Third circuit task force report: On selection of class counsel

Temple Law Review

Volumn 74, Issue 4, 2001, Pages 689-780

[No Author Info available]

Author keywords

[No Author keywords available]

Indexed keywords

EID: 9644288028     PISSN: 08998086     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (338)

1. Fed. R. Civ. P. 23(a).
2. Some commentators refer to "auctions" only as they relate to an auction of a class claim. We use the term "auction" here as synonymous with bidding for an appointment as lead counsel - i.e., where counsel seeking to be named class counsel compete with each other through a bidding process monitored by a judge. We note that courts have used the term "auction" as we do, in reference to judicially-controlled bidding for appointment of class counsel. See, e.g., In re Cendant Corp. Litig., 264 F.3d 201, 270-71 (3d Cir. 2001) (reviewing "the District Court's decision to employ an auction to select lead counsel").
3. 15 U.S.C. § 78u-4(a)(3) (2000).
4. Lindy Bros. Builders, Inc. of Philadelphia v. American Radiator & Standard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973), appeal following remand, 540 F.2d 102 (3d Cir. 1976); In re Cendant Corp. Prides Litig., 243 F.3d 722 (3d Cir. 2001); In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001). In 1985, then Chief Judge Ruggiero J. Aldisert convened a Task Force to study the question of how attorney fees should be awarded in class actions. Its report, Court Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237 (1985), has been very influential in the development of the law and procedures for managing attorney fees in class actions.
5. 521 U.S. 591, 617 (1997).
6. See, e.g., John C. Coffee, The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. CHI. L. REV. 877 (1987) (describing and noting the need for economic incentives for plaintiffs' lawyers in common fund class actions).
7. Advancing expenses and court costs, the repayment of which are contingent on the outcome of the litigation, is permitted by Rule 1.8(e), Model Rules of Professional Conduct. Most states follow that Rule. STEPHEN GILLERS & ROY D. SIMON, REGULATION OF LAWYERS: STATUTES AND STANDARDS, pp. 101-07 (2001). (But see New York Code of Professional Responsibility D.R.5-103(b)(1), codified at 22 N.Y.C.R.R. § 1200.22(b)(1), requiring that the client remain ultimately liable for such expenses). The ABA Ethics 2000 project proposes to add a comment to the Model Rule stating: "[A] prohibition on a lawyer lending a client court costs and litigation expenses [is not warranted], because these advances are virtually indistinguishable from contingent fees and help ensure access to the courts."
8. See Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 56 (2001): Lawyer-driven litigation is not inherently undesirable. The willingness of plaintiffs' lawyers to investigate potential causes of action, mobilize the plaintiff class, and bear the costs and risks associated with the suit leads to an increase in enforcement and provides a valuable contribution to the deterrence of corporate misconduct. Indeed, by providing suitable financial incentives for these activities, class actions have led to the evolution of entrepreneurial plaintiffs' lawyers, who play a central role in rendering the class action a meaningful vehicle for compensating victims and deterring wrongful conduct.
9. "The common-fund doctrine...allows a person who maintains a lawsuit that results in the creation, preservation, or increase of a fund in which others have a common interest, to be reimbursed from that fund for litigation expenses incurred." Court Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237, 241 (1985).
10. For example, a study of class actions in four federal districts, conducted by the Federal Judicial Center, rendered results that "did not show recurring situations where (b)(3) class actions produced minimal benefits in relation to attorneys' fees." The study noted some cases in which "the settlement produced relatively small payments to the class as well as to attorneys for the class." Thomas E. Willging, Laural L. Hooper & Robert J. Niemic, EMPIRICAL STUDY OF CLASS ACTIONS IN FOUR FEDERAL DISTRICT COURTS 77 (Federal Judicial Center 1996).
11. See, e.g., In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir. 1995), where the original settlement called for class counsel to receive attorney fees in the amount of $9.5 million, and class members received no more than a $1,000 certificate towards a GM truck.
12. It is worth noting that many of the concerns about coupon settlements can be alleviated by basing counsel fees on the value of coupons actually redeemed, rather than the theoretical value of coupons awarded. Statement of Brian Wolfman, submitted to the Task Force, at 14-15 ("[B]y tying counsel's fate to that of their clients, the typical coupon settlement would become a thing of the past, and only settlements in which the coupon has a cash redemption value or the settlement includes the participation of a secondary market-maker - in other words, a settlement that actually broadly benefits the class - would be worth counsel's efforts.").
13. Although we are unaware of any scientific study of the matter, the Task Force believes that most nonlawyers are unaware of many of the risks faced by lawyers who take on and assume responsibility for class actions. There often is substantial publicity of successful class actions, and the focus of the publicity will naturally be on the amount of the recovery if it is large. Large recoveries get public attention, and large recoveries often result in substantial attorneys' fees that also attract attention. When class actions are dismissed, the publicity is often sparse or nonexistent, and the fact that class lawyers are uncompensated is often not understood. Motions to dismiss on the pleadings are not big news, although they are common in a number of class action scenarios.
14. Outside of securities cases and the PSLRA, the concept of "lead plaintiff" is a familiar one. We shall use the term "lead plaintiff" as synonymous with the "most adequate plaintiff in discussing securities class actions.
15. Throughout this Report, we cite to the applicable sections of the ABA Model Rules of Professional Conduct ("Model Rules"). These rules form the basis of the professional rules of the majority of the states. STEPHEN GILLERS & ROY D. SIMON, REGULATION OF LAWYERS STATUTES AND STANDARDS, p. xxiii (2001) ("As of Fall, 1999, more than 40 states and the District of Columbia had adopted all or a significant portion of the Model Rules."). In 1997, the ABA appointed the Ethics 2000 Commission ("Ethics 2000"), to recommend changes and to update the Model Rules. The recommendations of Ethics 2000 are available at http://www.abanet.org/cpr/ethics2k.html. Ethics 2000 has submitted its Final Report to the ABA House of Delegates, which is in the process of considering its recommendations. CONFERENCE REPORT ABA ANNUAL MEETING, 17 ABA/BNA LAWYERS' MANUAL ON PROFESSIONAL CONDUCT 492 (August 15, 2001). Whatever the outcome in the ABA House of Delegates, the states are free to adopt or reject Ethics 2000 recommendations. Those proposals adopted by the ABA are likely to become the most influential. Pertinent recommendations of Ethics 2000 will also be referred to in this Report. Several states retain all or parts of the ABA Model Code of Professional Responsibility ("Model Code"), which was the predecessor to the Model Rules. Pertinent provisions of the Model Code will be cited in this Report. In 2000, the ALI published the RESTATEMENT OF LAW GOVERNING LAWYERS. A product of 14 years of work, the Restatement is likely to become influential on many topics. Pertinent provisions of the Restatement are also included in this Report. Whatever the specific articulation, the core values comprising the responsibilities of lawyers are the same. Pertinent to the Task Force's inquiry, lawyers owe clients duties of loyalty, dedication, and competence and are prohibited from charging unreasonable fees. (Other core values include duties of communication and confidentiality, which are not directly implicated here.)
16. Throughout this Report, we cite to the applicable sections of the ABA Model Rules of Professional Conduct ("Model Rules"). These rules form the basis of the professional rules of the majority of the states. STEPHEN GILLERS & ROY D. SIMON, REGULATION OF LAWYERS STATUTES AND STANDARDS, p. xxiii (2001) ("As of Fall, 1999, more than 40 states and the District of Columbia had adopted all or a significant portion of the Model Rules."). In 1997, the ABA appointed the Ethics 2000 Commission ("Ethics 2000"), to recommend changes and to update the Model Rules. The recommendations of Ethics 2000 are available at http://www.abanet.org/cpr/ethics2k.html. Ethics 2000 has submitted its Final Report to the ABA House of Delegates, which is in the process of considering its recommendations. CONFERENCE REPORT ABA ANNUAL MEETING, 17 ABA/BNA LAWYERS' MANUAL ON PROFESSIONAL CONDUCT 492 (August 15, 2001). Whatever the outcome in the ABA House of Delegates, the states are free to adopt or reject Ethics 2000 recommendations. Those proposals adopted by the ABA are likely to become the most influential. Pertinent recommendations of Ethics 2000 will also be referred to in this Report. Several states retain all or parts of the ABA Model Code of Professional Responsibility ("Model Code"), which was the predecessor to the Model Rules. Pertinent provisions of the Model Code will be cited in this Report. In 2000, the ALI published the RESTATEMENT OF LAW GOVERNING LAWYERS. A product of 14 years of work, the Restatement is likely to become influential on many topics. Pertinent provisions of the Restatement are also included in this Report. Whatever the specific articulation, the core values comprising the responsibilities of lawyers are the same. Pertinent to the Task Force's inquiry, lawyers owe clients duties of loyalty, dedication, and competence and are prohibited from charging unreasonable fees. (Other core values include duties of communication and confidentiality, which are not directly implicated here.)
17. Model Rule 1.3 (Comment 1: "A lawyer should act with commitment and dedication to the interests of the client and zeal in advocacy upon the client's behalf."); Model Code DR6-101(A)(1)(A lawyer shall not handle a matter "which he knows or should know that he is not competent to handle..."); RESTATEMENT OF THE LAW GOVERNING LAWYERS § 52 (Comment c "The lawyer must perform tasks reasonably appropriate to the representation including, where appropriate, inquiry into the facts, analysis of law, exercise of professional judgment, communication with the client, rendering of practical and ethical advice, and drafting of documents.").
18. Model Rule 1.7 (Comment 1: "Loyalty is an essential element in the lawyer's relationship to a client."); Model Code EC 5-1 ("The professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client."); RESTATEMENT OF THE LAW GOVERNING LAWYERS § 121 (Comment b. "[T]he law seeks to assure clients that their lawyers will represent them with undivided loyalty. A client is entitled to be represented by a lawyer whom the client can trust.").
19. Model Rule 1.1 ("Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation."); Model Code EC 6-1 ("Because of his vital role in the legal process, a lawyer should act with competence and proper care in representing clients."); RESTATEMENT OF THE LAW GOVERNING LAWYERS § 52 (Comment b) (the duty of competence is "the skill and knowledge normally possessed by members of that profession or trade in good standing.").
20. Model Rule 1.4 (b) ("A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation."); Model Code EC 7-8 (a lawyer "should exercise his best efforts to insure that decisions of his client are made only after the client has been informed of relevant considerations."); RESTATEMENT OF THE LAW GOVERNING LA WYERS § 20.
21. Model Rule 1.2(a) ("A lawyer shall abide by a client's decisions concerning the objectives of representation .."); Model Code EC 7-7 ("In certain areas of legal representation not affecting the merits of the cause..., a lawyer is entitled to make decisions on his own. But otherwise the authority to make decisions is exclusively that of the client..."); RESTATEMENT OF THE LAW GOVERNING LAWYERS §§ 21, 22 (permitting the lawyer and client to alter by agreement the usual allocation of decisionmaking responsibility).
22. Model Rule 1.2(c), Comment 5 ("The client may not be asked to agree to representation so limited in scope as to violate [the duty to perform competently], or to surrender the right to terminate the lawyer's services or the right to settle litigation that the lawyer might wish to continue."); Model Code EC 7-7 ("[I]t is for the client to decide whether he will accept a settlement offer ...").
23. Model Rule 1.5(a) ("A lawyer's fee shall be reasonable."); Model Code DR 2-106(A) & (B) (A lawyer "shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee." A fee is "clearly excessive when,...a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee."). Ethics 2000 would amend Rule 1.5 to provide that an attorney be precluded from charging unreasonable amounts for expenses as well as fees. See also ABA Formal Opinion 93-379 (Dec. 6,1993) (holding that the Rule 1.5 "reasonableness" standard also applies to expenses).
24. Randall S. Thomas & Robert G. Hansen, Auctioning Class Action and Derivative Lawsuits: A Critical Analysis, 87 Nw. U. L. REV. 423, 433 (1993) ("Despite the strictures of the received legal model of the attorney-client relationship, the plaintiffs' attorney, not the plaintiffs, in these actions, controls the conduct of every important aspect of the litigation.... Individual plaintiffs cannot, by themselves, effectively control the agency costs that arise from the attorney-client relationship in these cases.").
25. See John C. Coffee, The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. CHI. L. REV. 877, 908 (1987) (observing that under private ordering, competing groups have sometimes invited other attorneys into the action in order to secure their vote for lead counsel, and that the result of some private ordering is a "political compromise," the price of which is "often both overstaffing and an acceptance of the free-riding or marginally competent attorney, whose vote gave him leverage that his ability did not"). See also In re Milestone Sci. Sec. Litig., 187 F.R.D. 165, 175 (D.N.J. 1999) (noting that a "litigation by committee" approach to securities class actions may prove wasteful and harmful to the class). But see In re Oxford Health Plans, Inc. Sec. Litig, 182 F.R.D. 42, 46 (S.D.N.Y. 1998) (noting the benefits of pooling the resources of multiple counsel "in order to support what could prove to be a costly and time-consuming litigation").
26. th Cir. 2001) ("Only ex ante can bargaining occur in the shadow of the litigation's uncertainty; only ex ante can the costs and benefits of particular systems and risk multipliers be assessed intelligently.").
27. See 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 (1991) (proposing auctions of class action claims); Randall S. Thomas & Robert G. Hansen, Auctioning Class Action and Derivative Lawsuits: A Critical Analysis, 87 Nw. U. L. REV. 423, 423-24 (1993) (criticizing Miller & Macey proposal as unworkable in practice, and questionable under the current rules of professional responsibility); Statement of Professor Samuel Issacharoff, submitted to the Task Force, at 6 (noting that the size of the class claims at stake render it unlikely that they could be purchased by a plaintiffs firm, and that the only realistic prospective bidders would be the defendants or their insurers, leading to the problem "of the class created through the contrivance of the defendant, rather than through the adversarial process.").
28. See 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 (1991) (proposing auctions of class action claims); Randall S. Thomas & Robert G. Hansen, Auctioning Class Action and Derivative Lawsuits: A Critical Analysis, 87 Nw. U. L. REV. 423, 423-24 (1993) (criticizing Miller & Macey proposal as unworkable in practice, and questionable under the current rules of professional responsibility); Statement of Professor Samuel Issacharoff, submitted to the Task Force, at 6 (noting that the size of the class claims at stake render it unlikely that they could be purchased by a plaintiffs firm, and that the only realistic prospective bidders would be the defendants or their insurers, leading to the problem "of the class created through the contrivance of the defendant, rather than through the adversarial process.").
29. See Model Rule 1.8(j) and Model Code DR 5-103(A) (both prohibiting a lawyer from acquiring a proprietary interest in the cause of action).
30. The Task Force familiarized itself with the literature on auctioning of claims and made a decision not to discuss in this Report the question whether it thought that auctions of claims might make sense in certain kinds of cases. As noted in the text, auctioning of claims would require changes in the law that as yet appear highly unlikely to be made. Indeed, if auctions of claims were seriously considered by lawmakers, it might well make sense to begin slowly with auctions of single, as opposed to class, claims. The issues that arise in auctions of claims differ from those that arise when bidding for lead counsel occurs. This Report will demonstrate that auctions of lead counsel raise a number of issues that require careful analysis. We chose to confine ourselves to that analysis and to leave for the future and for others the subject of the possibility, let alone the desirability, of auctioning class claims.
31. The Task Force expresses its thanks to the Federal Judicial Center and its Director, Judge Fern M. Smith, for the invaluable assistance provided to the work of the Task Force. The Report prepared for the Task Force by Laural Hooper & Marie Leary, Auctioning the Role of Class Counsel in Class Action Cases: A Descriptive Study (Federal Judicial Center 2001) ("FJC Report"), is posted on the Task Force website at www.ca3.uscourts.gov.
32. All written statements of the witnesses submitted to the Task Force are available on the Third Circuit website at www.ca3.uscourts.gov. They can be found alphabetically by the name of the person who submitted the statement. The statements submitted to the Task Force are referred to throughout this Report as "Statements submitted to the Task Force," as distinguished from the actual testimony before the Task Force. The testimony before the Task Force is posted separately on the Third Circuit website. Citations to "Testimony" throughout this report refer to testimony at the Task Force hearings.
33. Two of the judges with the most experience with auctioning class counsel. Judge Milton I. Shadur and Judge Vaughn R. Walker, participated extensively in the Third Circuit Judicial Conference discussions. Each pointed out perceived failings in the Task Force's draft report. Each took the time after the Conference to submit extensive written comments, which are posted on the Third Circuit web site. Their willingness to engage on the subject, to invest time to assist us in our effort, and their obvious dedication to and concern for the interests of individuals and entities who depend on our judicial system for justice is much appreciated. While we may disagree in this Final Report with some of their views, we have enormous respect for the intellectual commitment they have given to our work. Nothing in this Report should be construed as criticism of any of the auctions that they or any other judge has conducted, or of the results in any particular case. In the hands of some judges, procedures that might seem problematic as a general matter work well. The Task Force examined the concept of auctioning class counsel with an eye to how the auction process would work if used routinely by district judges. Our goal is to point out the advantages and disadvantages of various selection options in order to assist judges in making their choice of the option that they believe will work best in particular cases.
