowledge that has general value to the client.”28
What’s happened in the legal sector is exactly what one would expect to see in a competitive market when barriers to entry are reduced. Supply goes up, price goes down, and quality of service improves as lawyers compete with one another aggressively for business. As a result, we also see that contingent fee lawyers rarely receive windfalls. Studies have shown that the returns earned by contingent fee lawyers are not much out of line with the returns earned by lawyers who work on a guaranteed compensation basis.
Herbert Kritzer studied 511 Wisconsin contingent fee lawyers for a 1997 article.29 What did he find? Lawyers’ fees from contingency fee work do not differ substantially from the median rate charged for hourly fee work. That’s exactly what we would expect to see, because if it were possible to make buckets of money being a plaintiff’s attorney without taking any risk, all of the securities, income tax, and trust and estates lawyers would enter the contingency fee market.
Stock and Wise conducted a different empirical study. They looked at data collected on ordinary contingent fee representations in a variety of different jurisdictions. What did they find? Compared to non-contingent cases, the estimated risk premium for cases taken on contingency is about 16%.
What we’re seeing is exactly what we would expect to see in a competitive market. Contingency fee lawyers take risks that guaranteed-hourly-rate lawyers do not take. Consequently, they earn somewhat more than those lawyers. That means the market is working the way it should. We should not expect to see them earning exactly what other lawyers earn because they’re not delivering the exact same services that other lawyers are delivering. But enough about contingency fee lawyers and individual representation. What about contingency fees and class actions?
A lot of gross exaggeration has taken place here about what the fees are in class actions. Most class actions are very small. They settle for a couple of million dollars and the fees tend to be a half a million dollars or less. What we would really like to know is why class actions are like that. Why is it that so many class actions settle for small sums?30
One possible reason is that fees are too small to justify the risk that lawyers would incur to take large cases and prosecute them successfully. That’s not just my opinion, it’s also the opinion of Stock and Wise. Who are Stock and Wise? They are professors at the Kennedy School of Government who are trained economists. They published a piece in Class Action Reports in which they apply an economic model that looks at something called risk aversion.31
Risk aversion is something that you haven’t heard anyone talk about on this panel. That’s because in individual plaintiff representations, risk aversion really isn’t a problem. Lawyers who handle personal injury cases have diversified portfolios. They’re like stockholders. They have lots of shares in lots of different companies, so they have a predictable rate of return on their portfolios.
Class action lawyers aren’t like that. They have a relatively small number of cases, each of which represents a very large non-diversifiable risk. They are incredibly risk averse. Now, the rational thing for a risk averse person to do when faced with large risks is to settle cheaply unless highly motivated to do otherwise.
Stock and Wise say, “Multipliers would have to be substantially higher than recent court-awarded multipliers to induce firms to take on larger cases with lower success probability.” As it is today, class action lawyers will take on cases where the likelihood of recovery is at least 70 to 80%. They then settle those cases or sell them out cheaply because they’re not incentivized to take the risks that would be required to make something of them. They’re not even going to take cases that have a 50% likelihood to win because the payoff does not warrant it.
The most significant problem we have in class action litigation today is not over, but under-compensation of lawyers, as well as a failure to tie lawyers’ compensation to the risks that they incur in these cases. Why do we have this problem? Because everybody thinks about fees in class actions in the wrong way. Everybody thinks about fees in class actions in terms of legal ethics. Fees in class actions have nothing to do with legal ethics and are not governed by ethical principles. Class actions are about due process of law, not legal ethics. The purpose of the class action is to insure that a person who has not actually appeared in court is bound only when he or she is adequately represented.
Accordingly, the manner of regulating fees in class actions should be calculated with an eye to insuring that every class member is adequately represented. What does that mean? It means we should regulate the fee in a way that encourages lawyers to maximize the absent class members’ net recovery. If it turns out that you have to pay the lawyer $100,000 an hour to overcome risk aversion, do it. That’s what due process requires.
If such a fee is inconsistent with the state bar ethics rules that limit fees to a reasonable amount, I say too bad for them. Judges routinely—I emphasize routinely—ignore state bar ethics rules when managing class actions because they understand that class actions are not about state bar ethics rules. They’re about due process.
Every state in the country has something called the aggregate settlement rule. But no judge presiding over a class action has ever applied it to a class action settlement. Why? Because the aggregate settlement rule allows a group lawsuit to settle only with the unanimous consent of every client who participates. Can you imagine the difficulty of getting every class member to consent to a class-wide settlement? It would never happen. If we’re going to have class action settlements at all, we can’t apply that rule. So judges don’t. Judges also ignore the duty of loyalty rules in class actions. They allow lawyers to do all kinds of things in class actions that lawyers representing individual clients would not get to do. They also ignore the duty of obedience.
My point is simple. Judges should also ignore the fee rules. They should set fees in class actions with an eye to maximizing the net recovery of class members and they should not care one whit about the criteria that state bars have adopted. I explain all of this at much greater length in a forthcoming article in the Tulane Law Review and I have explained it in other writings I have already published on class actions.32
Why are fees in class actions so controversial if, as I believe, they are too low? It’s because when fees in class actions are handled as they should be, in a manner that’s calculated to maximize the value of the claims, defendants get upset. The defendants are the people who are here today. You, the defendants, don’t want fees in class actions to be handled in a manner that maximizes the value of class actions. You, the defendants, want fees in class actions to be handled in a way that minimizes the value of class actions. So you complain when judges try to tie the fees to the recovery. That’s one reason that fees are controversial.
By the way, it really vexes me that people keep blaming plaintiffs’ attorneys for the reversions that we see in class action settlements. I do not know a single plaintiffs’ attorney who has ever proposed that unclaimed funds in a class action should revert to a defendant. Defendants always insist on that. If defendants were willing to give up on reversions, which everybody including me regards as terrible, reversions would disappear tomorrow. I don’t know why plaintiffs’ attorneys are being blamed for this feature of settlements.
Why else are class action fees controversial? Defendants don’t like these fees, so they underwrite tort reform movements. The tort reform movements spend lots of money getting abuses of fees into the media, and certainly there are lots of fee abuses in lots of different cases. All the statistics that I’ve talked about are aggregate statistics.
