In Search of Bargained-for Fees for Class Action Plaintiffs' Lawyers: The Promise and Pitfalls of Auctioning the Position of Lead Counsel

Business Lawyer

Volumn 54, Issue 2, 1999, Pages 763-834

  Niebler, Andrew K ^a  

^a Cleary Gottlieb Steen and Hamilton   (United States)

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EID: 0033453071     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (288)

1. Martin Shubik, On Auctions, Bidding, and Contracting, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 1, 5-6 (Richard Engelbrecht-Wiggans et al. eds., 1983).
2. Id. at 9.
3. These judges include the Honorable Vaughn R. Walker of the Northern District of California and the Honorable Milton I. Shadur of the Northern District of Illinois, both of whom authored opinions analyzed in this Article. See In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190 (N.D. Ill. 1996); In re Oracle Sec. Litig., 131 F.R.D. 688 (N.D. Cal.), modified, 132 F.R.D. 538 (N.D. Cal. 1990) [hereinafter Oracle I]; see also generally Julie Rubin, Auctioning Class Actions: Turning the Tables on Plaintiffs' Lawyers' Abuse or Stripping the Plaintiff Wizards of Their Curtain, 52 BUS. LAW. 1441 (1997) (analyzing the auction of class actions both generally and in the context of securities class actions).
4. The Oracle I court stated: [I]n order to decide whether or not to sue, the class would . . . demand [to know] in advance of the litigation . . . how much their lawyers will charge for their services and the best price available for those services. . . . [I]n order to obtain the best price available, there must be competition among applicants for lead class counsel; competition in turn requires an ex ante determination of the fee award. Oracle I, supra note 3, at 692 (emphasis in original).
5. See id. The court noted: [T]he court bears fiduciary responsibilities to the class. Under Fed.R.Civ.P. 23(d), the court may make appropriate orders 'for the protection of the members of the class.' In light of the undeniable non-involvement of the plaintiffs themselves on the matter of class counsel fees or indeed any other aspect of the litigation, this opportunity becomes an obligation of the court. Id. at 691. The court also noted that "[i]f the court were acting as a private fiduciary, the law would require it to obtain the best price the market would yield for the services of the class' lawyers." Id. at 692 n. 10.
6. See id. at 691-92. [P]ublic disapproval of class actions arises from the perception that lawyers profit undeservedly from them. Class actions would not be possible without the use of scarce public judicial resources, and lawyers use such resources free of charge. Charging lawyers the value of those resources would obviously alleviate the risk that lawyers might obtain excess profit from class actions. Id. at 691 n.5.
7. See In re Telesphere Int'l Sec. Litig., 753 F. Supp. 716, 719 (N.D. Ill. 1990); Oracle I, supra note 3, at 689-91; In re Activision Sec. Litig., 723 E Supp. 1373, 1374 (N.D. Cal. 1989).
8. Oracle I, supra note 3, at 689-91, 695-96; Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. CHI. L. REV. 1, 50-54 (1991).
9. Oracle I, supra note 3, at 689-91.
10. Id. at 689.
11. Id.
12. Concerning the uncertainty surrounding lawyer compensation, the court in Oracle I stated: In addition to its effect on the conduct of the litigation once initiated, this uncertainty surrounding attorney compensation also affects who is drawn to prosecute common fund cases. It is axiomatic that risk demands a premium; the greater the uncertainty of payment, the greater the payment that will be demanded. Compounding the uncertainty of the ultimate outcome of the litigation with more uncertainty relating to fees only increases the risk premium required to attract lawyers to undertake these cases. Moreover, uncertainty about compensation affects not only the litigation at hand, but also 'incentives in future roughly comparable cases.' By virtue of their experience and knowledge of the law, shrewd plaintiffs' lawyers are able to weigh the risks and rewards of litigation, but they are much less able to gauge in advance the reaction of an individual judge to a fee application that is to be given discretionary review. Id. at 692-93 (quoting In re Folding Carton Antitrust Litig., 84 F.R.D. 245, 275 (N.D. Ill. 1979)). Regarding attorneys' fees, the court added that "the benefits of competitive bidding include . . . a fee determined prior to litigation and an increased ability on the part of counsel, the parties and the court during litigation to forecast one (perhaps the most) important variable for purposes of strategy, settlement and the like." Id. at 695.
13. In re Activision Sec. Litig., 723 F. Supp. 1373, 1374 (N.D. Cal. 1989).
14. Oracle I, supra note 3, at 689.
15. Steinlauf v. Continental Ill. Corp. (In re Continental Ill. Sec. Litig.), 962 F.2d 566, 572 (7th Cir. 1992); see also Blum v. Stenson, 465 U.S. 886, 895 (1984) (explaining that, in the context of a federal statute, reasonable attorneys' fees are those "calculated according to the prevailing market rates in the relevant community"); In re Oracle Sec. Litig., 132 F.R.D. 538, 546 (N.D. Cal. 1990) [hereinafter Oracle II] ("A reasonable percentage fee is also one which reflects market forces.").
16. Continental Ill., 962 F.2d at 572.
17. See Oracle I, supra note 3, at 696 n.20.
18. Id. at 689 (citing Kirchoff v. Flynn, 786 F.2d 320, 325 (7th Cir. 1986)) (emphasis in original). The court continued: Hindsight will invariably alter the perceived fairness of class counsel's compensation arrangements. For example, if counsel engages in only a limited amount of discovery and motion practice, a judge's perception of how much compensation is due plaintiffs' lawyers is likely to be diminished - even if a large and early settlement is produced. Conversely, lengthy discovery and numerous motions will always seem deserving of significant recompense, even if the settlement is smaller and long in coming. Yet the former outcome is clearly of greater value to the class. . . . [I]t is inherently illogical for lawyers to undertake litigation on the basis of the risks and rewards they perceive at the beginning, yet be compensated on the basis of the risks and rewards the court perceives at the end of the litigation. Despite a certain bravado, plaintiffs' lawyers cannot but be affected by the prospect that their compensation will be determined by some flinty-eyed judge second-guessing their every move. Id. at 692. In a footnote, the court noted that "[a] substantial settlement with high legal fees and expenses might well be better for the class than a long-delayed and smaller settlement, a larger percentage of which goes to plaintiffs." Id. at 692 n.6.