34. Judge Leonard I. Garth invited the Task Force's attention to the effect of an arbitration demand by a class member on class action certification and settlement. In re Cendant Corp. Litig., No. 00-2185, slip op. at 42 (3d Cir. May 9, 2001) (Garth, J., dissenting), vacated on grant of rehearing en banc, June 5, 2001: Indeed, just recently this Court has announced the formation of a Task Force on selection of class counsel and has enumerated a number of issues for the Task Force to consider. I suggest that this question of arbitration-class certification is one which in my opinion should assume prominence in the Task Force's labors. The Task Force did not understand that Judge Becker's charge fairly included this question and therefore, respectfully, considered it to be outside its jurisdiction.
35. The Task Force, in Section X, supra, provides recommendations for appropriate procedures to be used in those cases in which an auction might be considered.
36. The Delaware Courts rely heavily on private ordering. A description of that process is set forth in the Statements of R. Franklin Balotti and Joseph Rosenthal, submitted to the Task Force. See also TCW Technology Limited Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 (Del.Ch.) ("Traditionally, the Court of Chancery has allowed counsel representing individual, class or derivative plaintiffs to engage in a type of private ordering, that is, to coordinate prosecution of the litigation and to propose the most efficient means of consolidation."). Many federal courts have recognized a preference for private ordering as well. See, e.g., In re Continental Illinois Securities Litig., 572 F. Supp. 931, 935 (N.D. Ill. 1983) ("In the event a class is certified, I would prefer to designate counsel who are nominated by plaintiffs' attorneys. I therefore suggest that plaintiffs' counsel confer together with a view toward submitting a proposed roster that will be no larger than necessary to provide effective representation...").
37. The Third Circuit has described the lodestar method as follows: A court determines an attorney's lodestar award by multiplying the number of hours he or she reasonably worked on a client's case by a reasonable hourly billing rate for such services given the geographical area, the nature of the services provided, and the experience of the lawyer. Gunter v. Ridgewood Energy Corp., 223 F.3d 190, 195 n.l (3d Cir. 2000).
38. The Third Circuit has stated "that the percentage of recovery method "resembles a contingent fee in that it awards counsel a variable percentage of the amount recovered for the class." In re General Motors Trucks, 55 F.3d 768, 819 n.38 (3d Cir. 1995).
39. th Cir. 1986) (observing that the lodestar method creates an incentive to run up hours).
40. Court Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237, 248 (1985) (the lodestar approach "creates a disincentive for the early settlement of cases" because of the emphasis on hours worked; "there appears to be a conscious, or perhaps unconscious, desire to keep the litigation alive despite a reasonable prospect of settlement, to maximize the number of hours to be included in computing the lodestar."). See also Goldberger v. Integrated Resources, 209 F.3d 43, 48 (2d Cir. 2000) (noting that the lodestar "created an unanticipated disincentive to early settlements."); Statement of Professor Arthur Miller, submitted to the Task Force, at 3 ("The lodestar method also can create unfortunate incentives for a plaintiff's lawyer to engage in unnecessary work to prolong the litigation in an effort to justify a larger fee, which, of course, causes inefficiency, inhibits settlement, and misaligns the interests of counsel and class.").
41. th Cir. 1988) (noting the administrative difficulties imposed by the lodestar method). See also Court Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. at 246 (criticizing lodestar approach as unduly burdensome on the judiciary).
42. See Thomas E. Willging, Laural L. Hooper & Robert J. Niemic, EMPIRICAL STUDY OF CLASS ACTIONS IN FOUR FEDERAL DISTRICT COURTS at 71 (Federal Judicial Center 1996) (noting the problem of using a percentage of recovery method that is not case-sensitive). See also Martha Pacold, Attorneys' Fees in Class Actions Governed by Fee-Shifting Statutes, 68 U. CHI. L. REV. 1007, 1021 (2001) ("In the 1970s, many courts began to view the percentage method as problematic because it generated windfalls for attorneys in cases with exceptionally large funds. Some courts avoided this problem by reducing the percentage awarded. However, this exposed the method to criticism as unprincipled.").
43. See Thomas E. Willging, Laural L. Hooper & Robert J. Niemic, EMPIRICAL STUDY OF CLASS ACTIONS IN FOUR FEDERAL DISTRICT COURTS at 71 (Federal Judicial Center 1996) (noting the problem of using a percentage of recovery method that is not case-sensitive). See also Martha Pacold, Attorneys' Fees in Class Actions Governed by Fee-Shifting Statutes, 68 U. CHI. L. REV. 1007, 1021 (2001) ("In the 1970s, many courts began to view the percentage method as problematic because it generated windfalls for attorneys in cases with exceptionally large funds. Some courts avoided this problem by reducing the percentage awarded. However, this exposed the method to criticism as unprincipled.").
44. See, e.g., Gunter v. Ridgewood Energy Corp., 223 F. 3d 190, 196 (3d Cir. 2000), which remanded a percentage fee award for redetermination by the District Court because the fee opinion was too "cursory and conclusory" to be adequately reviewed. See also In re Quintus Securities Litigation, 148 F. Supp. 2d 967, 974 (N.D. Cal. 2001) (criticizing the automatic award of a "benchmark" percentage).
45. In re Auction Houses Antitrust Litig., 197 F.R.D. 71, 77 (S.D.N.Y. 2000); Statement of Arlin M. Adams, submitted to the Task Force, at 10 (noting that percentage of recovery method may create incentives for counsel to "cut corners"; lawyers "may settle too early, because they may prefer to spend relatively few hours (and thus maximize the amount they are paid per hour), rather than spend more time and increase the plaintiff's recovery").
46. Statement of Arlin M. Adams, submitted to the Task Force, at 4 (when fees are determined at the end of the action, "the adversary process breaks down, because defendants are eager to settle the case and those in the class often lack the incentive or means to mount a serious challenge to an award of fees."); Statement of Professor Joseph A. Grundfest, submitted to the Task Force, at 7 ("The defendant could care less about the size of the fee because the defendant's obligation to fund the pool is fixed by the settlement, and a lower fee award therefore would not provide any benefit to the defendant.... The absent class members are rationally apathetic and have no cause to object."); Statement of Brian Wolfman, submitted to the Task Force, at 17 ("Indeed, class counsel often negotiate 'clear sailing' arrangements, where the defendant agrees not to contest a fee up to a certain amount, the very purpose of which is to eliminate an adversary contest regarding fees.").
47. The first judge to utilize an auction was Judge Vaughn R. Walker in In re Oracle Securities Litig., 131 F.R.D. 688, 698 (N.D. Cal. 1990).
48. See In re Oracle Securities Litig., 131 F.R.D. 688, 693 n.12 (N.D. Cal. 1990) (explaining that the use of an auction would "make use of the mechanisms of a competitive market").
49. See, e.g., In re Cendant Corp. Prides Litig., 243 F.3d 722, 735 n.18 (3d Cir. 2001) ("A preliminary bidding process cannot replace subsequent analysis... [T]he circumstances and progression of every case are different, and these unique factors must be taken into account by district courts awarding attorney's fees. Therefore, though the result of a bidding process may be of use to a district court in awarding fees at the end of the case, it cannot supplant post-settlement analysis to determine a reasonable fee.")
50. 15 U.S.C. § 78u-4(a)(3)(B).
51. In re Razorfish, Inc. Securities Litig., 143 F. Supp. 2d 304, 311 (S.D.N.Y. 2001) (finding that under the PSLRA the primary focus is on choosing the lead plaintiff and then deferring to that plaintiffs choice of counsel).
52. Model Rule 1.7(b) ("A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to...a third person or...a lawyer's own interests.").
53. Model Rule 1.1 ("A lawyer shall provide competent representation to a client.").
54. Model Rule 13. ("A lawyer shall act with reasonable diligence and promptness in representing a client."). Lawyers also owe clients duties of communication (Model Rule 1.4) and confidentiality (Model Rule 1.6).
55. GEOFFREY C. HAZARD & W. WILLIAM HODES, THE LAW OF LAWYERING § 2.1 (3d ed. 2001) (observing that the Model Rules reverse the common reference to the "lawyer-client" relationship, referring instead to the "client-lawyer" relationship to emphasize the primacy of the client's interests).
56. Model Rule 1.14: "When a client's ability to make adequately considered decisions ... is impaired,... the lawyer shall as far as reasonably possible, maintain a normal client-lawyer relationship with the client."; RESTATEMENT OF THE LAW GOVERNING LAWYERS, § 24.
57. Model Rule 1.14; RESTATEMENT OF THE LAW GOVERNING LAWYERS, § 24 (4).
58. Jill E. Fisch, Aggregation, Auctions, and Other Developments in the Selection of Lead Counsel under the PSLRA, 64 LAW AND CONTEMP. PROBS. 53, 71-72 ("Although the group [of plaintiffs] may have a large financial interest in the aggregate, the small individual stakes reduce the likelihood that group members will participate actively in the litigation process."); Randall S. Thomas & Robert G. Hansen, Auctioning Class Action and Derivative Lawsuits: A Critical Analysis, 87 N.W. U. L. REV. 423, 433 (1993) ("Our analysis of the agency costs inherent in class action...lawsuits conflicts with the received legal model of the attorney-client relationship. This model presumes that the attorney is the agent of the client. Under the legal profession's ethical rules, the attorney has a duty to advance the client's interest to the furthest extent permissible. Clients are to keep watch over their attorneys using monitoring devices, bonding mechanisms, and incentive structures.... Despite the strictures of the received legal model of the attorney-client relationship, the plaintiffs' attorney, not the plaintiffs, in these actions controls the conduct of every important aspect of the litigation."); 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, 20 (1991) (noting that class counsel operates essentially unregulated by clients); RESTATEMENT OF THE LAW GOVERNING LAWYERS § 14 Comment f. ("Members of the class often lack the incentive or knowledge to monitor the performance of class representatives.").
59. Jill E. Fisch, Aggregation, Auctions, and Other Developments in the Selection of Lead Counsel under the PSLRA, 64 LAW AND CONTEMP. PROBS. 53, 71-72 ("Although the group [of plaintiffs] may have a large financial interest in the aggregate, the small individual stakes reduce the likelihood that group members will participate actively in the litigation process."); Randall S. Thomas & Robert G. Hansen, Auctioning Class Action and Derivative Lawsuits: A Critical Analysis, 87 N.W. U. L. REV. 423, 433 (1993) ("Our analysis of the agency costs inherent in class action...lawsuits conflicts with the received legal model of the attorney-client relationship. This model presumes that the attorney is the agent of the client. Under the legal profession's ethical rules, the attorney has a duty to advance the client's interest to the furthest extent permissible. Clients are to keep watch over their attorneys using monitoring devices, bonding mechanisms, and incentive structures.... Despite the strictures of the received legal model of the attorney-client relationship, the plaintiffs' attorney, not the plaintiffs, in these actions controls the conduct of every important aspect of the litigation."); 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, 20 (1991) (noting that class counsel operates essentially unregulated by clients); RESTATEMENT OF THE LAW GOVERNING LAWYERS § 14 Comment f. ("Members of the class often lack the incentive or knowledge to monitor the performance of class representatives.").
60. Jill E. Fisch, Aggregation, Auctions, and Other Developments in the Selection of Lead Counsel under the PSLRA, 64 LAW AND CONTEMP. PROBS. 53, 71-72 ("Although the group [of plaintiffs] may have a large financial interest in the aggregate, the small individual stakes reduce the likelihood that group members will participate actively in the litigation process."); Randall S. Thomas & Robert G. Hansen, Auctioning Class Action and Derivative Lawsuits: A Critical Analysis, 87 N.W. U. L. REV. 423, 433 (1993) ("Our analysis of the agency costs inherent in class action...lawsuits conflicts with the received legal model of the attorney-client relationship. This model presumes that the attorney is the agent of the client. Under the legal profession's ethical rules, the attorney has a duty to advance the client's interest to the furthest extent permissible. Clients are to keep watch over their attorneys using monitoring devices, bonding mechanisms, and incentive structures.... Despite the strictures of the received legal model of the attorney-client relationship, the plaintiffs' attorney, not the plaintiffs, in these actions controls the conduct of every important aspect of the litigation."); 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, 20 (1991) (noting that class counsel operates essentially unregulated by clients); RESTATEMENT OF THE LAW GOVERNING LAWYERS § 14 Comment f. ("Members of the class often lack the incentive or knowledge to monitor the performance of class representatives.").
61. Deborah L. Rhode, Class Conflicts in Class Actions, 34 STAN. L. REV. 1183, 1183 (1982). See also In re Cendant Corp. Litig., 264 F.3d 201 at 254 (3d Cir. 2001): Lawyers operate under ethical rules that require them to serve only their clients' interests. When a representation involves a single client, the ability to select, retain, and monitor counsel gives clients reason to be confident that their lawyers will live up to this obligation. The power to select counsel lets clients choose lawyers with whom they are comfortable and in whose ability and integrity they have confidence.... Most of the safeguards we have described vanish in the class action context, where "the client" is a sizeable, often far-flung group. Logistical and coordination problems invariably preclude class members from meeting and agreeing on anything, and, at all events, most class members generally lack the economic incentive or sophistication to take an active role.
62. See generally Model Rule 1.7 and Model Rule 5.2(a) ("A lawyer is bound by the rules of professional conduct notwithstanding that the lawyer acted at the direction of another person."); Greenfleld v. Villager Industries, Inc., 483 F.2d 824, 832 (3d Cir. 1973) ("[I]n addition to the normal obligations of an officer of the court, and as counsel to parties to the litigation, class action counsel possess, in a very real sense, fiduciary obligations to those not before the court.").
63. In re Cendant Corp. Litig., 264 F.3d 201 at 255 (3d Cir. 2001) (in the absence of effective client oversight and because there are inherent conflicts of interest between counsel and the class, the court is traditionally the agent designated to oversee the relationship between counsel and the class.). The Task Force notes that class actions are not the only situations in which judges are called on to oversee counsel's fidelity to clients. Cases in which the client is a trustee or fiduciary, guardianships over infants or the mentally incompetent, bankruptcy and the purchase of legal services by governmental units to litigate on behalf of the public are other situations in which the court is called on to be the primary monitor of counsel's activity and fee. GEOFFREY C. HAZARD & W. WILLIAM HODES, THE LAW OF LAWYERING, § 8.7 (3d ed. 2001) ("In several recurring situations, courts increase the rigor of their scrutiny.... When the lawyer's' client is a trustee or other fiduciary, for example, the fee that the client pays will be charged against the estate or other res that is the subject of the proceedings and thus will effectively be borne by the beneficiary.... On this rationale, heightened scrutiny of the reasonableness of attorney fees is routine in trust and estate administration, guardianships over infants and the mentally incompetent, as well as in bankruptcy proceedings.... Class action litigation provides another example of 'built-in' enhanced scrutiny of attorney fees."). Accordingly, judges are called on to develop methods and procedures to safeguard client interests in a variety of situations, in addition to the class action cases that are the focus of this Report.
64. In re Auction Houses Antitrust Litig., 197 F.R.D. 71, 75 (S.D.N.Y. 2001) ("[T]he class action mechanism is not free of problems, foremost among them for purposes of this case, difficulties in obtaining counsel who will manage the case efficiently and effectively on behalf of the class and the mismatch of economic incentives between the plaintiff class and its attorney."); Statement of Prof. Samuel Issacharoff, submitted to the Task Force, at 3 ("[T]he central issue is therefore the determination of which manner of selecting and compensating class counsel best attracts skillful lawyers and then best structures the incentives for faithful representation of the class.")
65. A Comment to Model Rule 1.5 states: "A [fee] agreement may not be made whose terms might induce the lawyer improperly to curtail services for a client or perform them in a way contrary to a client's interest." This Comment recognizes the possibility that fee agreements may influence the lawyer's loyalty to a client.
66. See In re Cendant Corp. Litig., 264 F.3d 201, 254-55 (3d Cir. 2001) ("[A] rational self-interested client seeks to maximize net recovery; he or she wants the representation to terminate when his or her gross recovery minus his or her counsel's fee is the largest. In contrast, at least in theory and often in practice, a rational self-interested lawyer looks to maximize his or her net fee, and thus wants the representation to end at the moment when the difference between his or her net fee and costs...is greatest. These two points rarely converge. As a result there is often a conflict between the economic interests of clients and their lawyers, and this fact creates reason to fear that class counsel will be highly imperfect agents for the class.").