The American legal system is huge. If you look hard enough, you’ll find all kinds of things to complain about, and defendants and tort reformers have created a mechanism that gets distorted cases into the media and keeps ordinary cases out. I offer as an example the case of the grandmother who spilled hot coffee into her lap at a McDonald’s. Everybody’s heard of it.
Why have you heard of the McDonald’s case? Because millions of dollars were spent to make sure that you did. But the McDonald’s case is just one case out of a zillion. Its importance is minuscule, and I’m sure that what you heard about it was totally incorrect. What we have is a one-sided media affair.
Finally, I want to address the tendency to think about fees in class actions in ethical terms instead of due process terms. Let’s consider the tobacco cases.
I have a simple thesis. There’s nothing wrong with the fees that were promised in the tobacco cases. Why? For every reason that I can think of. First, the contracts were made by sophisticated clients who were themselves represented by lawyers. Second, the market provided opportunities for the attorneys general to shop for the lowest possible rates. In Texas, I know for a fact that the attorney general hung out a “help wanted” sign and for a long time could not get any lawyers to take the case.
Moreover, tobacco case fees varied with market conditions. Lester Brickman has studied the fees that were offered by the states. I think he will agree with me that, generally speaking, the fees declined over the course of the litigation. As it became clearer that there might be sizable recoveries, the fees declined—which is what you would expect to see in a competitive market. The private attorneys involved took exceptional risks. Remember, they were asked to finance millions of dollars out of their own pockets. That’s incredible, given the size of the firms involved. Start throwing in risk aversion, because these are non-diversifiable risks, and the fees have to go up astronomically.
My favorite point, though, is this. When the attorneys general announced these contracts back in the early or mid-1990’s, nobody complained. I was there in Texas in 1996 when our attorney general, Dan Morales, announced our contract. It said 15% of the recovery would go to the lawyers. You don’t win anything, you don’t get paid. Did Governor George W. Bush jump in and say, “Hey, that’s excessive?” No. He said, “I leave this decision to my attorney general.” What did John Cornyn, our current attorney general, say at the time? Not one word. What did the seven state legislators who subsequently intervened in the case to attack the payment of the fees say at the time? Nothing. They were all in hiding.
Why is it that nobody complained back in 1996 when our contract was announced and it was publicized that 15% of the state’s recovery, which was then thought to be around $400 million, was excessive? Because it wasn’t unreasonable and because they were cowards. Our detractors knew they couldn’t stand up to object without appearing to be in the lap of the tobacco industry.
A lot of this, I think, is politically motivated. Why is it politically motivated? Trial lawyers support Democrats. No kidding.
Here’s an article from The Dallas Morning News this week. “Trial lawyers give heavily to Democrats. Tobacco attorneys among biggest donors.” It basically says the tobacco lawyers in Texas are Governor Bush’s worst nightmare. And they are. My take on this is very simple. It’s their money. Let them do whatever they want with it. They can give it all to charity; they can spend it on jets; they can give it to Democrats. I don’t really care. That’s not a matter of legal ethics at all.
Now, there are other reasons why the attorney fees in the tobacco cases are controversial. One of them is legitimate. The controversy over tobacco fees raises legitimate concerns about excessive governmental power, but this is miscast as a concern about the ethics of contingent fees. I’ll read you a quote. “Businesses have undertaken a campaign to prevent states from retaining private attorneys on a contingent fee basis, the compensation arrangement that enabled the attorneys general to bring the tobacco companies to their knees. At stake in this epic struggle is nothing less than the balance of power between the private and public sectors.”
That, it seems to me, is the legitimate issue at stake in the tobacco cases. How much power are the states going to have to exert over private businesses? If they have access to contingent fees, they have tremendous power. If they don’t, then their power is considerably less. Who am I quoting? I’m quoting myself. There is a legitimate issue here. I am as anti-regulation and as fearful of government power as any person sitting in this room. I guarantee you, given the positions I’ve taken in public, that if Governor Bush becomes President, I will be more fearful of public power than any of you. But you know what? Fear of public power is not a good reason for not paying these lawyers.
Why is that? Because governments do all kinds of things that they should not do, including things that are dumb and things that are clear abuses of power. There are many projects that might be better left to the private sector: school finance, garbage collection, public transportation, collection of child support, insurance for bank deposits and retirement funds. There also are many public projects that are misguided, especially the war on drugs.
That said, I think that anyone who contracts with a government to provide a service in connection with any one of these projects is entitled to be paid the contract rate. The fact that the government is doing something that’s stupid or excessive is not a reason for breaching a contract with a private service provider. Teachers, military contractors, all who make contracts with government are entitled to be paid the contract rate. They do not deserve to have ethics professors or politicians carping about their fees after they have done what they agreed to do.
MR. BARNES: We now move to the Washington, D.C. wing of the panel, beginning with Michael Horowitz, who many of you know is the senior fellow and director of the Project for Civil Justice Reform at the Hudson Institute.
MR. MICHAEL HOROWITZ: I agree with the core of what Charlie Silver has said. With him, I strongly believe that legal fees should be based on a clear and fair relation between risk and reward. Charlie and I part company, however, when he claims that this can be done by letting the devil take the hindmost, by treating lawyers as businessmen and by treating clients as if they were simply commercial customers, by doing nothing but enforcing fee agreements as written by lawyers and signed by their clients. Charlie would trash the rules in existence, operative legal ethics codes that require fees to be reasonable ones, and would openly abolish the present fiduciary basis of the attorney-client fee relationship. (He would do so by simply not enforcing presently governing rules without repealing or amending them. But, let’s pass by the ethics and propriety of his “if-you-don’t-like-a-rule-let’s-simply-ignore-it” jurisprudence in the interest of debating the virtues and value of his arguments about fiduciary rules and standards.)
In making his case, Charlie offers a supposed analogy between attorneys and insurance companies. As he points out, insurance companies have large pools of clients, some of whom are young, healthy and unlikely to get sick or die, from whose premiums large profits can be expected to be made. But what Charlie doesn’t mention is that insurance companies are obliged by a complex set of generally enforced laws and regulations to balance those profits against the losses likely to be incurred by insurers’ obligations to offer insurance to riskier customer cohorts. What he neglects to mention is that the insurance business is a highly regulated one, where high rates of return generally lead to State-mandated rate reductions. It’s not “self-regulated” by bar association ethics . . . rhetoric enforced, if at all, only against a small handful of small-fry lawyers.