19. See In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190, 1194 (N.D. Ill. 1996).
20. See id.; see also In re Oracle Sec. Litig., 829 F. Supp. 1176, 1179 (N.D. Cal. 1993) [hereinafter Oracle III].
21. Oracle I, supra note 3, at 695-97; Macey & Miller, supra note 8, at 50-54.
22. Jane Massey Draper, Annotation, Excessiveness or Inadequacy of Attorney's Fees in Matters Involving Commercial and General Business Activities, 23 A.L.R.5th 241, 347 (1996).
23. Galdi Sec. Corp. v. Propp, 87 F.R.D. 6, 10 (S.D.N.Y. 1979).
24. See, e.g., Oracle III, supra note 20, at 1179; John C. Coffee, Jr., Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 COLUM. L. REV. 669, 677 (1986); Macey & Miller, supra note 8, at 19-20.
25. Oracle III, supra note 20, at 1179.
26. Id.
27. Id.
28. This Article deals only with common fund class litigation, and therefore does not address fee applications made pursuant to fee shifting statutes which would require a different analysis.
29. See Kirchoff v. Flynn, 786 F.2d 320, 324-25 (7th Cir. 1986) (cited with approval in Oracle I, supra note 3, at 694).
30. See Oracle I, supra note 3, at 689-91, 695-96; Macey & Miller, supra note 8, at 50-54.
31. Macey & Miller, supra note 8, at 52.
32. See Coffee, supra note 24, at 691 n.61 ("Recent cases have greatly increased both the findings of fact that must be made and the paperwork that must be filed with, and reviewed by, a court before a fee award order can be entered that will withstand appeal.").
33. Id. at 691.
34. Oracle I, supra note 3, at 694.
35. Id.
36. See Kirchoff v. Flynn, 786 F.2d 320, 324 (7th Cir. 1986); Coffee, supra note 24, at 717-18; Macey & Miller, supra note 8, at 4.
37. See Macey & Miller, supra note 8, at 4.
38. See Coffee, supra note 24, at 717-19.
39. See id. at 718.
40. Id. at 717-18.
41. See id. at 718 (describing this phenomenon as "structural collusion").
42. Fixed fees may be preferred where the representation is strong and the presence of a particular lawyer makes a desired outcome more likely. In other words, where lawyers can trade on their reputations, fixed fees will often lead to higher total compensation than either hourly or contingency fee arrangements.
43. Oracle I, supra note 3, at 694 (quoting Kirchoff v. Flynn, 786 F.2d 320, 324 (7th Cir. 1986)).
44. See Macey & Miller, supra note 8, at 24.
45. See Robert E. Litan & Steven C. Salop, Reforming the Lawyer-Client Relationship Through Alternative Billing Methods, 77 JUDICATURE 191, 194 (1994).
46. Oracle I, supra note 3, at 694.
47. See Litan & Salop, supra note 45, at 194; see also Kirchoff, 786 F.2d at 325.
48. In re Oracle Sec. Litig., 136 F.R.D. 639, 645 (N.D. Cal. 1991) [hereinafter Oracle IV].
49. See Kirchoff, 786 F.2d at 324; Litan & Salop, supra note 45, at 194.
50. Oracle I, supra note 3, at 694.
51. Kirchoff, 786 F.2d at 324.
52. In most cases, individual class plaintiffs with small stakes in the outcome would not rationally choose to incur the litigation costs associated with bringing the claim on their own behalf.
53. See Macey & Miller, supra note 8, at 24. As an example, assume that the expected legal costs of an action are $500,000 and consist entirely of lawyer's time. At a 25% contingency fee, the lawyer would only take this case if the gross damages were at least $2 million. But if there existed a 50% risk of a defendant's verdict, then the lawyer would only take the case if total gross damages were at least $4 million. See Coffee, supra note 24, at 687.
54. Coffee, supra note 24, at 687; see also Murray L. Schwartz & Daniel J. B. Mitchell, An Economic Analysis of the Contingent Fee in Personal-Injury Litigation, 22 STAN. L. REV. 1125, 1136 (1969-1970).
55. Coffee, supra note 24, at 686.
56. Id.
57. See id. n.52.
58. Id. at 685.
59. See Litan & Salop, supra note 45, at 196 ("The potential for conflict of interest that contingent fee arrangements raise regarding settlement . . . must be balanced against the potential for economic conflicts of interest inherent in both hourly and fixed fees.").
60. Oracle IV, supra note 48, at 645-46.
61. See supra notes 7-27 and accompanying text (discussing the main concerns raised by judges in applying the lodestar fee formula).
62. See Shubik, supra note 1, at 6-9; see also supra notes 15-18 and accompanying text (explaining that the objective in establishing class counsel's fee is to simulate the market outcome where an arm's-length negotiation is infeasible).
63. See Macey & Miller, supra note 8, at 24.
64. See supra text accompanying note 19.
65. See Oracle I, supra note 3, at 695.
66. See supra text accompanying note 12.
67. See supra notes 17-18 and accompanying text.
68. Oracle III, supra note 20, at 1179.
69. Oracle IV, supra note 48, at 645.
70. See supra notes 23-27 and accompanying text.
71. See generally Shubik, supra note 1.
72. See id. Shubik notes: When the item is highly complex and may cost anywhere between several hundred million and several billion dollars, there are few firms that are even in a position to submit a bid. . . . The cost of the estimation and the design engineering in the preparation of a meaningful bid may be millions of dollars. Thus, it may be necessary to have bids for bids, with the first round resulting in the reward of funds to do the estimation and engineering work necessary to prepare a bid for the main contract. Id. at 7.
73. Of course other explanations for wide variations in proposed fee structures might be strategic law firm behavior such as "window dressing" or the submission of deliberately low bids by firms suffering from moral hazard. See infra notes 105-27 and accompanying text.
74. Daniel F. Spulber, Auctions and Contract Enforcement, 6 J.L. ECON. & ORG. 325, 326 (1990). Auctions for service contracts are not simply the mirror image of auctions for objects, with the low bidder winning the former and the high bidder winning the latter. "Whereas sales of an object reflect an immediate exchange, a contract entails commitment to an ongoing relationship between buyer and seller." Id. But where the means for policing the commitment is ineffective, one party can behave opportunistically at the expense of the other party. Cf. Oracle II, supra note 15, at 542 n.9 (explaining that "high [lawyer] ability . . . comes at a price . . . [because] there is a high opportunity cost to their time, which may correlate inversely with their willingness to put effort into the litigation") (citing William J. Lynk, The Courts and the Market: An Economic Analysis of Contingent Fees in Class-Action Litigation, 19 J. LEGAL STUD. 247, 255 (1990)).