67. Model Rule 1.5(a); Model Code DR2-106(A)&(B).
68. Under the recommendations by the ABA's Ethics 2000 Commission, Model Rule 1.5 would be amended to preclude lawyers from charging an unreasonable amount for expenses as well as fees. See also ABA Formal Opinion. 93-379 (Dec. 6, 1993) (holding that the Rule 1.5 "reasonableness" standard also applies to expenses).
69. 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, 20 (1991) (describing the agency problems presented by class actions).
70. RESTATEMENT OF THE LAW GOVERNING LAWYERS, Ch. 2, Introductory Note ("A lawyer is an agent, to whom clients entrust matters, property, and information, which may be of great importance and sensitivity, and whose work is usually not subject to detailed client supervision because of its complexity. Because those characteristics of the client-lawyer relationship make clients vulnerable to harm, and because of the importance to the legal system of faithful representation, the law stated [in the Restatement] provides a number of safeguards for clients beyond those generally provided to principals.").
71. GEOFFREY C. HAZARD & W. WILLIAM HODES, THE LAW OF LAWYERING, § 8.6, pp. 8-15 (3d ed. 2001) ("This focus on procedural requirements [in Model Rule 1.5], however, should not obscure the fact that contingent fee agreements must also satisfy the threshold substantive requirement of reasonableness."); RESTATEMENT OF LAW GOVERNING LAWYERS § 34 ("A lawyer may not charge a fee that is larger than is reasonable in the circumstances....").
72. Model Rule 1.5(d) prohibits contingent fees in criminal and domestic relations matters. RESTATEMENT OF THE LAW GOVERNING LAWYERS § 35 is similar.
73. Model Rule 1.7, the general rule governing loyalty and conflicts of interest, provides that a lawyer may not seek a client's consent for a representation that may materially limit the lawyer's responsibilities to that client unless "the lawyer reasonably believes the representation will not be adversely affected." Model Rule 1.7(b)(2). Ethics 2000 proposed a change in the form of this Rule but not its substance. A new comment to Rule 1.7 is proposed which elaborates on the idea of non-consentable conflicts of interest: "The proposed Rule makes clear that in certain situations a conflict may not be waived by the client. That is, the representation may not go forward even with the client's consent.... This standard is set forth in a separate paragraph, both to reflect the separate steps required in analyzing conflicts (i.e., first identify potentially impermissible conflicts, then determine if the representation is permissible with the client's consent) and to highlight the fact that not all conflicts are consentable." RESTATEMENT OF THE LAW GOVERNING LAWYERS § 122(2)(c) ("Notwithstanding the informed consent of each affected client or former client, a lawyer may not represent a client if...in the circumstances, it is not reasonably likely that the lawyer will be able to provide adequate representation to one or more of the clients.").
74. RESTATEMENT OF THE LAW GOVERNING LAWYERS § 122, Comment g (iv) and § 122,d(iii). See generally, Lazy Oil v. Witco, 166 F.3d 581, 588 (3d Cir. 1999) (suggesting that a strict reading of the conflict of interest rules in class actions should be tempered, because the very nature of a class action is to combine many divergent interests).
75. Testimony of Lawrence A. Sucharow, June 1, 2001, p. 138-39 ("I only know that in all my years of practice, I have understood what a fiduciary duty is, and I tried to carry that out... I believe that most, the vast majority of counsel and courts understand what fiduciary duties are and carry them out in connection with class actions."); Testimony of H. Laddie Montague, June 1, 2001 p. 153-154 ("There is a real feeling of doing good and when we get into cases, we really take up the [cudgels] for the principals.... Is it a case that will redress a wrong that otherwise might not be made?"); Statement of Horace Schow II, submitted to the Task Force, at 3 ("Legal services are not a commodity. The quality of counsel, their reputation and experience in the field, knowledge of [the client], and their openness to negotiating with us on a fee structure appropriate to the case as we assess it at the outset, are all factors to be considered together [ when retaining counsel].").
76. Statement of Sherrie R. Savett, submitted to the Task Force, at 9 ("Experience, resources, and other factors such as accessability, demeanor, reputation, etc. are all elements that an individual client takes into consideration in selecting an attorney. It is exceptionally difficult for a court to take these factors into consideration when conducting an auction. One cannot easily quantify an unquantifiable element.")
77. Testimony of Prof. Arthur R. Miller, June 1, 2001, p. 196 ("I love judicial discretion. I know some judges on the courts of appeal...want to rein that discretion in but I think one of the beauties of the Unites States district judge is his or her discretion."); Testimony of Hon. Louis C. Bechtle, June 1, 2001, p. 121 ("I don't agree totally with Judge Kaplan's assertion that a percentage [attorney's fee recovery] is out of the air. Percentages come from years and years of experience and history in these cases.").
78. 131 F.R.D. 688 (N.D. Cal. 1990); 132 F.R.D. 538 (N.D. Cal. 1990); 136 F.R.D. 639 (N.D. Cal 1991).
79. See Laural L. Hooper & Marie Leary, Auctioning the Role of Class Counsel in Class Action Cases: A Descriptive Study (Federal Judicial Center 2001). The auction cases cited and analyzed by the FJC are: In re Oracle Securities. Litig., 131 F.R.D. 688 (N.D. Cal. 1990)); In re Wells Fargo Securities. Litig., 157 F.R.D. 467 (N.D. Cal. 1994); In re Amino Acid Lysine Antitrust Litig., 918 F. Supp 1190 (N.D. Ill. 1996); In re California Micro Devices Securities Litig., 168 F.R.D. 257 (N.D. Cal. 1996); In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998), rev'd, 264 F.3d 201 (3d Cir. 2001); In re Network Assocs. Inc., Securities Litig., 76 F. Supp. 2d 1017 (N.D. Cal. 1999); Sherleigh Assocs. LLC v. Windmere-Durable Holdings, Inc., 184 F.R.D. 688 (S.D. Fla. 1999); In re Lucent Techs. Inc. Securities. Litig., 194 F.R.D. 137 (D.N.J. 2000); In re Bank One Shareholders Class Actions, 96 F. Supp. 2d 780 (N.D. Ill. 2000); Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999); In re Auction Houses Antitrust Litig., 197 F.R.D. 71 (S.D.N.Y. 2001); In re Quintus Securities Litig., 148 F. Supp.2d 967, 986-87 (N.D. Cal. 2001); In re Commtouch Software Ltd. Securities Litig., No. 01-C-00719, Order Re Lead Plaintiff Selection and Class Counsel Selection (N.D. Cal. June 27, 2001); In re Comdisco Securities Litig., 141 F. Supp. 2d 951 (N.D. Ill. 2001). The Judges who have used the auction procedure are: Judge Vaughn R. Walker, Northern District of California (five cases); Judge Milton I. Shadur, Northern District of Illinois (three cases); Judge William H. Alsup, Northern District of California (two cases); Judge Alfred J. Lechner, Jr., District of New Jersey (twice in In re Lucent); Judge William A. Walls, District of New Jersey (one case); Judge Joan A. Lenard, Southern District of Florida (one case); and Judge Lewis A. Kaplan, Southern District of New York (one case). The Report by the Federal Judicial Center, supra, lists and provides details on all of the cases in which an auction process has been used to date. The FJC Report indicates that the number of cases in which courts considered conducting an auction but rejected the idea "remains unknown." FJC Report, at 4. Fred B. Burnside, in "Go Pick a Client - And Other Tales of Woe Resulting From the Selection of Class Counsel by Court-Ordered Competitive Bidding (unpublished manuscript, on file with the Task Force), states that after the Oracle decision "the overwhelming majority of courts have not adopted competitive bidding" and cites the following cases in which bidding was considered but rejected: Cooperman v. Powell, No. 91-37-FR, 1991 U.S. Dist. LEXIS 4941, at*4-*5 (D. Or.); Davis v. Coopers & Lybrand, No. 90-C-7173, 1991 U.S. Dist. LEXIS 10384, at *12-*13 (N.D. 111.); In re In-Store Advertising Securities. Litig., Civ. No. 90-5594 (S.D.N.Y. 1990); In re Computer Assocs. Int'l, Inc. Securities. Litig., No. CV-90-2394, et al. (E.D.N.Y. 1990); In re Software Toolworks, Inc. Securities Litig., Master File No. CA 90-3191-FMS (N.D. Cal. 1990); Sutton v. MarchFirst, Inc., 00-C-6676 (N.D. Ill. Feb. 7, 2001) (minute order provides for counsel to submit fee agreement to court, but implicitly rejects earlier suggestion of defendants to adopt competitive bidding by not doing so); In re AT&T Corp. Sec. Litig., Civ. No. 00-5364 (GEB) (D.N.J. Jan. 29, 2001) (appointing the New Hampshire Group as lead plaintiff over defendant's suggestion of competitive bidding); Rosenberg v. Nationsbanc Montgomery Sec. Inc., No. C-98-20956 RMW (N.D. Cal. 1998) (appointing lead counsel without resorting to bidding despite the request in prior pleadings of one group of plaintiffs to auction off lead counsel position); In re IBP, Inc. Securities Litig., 2001 U.S. Dist. LEXIS 7898 (D. S.D.); In re Diamond Multimedia Sys. Securities Litig., 1997 U.S. Dist. LEXIS 21558 (N.D. Cal.); In re Aronson v. McKesson HBOC, Inc., 79 F. Supp. 2d 1146 (N.D. Cal. 1999); Sakhrani v. Brightpoint, 78 F. Supp. 2d 845, 854 (S.D. Ind. 1999) (rejecting the suggestion for an open competition for lead counsel because "the court is satisfied based on prior submissions that the two proposed lead firms can represent a proposed class effectively"); In re Critical Path Sec. Litig., CV-01-0551 (WHO), 156 F. Supp. 2d 1102 (N.D. Cal. 2001); In re Calico Commerce, 01-CV-3221, Hearing Transcript at 11-17 (S.D. N.Y. June 12, 2001).
80. See Laural L. Hooper & Marie Leary, Auctioning the Role of Class Counsel in Class Action Cases: A Descriptive Study (Federal Judicial Center 2001). The auction cases cited and analyzed by the FJC are: In re Oracle Securities. Litig., 131 F.R.D. 688 (N.D. Cal. 1990)); In re Wells Fargo Securities. Litig., 157 F.R.D. 467 (N.D. Cal. 1994); In re Amino Acid Lysine Antitrust Litig., 918 F. Supp 1190 (N.D. Ill. 1996); In re California Micro Devices Securities Litig., 168 F.R.D. 257 (N.D. Cal. 1996); In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998), rev'd, 264 F.3d 201 (3d Cir. 2001); In re Network Assocs. Inc., Securities Litig., 76 F. Supp. 2d 1017 (N.D. Cal. 1999); Sherleigh Assocs. LLC v. Windmere-Durable Holdings, Inc., 184 F.R.D. 688 (S.D. Fla. 1999); In re Lucent Techs. Inc. Securities. Litig., 194 F.R.D. 137 (D.N.J. 2000); In re Bank One Shareholders Class Actions, 96 F. Supp. 2d 780 (N.D. Ill. 2000); Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999); In re Auction Houses Antitrust Litig., 197 F.R.D. 71 (S.D.N.Y. 2001); In re Quintus Securities Litig., 148 F. Supp.2d 967, 986-87 (N.D. Cal. 2001); In re Commtouch Software Ltd. Securities Litig., No. 01-C-00719, Order Re Lead Plaintiff Selection and Class Counsel Selection (N.D. Cal. June 27, 2001); In re Comdisco Securities Litig., 141 F. Supp. 2d 951 (N.D. Ill. 2001). The Judges who have used the auction procedure are: Judge Vaughn R. Walker, Northern District of California (five cases); Judge Milton I. Shadur, Northern District of Illinois (three cases); Judge William H. Alsup, Northern District of California (two cases); Judge Alfred J. Lechner, Jr., District of New Jersey (twice in In re Lucent); Judge William A. Walls, District of New Jersey (one case); Judge Joan A. Lenard, Southern District of Florida (one case); and Judge Lewis A. Kaplan, Southern District of New York (one case). The Report by the Federal Judicial Center, supra, lists and provides details on all of the cases in which an auction process has been used to date. The FJC Report indicates that the number of cases in which courts considered conducting an auction but rejected the idea "remains unknown." FJC Report, at 4. Fred B. Burnside, in "Go Pick a Client - And Other Tales of Woe Resulting From the Selection of Class Counsel by Court-Ordered Competitive Bidding (unpublished manuscript, on file with the Task Force), states that after the Oracle decision "the overwhelming majority of courts have not adopted competitive bidding" and cites the following cases in which bidding was considered but rejected: Cooperman v. Powell, No. 91-37-FR, 1991 U.S. Dist. LEXIS 4941, at*4-*5 (D. Or.); Davis v. Coopers & Lybrand, No. 90-C-7173, 1991 U.S. Dist. LEXIS 10384, at *12-*13 (N.D. 111.); In re In-Store Advertising Securities. Litig., Civ. No. 90-5594 (S.D.N.Y. 1990); In re Computer Assocs. Int'l, Inc. Securities. Litig., No. CV-90-2394, et al. (E.D.N.Y. 1990); In re Software Toolworks, Inc. Securities Litig., Master File No. CA 90-3191-FMS (N.D. Cal. 1990); Sutton v. MarchFirst, Inc., 00-C-6676 (N.D. Ill. Feb. 7, 2001) (minute order provides for counsel to submit fee agreement to court, but implicitly rejects earlier suggestion of defendants to adopt competitive bidding by not doing so); In re AT&T Corp. Sec. Litig., Civ. No. 00-5364 (GEB) (D.N.J. Jan. 29, 2001) (appointing the New Hampshire Group as lead plaintiff over defendant's suggestion of competitive bidding); Rosenberg v. Nationsbanc Montgomery Sec. Inc., No. C-98-20956 RMW (N.D. Cal. 1998) (appointing lead counsel without resorting to bidding despite the request in prior pleadings of one group of plaintiffs to auction off lead counsel position); In re IBP, Inc. Securities Litig., 2001 U.S. Dist. LEXIS 7898 (D. S.D.); In re Diamond Multimedia Sys. Securities Litig., 1997 U.S. Dist. LEXIS 21558 (N.D. Cal.); In re Aronson v. McKesson HBOC, Inc., 79 F. Supp. 2d 1146 (N.D. Cal. 1999); Sakhrani v. Brightpoint, 78 F. Supp. 2d 845, 854 (S.D. Ind. 1999) (rejecting the suggestion for an open competition for lead counsel because "the court is satisfied based on prior submissions that the two proposed lead firms can represent a proposed class effectively"); In re Critical Path Sec. Litig., CV-01-0551 (WHO), 156 F. Supp. 2d 1102 (N.D. Cal. 2001); In re Calico Commerce, 01-CV-3221, Hearing Transcript at 11-17 (S.D. N.Y. June 12, 2001).
81. See Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 82 (2001) ("Lead counsel auctions remain a work in progress. Judicial experience with the auction process is limited, and few cases utilizing an auction have progressed to a stage in which it is possible to evaluate the result."); Statement of Guy Miller Struve on behalf of the Association of the Bar of the City of New York, submitted to the Task Force, at 2 ("The limited base of knowledge cautions us that reaching definitive conclusions at this early juncture is a hazardous endeavor.").
82. See FJC Report, at 15 ("We found the most common reason judges gave for employing bidding was to foster competition among counsel by replicating the private marketplace for legal services.").
83. Testimony of Judge Vaughn R. Walker, March 16, 2001, pp. 38 et seq.
84. See, e.g., In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190, 1194 (N.D. Ill. 1996) (noting that the "difficulty comes when a lawyer who is not of one's choosing is foisted on one, as is inevitable in the class action context").
85. See, e.g. In re Bank One Shareholders Class Actions, 96 F. Supp. 2d 780, 785 (N.D. Ill. 2000) ("[T]hat [auction] procedure is superior to any alternatives that the caselaw or other authorities have entertained.").
86. In re Auction Houses Antitrust Litigation, 197 F.R.D. 71 (S.D.N.Y. 2000).
87. Testimony of Judge Lewis A. Kaplan, June 1, 2001, pp. 66 et seq.
88. See, e.g., In re Quintus Securities Litig., 148 F. Supp.2d 967, 986-7 (N.D. Cal. 2001).
89. In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190 (N.D. Ill. 1996); In re Bank One Shareholders Class Actions, 96 F. Supp. 2d 780, 785 (N.D. Ill. 2000) ("any bidding constraints that this Court (not having more than threshold knowledge of the litigation and its prospects) might have imposed on the outside in the form of mandated structural limitations would necessarily have generated corresponding limitations on the exercise of imagination by bidding counsel in devising proposals that they thought would provide the maximum benefit to the class.").
