Columbia Law Review Study of Fee Awards in Securities Class Actions Yields Surprising Results
The Columbia Law Review has recently published an article, Is the Price Right: An Empirical Study of Fee-Setting in Securities Class Action, 115 Colum. L. Rev. 1371 (Oct. 2015), by Professors Lynn A. Baker, Michael A. Perino, and Charles Silver, with the involvement of Cornerstone Research, a litigation consulting firm. This article contains both a methodical examination of fee awards in securities class actions and a proposal for improving the system.
The main thrust of the article is an analysis of judicial treatment of fee proposals (such as whether the judge reduces plaintiffs’ counsel’s fee proposal, and by how much), the frequency of fee arrangements between plaintiffs and their counsel before seeking to be named as class counsel, how these factors differ between districts that do and don’t see a high volume of securities class actions, and how often judges provide explanations to justify their fee decisions. To conduct this study, the authors (and what appears to be a small army of law student assistants) collected a vast trove of data “with information on all of the 431 securities class action settlements that were announced between January 1, 2007 and December 31, 2012 in the federal district courts in the United States.” Id. at 1380. The data “include the number and type of plaintiffs who sought control of class litigation, the terms of any agreements regarding fees and costs that were disclosed to the courts, the amounts requested as fees, the formulas for calculating fees that judges were asked to employ, the presence and number of objectors, and many other details.” Id. (A useful chart in the appendix of the article includes the details of each case in which fees were cut. See id. at 1451-52.)
The results of the study are fascinating. The authors find that, in several regards, the revisions to the fee award scheme in the Private Securities Litigation Reform Act of 1995 (PSLRA) have not worked as envisioned. “For example, although the statute was supposed to encourage lead plaintiffs to bargain over fees with class counsel at the start of litigation,” the authors found that “cases with ex ante fee agreements are the exception rather than the rule,” and courts seem to have little interest in requiring or enforcing such ex ante fee agreements. Id.; see also id. at 1389-95. The authors also found that judges in low-volume districts set fees that are higher than those in high-volume districts, and the data suggests that “plaintiffs’ attorneys may be aware of and may seek to exploit these market imperfections by asking courts for significantly higher fees in low-volume districts than in high-volume ones.” Id. at 1380-81; see also id. at 1396-1402. Finally, courts reduced the fee request from plaintiffs’ counsel in only a very small minority of cases (15 percent); worse, these reductions “are effectively random events, driven more by judges’ predilections and biases than by the merits of the fee requests.” Id. at 1381; see also id. at 1402-06.
In light of these findings, the authors propose a new structure for fee awards. The proposal has four key aspects:
The lead plaintiff should negotiate a fee when retaining counsel to handle the case;
The lead plaintiff should disclose the terms of the negotiated fee to the district court when offering a law firm for appointment as class counsel;
The district court should review the negotiated fee terms before appointing class counsel and should uphold them unless they are clearly unreasonable or not the products of arm’s-length negotiations; and
When reviewing class counsel’s request for a fee award at the end of litigation, the district court should apply the agreed terms unless unforeseen developments have rendered those terms clearly excessive or unfair. In the rare instance in which a court determines that the agreed terms merit modification, the court should provide an opinion that articulates its reasons for deviating from the agreed terms.
Id. at 1432, 1432-49. The authors emphasize that this proposal maintains the PSLRA’s preference for considering the lead plaintiff as “bargaining agent for the class,” with the judge “serving as a backstop in case the lead plaintiff fails to do its job.” Id. at 1433. However, “[b]y setting class counsel’s fees at the appointment stage, courts would strengthen class counsel’s incentives to devote resources to the litigation, while also compensating them appropriately for incurring risks.” Id. at 1437. This proposal, especially in requiring ex ante fee arrangements, “would give class counsel considerable protection from a court’s subsequent, arbitrary fee reduction by establishing a presumption of reasonableness following initial review.” Id. at 1444.
Whatever one thinks of the authors’ proposal, the article clearly illustrates some under-appreciated and under-analyzed aspects of the fee-setting schema in securities class actions, and it should hopefully spark discussion among both scholars and practitioners.