75. Daniel F. Spulber, Auctions and Contract Enforcement, 6 J.L. ECON. & ORG. 325, 326 (1990). Auctions for service contracts are not simply the mirror image of auctions for objects, with the low bidder winning the former and the high bidder winning the latter. "Whereas sales of an object reflect an immediate exchange, a contract entails commitment to an ongoing relationship between buyer and seller." Id. But where the means for policing the commitment is ineffective, one party can behave opportunistically at the expense of the other party. Cf. Oracle II, supra note 15, at 542 n.9 (explaining that "high [lawyer] ability . . . comes at a price . . . [because] there is a high opportunity cost to their time, which may correlate inversely with their willingness to put effort into the litigation") (citing William J. Lynk, The Courts and the Market: An Economic Analysis of Contingent Fees in Class-Action Litigation, 19 J. LEGAL STUD. 247, 255 (1990)).
76. See Oracle IV, supra note 48, at 648 (citing George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. ECON. 488 (1970)); see also Spulber, supra note 74, at 325-26.
77. Spulber, supra note 74, at 326.
78. Id.
79. Id.
80. Id. In many auction contexts the challenge [to the bidder] is to "get the job," whatever the price; the actual payment will, in effect, be [determined] later. Reasons for such actions are due to laws and directives, which encourage the choice of a low bidder; a lack of well-defined statements of work and/or design packages or knowledge of what is to be procured; depressed industry looking for work at a very low profit or at cost to pay for the fixed cost and maintain a functioning firm; rates of inflation which were not properly accounted for in the bid. Robert M. Stark & Thomas C. Varley, Bidding, Estimating, and Engineered Construction Contracting, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 121, 123 (Richard Engelbrecht-Wiggans et al. eds., 1983). Many of these problems, fortunately, can be avoided with a "well-established acquisition strategy at the beginning of a major project." Id.
81. Spulber, supra note 74, at 326.
82. Oracle IV, supra note 48, at 647-48.
83. Id.
84. Id. at 648.
85. Id. at 648-49.
86. Id. at 649.
87. See, e.g., In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190, 1200-01 (N.D. Ill. 1996); In re Wells Fargo Sec. Litig., 157 ER.D. 467, 470 (N.D. Cal. 1995); Oracle II, supra note 15, at 542-43.
88. Oracle II, supra note 15, at 542 n.9.
89. Wells Fargo, 157 F.R.D. at 470-71.
90. See Lynk, supra note 74, at 255; Macey & Miller, supra note 8, at 22-25.
91. See Lynk, supra note 74, at 259; Macey & Miller, supra note 8, at 24-25.
92. See Lynk, supra note 74, at 259.
93. Id.
94. Oracle I, supra note 3, at 689-93.
95. See, e.g., In re California Micro Devices Sec. Litig., No. C-94-2817, 1995 WL 476625, at *3 (N.D. Cal. Aug. 4, 1995).
96. See, e.g., Oracle II, supra note 15, at 542-43.
97. The tendency to underfund litigation arises out of the fact that class counsel's ultimate product is an uncertain monetary recovery; the low and high estimates of the claim's value may vary by millions of dollars. Other industries that award contracts via competitive bidding produce products that conform to particular specifications and that are subject to effective monitoring during the production process. One such example is the construction industry. Soliciting bids on a class action claim with disparate valuations is therefore analogous to soliciting a bid from a construction company on one or two high rise office buildings. It would certainly not be surprising if selection of the low cost contractor resulted in the construction of only one building. Similarly, it should not be surprising that the low cost provider of legal services who valued a class claim at between $10 and $20 million, in the end, recovers only $10 million for the class. Moreover, unlike the construction industry scenario, the class plaintiffs can never truly be certain that $10 million is either the good or bad outcome, for there is always some possibility that $20 million was an overly optimistic valuation of the claim. See Coffee, supra note 24, at 686 n.52; see also supra notes 47-57 and accompanying text.
98. See supra notes 74-92 and accompanying text.
99. See supra notes 47-57, 68-92 and accompanying text.
100. Geoffrey P. Miller, Some Agency Problem in Settlement, 16 J. LEGAL STUD. 189, 191 (1987).
101. For an example of the faulty judicial reasoning that has buttressed static analysis in the bid selection process, see In re Wells Fargo Securities Litigation, 157 F.R.D. 467, 470 (N.D. Cal. 1995). The Wells Fargo court recognized that its "fiduciary obligation to the plaintiff class compels it to secure the best representation possible. . . . [by] emulat[ing] the [quantitative and qualitative] arrangements and decisions that the class itself would make were it able to negotiate." Id. at 468. "[W]hat ultimately matters to the class is the amount of the recovery, net of attorney fees and costs." Id. at 473. But, the court then inexplicably selected a bid by analyzing only the prices offered for representation, ignoring entirely the incentives afforded class counsel. Id. at 473-77.
102. See In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190, 1197-98 (N.D. Ill. 1996); Wells Fargo, 157 F.R.D. at 476-77; Oracle II, supra note 15, at 543.
103. For a discussion of why judges tend to focus on attorneys' fees rather than lawyer incentives, see Oracle II, supra note 15, at 545-46. The court explained that a tension can exist between providing class counsel with performance incentives and awarding class counsel reasonable compensation for producing a common fund: At its limit, the rationale of these "incentives" would justify awarding the entire recovery to the lawyers and none to the class for only when the lawyers own the whole claim will their incentives be identical to those of the class. But this is a formula for converting class action lawyers into private parens patriae. The court finds no legal policy to elevate lawyers to quasi-sovereigns. Id. (citations omitted).
104. See Wells Fargo, 157 F.R.D. at 473-77; Oracle II, supra note 15, at 540.
105. See supra note 102.
106. See Lynk, supra note 74, at 258 (arguing that a percentage fee which reflects market forces is likely to be one in which "class-action plaintiffs' lawyers obtain a smaller fraction of the total recovery the larger the recovery is").
107. See Amino Acid, 918 F. Supp. at 1198, 1201; Wells Fargo, 157 F.R.D. at 468-69, 477; Oracle II, supra note 15, at 541, 548.
108. See Amino Acid, 918 F. Supp. at 1198, 1201; Wells Fargo, 157 F.R.D. at 468-69, 477; Oracle II, supra note 15, at 541, 548.