What we have, as Lester Brickman has made clear, is a situation where there is but the rhetoric of ethical regulation and fiduciary duty, and the reality, thanks in part to Charlie’s efforts, to an almost-complete (and increasing) real-world breakdown of enforceable ethical norms. We have busy judges who don’t want to get involved in fee regulation and who find it easier, as Roger Cramton has pointed out, to award or endorse flat percentage fees. In the case of attorneys’ fees, we have thus moved away from any semblance of regulation into the brave new unregulated world that Charlie posits.
Charlie thinks this world a swell one because he thinks that abandoning attorney-client fiduciary standards creates a better risk/reward relationship for both attorneys and clients in mass tort cases, creates a fairer balance between the work done by attorneys and the compensation they receive. This world will be in even fairer balance, he says, once mass-tort contingency fees get even higher.
My difference with Charlie pivots on the issue of whether, in the real world of today’s mass tort cases, there is often even the slightest relationship between the risks that increasing numbers of attorneys bear and the rewards they are increasingly receiving.
In making his case, Charlie highlights the McDonald’s case. It’s good advocacy for him to do so, for the hot coffee spill case was one in which, against great odds, a lawyer took on a brutally risky case and won. For that reason, I think it a strategic mistake for the business community—and for Fred Barnes—to present the McDonald’s case as a paradigm of runaway tort law.
I may believe that the lady burned by the coffee shouldn’t have won her case. But I also know that her lawyer took on substantial risk and deserved to be well compensated for his success—and I’ve got no beef with the standard percentage fee he received. On the other hand, I’d like to talk about the cases Charlie ignores—for example the paradigm claim of a patient whose wrong leg has been sawed off by a drunken surgeon. Today, when such a wronged, afflicted victim hobbles into a lawyer’s office, the lucky lawyer can expect to become a multi-millionaire at no risk to himself. His payoff will indeed be handsome enough to allow him to refer the case to another lawyer who will do the work and with whom he can split his fee and still make his million. As distinguished from Charlie’s insurance companies, lawyers today increasingly revel in such a world—one in which (as distinguished from insurance companies) they and they alone decide what cases to take and what fees to charge. Mass tort case lawyers now increasingly exploit the bar’s monopoly of access to the courts to mulct clients of millions and now billions of dollars, doing so “in exchange” for assuming few if any risks and while adding little and often negative value to their clients’ claims.
Which brings us to the tobacco cases, a Teapot Dome scandal that puts Charlie’s theories of risk/reward ratios in mass tort cases to real world test. In my view, the cases are a terrifying harbinger of what’s coming, and pose the largest single strategic threat to the well-being of America’s 21st Century legal, commercial and political systems. Here’s the record: Many lawyers in the recently settled tobacco cases will earn hundreds of millions and billions of dollars in fees for no-risk, copycat, late-filed representations, and even the lawyers who first brought the cases and assumed real risks of non-payment when they did so are scheduled to receive fees far in excess of any imaginable fiduciary standard and far in excess of what they needed to hope for as a quid pro quo for the representational risks they assumed.
Let’s look at but a mere sample of the seamy record of the tobacco fee awards that Charlie Silver purports to defend. In Maryland, Peter Angelos now seeks a $1.1 billion fee for a case described by the President of the Maryland State Senate (who thinks Angelos should get a mere $500 million fee) as one in which the legislature—and I quote—“changed centuries of years of precedents to guarantee [him] a win.” Angelos, by the way, is the largest single contributor to the Maryland Democratic party and is a controlling, if not the controlling figure in Maryland politics today. This is the man who wants 1,100 million dollar bills, taken from the taxpayers of the State of Maryland, for a case that he couldn’t lose.
In the Florida tobacco case, the lawyers have been awarded a $3.43 billion fee. What’s a billion dollars, as Everett Dirkson used to say, except that, in time, a billion dollars here and there starts to add up. In the Florida $3.43 billion case, the lawyers were retained after the legislature changed the laws of the State to create, in the words of the statute’s author, a “slam dunk case that couldn’t be lost.”
On and on the tobacco fee scandal goes, with multi-million and billion dollar payoffs to politically wired Democratic and Republican attorneys. We are looking at $500 million a year in fees scheduled to be paid to 300 lawyers more or less—that’s probably on the high side—for the next 10,000 years!!! We are looking at $300,000, $400,000 per hour fees in zero risk cases, and that is the nature of a rotten Teapot Dome scandal that will give a handful of lawyers sufficient capital to, as they say, “invest” in and significantly control state judicial elections and entire political systems well into the 21st Century.
In one of the cases Judge Walker cited, the court stated the obvious: that a $100 million case was not ten times harder for a lawyer to conduct than a $10 million case, and that it was therefore wrong (and unfair to his client) to permit a contingency fee ten times larger in the $100 million case and that it was equally unnecessary to do so in order to insure effective representation in future cases of that sort.
To get closer to home, let me ask whether a $250 billion case is a thousand times harder for a lawyer than a $250 million case? Of course not. The kind of compensation we’re looking at from multi-billion dollar cases is creating a new class of billionaire lawyers—forty, fifty, or sixty of whom will be in the Forbes 400 in the next ten to 15 years unless we enforce fiduciary standards when dealing with fees in mass tort cases.
The ironic thing is that a $250 billion case is not 2500 times harder for a lawyer than a “mere” $100 million dollar case—all things being even close to equal, it is in fact less risky to take on and easier to win. The reason for this is nicely captured by Judge Posner in the Rhone-Poulenc case.33 This was a case where the District judge had certified as a class action a series of claims brought by a highly sympathetic group of class plaintiffs, hemophiliacs with AIDS who had sued companies that had provided transfused blood.