90. See FJC Report, at 60 ("In all of the bidding cases, the court required the bids to be submitted under seal and the court kept the bids under seal at least until the bids were evaluated and the winning bidder was chosen or the bids were rejected.").
91. See, e.g., In re California Micro Devices Securities Litig., 168 F.R.D. 257, 259-60 (N.D. Cal. 1996); In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190, 1192, 1201 (N.D. Ill. 1996); In re Bank One Shreholders Class Actions, 96 F. Supp.2d 780, 782, 785 (N.D. Ill. 2000); In re Wells Fargo Securities Litig., 157 F.R.D. 467, 468 (N.D. Cal. 1995).
92. See In re Auction Houses Antitrust Litig., 197 F.R.D. 71, 80 (S.D.N.Y. 2000) ("If disclosed to defendants, the fee [arrangement] also can lead defendants to exploit the disjuncture of interests between the plaintiffs' and their counsel by making a firm settlement offer in the amount that would exactly maximize counsel's fee, even if defense counsel otherwise would be prepared to go higher.").
93. 260 F.3d 183, 193 (3d Cir. 2001).
94. See, e.g., In re Cendant Corp. Litig., 264 FJd 201, 259 (3d Cir. 2001) (expressing the concern that "because auctions do not award the attorneys who discover legal violations, they may reduce lawyers' incentives to seek out and disclose illegality (because unless they are selected as lead counsel, they may not be compensated for the time they spend doing so)").
95. See, e.g., In re Bank One Shareholders Class Action, 916 F. Supp. 2d 780, 789-90 n.13 (N.D. III. 2000).
96. In re Ammo Acid Lysine Antitrust Litigation, 918 F. Supp. at 1198-99 (N.D. Ill. 1996) (class counsel chosen who would not receive a percentage of any recovery in excess of $25 million).
97. In re Quintus Securities Litig., 148 F. Supp.2d 967, 986 (N.D. Cal. 2001).
98. In re Auction Houses Antitrust Litig., 197 F.R.D. 71, 80 (S.D.N.Y. 2000).
99. See, e.g. In re Oracle Securities Litig., 131 F.R.D. 688, 690 (N.D. Cal. 1990); In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. at 1992 n.7 (N.D. Ill. 1996). Judge Shadur testified that he permits lawyers who have jointly filed a complaint (other than jointly with a common liaison counsel) to prepare a joint bid. Testimony of Judge Shadur, March 16, 2001, pp. 10 & 94.
100. In re Lucent Technologies, Inc. Securities Litig., 194 F.R.D. 137, 156-57 (D.N.J. 2000) (preventing joint bids "is necessary to protect the interests of the proposed class").
101. See, e.g., In re Oracle Securities Litig., 131 F.R.D. 688, 697 (N.D. Cal. 1990) ("Each firm submitting an application shall certify to the court that its compensation proposal was prepared independently and that no part thereof was revealed to any other bidder prior to filing with the court.").
102. See, e.g. In re Quintus Securities Litig., 148 F. Supp. 2d 967, 977 (N.D. Cal. 2001).
103. HERBERT B. NEWBERG & ALBERT CONTE, 3 NEWBERG ON CLASS ACTIONS § 14.03 (3d ed. Supp. Dec. 2000).
104. In re Comdisco Securities Litig., 150 F. Supp. 2d 943, 951-52 (N.D. Ill. 2001).
105. Andrew K. Niebler, In Search of Bargained-For Fees for Class Action Plaintiffs' Lawyers: The Promise and Pitfalls of Auctioning the Position of Lead Counsel, 54 Bus. LAW 763, 802 (1999) (discussing the advantages of increasing percentages). See also Statement of Professor John C. Coffee, submitted to the Task Force, at 4-5 (arguing for modestly increasing percentages).
106. Laural L. Hooper & Marie Leary, Auctioning the Role of Class Counsel in Class Action Cases: A Descriptive Study (Federal judicial Center 2001).
107. Testimony of Judge Vaughn R. Walker, Judge Milton I. Shadur, Judge William A. Walls, March 16, 2001; Testimony of Judge Lewis A. Kaplan, Professor Joseph A. Grundfest, Andrew T. Berry, Richard B. Drubel, June 1, 2001.
108. Testimony of Judge Walker, March 16, p. 39-40, Statement of Richard B. Drubel, submitted to the Task Force, at 5.
109. Statement of Professor Joseph A. Grundfest, submitted to the Task Force, at 6-7 (relying on Todd S. Foster, Denise M. Martin, Vinita M. Juneja and Frederick C. Dunbar, Trends in Securities Litigation and the Impact of PSLRA (August 1999)). Professor Grundfest cautions that the data indicating lower fees in auction cases must be "interpreted with caution" because the data comes from a small sample of auction cases.
110. John C. Coffee, The PSLRA and Auctions, N.Y.L.J., May 17, 2001, p. 5.
111. See Jill E. Fisch, Class Action Reform: Lessons From Securities Litigation, 39 ARIZ. L. REV. 533, 538 (1997) (noting that traditional appointments that rely on a race to the courthouse provide a poor proxy for quality of counsel).
112. Statement of Arlin M. Adams, submitted to the Task Force, at 16 (appointment of lead counsel on the basis of first to file "does not reflect market forces in any meaningful way. If anything, it reflects which firm is best able to put together a complaint with a minimum of investigation and research. The auction method avoids rewarding such behavior."). This argument assumes, of course, that appointment other than through an auction will always be based on a "first to file" principle. As discussed later in this Report, appointment of class counsel through "traditional" methods should not mean an automatic appointment based on the first to file.
113. th Cir. 2001) (holding that an attorney fee in a class action should be set as the market would set it before the representation, and noting that an auction is one means of determining an ex ante fee).
114. In re Auction Houses Antitrust Litig., 197 F.R.D. 71, 82 (S.D.N.Y. 2000).
115. Statement of Richard B. Drubel, submitted to the Task Force, at 8; Testimony of Andrew T. Berry, June 1, 2001, pp. 36-37.
116. th Cir. 1993) (recognizing a "benchmark" percentage recovery of 25% for attorney fees in class actions). For a criticism of "benchmark" fee awards, see Statement of Brian Wolfman, submitted to the Task Force, at 11 ("Starting from the market rate for contingency fee lawyers in individual cases... and tweaking the numbers a bit, while doing nothing to evaluate the actual risks of class litigation, does not reflect the market in which the class action is actually operating. As a result, the benchmark 'market' rates for class actions, accepted over and over again by the courts, were established tautologically, with courts simply looking to other courts that have engaged in the identical exercise.").
117. th Cir. 2001) ("The judicial opinions from auction cases are helpful [to courts determining fees ex post] because they provide detailed analysis of the market rate for attorneys facing different levels of risk. Forcing firms to bid at least approximates a market," and "a court can examine the bids and the results to see what levels of compensation attorneys are willing to accept in competition."); In re Comdisco Securities Litig., 150 F. Supp. 2d 943, 951 (N.D. Ill. 2001) (noting the possibility "that at some future point the increased use of bidding for legal representation will itself have generated enough evidence of the propriety of a new set of 'norms' at much lower percentages").
118. Statement of Arlin M. Adams, submitted to the Task Force, at 7.
119. Statement of Professor John C. Coffee, submitted to the Task Force, at 2. See also Statement of Professor Joseph A. Grundfest, submitted to the Task Force, at 8 (arguing that "market check procedures are attracting talented counsel who traditionally did not represent plaintiff classes but who are now willing to represent the class at lower fees (see, e.g., the Boies, Schiller & Flexner bid in the Auction Houses litigation)").
120. Statements and testimony from Professor Elliott J. Weiss, Professor Jill E Fisch, Arlin M. Adams Professor John C Coffee, Professor Samuel Issacharoff, Edward Labaton, Joseph Rosenthal, Stephen A. Sheller, Howard A. Specter, Sherrie R. Savett, Michael D. Fishbein, Stuart H. Savett, Keith Johnson, Professor Arthur R. Miller, Arthur M. Kaplan, Lawrence Sucharow, Horace Schow II, H. Laddie Montague, Jr., Catherine E. LaMarr, Lorna Goodman, Stuart M. Grant, Jay W. Eisenhofer, Howard I. Langer, Leonard Barrack, and F. Franklin Balotti. All submitted to the Task Force.
121. See, e.g., Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53 (2001); 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 (1991) (criticizing auction of lead counsel as providing disincentives to effective representation); Developments in the Law, The Paths of Civil Litigation, 113 HARV. L, REV. 1827, 1829 (2000) (arguing that auctioning of counsel "tends to exacerbate rather than resolve the problems inherent in the judicial regulation of plaintiffs' attorneys' fees").
122. See, e.g., Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53 (2001); 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 (1991) (criticizing auction of lead counsel as providing disincentives to effective representation); Developments in the Law, The Paths of Civil Litigation, 113 HARV. L, REV. 1827, 1829 (2000) (arguing that auctioning of counsel "tends to exacerbate rather than resolve the problems inherent in the judicial regulation of plaintiffs' attorneys' fees").
123. See, e.g., Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53 (2001); 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 (1991) (criticizing auction of lead counsel as providing disincentives to effective representation); Developments in the Law, The Paths of Civil Litigation, 113 HARV. L, REV. 1827, 1829 (2000) (arguing that auctioning of counsel "tends to exacerbate rather than resolve the problems inherent in the judicial regulation of plaintiffs' attorneys' fees").
124. We recognize that the term "maximum net recovery" is somewhat slippery. It might appear, for example, that an attorney fee of 20% rather than 15% in a given case would lower the maximum net recovery to the class. Yet, this is not necessarily so. If attorney fees of 20% are available, counsel may, for example, assume the risk of pursuing a difficult secondary or tertiary defendant. If fees are limited to 15%, this may not occur. Assuming that liability is established and damages awarded against additional defendants, the overall class recovery may increase as a result of a greater percentage of recovery for class counsel. We have recognized throughout this Report that there is a risk factor to be considered when attorney fees are assessed, and it is therefore important that the maximum net recovery concept not ignore the risk assumed by counsel. Our conception of maximum net recovery is one that takes into account the risk incurred by counsel. It would be neither fair nor reasonable to assume that as an attorney's fees rise, a class recovery shrinks. Rising attorney fees may cause an overall increase in the potential class recovery.
125. See Statement of Professor Samuel Issacharoff, submitted to the Task Force, at 5 ("A smaller percentage [attorney fee] may make the class worse off if the underlying corpus is reduced because of lawyer incompetence or because of incentives not to maximize the amount to be sought in the class action.").
126. Statement of Professor Samuel Issacharoff, submitted to the Task Force, at 4.
127. See Statement of Professor Arthur Miller, submitted to the Task Force, at 15 ("the real issue is not whether a particular fee regime will give class members a larger percentage share of the common fund recovery, but whether it will maximize the net recovery class members actually receive.")
128. Statement of Professor Arthur Miller, submitted to the Task Force, at 16. See also Statement of Professor Jill E. Fisch, submitted to the Task Force, at 1-2, noting that the case for auctions maximizing class recovery remains unproven: Current experience with auctions is limited, and many existing cases involved flawed auction designs or limited competition. The absence of comparable control groups makes it impossible to identify the extent to which auctions reduce legal fees or, more problematically, whether any fee savings are the result of reduced attorney effort, poor attorney quality, or both.... As a result, empirical analysis cannot readily address the effect of auctions on the net recovery to the plaintiff class.
129. See, e.g., In re Cendant Corp. Prides Litig., 243 F.3d 722, 737 (3d Cir. 2001) (listing 12 recent cases in which the fees were substantially less than 25-30% of the settlement); In re Dreyfus Aggressive Growth Mutual Fund Litigation, 2001 WL 709262, at 4 (S.D.N.Y.) (finding 30% of a common fund award to be "at the far end" of reasonableness for securities class actions, and awarding attorney fees amounting to 15% of the fund); Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 52 (2d Cir. 2000) (affirming a fee award of 4% of the class recovery and rejecting counsel's objections to the fee as a substantial departure from the 25% "benchmark" in the profession); Varljen v. H.J. Myers & Co., 2000 WL1683656, at *5 (S.D.N.Y. 2000) (awarding attorney fees of 20% of class recovery); In re Fine Host Corp. Securities Litig., 2000 WL 33116538 (S.D.N.Y. Nov. 8, 2000) (awarding attorney fees amounting to 17.5% of the class recovery). See also In re Comdisco Securities Litig., 150 F. Supp. 2d 943, 947 (N.D. Ill. 2001) (arguing that Cendant Corp. Prides table of cases "undercuts severely" the idea that 25-30% is the normal benchmark). In Goldberger, supra, the Second Circuit observed that the asserted 25% "benchmark" reflected a contingency risk that was unlikely to be present in every securities fraud lass action. 209 F.3d at 51-52. The Court held that a 25% fee would be unreasonably high in the absence of a significant risk of non-recovery in the specific case.
130. 243 F.3d 722 (3d Cir. 2001).
131. 264 F.3d 201 (3d Cir. 2001).
132. Statement of Judge Vaughn R. Walker, submitted to the Task Force, at 11.
133. Statement of Sherrie R. Savett, submitted to the Task Force, at 5-6 (arguing that the court "is likely to bear more costs" in an auction "as it must evaluate fee and expense proposals from a potentially unlimited number of plaintiffs firms"). See also Statement of Professor Arthur Miller, submitted to the Task Force, at 21 ("Evaluating each bid is a time consuming and highly subjective matter, and requires the court - in the absence of a developed record - to make numerous assessments and assumptions that may (or may not) be correct, and that may (or may not) ultimately have to be reconsidered at the end of the case.... One must ask whether one of the system's most precious and limited resources - judicial time - is better expended in running competitive bidding regimes or devoted to other, more judicial, matters").
134. See, e.g., In re Comdisco Securities Litig., 150 F. Supp. 2d 943, 951 (N.D.Ill. 2001) (holding open the possibility that the winning bid could be adjusted in light of developments unforeseen at the time of bidding).
135. It is not clear to what extent the judges who have conducted auctions engage in the same ex post review of fees as judges who selected counsel by other methods. The key question is whether the judge should-in fairness to both counsel and the class-be satisfied at the end of the case that the fee is reasonable. If so, the auction procedure may add a layer of costs without providing much benefit at the end of the case.
136. In re Cendant Corp. Prides Litig., 243 F.3d 722, 735, n.18 (3d Cir. 2001). The Third Circuit has also held that a fee set in an auction is entitled to no special deference in determining whether it is a reasonable award at the conclusion of the action. See In re Cendant Corp. Litig., 264 F.3d 201, 282-83 (3d Cir. 2001).
137. See Letter from Professor John Leubsdorf to the Task Force, May 30, 2001 (on file with the Task Force) ("It seems to me that, in most instances, an auction is not a desirable way to select the lawyers who will do most for their clients. It tends to select the cheapest but not necessarily the best counsel, and may also result in a fee structure that will not provide incentives for optimal performance").
138. Statement of Professor Lucian Bebchuk, submitted to the Task Force, at 9.
139. See Bruce Hay, Contingent Fees and Agency Costs, 25 J. LEG. STUD. 503, 513 (1996) (optimal contingent fee, providing the best incentive to the lawyer and maximum return to the client, is generally above the level that a bidding process would produce). Judge Walker contends in a written submission to the Task Force (available on the Task Force web site) that any problem with attorney performance after winning an auction is controlled by the fact that lawyers who lose the bidding will monitor the performance of the successful bidder and will be in a position to object to a fee application. The Task Force could find no evidence, however, that this monitoring by losing bidders actually occurs. It is in fact counterintuitive. Losing bidders drop from a case. It is difficult to imagine why they would invest time and resources in monitoring the counsel who has won and will receive fees. When we contrast auctions with private ordering, we note that in private ordering there may be lead counsel and other counsel sharing certain responsibilities. Although shared responsibilities raises a concern about overstaffing, it provides an opportunity for firms to monitor each other and an incentive to do so - after all, there is nothing to share if the class does not prevail and too little to share if the recovery is not all it should be.
140. Statement of Brian Wolfman, submitted to the Task Force, at 3-4: My chief concern is that in many, and probably most, cases, the putative plaintiffs' lawyer simply does not have the information to participate sensibly in a pre-litigation auction.... [M]any key points of law and fact are in substantial doubt at the outset of the case (or even half way into it), and only gradually come into focus as the litigation matures. Some of the unknowns are: (1) the legal viability of one or more of the key claims for relief (2) facts that might prove necessary or important to establish a viable legal claim (indeed in some cases, the "historical" facts themselves are still developing) (3) whether the case can be maintained as a class action, or whether instead the case cannot be maintained at all or can be maintained only individually or in some other form of aggregated litigation (4) key facts bearing on the amount of damages suffered by the class (assuming liability) (5) the financial ability of the defendant to withstand full liability, or, rather, whether recovery is possible only on a "limited fund" basis, in bankruptcy, or must be sought, in whole or in part, from other parties not believed to be principally responsible (6) the form of relief (for instance, cases in which money damages initially are sought, but, as the litigation develops, only injunctive relief, ADR, or some other form of relief is viable) (7) the size of the class, and perhaps more important, the approximate number of class members likely to be eligible for relief on account of the defendant's alleged misconduct (8) the potential for infra-class conflict, and the resulting need for sub-classes requiring separate sub-class counsel.