109. See, e.g., Oracle II, supra note 15, at 543.
110. Id.
111. Id.
112. Id.
113. See id. In Oracle II, Judge Walker essentially argued that a lawyer's incentive to seek higher recoveries is preserved so long as the absolute dollar amount received by class counsel increases as the recovery amount increases. Id. Accordingly, he seems to believe that it is proper for fees to rise less rapidly than the recovery amount so as to enable the class to benefit from the economies of effort. See id. Taken to its limit, however, this reasoning suggests that a lawyer will seek higher recoveries as long as he or she can earn any positive fee from his or her effort. This behavior would only be economically rational if the lawyer's opportunity costs were zero. A lawyer who could earn more by investing his or her time in another case would not choose to pursue higher recoveries simply because the lawyer could earn some additional amount of money through additional effort.
114. See supra notes 93-104 and accompanying text.
115. See supra note 102.
116. Diminishing returns-to-effort indicate that equally sized marginal amounts of recovery require class counsel to expend larger amounts of effort.
117. See infra Figure 1.
118. Increasing returns-to-effort indicate that equally sized marginal amounts of recovery require class counsel to expend smaller amounts of effort.
119. See infra Figure 2. As an example, consider a lawyer who could earn a 15% contingency fee on a marginal amount of recovery in case A exerting effort E, and a 30% contingency fee on an identical marginal amount of recovery in case B exerting effort twice as much as E. All things being equal, the lawyer will be indifferent between pursuing either case. Because the lawyer prefers to continue trying those cases that provide the highest returnto-effort ratios, the lawyer would rationally prefer case A if, by expending effort E, he or she could earn something greater than 15% - this analysis applies even though the lawyer's percentage fee in case A (over 15%) is lower than in case B (30%).
120. Steady returns-to-effort indicate that equally sized marginal amounts of recovery require the same amount of effort.
121. See infra Figure 3 (showing that a straight contingency fee can provide sufficient incentive and avoid lawyer windfall gains when the lawyer realizes steady returns-to-effort).
122. See infra Figures 1 and 3.
123. See infra Figures 1 and 3; see also Coffee, supra note 24, at 686 n.52.
124. (1 - (25 / 30)) = 16.67%. See supra note 118.
125. See infra Figure 1.
126. See Coffee, supra note 24, at 686. In certain cases, "the declining percentage approach . . . can be explained only by an incentive rationale: . . . [early settlement] should beget a bigger fee. The underlying premise must be that higher percentage fees to the lawyers will call forth the effort needed to achieve a recovery sooner rather than later." Oracle II, supra note 15, at 545.
127. See supra Figure 1.
128. See MERRIAM-WEBSTER'S COLLEGIATE DICTIONARY 1355 (10th ed. 1993) (defining "window dressing" as "something used to create a deceptively favorable or attractive im-pression").
129. Oracle II, supra note 15, at 544.
130. See, e.g., id.
131. Id.; see also supra Figure 2.
132. Specifically, judges have criticized rising marginal contingency fees for rewarding additional recovery, not additional lawyer effort. See, e.g., Oracle II, supra note 15, at 544. These judges have correctly emphasized that "[t]he 'sell-out settlement' or 'underinvestment' problem to be corrected is insufficient attorney effort to realize the optimal level of class recovery," but they believe that the rising marginal contingency fee approach inappropriately uses the amount of recovery as a surrogate for lawyer effort. Id. This argument cannot withstand scrutiny, however, because it assumes that plaintiff's counsel systematically leaves money on the table, money which could be had without expending any additional effort. Clearly, this cannot be true for it is always in class counsel's interest to maximize the class recovery given a particular level of effort. Therefore, additional recovery will require additional effort, and recovery is a good proxy for lawyer effort.
133. Id. at 540.
134. Consider, for example, a claim in which there exists a 10% probability of realizing each of the following cash recoveries: $0, $10, $20, $30, $40, $50, $60, $70, $80, and $90. The expected recovery here is $45. Assume further that class counsel has an offer from the defendant to settle the claim for $45 and that the lawyer's contingency fee is 30%. If the lawyer does not update his or her expectations in light of the settlement offer, the lawyer will press for a higher settlement if opportunity costs are less than ($90 - $45) × 50% × 30%, or $6.75. Thus, if the lawyer had other work that, over the same amount of time, could earn a return of $6.76 or more, the lawyer would not press for a higher settlement. Now assume that the defendant has offered to settle the claim for $63. In this case, the lawyer will press for a higher settlement only if opportunity costs are less than ($90 - $63) × 30% × 30%, or $2.43. If the lawyer's opportunity costs are $6.75, then he or she would have an incentive to pursue a recovery in excess of $63 only if he or she earned 83.33% - i.e., $6.75 / ($27 × 30%) - of any marginal amount earned.
135. 157 F.R.D. 467 (N.D. Cal. 1995).
136. 918 F. Supp. 1190 (N.D. Ill. 1996).
137. See Amino Acid, 918 E Supp. at 1197; Wells Fargo, 157 F.R.D. at 469.
138. See supra notes 105-27 and accompanying text.
139. The Oracle II court explained that the presumed disincentives of percentage fees which decline with time . . . also are inconsistent with redress of the class' injury. Because the passage of time diminishes class counsel's compensation . . . , the temptation of counsel to succumb to a 'sell-out settlement' would be aggravated, not diminished. Rather than put in the additional effort to increase the class' recovery, counsel . . . could improve its take by the earliest possible settlement even though spending additional time and effort could improve the class' recovery. Oracle II, supra note 15, at 546.
140. See Amino Acid, 918 F. Supp. at 1190; Wells Fargo, 157 F.R.D. at 469.
141. See supra notes 128-33 and accompanying text.
142. See supra notes 30-41 and accompanying text.
143. See supra notes 134-36 and accompanying text.
144. Declining contingency fee, stage-of-litigation bids are not discussed in this Article. Such bids are oddities because litigation costs almost always rise as cases pass into subsequent stages that require additional work or that are significantly more complicated and difficult. Nonetheless, it is possible for an early settlement surcharge to convert a rising contingency fee, stage-of-litigation bid into a bid that applies lower contingency fees to successive stages of litigation when the litigation proceeds sufficiently quickly so as to trigger application of the surcharge. See infra notes 152-57 and accompanying text.
145. For a discussion of how stage-of-litigation bids help to partially mitigate attorney-client conflicts, see Miller, supra, note 99, at 201.
146. See id.; see also In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190, 1197 (N.D. Ill. 1996); Oracle II, supra note 15, at 540 .