Noting that all of the plaintiffs had been aggregated into a single case, Judge Posner did a simple calculation. He found that the potential liability in that one case was greater than the net worth of all of the defendants combined. As such, he then rightly found that the class action certification required the defendants, as the price of playing the game of law, to bet themselves. Judge Posner thus found that to certify the cases into a single class litigation—a “merely” procedural decision—was the functional equivalent of a decision on the merits rendered against the defendants.
A defendant faced with a single case which, if lost, terminates its existence, is in the same position as a man confronted with a gun to his head and asked for his wallet. In such a situation, the most prudent course is to bargain for a share of your billfold. It’s imprudent to risk the life of a company on a single case, and the legal merits of a defendant company’s position will matter less and less in determining whether a defendant will thus be obliged to surrender to mass tort claims made against it. In such cases, the defendants’ lawyers will engage in a Kabuki to skinny down the size of the ransom that their client pays. And, this will be increasingly truer as tort lawyers, flush with tobacco and other mass tort case fees, have billions to “invest” in elections of state judges.
Imagine yourself the general counsel of McDonald’s, or the general counsel of Exxon a few years from now. Imagine there are floods on the East Coast and droughts in the Midwest. Imagine then that the Midwestern farmers and the East Coast beach house owners are suing the oil companies for the value of their properties. Imagine that they are joined in their claims by state attorneys general and other public officials alleging billions of dollars of lost tax revenues caused by alleged global warming caused by hydrocarbon fuels. Imagine further that your files have memos speculating on the relation between automobile fuels and higher temperatures. Finally imagine that ten to fifteen state supreme courts are dominated by tort lawyers as a result of the elections of, and election campaigns financed by, billionaire attorneys. (I think the ten-fifteen speculation modest, given the likely effect of multi-million dollar lawyer investments in state judicial elections.) As Exxon general counsel, what are your alternatives?
Or, let’s say you’re the general counsel of McDonald’s and are being hit by lawsuits based on the high cholesterol content of hamburgers brought both by states and medically impaired customers. Leave aside that legislatures have refused to bar the sale of Happy Meals. Forget that you tried to introduce low fat hamburgers, and that consumers refused to buy them. The simple fact of the matter is that you’ve almost got to be crazy to defend yourself to judgment against such suits, irrespective of the merits of your defenses. (Among other things, your stocks will be phenomenally depressed for as long as the cases go on.) In the end, your job as general counsel of McDonald’s will be twofold: first, make sure that competitors like Kentucky Fried Chicken are also defendants, and next try to reduce the amount of the settlement so that the tort/excise tax on every hamburger eaten is not 25 cents but 15. You will work to ensure that the global warming case only adds 15 rather than 20 cents to each gallon of gas—or 75 cents rather than a dollar to every pint of booze or $25 rather than $50 to every pistol price tag. What is the best way to do that? Easy. Work with the guys who control the litigation, the thousand or so lawyers who are colluding with state attorneys general seeking free revenue windfalls that come into state coffers without anyone ever having to vote for a controversial tax increase. As defense attorney here’s what you do: give the lawyers six rather than three cents on every hamburger eaten from now till the end of time, three or four cents per gallon of gas rather than a mere penny, five rather than two dollars per pistol. You get the point. Do that and you’ll get your settlement, with only 15 cents added to the price of hamburgers.
Now, where is Congress, where are the state legislatures, in all this business? Nowhere. What of taxation without representation principles, of constitutional provisions vesting legislatures with the power to tax? Again no place. These sorts of cases will corrupt our system, and corrupt it more fundamentally than is commonly supposed. And they will produce tens of billions in unethical fees in straight-out blackmail cases whose legal merits and/or lack thereof will be of increasingly marginal significance.
MR. ROBERT PECK: This has been a very entertaining day for me. I’ve witnessed leaps of logic and heard factual predicates that can only exist in a world of computer-generated animation, where dinosaurs come alive and take on human qualities. So we’ve achieved at a bargain price, on this panel, what it took more than $200 million for Disney to do in it’s movie Dinosaur.
Earlier panelists have described studies I have read as though they say something entirely different from the reports’ express words. The ATLA web site has also been scrutinized, and the news headlines reprinted on the site have been portrayed as reflections of our policy. I’ve heard our convention, which is scheduled from July 29 to August 3, moved by one speaker to sometime in June. I’ve heard celebration over the fact that ATLA lawyers did not sue over Y2K because of Chamber supported legislation, yet that legislation exempted personal injury claims from it’s coverage, which, of course, is what our lawyers sue about. Instead, I would have expected embarrassment. The lack of problems or litigation exposes the hoax that there was a Y2K litigation crisis. Even in the Third World countries where they did not spend money to fix the alleged problems, there did not seem to be any problems.
And I’ve heard a New American Rule announced, a Rule where sophisticated clients—i.e., the clients that are members of the Chamber—are exempted. It exists only for consumers who actually sue the members of the Chambers. If that isn’t a virtual reality in terms of credibility, I don’t know what it is.
This attitude seems to be at the core of the complaints about the tobacco fees as well—lawyers are supposedly going to spend their fees, according to today’s speakers, on state supreme court races. This is a common complaint from the business community; however, the business community has targeted those races as well and achieved the majorities they wanted in Texas and Alabama by precisely the tactics they imagine on the part of this handful of tobacco lawyers.
Accusations of unfair campaign practices in judicial elections were first made this year in South Carolina by a front group called Citizens Against Lawsuit Abuse, which charged that plaintiff lawyers were flooding the campaign coffers of their favorite judges. Yet, when the South Carolina newspapers actually looked at the election records, they found that defense lawyers—lawyers for businesses—actually dominated in terms of campaign contributions.
My fellow panelists apparently live in a different world than I do. I submit that their world consists of bugbears that don’t exist in the real world.
In this world, legitimate claims are always paid and lawsuits are rendered unnecessary. Let me talk about one of these “obvious” liability cases, where payment should have occurred. All of this debate, frankly, is very theoretical to me. I’m a constitutional lawyer. I’ve never handled a personal injury case. I’ve never handled a contingency fee case. But this past fall my mother slipped and fell in a grocery store and it became real to me. She was 76 years old. She was caring for her then dying sister, shopping in an unfamiliar store. They failed to put out the little signs that warn you about a wet floor. Her shopping cart slipped out from under her hand and she slipped and broke her arm.