141. A number of experienced counsel testified that it is all but impossible to predict the outcome of a class action as of the time that an auction would have to be conducted. See, e.g., Statement of Michael D. Fishbein, submitted to the Task Force, at 1-2 ("Even where the objective facts known to counsel at the outset of litigation make it appear as though a lawsuit is a 'slam dunk,' such cases will frequently be unsuccessful because of unknown facts subsequently unearthed in discovery, unforeseen changes in the existing science, changes and variations in the application of law, or even the peculiarities of a given judge or jury."). See also the Statements of Sherrie R. Savett and John Innelli, both submitted to the Task Force. The Task Force notes that in the cases in which bidding has been conducted, judges have not permitted any type of preliminary discovery to assist the bidders in forming their bids. See FJC Report, at 33 ("None of the bidding cases give any indication that the judge permitted any type of preliminary discovery by any of the bidders to assist them with the proposals prior to the commencement of the initial bidding period. Discovery either had not yet commenced in the case, or, if it had, once the court requested bids, discovery in the case was stayed.").
142. Professor Fisch describes the "winner's curse" as follows: Where bidders bid for an item of unknown value, an auction model known as the common value model, the successful bidder is the one who estimates the value of the item at the highest level. Because this bidder will have made an estimate that is higher than any other bidder, and because the bidders are acting without full information about the outcome of the litigation, the winning bidder will therefore face the risk of overpayment, or the "winner's curse" problem. The possibility of overpayment causes rational bidders to discount for that risk and can lead to inefficient, rather than competitive, prices. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 89 (2001).
143. Professor John Coffee explained the "winner's curse" in the context of the actual bids in In re Auction Houses Antitrust Litig., supra. John C. Coffee, Untangling the "'Auction Houses' Aftermath, N.Y. L. J., Nov. 30, 2000, p. 1. In that case, the judge required counsel to state an X factor below which they would not receive a fee; above that amount, counsel would take 25% of the recovery. The X factor of the winning bid was more than twice as high as the next bid. Had the value of the class action turned out to be well below the X factor, it would have created a conflict of interest between counsel and the class, because counsel would have had the incentive to settle the case at the earliest opportunity, even though more effort might result in a higher settlement (though below the X factor). Moreover the large disparity in bids suggested the possibility that the winning bid might have been too high in light of what was known at the time. Professor Coffee has stated that the Auction Houses case indicates that the "winner's curse" problem "does have real world analogues." Statement of John C. Coffee, submitted to the Task Force, at 6. In contrast, Richard B. Drubel, who submitted the winning bid in Auction Houses, contends that the disparity in bids was not the result of a "winner's curse" but rather was due to the fact that the winning bidder had a reputation as an excellent litigation firm, willing to take a case to trial. Therefore, the claim had a higher value to his firm than to competing firms who might not have the same reputation. Statement of Richard B. Drubel, submitted to the Task Force, at 2.
144. Statement of Professor Samuel Issacharoff, submitted to the Task Force, at 4.
145. Statement of Andrew Niebler, submitted to the Task Force, at 2-4.
146. Professor Fisch elaborates on the difficult if not impossible task for a court evaluating auction bids for appointment of class counsel: The court must determine the likely recovery and predict the process by which that recovery will be achieved. The court must then evaluate each bid against those predictions to determine how the proposed structure will affect counsel's ability to achieve the predicted outcome. The auction requires the court to make these predictions at the outset of the case, before discovery reveals the facts and before motion practice uncovers the legal issues. Accordingly, the court has extremely limited information on the probability, amount, and range of possible recovery. Professor Fisch contrasts this ex ante assessment of optimal fees to the ex post approach used with traditional appointment of class counsel: In contrast, if the court decides on the appropriate fee award at the conclusion of the case, the court can assess the amount and the quality of counsel's work effort. Moreover, although the court may not have complete information on the merits of the case, particularly if the case is resolved by settlement, the court is likely to have a better sense of the strength of the case and the degree of risk associated with the litigation. Most important, by reserving its determination of the appropriate fee award until the conclusion of the case, the court can address many of the incentive problems previously identified. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 88-89 (2001).
147. Statement of Arlin M. Adams, submitted to the Task Force, at 21 ("a problem in analyzing and comparing bids is that doing so may require the court to make some assumptions about the likely outcome of the case.... Aside from the dangers of speculating (on the record) about the court's view of the difficulty of litigating the claims involved and the length of time the court expects it to take to reach settlement, such assumptions may insert a degree of subjectivity into the analysis of the bids.").
148. See Statement of Lorna Goodman, submitted to the Task Force, at 6-7 (noting that the district court in Cendant rejected what turned out to be the lowest bid by assuming that class recovery would be far less than $1 billion; the recovery in Cendant turned out to be $3 billion).
149. See, e.g., In re Quintus Securities Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001); In re Oracle Securities Litig., 131 F.R.D. 688 (N.D.Cal. 1990); In re Amino Acid Lysine Antitrust Litig., 918 F.Supp. 1190 (N.D. Ill. 1996); In re Bank One Shareholders Class Actions, 96 F.Supp. 2d 780 (N.D Ill. 2000).
150. Statement of Arlin M. Adams, submitted to the Task Force, at 17.
151. th Cir. 2001) ("Judges don't look for the lowest bid; they look for the best bid - just as any private individual would do in selecting a law firm, an advertising firm, or a construction company. Bidding law firms provide the judge with firm profiles, testimonials of former clients, predictions of expected recovery, fee proposals, and arguments on why their firm provides good value. The judge in turn acts as an agent for the class, selecting the firm that seems likely to generate the highest recovery net of attorneys' fees.").
152. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 82-83 (2001) ("For bids to provide the court with an objective basis on which to distinguish among counsel, the court's determination must focus primarily on price."). See also Statement of Professor Arthur R. Miller, submitted to the Task Force, at 20-21: Although auctions may create the appearance of objectivity to an unsophisticated observer (as the "lodestar" methodology once gave the appearance of mathematical precision), in reality virtually every element of a class counsel auction is subjective. For example, a court's perception of a bidding firm's quality, experience, resources, willingness to litigate... all have substantial subjective elements. Similarly, determining what weight to give to the varying perceived strengths and weaknesses of different law firms and competences in various substantive contexts is inherently subjective.... In addition...price is not necessarily objective. To the contrary, to the extent that auction advocates have supported the use of fee grids...or "caps" or other variable structures, determining what bid is "lowest" is dependent on a court's subjective ex ante perception of a range of factors. These include the likely value of the case, the likelihood that a case will settle early or late, and on and on.
153. See, e.g., In re Lucent Technologies Securities Litig., 194 F.R.D. 137, 157 (D.N.J. 2000) ("Each bidding firm is required to submit a declaration of matters such as: the firm's experience in securities class action litigation; the qualifications of the firm to perform the work required; whether the firm will post a completion bond; a description of malpractice insurance for the firm and for each lawyer working on the case; a demonstration of familiarity with the case, including a specification of the probability of recovery and its possible range.").
154. Statement of Arlin M. Adams, submitted to the Task Force, at 20 ("depending on the importance given certain factors by some judges but not others, the auction method may be applied in as subjective a manner as the lodestar method or an adjustment to a percentage method.").
155. See Attachment to the Statement of State of Wisconsin Investment Board, submitted to the Task Force (setting forth quality-based standards for selection of class counsel).
156. The fact that no court has relied or suggested that it would be wise to rely on the low bid irrespective of who makes it also suggests that the claim that auctions may open the door to new entrants in the class action field is probably overstated. New entrants who make extremely low bids may raise eyebrows, and may fail the "experience" prong of any analysis. The fact is that in auctions as in other methods of selecting class counsel, judges will probably be wary of entrusting the responsibility of representing large numbers of class members to lawyers without much experience in class action cases.
157. Statements of Arlin M. Adams at 1, H. Laddie Montague, Jr. at 5, and Arthur M. Kaplan at 5, all submitted to the Task Force. See also Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 93-94 (2001): In addition to the practical issues presented by the auction structure, a selection process that disregards differences in the competing firms' early efforts creates undesirable incentives with respect to future litigation. The public interest is served by lawyers who carefully conduct investigations prior to filing a complaint.... Investigation, however, is costly, and a lawyer's investigatory efforts are penalized if they can be appropriated by a low-bidding latecomer. Under the auction model, the firms that perform work early in a case face a risk that they will not be compensated; firms that do no initial work preserve lower cost structures that give them an advantage in the auction.
158. Statement of Professor John C. Coffee, submitted to the Task Force, at 3.
159. In re Bank One Shareholders Class Actions, 96 F. Supp. 2d 780 (N.D. Ill. 2000) (promising compensation to counsel who had prepared the consolidated class action). The SEC supports the position that firms that do valuable work in investigating securities claims should be separately compensated if they are not chosen as lead counsel. Memorandum of the Securities and Exchange Commission, Amicus Curiae, at 9 n.5, In re Milestone Scientific Securities Litig., 183 F.R.D. 404 (D.N.J. 1998).
160. Statement of Arlin M. Adams, submitted to the Task Force, at 23 ("even if counsel are compensated for their time in investigating, the incentive may not be great enough to encourage attorneys to pursue such early investigation.").
161. Statement of Sherrie R. Savett, submitted to the Task Force, at 5 ("The auction process gives plaintiffs attorneys an incentive to sit back and let others do all of the work, so as to swoop in at the last minute and submit a bid. An auction process discourages the filing of initial complaints, but encourages the filing of duplicative or copycat complaints where most of the work has already been performed by others."). But see Statement of Richard B. Drubel, submitted to the Task Force, at 6 (arguing that claim jumping is not necessarily bad because the investigating lawyer "may be a great investigator but an inexperienced or inept trial lawyer"). Mr. Drubel's proposed solution is "to reward the finder separately for his work in some fashion, but to auction the position of lead counsel to the firm that can get the most value to the class."
162. In re Wells Fargo Securities Litig., 157 F.R.D. 467 (N.D. Cal. 1994) (three bids); In re Comdisco Securities Litig., 150 F. Supp. 2d 143 (N.D. Ill. 2001) (three bids; the court notes the decrease in number of qualified bidders in other cases); In re California Micro Devices Securities Litig., 168 F.R.D. 257 (N.D. Cal. 1996) (two bids); Wenderhold v. Cylink Corp., 191 F.R.D. 600 (N.D. Cal. 2000) (one bid; after the court rejected the bid and reopened the bidding, the court received three bids). See Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 90 (2001): Several of the cases in which courts have used auctions suggest that the risk of limited bidder participation is real. For example, only four firms submitted bids in the Oracle auction, and Judge Walker had to conduct two rounds of bidding to obtain a total of three bids in Cylink. The auction in In re California Micro Devices Securities Litigation, resulted in only two bids, although seventeen firms had previously entered appearances representing members of the plaintiff class. Even the auction conducted in In re Amino Acid Lysine Antitrust Litigation resulted in the submission of only eight bids, despite the fact that approximately thirty-eight firms had entered an appearance prior to the court's decision to use an auction.
163. Statement of Arlin M. Adams, submitted to the Task Force, at 26 ("When confronted with a complex bidding process at the outset, particularly where the use of the auction method is still relatively novel, some firms may decide that the opportunity cost to them of analyzing the case sufficiently to put together a winning bid is too great, and they may choose to pursue other cases in non-auction jurisdictions instead."). Notably, courts have often required the bid to be structured in relation to certain mileposts in the litigation, and many of these mileposts are unlikely to be reached. For example, it is quite unlikely that a class action will be resolved after a trial or on appeal. As Professor Fisch puts it: "By including a variety of marginally relevant contingencies, litigation milepost grids increase the cost of bid preparation and complicate the task of bid comparison." Statement of Professor Jill E. Fisch, submitted to the Task Force, at 3.
164. But see Statement of Richard B. Drubel, submitted to the Task Force, at 8. Mr. Drubel does not see a problem with an auction so long as there is more than one qualified bidder. One benefit of an auction is to drive each participant to compete against the others for the benefit of the class. Unless a bidder is assured in advance that no one else will bid, that competitive discipline will still exist - and the class will still reap the benefits - whether there is one bidder or twenty.
165. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 84-85 (2001). See also Andrew K. Niebler, In Search of Bargained-For Fees for Class Action Plaintiffs' Lawyers: The Promise and Pitfalls of Auctioning the Position of Lead Counsel, 54 Bus. LAW. 763, 777-78 (1999) (discussing the "lemons" problem in the context of auction of class counsel).
166. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 84-85 (2001). See also Andrew K. Niebler, In Search of Bargained-For Fees for Class Action Plaintiffs' Lawyers: The Promise and Pitfalls of Auctioning the Position of Lead Counsel, 54 Bus. LAW. 763, 777-78 (1999) (discussing the "lemons" problem in the context of auction of class counsel).
167. In re Cendant Corp. Prides Litig., 243 F.3d 722, 734 (3d Cir. 2001).
168. In re Comdisco Securities Litig., 150 F. Supp. 2d 943, 947 (N.D. Ill. 2001).
169. See Statement of Professor Samuel Issacharoff, submitted to the Task Force, at 3 n.2 ("If the auction process is to have any effect, there must be a quasi-contractual expectation that the auction will indeed set the expected terms governing the retention and compensation of class counsel"; this premise has been "called into question" by Cendant Prides).
170. Statements of Keith Johnson at 5, Catherine E. LaMarr at 3-4, Horace Schow at 4-5, and Lorna Goodman at 5-6, all submitted to the Task Force.
171. See, e.g. In Re Bank One Shareholders Class Actions, 96 F. Supp. 2d 780, 785 (N.D. Ill. 2000) ("[V]ariation...among the several proposals will necessitate some...assumptions by the Court about the potential class recovery in the process of comparing bids."); Statement of Professor Elliott Weiss, submitted to the Task Force, at 3 ("A court often will not be able to evaluate competing bids without pre-judging aspects of the case before it.").
172. Statement of Howard Langer, submitted to the Task Force, at 1 (arguing that the auction process "creates an appearance of impropriety or bias."). The Task Force is aware that judges are often called upon to make rulings that could influence their view of a case. For example, a judge could rule a confession invalid and preside over a trial at which the confession was excluded despite knowing its contents. We assume that judges are able to set aside matters that they know but are not permitted to consider. The issue is not, however, whether any possible influence on a judge's decision should be avoided at all costs. Rather, the question is whether certain procedures create too great a risk that judicial neutrality could be compromised or that an appearance of partiality could be raised.
173. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 95 (2001). See also Statement of Guy Miller Struve on behalf of the Association of the Bar of the City of New York, submitted to the Task Force, at 6 ("Our most serious concern with an auction procedure is the impact it may have on the role of the court as neutral arbiter.").
174. Statement of Arthur M. Kaplan, submitted to the Task Force, at 3 (contending that the auction procedure "encourages cozy communications between well-connected plaintiffs' counsel and defense counsel" with the potential for "sweetheart deals in which a winning bid is based upon information available only to the bidder favored by defense counsel").
175. During the bidding in In re Auction Houses Antitrust Litigation, Judge Kaplan became aware that certain bidding counsel had engaged in settlement discussions with defendants and had obtained information from defendants to aid in those discussions. Judge Kaplan ordered the information to be made available to all bidders. In re Auction Houses Antitrust Litig., 197 F.R.D. 71,74 (S.D.N.Y. 2000).
176. Statement of Michael D. Fishbein, submitted to the Task Force, at 3 ("In virtually every case we know of where the auction approach has been used, there are rumors that the successful bid was predicated on an undisclosed prior agreement with defendants concerning settlement. Regardless of whether these rumors ever have any validity, there is no question that they undermine confidence in the legal process.").
177. See Statement of Keith Johnson, submitted to the Task Force, at 4, discussing the considerations that institutional investors take into account in selecting lead counsel in class actions: Fee levels are one of the most significant factors considered in the selection process. However, they are not the only factor. Experience, claim analysis, investigation results, client responsiveness, reputation, and trial capabilities are among the other factors that might be taken into consideration. See also Statements of Lorna Goodman at 7, and Stuart M. Grant and Jay Eisenhofer at 4-5, submitted to the Task Force.