147. See Amino Acid, 918 F. Supp. at 1197-1201; In re Wells Fargo Sec. Litig., 157 F.R.D. 467, 468-70, 476 (N.D. Cal. 1995); Oracle II, supra note 15, at 539-41.
148. A stage-of-litigation bid was technically selected as the winning bid in Wells Fargo. The two stage-of-litigation bids submitted in this case distinguished only between recovery before and after trial. Wells Fargo, 157 F.R.D. at 468-70. The court acknowledged that "[f]or the trial scenario, . . . [one bid] is the best from the class' standpoint at all recovery levels." Id. at 476. The court nevertheless concluded that this advantage was outweighed by the winning bid's pre-trial superiority. Id. at 477. The court reasoned: While the possibility that the case may proceed to trial should not be entirely ignored, the likelihood of such an occurrence is significantly lower than the likelihood that a settlement will be reached prior to trial. The . . . [losing bid's post-trial] price advantage relative to . . . [the winning bid] is therefore considerably less important than the relationship between the two [bids] with respect to pre-trial settlements. Id. at 476. Therefore, for all practical purposes, the court in this case evaluated the bids as if they did not incorporate any stage-of-litigation element.
149. Oracle II, supra note 15, at 546 (explaining that stage-of-litigation bids "afford incentives consistent with the concept that class counsel are entitled to 'reasonable compensation' . . . by providing increased compensation for [the] increased attorney effort" demanded by each successive stage). Cf. supra notes 128-33 and accompanying text (discussing how rising marginal contingency fees provide incentives that can induce lawyers to expend additional effort litigating the claim).
150. Miller, supra note 99, at 201; see also supra Figure 1.
151. Miller, supra note 99, at 201; see also supra Figure 1.
152. Miller, supra note 99, at 201-02.
153. See Oracle II, supra note 15, at 545.
154. In practice, early settlement bonuses or surcharges, when applied to either straight or declining marginal contingency fees, can convert the fee structure into either declining calendar-based or declining stage-of-litigation contingency fees. In bids that are not simply straight contingency fees, but instead propose more complicated fee structures, the extent to which such conversion occurs depends upon the particular terms of the bid. Consider, for example, a rising stage-of-litigation bid which demands 20% of any recovery obtained prior to document discovery, 25% of any recovery obtained after document discovery but prior to trial, and 30% of any recovery obtained after the start of trial. The bid also applies a surcharge of 3% for any resolution obtained in the first 12 months, 2% for any resolution obtained between 12 and 18 months, and 1% for any resolution obtained between 18 and 24 months. In this case, the firm has to weigh its interest in proceeding to a subsequent stage of litigation, including the expected litigation costs that will be incurred, against the likely loss of some fee revenue because of the delay in resolving the case. On the one hand, if the additional litigation costs of the next stage can be controlled and the delay minimized, the firm may seek to delay resolution. On the other hand, if the additional percentage fee for pressing on with the litigation into the next stage just compensates the firm for the risk and expected costs of such a move, and the delay is likely to be more substantial, the firm may seek to settle early.
155. See supra notes 105-27, 134-38 and accompanying text.
156. Oracle II, supra note 15, at 545; see also supra notes 105-27 and accompanying text.
157. See supra notes 15-18 and accompanying text.
158. See, e.g., Oracle II, supra note 15, at 544; see also supra Figure 2.
159. See supra notes 139-51 and accompanying text.
160. See supra notes 105-33 and accompanying text.
161. See, e.g., Oracle II, supra note 15, at 543.
162. See supra notes 93-104 and accompanying text.
163. [(25 - 5.35) / (25 - 7.2) - 1] × 100 = 10.4%. This calculation reflects the fact that the class will choose the firm on the basis of the firm's expected recovery minus attorneys' fees and costs. See supra notes 94-105 and accompanying text.
164. For example, if the class plaintiffs believe that a $25 million recovery will be realized by firm A with a 60% probability and by firm B with a 66.25% probability, they will be indifferent between the two firms for that discrete level of recovery. In each case the class' net expected recovery equals $11.79 million.
165. If Firm B could earn a return-to-effort in excess of 28% by litigating an alternative case, the fact that its return-to-effort in this case is nearly twice that of firm A will not be sufficient to induce firm B to litigate this case. From the perspective of firm B the alternative investment is simply more attractive. Thus, selection of a particular firm requires information on each firm's labor supply curve in order to determine how aggressive the firm is likely to be in seeking to maximize the value of the class claim. See supra text accompanying note 118.
166. See In re Wells Fargo Sec. Litig., 157 ER.D. 467, 470-71 (N.D. Cal. 1995); Oracle IV, supra note 48, at 644-45.
167. See Oracle IV, supra note 48, at 644.
168. Id.
169. Id. at 644-45.
170. This "substitution effect" arises under the traditional "client pays" approach because non-lawyer investment is costless while lawyer investment is costly. For every $1 invested in non-lawyer inputs, the firm will receive back $1 plus a share of whatever recovery the investment generates. On the other hand, a one-third contingency fee means that the firm will only invest $1 in lawyer inputs if it yields $3 in recovery. Unlike investment in lawyer time, the firm does not need to be concerned with the rate of return on non-lawyer inputs.
171. See Wells Fargo, 157 F.R.D. at 470; Oracle IV, supra note 48, at 644.
172. See, e.g., Wells Fargo, 157 F.R.D. at 470.
173. See Oracle IV, supra note 48, at 644 n.9.
174. See Oracle II, supra note 15, at 539 n.4 ("The court believes that the risk of misestimating [non-lawyer] expenses should rest with class counsel who, after all, incur them."). The court in Oracle IV stated: To the extent ultimate client liability for litigation expenses serves [a] useful purpose, it is to protect contingent fee lawyers against feckless clients by making them put up something to lose. . . . This objective is wholly unsuited to class actions. It is not class counsel, but the class, which needs protection. Oracle IV, supra note 48, at 643 (citations omitted).
175. Oracle IV, supra note 48, at 644 n.9.
176. In this regard, consider that some lawyers bill 1900 hours per year while others bill 2600 hours per year.
177. This is, to some extent, an over-generalization. Many modern large law firms negotiate fixed annual fees for access to such inputs as computer-assisted legal research. Pursuant to such contracts, firms do not pay any additional fee for research that occurs after a certain threshold has been reached. Thus, like lawyer inputs, such non-lawyer inputs carry a marginal cost of zero after reaching the threshold. A firm with such a cost structure could internalize the non-lawyer costs and still select the optimal mix of litigation inputs.