Now, this is a tough old lady. She doesn’t use Novocaine when she goes to the dentist. As soon as she fell down, the store manager came over and said, “It’s all our fault. Just send our insurance company your bills. We’ll pay for it.” She incurred about $5,000 in medical costs. $5,000 to her is a substantial amount of money. She collected the relevant papers and sent the information to the person at the insurance company that she was told to send it to. In response, she received a letter saying liability should be borne by the cleaning subcontractor, which unfortunately was out of business.
Under New Jersey law, where my mother lives, the supermarket is wholly responsible. She makes phone calls, she sends registered letters, she tries to get the insurance company to respond. She’s stonewalled. Now, $5,000 isn’t enough money for the kind of time and expense it would take a trial lawyer to pursue this for her. This is a case of obvious liability. It just happens that her son works for the Association of Trial Lawyers. I can call a prominent trial lawyer in New Jersey who, I assumed by reputation alone, would cause the company to wake up and say, “Okay, we’ll pay the medical bills,” because we’re only talking about $5,000.
Instead, he gets stonewalled. The insurance company knows if they waste his time he’s not going to spend the time on the case. They were wrong in this instance simply because this was my mother. But what they assumed is more often the paradigm case in the “apparent and obvious” liability instance. We can talk about all these other things, but the fact of the matter is that the quotation you heard earlier from Roger, from the New Jersey case, is the obvious strategy that is often used to wear out the plaintiffs’ lawyers because they are capped. If they have a certain percentage of a pretty much guaranteed recovery, you can lessen their economic incentives simply by dragging out the case.
I know that my invitation to appear today is a function of my position with ATLA. So let me begin addressing this panel’s topic by describing a number of propositions that ATLA supports. These are resolutions that we have adopted with respect to the issues under discussion today. But first, let me say that the fear of trial lawyers having tons of easy money to spend on all sorts of things is a myth. The majority of our members do not make what a first year associate in a law firm in Washington, D.C. makes. In fact, the majority of our members make less than $100,000 a year. I do wonder where all these excessive easy fees are hiding.
As for ATLA policies: we believe that contingent fees are the key to the courthouse for many people, particularly from the middle and lower classes. Only through a contingent-fee lawyer can many individuals hold people accountable for their injuries and receive just compensation. Further, some of the charges leveled against these lawyers ring hollow because contingent-fee arrangements operate as powerful screening mechanisms that prevent frivolous lawsuits from being filed. Consider that plaintiffs win fewer than half the jury trials, which is a powerful disincentive to speculative lawsuits.
We believe that class action suits can be important vehicles for consumers to halt and deter wrongful conduct. At the same time, we recognize that class actions have the potential to affect individual rights adversely and could interfere with an individual plaintiff’s right to exercise choice of counsel and the right to trial by jury.
Accordingly, we believe that tort and consumer causes of action should be prosecuted as class actions only when society’s interest in deterring wrongful conduct can be maintained, when individual litigation meant to address that wrongful conduct would be impractical, and when the rights of victims to fair and timely compensation can be protected.
ATLA opposes the use of class actions in a manner that diminishes the right to trial by jury or equal access to the courts. Meaningful exercise of the Seventh Amendment right to trial by jury requires, first, that plaintiffs have a choice about whether to pursue remedies individually or as members of a class out of which they have a right to opt out. Second, that they have a right to insist on individualized jury trials. Third, any waiver of the right to trial by jury should be a knowing and informed choice. Fourth, plaintiffs are entitled to the counsel of their choice, whose loyalty should be undivided by any conflict of interest.
ATLA opposes class actions that propose to adjudicate the rights of future claimants, i.e. those who have not yet been injured. Future claimants have rights that are not easily discovered; further, the causal link between the conduct of the wrongdoer and the injured party cannot reasonably be ascertained. The right to trial by jury for such persons must be preserved and such persons should be afforded the opportunity to opt out of the class action without penalty during a reasonable period of time following the date they were injured, i.e., when they could have reasonably discovered their injury, or when they could reasonably discover that causal link.
To the extent that a proposed settlement class or a proposed court rule amendment permitting certification of such a class might lead to the adjudication of the rights of future claimants or to collusive settlements, ATLA opposes such certification and opposes any rule that would permit it.
ATLA also opposes limited fund class actions and settlements unless there is a genuine danger that the defendant’s liability will so exceed the defendant’s available resources that a substantial number of plaintiffs would be deprived of a source of compensation under traditional tort proceedings. Moreover, the plaintiffs in question have to be accorded the same rights in regard to the defendant as any other secured creditor.
And finally, in our view the aggregation of mass tort claims should be restricted to those instances in which both the rights of victims to fair and timely compensation and the deterrent effect on those whose culpability has generated the risk are best served.
Now, having established our perspective on some of the underlying issues that go into the fee discussions, let me discuss the place of attorney fees. The typical rate, 33%, does represent a market rate. Many of our members charge less than 33%, particularly when they’re starting out, as a way of generating business. The standard arrangement, however, appropriately considers the compensation due to an attorney, the contingent nature of the litigation, the investment made by the attorney by advancing costs, the inherent risk of non-payment or underpayment, the quality of the attorney’s work, and the result achieved.
We know that class action Rule 23 and its state analogues give judges ample authority to police such fees. Courts, despite earlier comments, have increasingly been exercising that authority. Such authority should be exercised scrupulously, especially when the client is an unsophisticated consumer of legal services. In the case of the state tobacco litigation, for example, the state attorneys general were not unsophisticated consumers. No one has suggested problems in the attorney fees paid by the tobacco companies to their lawyers, which has amounted to more than one billion dollars a year.34
What some consider a useful approach to these fees is to chart them as hourly rates. Seen in that light, the fees seem outrageously high. But this is uninformative. In fact, the consideration of the number of hours expended is wrong-headed. By the same token, a sports agent who negotiates a tremendous contract for his under- performing professional athlete client will receive a significant fee as part of his percentage for what may be only a handful of hours’ work. Instead of being criticized for having an outrageous hourly fee, his or her skill is admired.