178. When a sophisticated investor - an institutional investor who is the most qualified plaintiff under the PSLRA, for example - assumes the role of lead plaintiff and has a substantial interest in the outcome of a case, the negotiations over fees ex ante may be closer to the typical case where a client hires a lawyer and agrees to a fee. There is no bar, however, to the institutional investor and the lawyer agreeing that they will reexamine the fee agreement as the case progresses and when it ends to see whether the assumptions made going into the case were valid. The problem in class actions in which there is no lead plaintiff with sufficient interest and ability to negotiate a fee is that the unknowns in a class action may be far more substantial than in a single plaintiff case. This makes reliance on an ex post appraisal more important.
179. See Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 83 (2001): Clients in the market for legal services do not choose their lawyer based solely on price. Indeed, the depth of the market for legal services, with its wide variation in billing rates, demonstrates the importance of non-price considerations. As in many markets, lawyer price and quality are often directly related. Those lawyers who offer higher quality legal services are able to command a higher price for their services. Less qualified lawyers charge a lower price. Lawyer quality is an important component of the selection process because a higher quality lawyer maximizes the client's expected recovery by increasing the likelihood of recovery, the amount of recovery, or both. See also Statement of Arlin M. Adams, submitted to the Task Force, at 21, n.8 ("some clients are willing to pay more even for marginally better representation, and class action plaintiffs should not be assumed to be any different.").
180. Statement of Professor Lucian Bebchuk, submitted to the Task Force, at 6.
181. Statement of Professor Jill E. Fisch, submitted to the Task Force, at 8, reporting research indicating that institutional investors have adopted a variety of procedures for the selection of counsel, all of which involve a high level of competition. Institutions actively invite a range of firms to compete for the lead counsel position by obtaining recommendations, circulating requests for proposals, and, in some cases, retaining a law firm specifically to assist in the process of selecting class counsel.... Following the identification of these firms, institutions conduct a rigorous evaluation process utilizing both quality and price criteria. Institutions report checking references, reviewing performance in comparable cases, and reviewing writing samples. Institutions typically conduct beauty contests akin to those used by corporate clients-face to face meetings in which they evaluate familiarity with the case, general legal expertise, and proposed litigation strategy. Institutions report placing a premium on firm style and client relationship issues, stressing the importance of selecting a firm that is willing to engage in joint decisionmaking and regular reporting.
182. Statement of Arthur M. Kaplan, submitted to the Task Force, at 1 (observing that "auction procedures sharply deviate from the way sophisticated private litigants select their counsel in high-stakes litigation" and that "sophisticated private litigants evaluate quality first" with fee negotiation "usually the final step, explored only with the final candidate or a few candidates").
183. See Statement of Judge Shadur, commenting on Draft Task Force Report, posted on Task Force web site, at 2.
184. See cases cited in note 121, supra, indicating substantial downward departures from a supposed "benchmark."
185. Statement of Professor Arthur E. Miller, submitted to the Task Force, at 16.
186. Several members of the Task Force were prepared to conclude that auctions are never appropriate. Ultimately the Task Force was persuaded by the testimony of many witnesses who urged that courts be encouraged to innovate and find creative solutions to these important issues. See, e. g., Testimony of Judge Vaughn R. Walker at 52, and Judge William A. Walls at 155, March 16, 2001; Testimony of Elizabeth Cabraser at 74, May 5, 2001; and Testimony of Professor Joseph A. Grundfest at 210, June 1, 2001. See also Statement of Brian Wolfman, submitted to the Task Force, at 3 ("In money damages actions where the alleged cause of action is well established and the amount of potential damages is well understood at the outset, an auction may produce a better deal for the class than the prevailing method of retrospective fee determination."). The Task Force was also persuaded by the thoughtful comments of judges and others at the Third Circuit Judicial Conference, who urged the Task Force not to discourage potentially useful judicial innovation.
187. Statement of Thomas Willging of the Federal Judicial Center, at 2 (noting that the cases in which judges have found bidding to be appropriate are "few and distinct").
188. We also believe that the experience of institutional investors in setting attorney fees in class actions can be useful to judges when they consider an award of attorneys' fees in other class actions.
189. The FJC Report, at 88, indicates that the seven judges who have conducted auctions reported a number of characteristics that made certain types of cases better candidates for auctions than others. Those characteristics are: clearly accepted or stipulated liability; information from a criminal investigation; publicly known details about the case; clearly defined case; multiple cases consolidated in one jurisdiction; existence of a well-defined class; multiple firms competing for lead counsel position; and common fund cases.
190. Statement of Arlin M. Adams, submitted to the Task Force, at 29 ("the auction procedure may be a viable option only in limited situations, where not much pre-filing investigation is necessary, the amount of expected damages is relatively easy for participating firms to estimate, and the expected recovery, media attention, or other circumstances are present that will ensure an adequate number of qualified auction participants."). Of course, more experience with auctions in the cases we identify as appropriate candidates might lead to a conclusion that the class of cases in which auctions might be useful should be expanded or contracted.
191. Statement of Leonard Barrack, submitted to the Task Force, at 5 ("auctions should be undertaken only in cases where the court can, at a minimum: (a) reasonably anticipate that numerous, competent law firms will seek appointment as class counsel; (b) reasonably evaluate the likelihood of a recovery for the class; and (c) reasonably foresee a very substantial recovery.").
192. As discussed in Section X, infra, auctions are not viable in PSLRA actions unless the "most adequate" plaintiff provisions fail to produce a lead plaintiff with the interest, resources and expertise to select and negotiate with counsel. The factors that follow in the Text are pertinent to whether to conduct an auction in PSLRA cases, after the court has already found that the "most adequate" plaintiff provisions will not result in a proper choice of counsel.
193. Statement of Guy Miller Struve on behalf of the Association of the Bar of the City of New York, submitted to the Task Force, at 3 ("An auction procedure would be unworkable in cases where injunctive relief is likely to be the sole or major form of relief or where the form of likely relief is unclear.").
194. Testimony of Paul Reingold at 126, and Professor Judith Resnik at 121, March 16, 2001; Testimony of Professor Samuel Issacharoff at 63, Elizabeth Cabraser at 70, Michael Fishbein at 75, and Joseph Rosenthal at 117, May 5, 2001; and Testimony of Hon. Lewis A. Kaplan at 73-74, and R. Franklin Balotti at 24, June 1, 2001.
195. Statement of Leonard Barrack, submitted to the Task Force, at 6 ("Where the court and counsel cannot make a realistic assessment in advance of the potential liability of the defendants, the level of potential damages or any likely recovery, counsel would be bidding 'blind' and the court would have no way to gauge whether bids were realistic in terms of providing the proper incentives to class counsel.").
196. See Howard M. Erichson, Coattail Class Actions: Reflections on Microsoft, Tobacco, and the Mixing of Public and Private Lawyering in Mass Litigation, 34 U.C. DAVIS L. REV. 1 (2000), for a discussion of the phenomenon of private class actions riding the coattails of successful government prosecutions. See also Statement of Professor Arthur Miller, submitted to the Task Force, at 24-25 (noting that some experimentation with auctions may be justified "when the auction is on the heels of the initiation of a government action"; in these circumstances, "(a) there may be sufficient public knowledge of pertinent underlying facts at the beginning of the private civil action for the court to make a more informed assessment of the relative merits of competing bids...and (2) there is less risk that independent investigations into wrongful conduct by members of the plaintiffs' bar would be discouraged by an auction..."); Statement of Professor Samuel Issacharoff, submitted to the Task Force, at 6: If the principal drawback of an auction is the underincentive to investigate and ferret out wrongdoing prior to filing, that failing will be least pronounced in cases in which the elements of liability are relatively clear independent of pre-filing investigation. This is most likely to be the case when private enforcement follows some form of independent public disclosure of wrongdoing - as for example when regulatory submissions or governmental criminal prosecution expose the basis for the subsequent civil recovery action.
197. See FJC Report, at 29 ("In almost all of the cases where class counsel was chosen from a competitive bidding process, the judge decided very early on in the life of the litigation that he or she would solicit bids. Class counsel was usually chosen before any dispositive motions were decided, prior to addressing Rule 23 certification issues, but after the appointment of the lead plaintiff in post-PSLRA securities cases.").
198. Statement of Brian Wolfman, submitted to the Task Force, at 4 (noting that uncertainty over class certification will negatively affect bidding).
199. Statement of Brian Wolfman, submitted to the Task Force, at 4 (cautioning against the use of auctions when 1) the number of class members entitled to relief is in doubt, and 2) the potential exists for intra-class conflict).
200. A proposed amendment to Fed. R. Civ. P. 23 would add a new subdivision (g), providing criteria for appointment of counsel. Among the factors that the court "must consider" are "(ii) the work counsel has done in identifying or investigating potential claims in this case." The Task Force agrees that prefiling investigation is a relevant factor in appointment of counsel. There is nothing inconsistent in also concluding that the existence of significant prefiling investigation counsels against the use of an auction to appoint counsel.
201. Testimony of Professor Jill E. Fisch at 110, March 16, 2001 (describing efforts of institutional investors to develop selection and monitoring procedures for lead counsel in class actions). See also Statement of Arlin M. Adams, submitted to the Task Force, at 25-26 ("where a strong plaintiff with a sufficient stake in the litigation emerges...there may be no need for the court to act as a surrogate for the plaintiff class. In such situations, it may be more desirable to allow the ordinary atttorney-client relationship to govern the arrangements to the extent possible."); Statement of Guy Miller Struve on behalf of the Association of the Bar of the City of New York, submitted to the Task Force, at 5 ("In situations where there is no client with a sufficient stake in the litigation, resources or knowledge of the market for legal services, auctions may provide a means of reaching a fee arrangement similar to that which a client with Such a stake, resources and knowledge might achieve.").
202. Statement of Professor John C. Coffee, submitted to the Task Force, at 9. Professor Coffee suggests that the minimum number of qualified bidders should be six. The Task Force believes that, while there may be merit in this suggestion, imposing any strict minimum is in the last analysis arbitrary, and that this should be left to the discretion of the court. A fixed limit may be particularly problematic if, as the Task Force recommends infra, consortium bidding is allowed.
203. Statement of Sherrie R. Savett, submitted to the Task Force, at 2 ("To the extent defendants are aware of a predetermined fee structure, that too presents an element of danger for the class, as any settlement proposals will be designed to appeal to class counsel's interests rather than the class's interests.").
204. In re Cendant Corp., 260 F.3d 183 (3d Cir. 2001).
205. 260 F.3d at 197 (3d Cir. 2001) (emphasis added).
206. In re Cendant Corp., 260 F.3d at 196 (3d Cir. 2001).
207. The question whether a fee arrangement should be publicly disclosed has been lurking since the 1985 Third Circuit Task Force Report. That Report recommended that consideration be given to setting a percentage fee by some kind of bargaining at the outset of a case. That Report was silent, however, as to whether the fee arrangement would be disclosed to the class and to the defendant, and if so, when disclosure would take place.
208. See also In re Lucent Techs. Securities Litig., 194 F.R.D. 137, 157 (D.N.J. 2000) (stating that joint proposals will not be considered); Sherleigh Assocs. v. Windmere-Durable Holdings, Inc., 186 F.R.D. 669, 670 (S.D. Fla. 1999) (rejecting consortium bid).
209. Judge Shadur has indicated that he believes that, if counsel has filed a class action complaint, he or she has represented a capability of prosecuting the class action alone and thus should be barred from joining with other counsel to submit a consortium bid. Although there is logic behind this approach, the Task Force observes that it can create a problem for firms. Even judges who have used bidding do not do so in all class action cases. If a judge decides to require bidding after one or more complaints are filed in a case, a firm that was willing to be lead counsel and to submit to ex post review of a fee application must now decide how much of a risk it is willing to take regarding fees ex ante. It would not be surprising that a firm willing to assume a class counsel role in a traditional case might be reluctant to engage in bidding without sharing the risk with other firms.
210. Statement of Leonard Barrack, submitted to the Task Force, at 16 (in class actions, "defendants are typically represented by highly regarded lawyers who defend such cases vigorously"; if plaintiffs' firms can submit joint bids, they will be able to "put a structure in place to prosecute the action fully and underwrite the costs for the action").
211. Statement of Sherrie R. Savett, submitted to the Task Force, at 11 ("allowing a consortium of firms to bid allows smaller firms to play an active role in cases in which they might otherwise feel too uncomfortable to submit a singular bid. Smaller firms would have an opportunity to take advantage of economies of scale.").
212. See FJC Report at 32-34 for a complete discussion of the guidelines for qualitative submissions used by the courts that have conducted auctions. The Task Force notes the difficulty of requiring counsel to provide an assessment of the case at the early stage in which an auction is conducted. As stated previously, the likelihood of success of a class action is often notoriously difficult to predict. Moreover, counsel has an incentive to put the case in the best light at this point, in order to convince the court of the merits of the case. But in doing so counsel might understate the risk involved.
213. This problem is compounded if the defendant has access to the bid prior to the conclusion of the litigation.
214. Testimony of John Innelli, pp. 54 et seq., June 1, 2001.
215. Statement of Sherrie R. Savett, submitted to the Task Force, at 7 ("The expense of litigation is something that is not entirely within plaintiff's counsel's control. Much depends on how the defendants decide to litigate and spend money. It is important for the defendants to know that they will not have the luxury of spending plaintiffs to death. If defendants believe that litigation expenses are capped...they will be tempted to spend more, so as to force plaintiff's counsel to reach the point at which they are no longer comfortable spending money which cannot possibly be reimbursed.").
216. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 86 (2001) (noting that in Oracle, "the case settled precisely at the point at which class counsel hit the cap on expenses").
217. The Task Force questions whether most plaintiffs in the marketplace for legal services would prefer expense caps. Task Force members have experience in cases in which clients indicate that they want a budget for expenses, but in most cases there are opportunities for counsel and the ient to discuss whether the budget should be exceeded. The problem with bidding is that expense caps are likely to viewed as "hard" caps by counsel. It would be possible, of course, for the court to entertain motions to increase the cap as a case progresses. But, such motions would involve the judge even more in the plaintiffs' case in ways that might compromise the appearance of neutrality.
218. Statement of Guy Miller Struve on behalf of the Association of the Bar of the City of New York, submitted to the Task Force, at 5-6 ("if, in a case in which an auction is based on a bid of a dollar amount below which counsel will receive no fee, it becomes apparent that the recovery will not reach the dollar amount, counsel's incentive may be to resolve the case, even if the interest of the class would be to obtain a larger recovery (though still lower than the dollar amount of the bid).").
219. Statement of Professor John C. Coffee, submitted to the Task Force, at 10 ("The truth is that most fee formulas can create conflicts, but these conflicts are exacerbated when radical discontinuities are built into the fee formula (such as the 'zero-percent-up-to-the-bid-level-and-25% thereafter' formula used by Judge Kaplan).").
220. th Cir. 2001) (declining percentage fee ructures "create declining marginal returns to legal work, ensuring that at some point attorneys' opportunity cost will exceed the benefits of pushing for a larger recovery, even though extra work could benefit the client"); Statements of Professor John C. Coffee at 5-6 and Andrew K. Niebler at 5, submitted to the Task Force; Statement of Howard A. Specter, submitted to the Task Force, at 6 (increasing percentages give counsel the incentive to pursue "the difficult to obtain 'last dollars' that might be obtained in settlement or trial").
221. The Task Force notes that a lawyer who uses an increasing percentage is
222. See Statement of State of Wisconsin Investment Board, submitted to the Task Force, at 4 ("SWIB has not used a descending fee schedule out of concern that it might operate to impose an artificial cap on lead counsel's incentives at the point where the fee percentage starts to decline. The last dollars are usually the hardest to obtain and lead counsel should be duly incentivized to get them.").
223. See FJC Report, at 31 (noting that only Judge Shadur has limited the bidding to attorneys of record in the action).
224. See FJC Report, n.136 (relating a telephone conversation with Judge Shadur).
225. See In re Auction Houses Antitrust Litig. 197 F.R.D. 71, 74 (S.D.N.Y. 2001), where the court found that interim lead counsel had engaged in settlement discussions with the defendants and had obtained information regarding potential damages. Judge Kaplan made this information available to all of the bidding firms. He explained that the release of this information was necessary to level the playing field, as well as to improve the quality of the bids.
226. See Statement of Professor Elliott Weiss, submitted to the Task Force, at 6 (suggesting the use of a special master).
227. 15 U.S.C. § 78a-4.
228. th Cir. 2001) (noting that under the PSLRA, "[c]lass action lawsuits are intended to serve as a vehicle for capable, committed advocates to pursue the goals of the class members through counsel, not for capable, committed counsel to pursue their own goals through those class members.").
229. "[T]he court shall adopt a presumption that the most adequate plaintiff...is the person or group of persons that...has the largest financial interest in the relief sought by the class [and who] otherwise satisfies the requirements of Rule 23...." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I).
230. 15 U. S. C. § 78u-4(a)(3)(B)(v).