178. Judge Walker, in Oracle IV, appeared to assume that all lawyers are fully warranted in arguing that "the impact of incurring an additional dollar in out-of-pocket expenses beyond [a cost] cap is exactly the same as the opportunity cost of devoting a dollar's worth of attorney billable time." Oracle IV, supra note 48, at 643.
179. At a one-third contingency fee, a firm will invest an extra $1 in costs only if it is expected to yield at least $3 in additional recovery.
180. Assume that a lawyer has a one-third contingency fee and has invested in inputs up to the point that each $1 of investment equals $1 in class recovery. The recovery at this point is $300, making the attorneys' fee $100. The lawyer is contemplating investing an additional $1 in inputs which will add only $.90 to the total recovery. The class, which has to pay for that dollar under the traditional approach, is clearly against the investment. The lawyer favors the investment only if he or she is paid a contingency before any reimbursable costs are paid. In this event, the lawyer can invest the $1, extract an additional $.30 from the recovery, and then get $1 repaid out of the remaining common fund. If the costs are paid first, then the lawyer will not favor the investment. In this case, the lawyer would spend $1 and would be reimbursed with $1. The common fund, however, would shrink by $.10 (i.e., $.90 - $1). The lawyer will therefore have been made worse off by virtue of receiving one-third of a common fund that is diminished by $.10. Consequently, the lawyer's interest in making the investment will depend upon whether reimbursable costs are paid out of the recovery amount net of attorneys' fees or the gross recovery.
181. See supra notes 68-73 and accompanying text.
182. See supra notes 175-76.
183. These firms maximize profits by investing in non-lawyer inputs until the last $1 invested yields $1 in additional recovery, and by investing in lawyer inputs until the last $1 invested yields: 1 / {[(Recovery - Non-Attorney Costs) × Contingency Fee] / Recovery}.
184. 157 F.R.D. 467 (N.D. Cal. 1995).
185. Id. at 469-70 (describing the bid submitted by Lowey Dannenberg Bemporad & Selinger).
186. Id. at 468-69 (describing the bid submitted by Lieff, Cabraser & Heimann).
187. Id. at 469 (describing the bid submitted by Milberg Weiss Bershad Hynes & Lerach).
188. Id.
189. See supra notes 93-104 and accompanying text.
190. (5 × .35) - .2 = 1.55.
191. (9.56 × .45) × .5 - (.2 + .4) = 1.551; (1.551 > 1.55).
192. (5 × .45) × .956 - (.2 + .4) = 1.551; (1.551 > 1.55).
193. (5 × .25) - .2 = 1.05; (3.58 × .35) - .2 = 1.053.
194. (3 × .24) = .72; (2.667 × .27) = .72; (10 × .22) = 2.2; (8.8 × .25) = 2.2.
195. [(3 × .32) + ((8.8 - 3 - (.2 + .4)) × .3)] × .5 = 1.26; (3 × .27) + ((2 - .2) × .25) = 1.26.
196. [(3 × .32) + (2 - (.2 + .4)) × .3] × .913 = 1.26.
197. See supra notes 105-27, 134-38 and accompanying text.
198. All contingency fees pose an agency problem of some type, and provide some incentive to settle earlier rather than later. See Oracle II, supra note 15, at 544 n.14. But this bid at least does not create an incentive to delay a negotiated settlement or to buy such a delay by reducing the settlement amount.
199. Arguably, Firm 1 has even greater incentive to press for a higher settlement. The problem with this argument is that Firm 1 also has significant incentive to produce a low, collusive, and delayed settlement agreement, particularly because it internalizes all costs. It is unlikely that an informed class would be willing to take on this risk in exchange for the possibility of a higher settlement stemming from the fact that Firm 1 earns 35% and not 25% of the recovery.
200. In re Wells Fargo Sec. Litig., 157 F.R.D. 467, 473 (N.D. Cal. 1995).
201. Id.
202. Id. at 477.
203. .5 × $10 × .25 = 1.25; 1.25 > ($5 × .25).
204. 1 × $5 × .25 = 1.25; 1.25 > ($5 × .25).
205. Wells Fargo, 157 F.R.D. at 475.
206. Id. at 477.
207. Oracle II, supra note 15.
208. Id. at 541 (describing the bid submitted by Lowey, Dannenberg, Bemporad, Brachtl & Selinger, PC).
209. Id. (describing the bid submitted by David B. Gold, PLC).
210. Id. at 539 (describing the bid submitted by Abbey & Ellis).
211. Id. (emphasis added). Thus, this fee structure is the opposite of the fee structure created by early settlement bonuses or surcharges.
212. Id. at 540 (describing the bid submitted by Berger & Montague, P.C.). It is noted that the author, in spring 1995, was temporarily employed as a financial consultant by a client of Berger & Montague, P.C., with respect to a legal matter entirely unrelated to the subject matter of this Article.
213. See supra notes 188-205.
214. (1 × .24) + (4 × .20) = 1.04; (1 × .3) + (4 × .25) = 1.3.
215. (1 × .3) + (2.97 × .25) = 1.0425; 1.0425 > 1.04.
216. (1 / 30) × 100 = 3.33%; (1 / 15) × 100 = 6.67%.
217. 30 × .3 = 9; (30 × .29) + (1.154 × .26) = 9. Interest is calculated at 2.5% for six months, which on $30 million is $.75 million. Therefore, class counsel must expect $31.9 (i.e., $30 + $1.154 + $.75).
218. This analysis assumes that once a settlement offer is made it cannot be reduced. Thus, the $30 million settlement offer is always on the table and the lawyers face uncertainty only with regard to the possibility of increasing the settlement amount.
219. Interest is calculated at 2.5% for six months, which on $30 million is $.75 million. Therefore, class counsel must expect $33.06 (i.e., $30 + ($1.154 / .5) + $.75).
220. Assume class counsel experiences diminishing returns-to-effort such that for recoveries in excess of $30 million returns-to-effort decline from $1 per unit of effort to $.8 per unit of effort. Under this scenario, the 10.2% difference would be equivalent to a 12.74% difference - i.e., [(1 / .8) × ((1.154 / .5) + .75) / 30] - for a lawyer who experienced steady returns-to-effort. Similarly, if class counsel experienced increasing returns-to-effort from $1 per unit of effort to $1.2 per unit of effort, the 10.2% difference would be equivalent to an 8.49% difference - i.e., [(1 / 1.2) × ((1.154 / .5) + .75)730] - for a lawyer who experienced steady returns-to-effort.