I submit that, in the case of the class action lawyer, it is more useful to look at the overall benefit to the class rather than to look at the hourly fee. When a utility cheats a consumer of a mere dollar a month, the amount of excess profit can easily reach tens of millions of dollars in short order. While an individual consumer in such an action could never bring an individual case to stop the practice, a class of consumers can. Even if the refund they ultimately receive from a year’s worth of utility avarice might amount to a mere twelve dollars, the reform of billing practices and the recoupment to all consumers of tens of millions of dollars is surely a benefit worthy of the contingent fee that was set up in the beginning.
Remember, by choosing a contingent fee lawyer, a consumer is in essence also agreeing to subsidize other cases where the case does not result in a payment and the risk is thus spread across a wider field, much like the concept of insurance. While my utility hypothetical provides what we consider a good use of class actions, ATLA has serious problems with the kind of coupon class action settlements that amount to giving consumers worthless credits while the lawyers receive substantial cash.
Herb Kritzer’s studies at the University of Wisconsin have been mentioned a number of times. But his studies demonstrate that on average contingent fees are not overpaid.35 He points out that plaintiffs’ lawyers incur risks when they invest time and energy in a portfolio of contingent fee cases, and that on the whole they do not earn excessive returns, particularly when this risk is taken into account. In fact, while there are many who get uncommonly exercised about the issue, there is, according to the leading civil procedure treatise, a virtual absence of empirical data showing any significant incidence of excessive fee.36 This is something that Charlie Silver has also shown.
The most frequently proposed alternative to the lodestar is problematic as well. On this, virtually everyone agrees. Moreover, as the First Circuit has recognized, it breaks significantly with precedent. Courts have and should exercise their express authority to approve class action settlements that are fair and reasonable, reject those settlements that are not, and properly award reasonable attorneys’ fees to plaintiffs’ counsel who have obtained an ascertainable economic benefit to the class members.
MR. C. BOYDEN GRAY: I think it is good to have plaintiffs’ lawyers. If you didn’t have trial lawyers it wouldn’t be much fun as a defense lawyer. In the South, where I grew up, there was a saying, “God bless the man who sues my client.” And I think that’s fair. But I do think that lawyers on both sides ought to be subject to the marketplace like everybody else, like the people that they serve.
Professor Silver suggests that the marketplace is working very well for both sides, the defense side and the plaintiff side. I’m not really sure about that. On the defense side, the legal profession is undergoing lots of jolts now. For example, you see dot com firms bidding up the beginning lawyer rates in an extraordinary fashion. The fact of the matter is, over the last decade or so, law firms have lost half their business to in-house corporate counsels. This basically happened because they were overcharging. The marketplace reacted to this in a kind of ham-handed way, by taking a lot of business in-house. This is not necessarily good for the company, because often you don’t get the independence of judgment that I think lawyers should be providing and clients ought to be demanding.
It has been estimated that lawyers’ rates on the defense side are between three hundred and three hundred and fifty billion dollars a year. And half of that is going to the in-house lawyers. Of course, the other half is still going to outside legal services. I think the computer is going to help us get to the point where we can operate, as the expression goes, B to B, that is, business to business. We’re seeing that happen all throughout the corporate sector. This should happen to legal services as well (and to related services such as accounting). Perhaps then there will be a more competitive basis for clients to seek counsel and counsel to sell their wares to their clients.
I also wonder about the marketplace on the plaintiff’s side of the matter. Judge Walker didn’t talk too much about his own innovation, which he described to me earlier as having come about almost off the cuff. The innovation is to use auctions, which he mentioned in the context of it being one of the four ways of dealing with common fund attorney fee compensation. The LIABA did a study called “Turning the Tables,” which examined what happens when you auction off lead class roles. The article and the study upon which it is based showed that auctions tend to bring the contingency fee down to 7%. This is a two thirds reduction from the sort of ordinary 20% that I think one gets in the big cases—not thirty three: it’s really probably more like twenty, 21%. With auctions we’re down to seven. Now, this is not all that unusual. A President Clinton appointee, Judge Kaplan, is doing the same thing in the New York vs. Sotheby’s case, the price fixing case. Judge Kaplan is going to auction off the lead role.
In response to this, development, Steve Susman, the brother of Tom Susman, said, “Oh, this is great. I’ve been cut out of this deal. Now I think I may try to get back into the game under an auction.” “Cut out,” he said. That was a very interesting way of putting it. Of course, a lot depends on how fair the bidding process was. Apparently, in Texas you had full open bids: Professor Silver says the whole thing was hawked quite openly, the way services or highway contracts are put out to bid. I’m not sure that’s true. What I’ve read in the press is that it was a very closed system. Unless you agreed in some way, informally, to engage in a little political campaign kickback, you didn’t get into the game. And, according to the press, Joe Jamail said he wasn’t going to play that game. Accordingly, he didn’t get a piece of the action.
Now Florida, in the tobacco cases, was not much better. Apparently the state attorney general’s office put out some feelers for firms to participate in the process; the feelers went out only to the trial bar and not to the defense bar. And even then there was an entry fee of ten thousand dollars which not too many people could afford to pay.
How far does this go? I don’t know. But I think the answer should be to subject lawyers to the same rules of competition that everybody else is subject to. I think that if judges would, like Judge Walker, put the lead class plaintiff out to bid, in cases involving governments and in private cases, so that there is competition in the marketplace, then many of the questions about ethics, reasonableness, and fairness would disappear. This is what I hope will happen in the future on both the defense and the plaintiff side.
At present, the incentives for lawyers are skewed. We have the worst of all possible worlds, where the defense lawyers are looking to cheat the class plaintiffs in a big case by quietly colluding with the plaintiffs’ bar, saying, in essence, “Look, we’ll give you a big cut. Let’s just get rid of this case and sacrifice the interests of both the defense and the real plaintiffs.” A little competition, it seems to me, would go a long way to resolving these issues.
MR. BARNES: I am going to forego my question about the McDonald’s case, except to say that I defend the news media in this instance, which I rarely do. Professor Silver described the case as one out of a zillion, which is why it got all that coverage. The media covers the planes that crash, not the ones that land safely. People know about the McDonald’s case because it is interesting news.