231. See the discussion of the legislative history in In re Cendant Corp. Litig., 264 F.3d 201, 261-62 (3d Cir. 2001).
232. H.R. CONF. REP. No. 104-369 at 32 (1995). See also Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53 (2001) ("The statute reflects the expectation that the lead plaintiff, presumptively the investor with the largest financial interest in the litigation, will oversee the conduct of the case and monitor the decisions of class counsel.")
233. H.R. CONF. REP. No. 104-369 at 32 (1995). See also Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53 (2001) ("The statute reflects the expectation that the lead plaintiff, presumptively the investor with the largest financial interest in the litigation, will oversee the conduct of the case and monitor the decisions of class counsel.")
234. H.R. CONF. REP. No. 104-369 at 37 (1995).
235. Statement of Professor Jill E. Fisch, submitted to the Task Force, at 9 (the PSLRA formalizes the "empowered lead plaintiff position"). The concept of empowered plaintiffs in securities actions was first raised by Professors Elliott J. Weiss and John S. Beckerman, in Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 YALE L.J. 2053 (1995). This article provided the conceptual basis for the PSLRA. See In re Cendant Corp. Litig., 264 F.3d 201, 262 (3d Cir. 2001) (PSLRA lead plaintiff provisions are "unquestionably based on Weiss and Beckerman's proposal.").
236. 15 U. S.C. § 78u-4(a)(3)(B)(II).
237. The Task Force notes that there is nothing explicit in the statutory language of the PSLRA that requires the "most adequate" plaintiff to negotiate a fee with counsel in advance of the action. However, the statute clearly envisions that the empowered plaintiff will monitor and control counsel for the benefit of the class, and negotiation of the fee is a critical component of this monitoring. See Elliott Weiss & John Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 YALE L.J. 2053, 2105 (1995) (arguing that the court should defer to the most adequate plaintiff's discretion in negotiating and setting attorney fees, and noting that courts "might well feel confident in assuming that a fee arrangement an institutional investor had negotiated with its lawyers before initiating a class action maximized those lawyers' incentives to represent diligently the class's interests, reflected the deal a fully informed client would negotiate, and thus was presumptively reasonable."); In re Cendant Corp. Litig., 264 F.3d 201, 265 (3d Cir. 2001) (holding that in deciding whether the movant with the largest losses satisfies the typicality and adequacy requirements of the PSLRA and Rule 23, the Court should "inquire whether the movant has demonstrated a willingness and ability to select competent class counsel and to negotiate a reasonable retainer agreement with that counsel"). Moreover, institutional investors are unlikely to become involved as lead plaintiffs unless they are given the opportunity to negotiate a fee with counsel. See Statements of Counsel for institutional investors, Keith Johnson at 2, Lorna B. Goodman at 1, Horace Schow II at 5, and Catherine LaMarr at 1, all submitted to the Task Force, indicating that the major incentive for participation by institutional plaintiffs is the opportunity to negotiate a counsel fee for the benefit of the class. Thus, to the extent the PSLRA is designed to encourage the participation of institutional investors, it implicitly establishes a regime in which the most adequate plaintiff will negotiate a fee with counsel; and this will usually occur at the beginning of the case. See Weiss & Beckerman, supra, at 2107 ("The change we propose also will place institutional investors in a position to negotiate fee arrangements with plaintiffs' lawyers before class actions are initiated.").
238. In re Cendant Corp. Litig., 182 F.R.D. 144, 148 (D.N.J. 1998). See also Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 79 (2001) (arguing that "allegations that institutional investors will select a law firm on the basis of political contributions undermine judicial willingness to trust the lead plaintiffs retention decision.").
239. See In re Cendant Corp. Litig. 264 F.3d 201, 270 n.49 (3d Cir. 2001): The concern is that an informal quid pro quo could develop in which law firms specializing in securities class actions would contribute to the campaign coffers of the elected officials who oversee these funds, and that, in exchange (and in the hopes of getting more contributions), those officials would use their control over the funds to select those firms to serve as lead counsel for cases in which the funds are the lead plaintiff. In such a situation, there would also be reason to fear that the lead plaintiff would be complacent and unwilling to object to an excessive fee request, thus defeating the Reform Act's goal of lead plaintiff-controlled, rather than lead counsel-controlled, litigation. See also Statement of Professor John C. Coffee, submitted to the Task Force, at 2 (noting that "the increasing prevalence of public pension funds as lead plaintiffs in securities class actions raises the danger that political contributions to the elected public official who in many states and municipalities determines the policies of the pension fund may determine the choice of counsel.").
240. Testimony of Keith Johnson at 49, May 5, 2001; Testimony of Horace Schow II at 98, Lorna Goodman at 81-82, and Catherine LaMarr at 98 et seq., June 1, 2001.
241. Testimony of Horace Schow II at 92, 98 June 1, 2001.
242. Testimony of Catherine LaMarr at 99, June 1, 2001; CONN. GEN. STAT. § 1-84 (2001).
243. See STEPHEN GILLERS & ROY D. SIMON, REGULATION OF LAWYERS: STATUTES AND STANDARDS 400 (2001).
244. Whatever the effect of the current language of Model Rule 7.6, the states are free to adopt their own versions of that Rule that would meet the concerns regarding pay-to-play in PSLRA cases. It is clear that the ABA was concerned about the same issues that concern judges in this area. See Comment 1 to Model Rule 7.6 ("[W]hen lawyers make or solicit political contributions in order to obtain an engagement for legal work awarded by a government agency, or to obtain an appointment by a judge, the public may legitimately question whether the lawyers engaged to perform the work are selected on the basis of competence and merit. In such circumstances, the integrity of the profession is undermined.").
245. 143 F. Supp. 2d 304, 311 (S.D.N.Y. 2001).
246. See also In re Microstrategy Inc. Securities Litig., 110 F. Supp. 2d 427, 437-8 (E.D. Va. 2000) (rejecting the use of auctions under the PSLRA, noting that "the lead plaintiffs duty is to 'select and tain counsel to represent the class'" and that "while plaintiff's selection of lead counsel is 'subject to the approval of the court,' approval should not be based on whether plaintiff's chosen counsel promises to charge a cheaper fee than anyone else.").
247. 96 F. Supp. 2d 780 (N.D. Ill. 2000).
248. 141 F. Supp. 2d 951 (N.D.Ill. 2001).
249. Testimony of Hon. Milton I. Shadur, p. 18, March 16, 2001.
250. In re Bank One Shareholders Class Actions, 96 F. Supp. 2d 780, 784 (N.D. Ill. 2000).
251. 148 F. Supp. 2d 967 (N.D. Cal. 2001).
252. See In re Network Associates, Inc., Securities Litig., 76 F. Supp. 2d 1017, 1033-34 (N.D. Cal. 1999) (prospective lead plaintiff is not "most adequate" under the PSLRA where it refuses to negotiate fee arrangements with the law firm it selected). But see In re Comdisco Securities Litig., 150 F. Supp. 2d 943, 947 (N.D. Ill. 2001) (rejecting the idea that a prospective lead plaintiff will perform a market-based search for counsel on the ground that it is "hardly reasonable to expect any plaintiff, on the speculative prospect of acting for a class, to engage on his, her or its own in the kind of comprehensive and studied beauty contest required to search out a cadre of law firms ready, willing and able to act as class counsel and to ascertain which of those firms is prepared to do so on the terms st favorable to the entire class"). The Court in Comdisco concluded that "a neutrally conducted and confidential competitive bidding process under the auspices of the court affords the best means - in fact, it would seem the only means - to derive that necessary information, so that the class gets the best available combination of highly competent representation at the least cost."
253. Jason Hoppin, Attorneys Getting the Silent Treatment, THE RECORDER, June 19, 2001, at 1.
254. 182 F.R.D. 144, 149 (D.N.J. 1998).
255. 264 F.3d 201, 276 (3d Cir. 2001).
256. In re Cendant Corp. Litig., 264 F.3d at 276 (3d Cir. 2001).
257. 15 U.S.C. § 78u-4(a)(3)(B)(v).
258. In re Cendant Corp. Litig., 264 F.3d at 275-76 (3d Cir. 2001).
259. In re Cendant Corp. Litig., 254 R3d at 277 (3d Cir. 2001).
260. In re Cendant Corp. Litig., 264 F.3d at 277 (3d Cir. 2001). Applying these standards to the facts, the Cendant Court found that the district court had abused its discretion in ordering an auction. There was nothing to indicate that the putative lead plaintiff had failed to conduct a good faith search for counsel or had failed to negotiate a reasonable fee agreement. Thus, the lead plaintiff had not defaulted on or abused its power granted by the PSLRA to "select and retain" counsel. The district court's desire to hold down attorney fees by "simulating" the market was not a sufficient reason to conduct an auction because it "would apply in every case, and thus cannot be enough to justify a procedure that we have concluded may be used only rarely." 264 R.3d at 278.
261. Chief Judge Becker carefully instructed the Task Force that it should feel free to disagree th any opinion of the Third Circuit, since his goal in appointing the Task Force was to have a report that would be national in scope and emphasis. The Chief Judge also indicated that the Task Force should not hesitate to make recommendations for statutory changes - in the PSLRA or other statutes - if it thought them desirable. It was the Task Force's decision not to take a position on legal issues like the interpretation of the PSLRA. That the courts may differ amongst themselves does not mean that we are equipped to provide the only correct answer. We have confined ourselves to taking a position on how judges should consider auctions under the PSLRA if they have the option to do so (either because the statute, properly interpreted, now authorizes it, or were Congress to amend the statute to provide any necessary authorization). Readers of this report will find that our recommendations are consistent with the legal interpretation of the PSLRA set forth in Chief Judge Becker's opinion in Cendant, discussed immediately above. The Chairs of the Task Force and the drafters of this Report wish to emphasize that each of the recommendations contained in this Report was voted on and adopted in June 2001, well before the Cendant opinion was released on August 28, 2001. We are comforted by the fact that the Cendant panel's analysis of the statute is similar to ours, but we can state categorically that our recommendations would be the same even if the panel had taken a more favorable view of auctions under the PSLRA. Judge Ambro was appointed to the Task Force before he was randomly selected to serve on the panel hearing the appeal in Cendant. He recognized early on that there could be an appearance problem if he participated in Task Force discussions regarding the PSLRA given his status as one of the panel members hearing a part of the Cendant litigation. Thus, he recused himself from any Task Force discussion of the PSLRA, as well as any presentation at the Task Force hearings on these matters. Judge Ambro did not know what the Task Force decided to recommend until a draft version of this Report was circulated to him as well as the other Task Force members in September 2001, after the date of the Cendant opinion. Judge Ambro took great pains to avoid any discussion that could conceivably be linked-even by inference - to issues that were before the Third Circuit. In doing so, he not only demonstrated an acute sense of judicial propriety, but reaffirmed for the other Task Force members that neither the Chief Judge who appointed the Task Force nor any other member of the Third Circuit sought to influence the decisonmaking of the Task Force on any issue.
262. See 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II).
263. See In re Bank One Shareholders Class Actions, No. 00-C-880, Transcript of Proceedings Before Judge Shadur, statements by Judge Shadur (the right of first refusal "is the best way to get an automatic depressing effect on bidders. Certainly fewer people are going to be prepared to bid riously if they know they can lose out even if they turn out to have submitted the best offer").
264. Statement of Professor John C. Coffee, submitted to the Task Force, at 9 (right of first refusal "tells all future bidders that they are not participating in a true auction.").
265. Statement of Professor Lucian Bebchuk, submitted to the Task Force, at 18 ("Having the selection of lead counsel done by competitive bidding would take away the decision from the lead plaintiff. The selection would be done by the court, based on the court's judgment as to which of the qualified bidders have made the lowest bid. By leaving the lead plaintiff with little say in the selection of lead counsel, competitive bidding would greatly diminish the role of the lead plaintiff.") Even a right of first refusal clashes with the empowered plantiff model of the PSLRA. See In re Cendant Corp. Lirig., 264 F3d 201, 277-78 (3d Cir. 2001) (the right of first refusal is given to counsel, not the plaintiff, thus undermining the concept of client control; moreover, under a right of first refusal the lead plaintiffs ability to retain counsel is conditioned by fee terms set by the court).
266. Statement of Professor Lucian Bebchuk, submitted to the Task Force, at 19-20: Since the lead plaintiff is not compensated, the incentive to become an effective and active lead plaintiff in the interest of the class - of the type contemplated by the PSLRA-must arise from the combination of (i) having a substantial stake and (ii) expecting that becoming a lead plaintiff would enable having a significant influence of the conduct of the litigation. Clearly, if a selected lead plaintiff could not expect to influence the litigation by selecting the lead counsel and subsequently working with the lead counsel of the lead plaintiff's choice, then the incentive to become lead plaintiff would very much decrease even for a shareholder with a significant stake.
267. Elliot J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 YALE L. J. 2053 (1995).
268. Statement of Professor Elliott J. Weiss, submitted to the Task Force, at 4. See also John C. Coffee, The PSLRA and Auctions, N.Y.L.J., May 17, 2001, at 5.
269. See, e.g., Declaration of Roger Pugh, Assistant Corporation Counsel, City of New York, In re Cendant Corp. Litigation (May 30, 2000) ("There are few benefits to be gained from serving as lead plaintiff for institutional investors.... For a public pension fund, such designation requires a significant commitment of time and resources, not the least of which is responding to extensive discovery propounded by defendants. In taking away the lead plaintiffs' right to choose its own counsel as well as their ability to negotiate attorneys' fees to maximize recovery for the class, the auction procedure virtually nullified the City Pension Funds' incentive to serve as lead plaintiff"). Accord: Statement of Keith Johnson, Chief Legal Counsel, State of Wisconsin Investment Board, at 2-5; Statement of Horace Schow, General Counsel, Florida State Board of Administration, at 3 (stating that his client has opted out of class actions rather than be forced to be represented by counsel it did not choose), Statement of Catherine E. LaMarr, General Counsel, Office of the Connecticut State Treasurer, at 3 (comparing lead plaintiff experiences where client had chosen counsel to those where court had designated counsel), all submitted to the Task Force.
270. Statement of Lorna Goodman on behalf of the City of New York, submitted to the Task Force, at 5. See also Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 92 (2001) ("The lead plaintiff cannot be expected to develop a close working relationship with a lawyer appointed by the court. Nor can the lead plaintiff be expected to monitor court-appointed counsel effectively, absent control over counsel's compensation in the case at bar and the potential for repeat business in comparable cases.").
271. Statement of Lorna Goodman on behalf of the City of New York at 2-5; Statement of Keith Johnson, Chief Legal Counsel, State of Wisconsin Investment Board, at 2-5, both submitted to the Task Force.
272. Statement of Catherine E. LaMarr, submitted to the Task Force, at 5 ("Sensitive to diversity issues and interested in expanding the base of available counsel, Connecticut has in fact already selected a diverse group of counsel in its selection process. An auction process is likely to eliminate opportunities for diversity in the selection of counsel.").
273. See In re Cendant Corp. Litig., 264 F.3d 201, 220 (3d Cir. 2001) (noting that fee awarded by auction was $76 million higher than the fee agreed to between the lead plaintiff and chosen counsel).
274. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 94 (2001) ("Selection of counsel is a business decision, and courts are poorly suited to make business decisions."). Professor Elliot Weiss suggested that the presumption in favor of a lead plaintiffs choice of counsel should not be as strong as the business judgment rule presumption. Statement of Professor Elliot Weiss, submitted to the Task Force, at 3-5. The Task Force believes that there is sufficient flexibility in the application of the business judgment rule that courts will develop a framework for review that will accord appropriate deference to lead plaintiffs while still carefully scrutinizing the process, alert for political considerations or other factors that might lead to doubt regarding the quality or appropriateness of plaintiff's choice. See In re Cendant Corp. Litig., 264 F.3d 201, 270 n.49 (3d Cir. 2001) (even under the deference required by the PSLRA, a court should find the lead plaintiff inadequate if counsel was appointed as a result of campaign contributions).
275. See Statement of Keith Johnson, submitted to the Task Force, at 5-6 (for lead plaintiffs to fulfill the role contemplated for them by the PSLRA, the courts must "defer to counsel selection decisions made by lead plaintiffs where a reasonable, client-controlled process was used to obtain competent representation at a fair price, much like the courts defer to decisions of corporate boards under the Business Judgment Rule.").
276. See, e.g., Brehm v. Eisner, 746 A.2d 244, 264 n.66 (Del. 2000) ("Due care in the decisionmaking context is process due care only.... [The business judgment rule] is a presumption that in making a business decision the directors...acted on an informed basis, in good faith and in the nest belief that the action taken was in the best interests of the corporation. Thus, the directors' decisions will be respected by the courts unless the directors are interested or lack independence...do not act in good faith...or reach their decision by a grossly negligent process.").