221. See supra notes 134-42 and accompanying text (explaining that declining calendar-based contingency fees tax class counsel's early effort, and in this way provide even greater incentives to settle early than declining marginal contingency fees); see also Oracle II, supra note 15, at 546 n.21.
222. See supra note 127 and accompanying text.
223. Oracle II, supra note 15, at 546-48.
224. See id. at 546.
225. See id. at 547.
226. See id.
227. See id. at 540-41.
228. See id. at 542-48.
229. 918 F. Supp. 1190 (N.D. Ill. 1996).
230. Id. at 1197 & n. 11 (describing the bid submitted by the three-firm consortium of Berger & Montague, P.C.; Duker & Barrett, L.L.P.; and Ritchie & Rediker, L.L.C.).
231. Id. at 1199 & n. 15 (describing the bid submitted by a consortium of firms, including: Much Shelist Freed Denenberg Ament Bell & Rubenstein, P.C.; Fine, Kaplan & Black; Freedman, Boyd, Daniels, Pifer, Hollander, Guttman & Goldberg; Keller Rohrback; Bailey, Harring & Peterson; Duane Morris & Heckscher; and Daughtry, Woodard, Lawrence & Starling).
232. Id. at 1197-98 & n. 13 (describing the bid submitted by the two-firm consortium of Kaye, Scholer, Fierman, Hays & Handler; and Bainbridge & Strauss).
233. Id. at 1198 (describing the bid submitted by Kohn, Swift & Graf).
234. Id. at 1197 & n. 12 (describing the bid submitted by the three-firm consortium of Heins, Mills & Olson; Cohen, Milstein, Hausfeld & Toll; and Lieff, Cabraser, Heimann & Bernstein).
235. Id. at 1200 & n. 18 (describing the bid submitted by a four-firm consortium of Roda & Nast; Hare, Wynn, Newell & Newton; Becnel, Landry & Becnel; and Zimmerman Reed, P.L.L.P.).
236. Id. at 1199 & n. 14 (describing the bid submitted by the four firm consortium of Milberg Weiss Bershad Hynes & Lerach; Dyer, Donnelly & Lilley; Van Steenberg, Chalupka, Mullin, Holyoke, Pahlke, Smith, Snyder & Hofmeiser; and Kost & Kost).
237. Id. at 1199-200 & n.17 (describing the bid submitted by a consortium of firms, including: Reinhardt & Anderson; Specks & Goldberg; Cochrane & Bresnahan; Chestnut & Brooks; Charles H. Johnson & Associates; and Rohan, Goldfarb & Shapiro).
238. See supra notes 188-96, 212 and accompanying text.
239. See supra notes 31-41 and accompanying text.
240. 35 × .25 = 8.75; 35 × .18 = 6.3; (10 × .2) + (15 × .18) + (10 × .16) = 6.3.
241. See Amino Acid, 918 F. Supp. at 1199-200.
242. But see Lisa Bernstein & Daniel Klerman, An Economic Analysis of Mary Carter Settlement Agreements, 83 GEO. L.J. 2215, 2238 n.65 (1995) ("(M]any states place strict limits on the maximum allowable contingent fee, . . . and judges scrutinize contracts that provide for unusually high contingent fee percentages with great care."). It may be difficult, therefore, to achieve the judicial reorientation that this Article argues is necessary to redesign lead counsel auctions in the absence of statutory reform.
243. Interview with Warren F. Schwartz, Professor of Law, Georgetown University Law Center, in Washington, D.C. (Apr. 1997).
244. Id.
245. This analysis assumes that all bidding firms would spend some amount of money on discovery or fact investigation to help them prepare the bid. The idea is that by pooling these expenditures more information can be generated, instead of the same paltry amount of information that each firm could generate on its own. Of course, firms that simply prepare bids without any discovery, if they exist, might resist the risk-sharing approach advocated here depending, in part, upon the magnitude of the up-front cost. One possibility for minimizing such resistance would be to require the winner to reimburse some portion of the discovery costs, or to restrict the firms that can do any legal work on the class claim to those firms that actually submitted bids in the auction.
246. In the context of bid preparation costs, one commentator noted: In auctions, in general, the professionals have inspected the items on which they are bidding. The bidders tend to be experienced professionals who can estimate accurately the resale potential of most of the items being offered. Little explicit planning needs to be done prior to an auction. However, when bidders are bidding on an oil lease, preliminary geological work may be time consuming and expensive. When they are bidding for a construction contract for a nonstandard item, the bidders' preparation costs can be so significant that they may be deterred from even considering making a bid without some form of funding or sharing the bid preparation costs. The risk-sharing aspects of bid preparation can be modified virtually continuously by contracting. . . . An expert buying an already extant item from a professional needs little more than basic inspection and validation. A bid . . . which calls for a systems design calls for considerable preliminary expenditure of time and understanding concerning the nature of future work which may have to be done after the bid is accepted and the contract awarded . . . . Shubik, supra note 1, at 14-15.
247. Id. at 15-16.
248. Macey & Miller, supra note 8, at 107.
249. Id. at 113.
250. Bernstein & Klerman, supra note 241, at 2236. The agency problem inherent in Mary Carter agreements can partially be dealt with by varying the payment structures. "Some repayment clauses (known as 'incentive clauses') specify that the plaintiff and the Mary Carter defendant are to share each dollar recovered in a fixed proportion. Others vary the proportion of each dollar recovered that each party receives depending on the size of the total recovery." Id. While the former approach fixes the marginal incentives, the latter approach alters the marginal incentives of each party at different levels of recovery.
251. "A call option is traditionally defined as a right but not an obligation to buy a property, security, currency, or commodity at a given price or rate (strike price or rate) within a specified time." SWISS BANK CORP. INV. BANKING, INC., BASIC RISK MANAGEMENT COMPONENTS: THE CALL OPTION (1992) (emphasis in original). The value of a call option is based, in part, upon the value of an underlying asset. Id. The opportunity value of the option represents the chance that the underlying asset, and hence the option, will appreciate in price. Id. "An out-of-the money call can be defined in terms of the price appreciation opportunity value which the parties to the option contract exchange." Id.