AUDIENCE QUESTION: This is addressed to Mr. Peck. You indicated that a client who chooses a contingency fee lawyer is in reality choosing to subsidize the lawyer’s other cases. My question is, where does that statement of yours come from? What is the lawyer’s motivation? Before you answer that, let me suggest a possible response, namely that this is utterly wrong as a matter of legal ethics. Unfortunately, this possible response of mine is in fact a reflection of what lawyers actually do. They impose costs on the no-brainer cases and create windfall fees to subsidize themselves so they can take on higher risk cases. Now, it seems to me your statement is consistent with Professor Silver’s view that legal ethics should have no role in fee setting. In that sense you both agree. But I would like to know the source of your statement that it is perfectly appropriate for contingency fee lawyers to overcharge one client in order to subsidize themselves to take on riskier cases.
MR. PECK: Well, first of all, let me disagree with your assumption that anyone is being overcharged. Here you have an opportunity to get a lawyer that you could not otherwise afford to pay because you could not otherwise afford a lawyer. You choose a contingency-fee lawyer with the understanding that if he does not win the case, he does not get paid. Now, simple common sense will tell you that if some of those lawyers lose their cases and they do not get paid, and since lawyers need to have a certain amount of income to continue to hold their shingle out there, then there is a way to figure out those costs. It is just like a business that does have loss leaders to draw in clients. That is part of the overall price setting. This does not mean that a client is being overcharged. What it does mean is that for this kind of a service there is a certain kind of market rate.
AUDIENCE QUESTION (Professor Brickman): I want to express a certain measure of sympathy with Mr. Peck, surprisingly. His larger concern, which I share, is that some of the easy cases appear to be tough because, as Boyden just said, the defense lawyer exploits the inherent conflict of interest between the plaintiff’s lawyer and his client. The defense lawyer says to the plaintiff’s lawyer “settle for peanuts,” and you’ll make one thousand dollars an hour. This is selling out your client. “But,” the conversation continues, “if you go for top dollar, even if you get it, I’ll see you make ten bucks an hour.” And that is a concern, a legitimate one. But I want to ask you if there is no response to that. What are the reforms on the table? Would the rule that exists in an area of contingency fee representation that really works, that is, in condemnation cases, apply to all contingency cases? In condemnation cases, the plaintiff’s lawyer can only levy his contingency fee on the value he adds to the claim, that is, the amount that he ultimately gets for his client that exceeds the state’s offer for one’s back yard or the home they want to build the road through. Now defense lawyers hate that as much as plaintiffs’ lawyers do, because they’re no longer in use. If you were to apply a rule like that in all tort cases, the defendant would have an incentive to put real money on the table and take the case off the table without having to pay the premium to the plaintiff’s lawyer or pay his own lawyers. Why can’t we have a setting that reverses the incentive for defendants to do all the bad things you say they do, and you’re right in thinking so, but one which would also cut out the windfall fees for the plaintiffs’ lawyers in the easy cases?
MR. PECK: I don’t think the incentives work in the way that you have described. I think that it would be very easy to institute a system in which, essentially, 50% is offered as a starting settlement cost and therefore basically reduces by 50% the possible fee. This would make it more difficult for the plaintiff’s lawyer to pursue the case. And if this is done this on a regular basis, a lot of plaintiffs’ lawyers are eliminated.
AUDIENCE QUESTION (Professor Brickman): Let us assume that we implement this rule, to say that the plaintiff’s lawyer cannot charge a contingency fee above the early offer, that he is limited in his ability to charge these massive one third fees, but only in cases where the offer is sweet enough that the claimant, after consulting his own lawyer, accepts the defendant’s early offer. This would, in other words, create a disincentive for the defendant to make a low-ball offer. In fact, we have such a situation in a whole set of cases that we do not have the time to get into, but assuming you’re right, and I do not, what about saying you can only charge a contingency fee against the value you add if the defendant’s offer is high enough to be accepted by the claimant. And if it is not, then the lawyer can charge his full contingency fee. Do you have a problem with that?
MR. PECK: I frankly don’t follow you, because if the offer is high enough for the client to accept, the case is over.
AUDIENCE MEMBER (Professor Brickman): Except that the lawyer charges 33 and 40% today when the offer is high enough. Now, how about a situation in which you cannot have that kind of 33 and 40% windfall if the lawyer hasn’t added any value to the case? He hasn’t put in any work; there’s just a notice to the defendant, “I’ve got a claim.” The defendant comes in with an offer that is sweet enough that there’s no basis for proceeding any further. Why should the lawyer, who has assumed no risk in that case, and done no work, get his 33 and 40%?
MR. PECK: Why don’t we just do blind bidding as well? It simply does not seem like a very workable approach.
PROFESSOR SILVER: I have two quick points. First point: if Michael Horowitz is right about these cases, then there’s a market to be made out there by an entrepreneur who goes out and offers to take them in return for agreeing to some kind of a structured fee like the ones you are talking about. And one of the interesting questions would be: why aren’t we seeing that market being created? My other point is that I reject the idea that there’s this cross-subsidization taking place, which is the assumption behind Professor Brickman’s question. I’ve already flipped the coin ten times and the question is do I flip the coin the eleventh time, which is the equivalent of taking the next plaintiff case. I ask myself, “do I expect to make money on this case?” If the answer is yes, then I take the case. If the answer is no, I don’t take the case; I don’t take the gamble. The only question that’s interesting to me is this: is there a market such that the return that I expect to make on that case actually reflects the real value of my services? Once I take the case, it goes into my portfolio. But it’s only at that point that cross-subsidization occurs, and cross-subsidization at that point is irrelevant because we’ve already gone through the process of bargaining over the fee. It’s already my case. Therefore, I think that the whole cross-subsidization idea is erroneous. The only thing we should be looking at is the marginal incentives under which the decision to take cases or reject them is made.