252. Macey & Miller, supra note 8, at 109.
253. All auctions for services cannot be "converted" in this way. But where the owner of an asset seeks services to maximize the asset's value, control over the asset can be passed and sold outright to the highest bidder. In this way, emphasis can be shifted from the low cost provider to the highest value user. This shift is important because law firms, unlike construction companies, are not simply trying to produce a product built to specifications. Instead, the law firm is working for an indeterminate cash recovery. See supra note 96. Thus, ultimately cash is supposed to flow back to the client whereas in
254. See supra notes 74-92 and accompanying text (explaining the "lemon" lawyer phenomenon).
255. Although firms would very much like to pass these costs on to the class in the form of lower bids, the ability of the firms to do so will depend in large part on the intensity of the price competition for the particular standardized contracts. More intense competition will drive prices higher and require firms to pay a greater share of the non-lawyer litigation costs.
256. See supra notes 244-54 and accompanying text.
257. See infra Figure 4.
258. For example, assume that a standardized contract provides that the class receives the first $14 million of any settlement. Class counsel receives 100% of the recovery between $14 million and $20 million. Class counsel purchases the call option on this claim for $300,000. Under this scenario, class counsel could earn a net $3 million fee only by obtaining a total recovery of $17 million plus the $300,000 cost of purchasing the call option, or $17.3 million. If class counsel had been able to negotiate a straight 30% contingency fee arrangement, however, then it could have earned that same $3 million fee with only a $10 million total recovery. Thus, the class would have netted only $7 million less any non-lawyer litigation costs for which the class may be responsible. Therefore, in this hypothetical, the net class recovery is improved by at least 100% - $14 million as opposed to $7 million. These class gains arise largely from the incentives provided by the different financial structure of the cash-bid approach.
259. See infra Figure 4.
260. All other non-monetary terms of the settlement would presumably be reviewable. Judicial disapproval of non-monetary terms that materially affect the settlement value of the claim, however, may require the entire settlement to be renegotiated.
261. 1 + P. In other words, based on this auction design, a bidding firm will not realize any recovery for the firm until the recovery exceeds the option strike price by the full amount of the option premium.
262. 1) - (Attorneys'fees) - (Non-lawyer litigation costs)].
263. 1 exceeds the expected value of the class claim.
264. 1 is less than the expected value of the class claim. Each firm will, of course, make its own assessment of the expected value of the class claim and will thereby determine how much the option is worth to that particular firm.
265. Miller, supra note 99, at 197.
266. 1).
267. Oracle IV, supra note 48, at 642.
268. Note that this requirement satisfies Judge Walker's desire to have the law firm bear the risk of any misestimation in the amount of actual litigation expenses. Id. at 644.
269. Id. at 645.
270. Consider, in this context, a holder of a future contract and a holder of an at-the-money option on the future contract. These individuals clearly have different risk/reward profiles, but they each have an identical interest in price appreciation of the future contract.
271. See supra notes 74-92 and accompanying text.
272. See supra text accompanying notes 221-22.
273. 3 are a function of the returns-to-effort and opportunity costs realized by class counsel.
274. This actually raises the issue of the "winner's curse" phenomenon, an issue beyond the scope of this Article. The "winner's curse" is a phenomenon in which each bidder simply makes a bid on the basis of an unbiased estimate of the object's value to [the bidder]. If there is a particular multiple of a bidder's estimate resulting in an unbiased estimate of the object's value . . . [t]he winner is the bidder who overestimated the object's value the most and thus on average pays more than the object is worth. Richard Engelbrecht-Wiggans, An Introduction to the Theory of Bidding for a Single Object, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 53, 70 (Richard Engelbrecht-Wiggans et al. eds., 1983). Naturally, bidders attempt to avoid the winner's curse phenomenon by biasing their bids to the low end. See Roger B. Myerson, The Basic Theory of Optimal Auctions, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 149, 154 (Richard Engelbrecht-Wiggans et al. eds., 1983). In situations where bidders are risk-averse, second highest bid auctions can be utilized to get bidders to reveal their true valuations of the object or asset up for bid. Id.
275. This actually raises the issue of the "winner's curse" phenomenon, an issue beyond the scope of this Article. The "winner's curse" is a phenomenon in which each bidder simply makes a bid on the basis of an unbiased estimate of the object's value to [the bidder]. If there is a particular multiple of a bidder's estimate resulting in an unbiased estimate of the object's value . . . [t]he winner is the bidder who overestimated the object's value the most and thus on average pays more than the object is worth. Richard Engelbrecht-Wiggans, An Introduction to the Theory of Bidding for a Single Object, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 53, 70 (Richard Engelbrecht-Wiggans et al. eds., 1983). Naturally, bidders attempt to avoid the winner's curse phenomenon by biasing their bids to the low end. See Roger B. Myerson, The Basic Theory of Optimal Auctions, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 149, 154 (Richard Engelbrecht-Wiggans et al. eds., 1983). In situations where bidders are risk-averse, second highest bid auctions can be utilized to get bidders to reveal their true valuations of the object or asset up for bid. Id.
276. $20 - $13 - $6 - $.6 = 1.4. Firms with a higher valuation of the claim, lower attorneys' fees (opportunity costs), or lower non-lawyer litigation costs could pay more for the option, while firms with a lower valuation of the claim, higher attorneys' fees (opportunity costs), and higher non-lawyer litigation costs would pay less or perhaps nothing for the option.
277. See supra notes 105-82 and accompanying text.
278. See, e.g., In re Wells Fargo Sec. Litig., 157 F.R.D. 467, 472 (N.D. Cal. 1995).
279. Id.
280. 2, the sum of the option strike price and the option premium.
281. See Swiss BANK CORP. INV. BANKING, INC., RISK MANAGEMENT PRODUCT STRUCTURES: IN OPTION (1993).
282. See id.
283. See supra notes 143-51 and accompanying text.
284. See, e.g., Myerson, supra note 273, at 149-54.
285. See id.
286. See generally Eric Maskin & John G. Riley, The Gains to Making Losers Pay in High-Bid Auctions, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 205 (Richard Engelbrecht-Wiggans et al. eds., 1983).
287. See Michael H. Rothkopf, Bidding Theory: The Phenomena to Be Modeled, in AUCTIONS, BIDDING, AND CONTRACTING: USES AND THEORY 105 ,107 (Richard Engelbrecht-Wiggans et al. eds., 1983) (citations omitted).
288. Id. at 108. Some effects that a law firm might need to consider are conflicts of interest, reputational costs, and rules governing ethical professional conduct.