AUDIENCE QUESTION: It seems to me that the strongest case for some sort of distorting situation was the case in which there really is no client, the class action situation. There are only two real solutions offered for that. One was Roger Cramton’s guardian ad litem solution. The other was Boyden Gray’s auction solution. New York has the guardian ad litem solution for all kinds of underage people and so forth. It was absolutely notorious as a way in which judges funneled money to their friends. So I’m not at all confident about that as a way of restoring an adversarial element to the system. Regarding the auction system, it seems to me that it is a great way to get the prices down. But if you don’t have a real client, who monitors the provision of services that the lawyer bids to provide? And finally, if Professor Silver truly believes that attorneys general are sophisticated clients in the right sense of the world, that is to say, they have optimal constraints on their behavior, then I have a bridge that I’m sure he’d be interested in buying.
PROFESSOR CRAMTON: A brief response. You have mentioned some practical problems with the guardian ad litem approach. I agree that the proposal needs a lot of structure and detail, and that it has worked very badly in some situations, encouraging judicial patronage to former partners or friends. You didn’t mention any of the other proposals that I also advanced, among which, it seems to me, is the one that ought to be most appealing in terms of deterrence and responsiveness to the fiduciary duties that a lawyer owes to his clients, namely, the possibility of a subsequent malpractice and breach of fiduciary obligation suit.
MR. GRAY: I do not have much to add. I was only addressing the issue of price, the actual fee. I do think that the fee, if it is awarded by the operation of the marketplace, might end up discouraging some of the more frivolous cases from being brought, which would make the judge’s job easier. But perhaps a trial judge would want to comment on that.
JUDGE WALKER: Judge Williams is someone who spends most of his professional time interpreting congressional statutes that have been enacted to solve one problem or another, so, like me, he has to be skeptical of any claim to sweeping reforms. This includes being skeptical about ways of reforming perceived problems with attorney fees. The auction method that Mr. Gray talked about and that I’ve used in a number of cases is one way of addressing this problem. There are, of course, problems with any kind of auction: the possibility of a race to the bottom, the possibility of lemon lawyers bidding a low bid in order to acquire the right to proceed in the case. Judges who use that method have to be very aware of that possibility and take measures to insure that the class is going to receive the quality of representation that the class is entitled to.
But I think a perhaps more fundamental method than that of an auction (or of some other means of attempting to simulate the market) is to insist that judges and lawyers address the fee issue at the very beginning of a case, rather than at the end. Most of the problems that we have with the present fair attorney fee problem-solving methodologies stem from the fact that the issue is not addressed until after the action ends. The risk has been borne, the recovery is there, and it is simply a question of dividing it up. You can assess risk much more effectively before the risk has been borne. And yet we allow lawyers and judges to postpone consideration of this issue until after there is any real loss at stake. So I think a great measure that appellate courts could insist upon, with some effectiveness, in dealing with these problems is simply to tell judges something like this: “look, judges, you’ve got to set the fees at the beginning of the case rather than at the end.”
MR. HOROWITZ: I want to put in a word for the lodestar approach. That is to say, you take the base line fee of what the defense lawyer gets, and then you accept the notion that the plaintiff’s lawyer has assumed certain risks in bringing the case. It’s a variable sort of risk. Echoing Judge Walker, I know that such an arrangement may first create an incentive for lawyers to run up their hours, and that it may also impose substantial burdens on judges to monitor how many hours have been put in. There is an easy response to these concerns, and the market has already created it. Today, there are firms retained by defendants that carefully, rigorously and effectively scrutinize law firm billings.
It seems to me entirely possible for judges to use the services of such firms by designating them as special masters. What this does is to put both defendants’ lawyers and plaintiffs’ lawyers in essentially the same position of having their fee claims expertly and carefully monitored. Good District Judges like Milton Pollack in the Southern District of New York adjust plaintiffs’ lawyers’ fees with multipliers based on assumed risks and significant results. But it is also quite feasible to do this without imposing difficult burdens on the courts by delegating to specialists with competence in the field the determination of the non-duplicative hours actually spent on cases by plaintiffs lawyers, while leaving for the court the responsibility of calculating the hourly rates and the appropriate multipliers.
On the other hand, I am troubled by Judge Walker’s bidding beforehand proposal. I think in many cases it will be very hard to know. And frankly, I think the collusion likely to be involved between groups of often-collegial sub-specialty lawyers is going to be hard for the courts to monitor.
AUDIENCE QUESTION: My question is for Professor Silver. You mentioned that the high rate of expenses that attorneys have incurred in the tobacco cases is a good reason for them to be awarded astronomical fees. However, they are contracted by a governmental agency. This means that they are at least indirectly accountable to taxpayers. Should they not be required to document all of their expenses? Should they not be required to show documentation for all the expenses they say they have incurred?
PROFESSOR SILVER: I assume you say what you say because in Texas there has been a controversy over the production of documents. Actually, that controversy is widely misunderstood. It was at the request of Attorney General Dan Morales, a request made after the contract was negotiated and contrary to its provisions, that expense sheets need not be submitted to the state on a monthly basis. The attorney general was worried that production or submission of expense documentation would be an open record that would in turn be subject to discovery by the press. And if it were discovered by the press it would immediately be published in the newspapers, at which point you are basically telling the defendant how much of your money you are spending and on what, thereby giving the defendant a very significant insight into what your litigation strategy is without him having to reciprocate. So the agreement was that we would not submit any expenses in that litigation until the end of the day.
Furthermore, the plaintiffs’ attorneys had no objection to submitting documentation of their expenses in Texas. What they had an objection to was the abuse of information relating to the litigation by the current attorney general, who is their political enemy. They have volunteered repeatedly to turn over records of expenses in response to a discovery request promulgated in the Federal District Court where the litigation is currently pending and in which court the State of Texas chose to put the lawsuit.
Attorney General John Cornyn has not once, in two years, submitted a request for those documents through the Federal District Court. His view is that the Federal district judge cannot be trusted to preside over an ethics investigation. I invite you to decide for yourself the merits of that view.
MR. BARNES: Let me close with one comment. The issue has been raised a couple of times that perhaps the Chamber of Commerce has an interest in reform because it is in the best interest of its members. I think that one of the things that has been a hallmark of this discussion is that a lot of people come with various interests and various ideas of what proposals ought to be, and I think these have been evaluated on the basis of their merit. We need to continue this discussion in that spirit, because it was fruitful to hear the parameters of the problem and different perspectives on the need to pursue it further.
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