277. See Statement of Stuart M. Grant and Jay W. Eisenhofer, submitted to the Task Force, at 5 ("The court should review the lead plaintiffs choice of counsel applying the tenets of the business judgment rule. When applied to lead plaintiff's counsel selection, the business judgment rule would create a presumption that the decision will be left undisturbed as long as it was made in good faith and on an informed basis. The selection can be judged to have been made in good faith if the process leading up to it was fair and free of nepotism (i.e., choosing counsel based on familial or political relationships). The lead plaintiff will have met its duty to act in an informed manner if it has followed a process of selection with the earmarks of the beauty contest-testing what the market of lawyers skilled in that practice will bear.").
278. See "Brief of the Securities and Exchange Commission as Amicus Curiae in Support of Appellants on the Issues Specified," In re Cendant Corp. Litig. (3d Cir. 2001) at 3-5 ("The court should not itself conduct an auction unless it has evaluated the lead plaintiff's own selection and retention of counsel, has particular concerns about the lead plaintiff's own selection and retention of counsel, has particular concerns about the lead plaintiff or its efforts, and, if feasible, has directed it to undertake a proper competitive selection process. It is not sufficient that the court merely prefers a process that it, rather than the lead plaintiff controls, or assumes that an auction is inherently superior to a negotiated agreement."). See also Statement of Catherine E. LaMarr, submitted to the Task Force, at 5 ("significant consideration should be given to institutional plaintiffs that have taken the time to negotiate fees and gain sufficient comfort with the style of the counsel selected" and "the presumption should be that the institutional investor has a sufficient level of sophistication in these matters to effectively select appropriate and competent counsel to serve the needs of the class."). Compare Raftery v. Mercury Fin. Co., 1997 WL 529553, at *2 (N.D. Ill.) (finding the putative lead plaintiff inadequate where the fee agreement reached with counsel called for a 1/3 fee that was "not the result of hard bargaining.").
279. See In re Cendant Corp. Litig., 264 F.3d 201, 276 (3d Cir. 2001) ("the ultimate inquiry is always whether the lead plaintiffs choices were the result of a good faith selection and negotiation process and were arrived at via meaningful arm's-length bargaining."); In re Quintus Securities Litig., 201 F.R.D. 475, 490-91 (N.D. Cal. 2001) (refusing to appoint as lead plaintiff a movant who had made no attempt to negotiate "anything close to a competitive fee" and who provided "no specifics" about the process by which the movant had selected counsel).
280. 264 F.3d 201, 269 (3d Cir. 2001).
281. "Brief of the Securities and Exchange Commission as amicus curiae in Support of Appellants on the Issues Specified, (December, 2000)," at 18-19, citing with approval Professor Joseph Grundfest's declaration in In re McKesson HBOC Inc. Sec. Litig., 97 F. Supp. 2d 993 (N.D. Cal. 1999).
282. The court clearly has the authority to require the putative lead plaintiff to provide information concerning its process of selection of counsel, given the fact that the court must approve the choice of counsel under the terms of the PSLRA. See 15 U.S.C. § 78u-4(a)(3)(B)(v).
283. 15 U.S.C. § 78u-4(a)(3)(B)(v).
284. 15 U.S.C. § 78u-4(a)(3)(B)(iii). See In re Cendant Corp. Litig. 264 F.3d 201, 265-66 (3d Cir. 2001) (stating that a court might find the putative lead plaintiff inadequate under the PSLRA if the plaintiff "lacked legal experience or sophistication, intended to select as lead counsel a firm that was plainly incapable of undertaking the representation, or had negotiated a clearly unreasonable fee agreement with its chosen counsel.").
285. Statement of Lawrence Sucharow, submitted to the Task Force, at 6 ("If the lead plaintiff is, as Congress intended, to take a meaningful and active role in the supervision of lead counsel and the progress of the litigation, the attorney-client relationship must be voluntary and based on the client's evaluation of the competency of its counsel, the resources that counsel can bring to bear on the matters at issue in the litigation, and feeling of respect for and confidence in that counsel's judgment. The Court...should not make a shotgun marriage of a relationship as sensitive as one of attorney-client.").
286. See In re Commtouch Software Ltd. Securities Litig., No. C 01-00719, Order re Lead Plaintiff Selection and Class Counsel Selection (N.D. Cal. June 27, 2001) (the plaintiff with the greatest economic loss was an individual with limited English skills, who resided in Israel, and no alternative lead plaintiff appeared capable of conducting a market search for counsel; consequently, the court ordered the lead plaintiff to conduct an auction and established procedures for the lead plaintiff to follow). The Task Force notes that ordering the lead plaintiff to conduct an auction is a less intrusive alternative to a court-conducted auction, given the clear preference in the PSLRA for client-driven litigation.
287. See In re Cendant Corp. Litig., 264 F3d 201, 277 (3d Cir. 2001) (noting that "it is possible that the court could conclude that, perhaps due to the nature of the case at hand, none of the possible lead plaintiffs is capable of fulfilling the model contemplated by the Reform Act"; in such an unusual case, "it would be permissible for a court to conclude that its obligation to protect the interests of the plaintiff class makes it necessary for the court to assume direct control over counsel selection and, if the court were so to conclude, an auction would be one permissible means by which the court could select and retain counsel on behalf of the class"; however, it is not enough "that the court thinks that auction is an inherently superior mechanism for determining a reasonable fee").
288. In re Cendant Corp. Prides Litig., 243 F.3d 722, 730-31 (3d Cir. 2001).
289. The Task Force notes that much of the concern in the cases is over the concept of "aggregation." Several courts have held that the financial losses of unrelated class members cannot be aggregated in determining the "most adequate" plaintiff(s) under the PSLRA. See, e.g., In re Network Associates Securities Litig., 76 F. Supp. 2d 1017, 1022 (N.D. Cal. 1999) (rejecting aggregation of unrelated plaintiffs and discussing case law); Sakhrani v. Brightpoint, Inc., 78 F. Supp. 2d 845, 847 (S.D. Ind. 1999) (rejecting aggregation of unrelated plaintiffs; appointing a single investor as lead plaintiff). The suspicion of these courts appears to be that aggregation is a device for lawyer-generated groups to take over the class action, contrary to the client-driven model of the PSLRA. In re Donkenny, Inc., Securities Litig., 171 F.R.D. 156, 157-58 (S.D.N.Y. 1997) (allowing aggregation of unrelated interests would foster lawyer-driven rather than client-driven litigation, contrary to the premise of the PSLRA). The Task Force notes that while some attempts to aggregate interests appear to be lawyer-driven, others appear to be client-driven. For example, a number of sophisticated investors might form a coalition in order to obtain greater bargaining power and control over chosen counsel. As a practical matter, aggregation on this level might still be problematic because the aggregated plaintiffs may have different interests, different management styles, and different decisionmaking processes that could result in conflict. However, it is possible that in certain cases aggregation of empowered plaintiffs may be useful in monitoring counsel and the litigation. Thus, courts would further the intent of the PSLRA by rejecting lawyer-driven aggregation, while being more tolerant of client-driven aggregation. See, e.g., In re Tyco International, Ltd. Securities Litig., 2000 WL 1513772, at *4 (D.N.H.) (determining that "the appointment of a group of three substantial shareholders as lead plaintiffs is consistent with the language and purpose of the PSLRA" and noting that "[w]hile a group comprised of many small shareholders might be unwieldy and lack the proper incentive to serve as an effective lead plaintiff, a group that consists of a small number of large shareholders should be capable of managing this litigation and providing direction to class counsel"). Compare In re Razorfish, Inc., Securities Litig., 143 F. Supp. 2d 304, 307-08 (S.D.N.Y. 2001) (rejecting as lead plaintiff a group that "was simply an artifice cobbled together for the obvious purpose of creating a large enough grouping of investors to qualify as 'lead plaintiff,' which can then select the equally artificial grouping of counsel as 'lead counsel'"). The Court in Cendant took the view consistent with that of the Task Force, declaring that lawyer-driven aggregation would render a lead plaintiff "inadequate" under the terms of the PSLRA, but that aggregation of unrelated interests could be permissible if client-driven. See In re Cendant Corp. Litig., 264 F.3d 201, 268 (3d Cir. 2001) (finding no error in appointing a group as lead plaintiff where there was no indication that the group "was artificially created by its lawyers" and "no obvious reason to doubt that its members could operate effectively as a single unit."). For a full discussion of the cases dealing with aggregation, and an argument that permitting gregation compromises the principles of the PSLRA, see Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53 (2001).
290. Jay Eisenhofer & Cynthia Calder, Fee Auctions: Are Courts Selling out the Class to the Lowest Bidder? THE LEGAL INTELLIGENCER, March 30, 2001, at 5. See also Testimony of Lorna Goodman at 223, June 1, 2001 (counsel fees negotiated as lead plaintiff ranged from 3-4% to 15% of the recovery); Testimony of Keith Johnson at 12, May 5, 2001 (fees negotiated as lead plaintiff were in the range of 15-20% of the recovery).
291. If a prospective plaintiff has the other qualities discussed in this paragraph, the amount of the loss might be probative of the plaintiff's motive and interest in monitoring the litigation.
292. See Testimony of Professor Joseph A. Grundfest at 173, June 1, 2001 (the court should evaluate whether the plaintiff "has the ability to fend for himself.").
293. See TCW Technology Limited Partnership v. Intermedia Communications Inc., 2000 WL 1654504, at *3 (Del. Ch.): Traditionally, the Court of Chancery has allowed counsel representing individual, class or derivative plaintiffs to engage in a type of private ordering, that is, to coordinate prosecution of the litigation and to propose the most efficient means of consolidation. Over the past ten years, members of the Court of Chancery have been asked, with increasing frequency, to become involved in the sometimes unseemly internecine struggles within the plaintiffs' bar over the power to control, direct and (one suspects) ultimately settle shareholder lawsuits filed in this jurisdiction. In every single instance that I am able to recall, this Court has resisted being drawn into such disputes. In every instance, the plaintiffs' bar has been able to work out a consolidation compromise. It may have been imperfect, but the compromise has always seemed, in the end, to accommodate reasonably the interests of all the parties and the Court. See also HERBERT B. NEWBERG & ALBERT CONTE, 2 NEWBERG ON CLASS ACTIONS § 9.35 at 9-95 (3d ed. 1992) ("the court should always encourage the parties themselves to agree on lead counsel, while imposing its own choice only in extraordinary circumstances.").
294. See In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litig., 55 F.3d 768, 819-22 (3d Cir.1995) (noting, in a case involving private ordering, that the court has a fiduciary obligation under Rule 23 to assure that counsel is adequate and that the fee is reasonable).
295. Statement of Elizabeth Cabraser, submitted to the Task Force, at 4 ("In serving as a fiduciary for the class, the court must, at a minimum, look at the qualifications of counsel. If the court abdicates this duty and does nothing to ensure that counsel for the class are, at the very least, qualified and adequate, there can be no assurance that the class's best interests are being served.").
296. See, e.g., In re Tyco International, Ltd., Securities Litig., 2000 WL 1513772, at *9 (D.N.H.) (approving an arrangement in which four law firms would operate as co-lead counsel; noting that in this case "the potential dangers stemming from multiple representation, while real, are less weighty than the benefits that it may produce."). The court in Tyco was satisfied that the co-lead counsel would devise "a system for dividing and managing the workload arising from this litigation efficiently and without duplication." It put counsel on notice "that this court will not approve any award of fees and expenses that reflects duplication, inefficiency, or the costs of coordinating the efforts of the firms involved in the representation." See also Memorandum of the SEC, Amicus Curiae, in In re Milestone Scientific Securities Litig., No. 98-2854, at 4 (D.N.J.) (noting that multiple counsel carry the danger of duplication of fees, but also that multiple counsel "may be justified where the firms provide necessary resources, skill, perience or expertise"); Oxford Health Plans, Inc. Securities Litig., 182 F.R.D. 42, 46, 49 (S.D.N.Y. 1998) (approving multiple counsel arrangement; pooling of resources and experience was necessary given the "magnitude" of the class action and to "ensure that the litigation will proceed expeditiously against Oxford and the experienced counsel it has retained to represent it"). In Oxford, the multiple counsel arrangement was approved "with the understanding that there shall be no duplication of attorneys' services and that the use of co-lead counsel will not in any way increase attorneys' fees and expenses."
297. Memorandum of the SEC, Amicus Curiae, in In re Milestone Scientific Securities Litig., No. 98-2854, at 4 (D.N.J.) ("The court should not rely on, or give weight to, generic asserted benefits such as assuring input from more rather than fewer class members or lawyers or avoiding disputes among competing lead plaintiff movants and among their counsel.").
298. Memorandum of the SEC, Amicus Curiae, in In re Milestone Scientific Securities Litig., No. 98-2854, at 17 (D.N.J.).
299. See Arthur R. Miller, Attorneys' Fees in Class Actions, at 344 (Federal Judicial Center 1980) (in some class actions, "the attorneys involved will agree among themselves to establish a reasonable structure and present it to the court. Otherwise, the judge should appoint lead counsel or establish any other organizational plan conducive to the management of the case.").
300. Data from the 1996 Federal Judicial Center study indicates that judges become involved in selecting class counsel in about one in five cases. See Thomas E. Willging, Laural L. Hooper & Robert J. Niemic, Empirical Study of Class Actions in Four Federal Districts 77 (Federal Judicial Center 1996). According to Thomas Willging of the FJC, an "informed but untested hunch" from the data is that "an educated estimate of the amount at stake will be a major factor in a judge's decision about whether to become involved in selecting counsel." The more money at stake, the more likely the judge will be involved in appointing counsel - probably because as the stakes increase, private agreement among the attorneys becomes less likely. Another factor relevant to judicial involvement in selection of counsel is the strength of the case on the merits. Statement of Thomas Willging, submitted to the Task Force, at 5-6.
301. See Elliott J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 YALE L.J. 2053, 2062-63 (1995) (discussing, and criticizing, cases in which lead counsel was awarded largely on the basis of the first to file).
302. See, e.g., TCW Technology Limited Partnership v. Intermedia Communications Inc., 2000 WL1654504, at *3 (Del. Ch.): Although it might be thought, based on myths, fables, or mere urban legends, that the first to file a lawsuit in this Court wins some advantage in the race to represent the shareholder class, that assumption, in my opinion, has neither empirical nor logical support. Too often judges of this Court face complaints filed hastily, minutes or hours after a transaction is announced, based on snippets from the print or electronic media. Such pleadings are remarkable, but only because of the speed with which they are filed in reaction to an announced transaction. It is not the race to the courthouse door, however, that impresses the members of this Court when it comes to deciding who should control and coordinate litigation on behalf of the shareholder class. Professor Fisch has justly criticized the first to file approach to appointment of lead counsel: The natural and foreseeable consequence of this approach is the creation of a race to the courthouse. There are at least three problems with this result. First, lawyers are encouraged to file complaints rapidly and defer their investigation of the merits of those complaints until after filing. Second, to file a complaint rapidly, lawyers must seek out prospective plaintiffs rather than waiting to be approached by a disgruntled investor. Finally, class counsel is appointed with little consideration given to qualifications. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 56-57 (2001). See also HERBERT B. NEWBERG & ALBERT COMTE, 3 NEWBERG ON CLASS ACTIONS § 9.35 at 9-96 (3d ed. 1992) ("The first attorney to file is not entitled to special consideration for appointment as lead counsel simply by winning the race to the courthouse.").
303. See, e.g., TCW Technology Limited Partnership v. Intermedia Communications Inc., 2000 WL1654504, at *3 (Del. Ch.): Although it might be thought, based on myths, fables, or mere urban legends, that the first to file a lawsuit in this Court wins some advantage in the race to represent the shareholder class, that assumption, in my opinion, has neither empirical nor logical support. Too often judges of this Court face complaints filed hastily, minutes or hours after a transaction is announced, based on snippets from the print or electronic media. Such pleadings are remarkable, but only because of the speed with which they are filed in reaction to an announced transaction. It is not the race to the courthouse door, however, that impresses the members of this Court when it comes to deciding who should control and coordinate litigation on behalf of the shareholder class. Professor Fisch has justly criticized the first to file approach to appointment of lead counsel: The natural and foreseeable consequence of this approach is the creation of a race to the courthouse. There are at least three problems with this result. First, lawyers are encouraged to file complaints rapidly and defer their investigation of the merits of those complaints until after filing. Second, to file a complaint rapidly, lawyers must seek out prospective plaintiffs rather than waiting to be approached by a disgruntled investor. Finally, class counsel is appointed with little consideration given to qualifications. Jill E. Fisch, Aggregations, Auctions and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 56-57 (2001). See also HERBERT B. NEWBERG & ALBERT COMTE, 3 NEWBERG ON CLASS ACTIONS § 9.35 at 9-96 (3d ed. 1992) ("The first attorney to file is not entitled to special consideration for appointment as lead counsel simply by winning the race to the courthouse.").
304. The Committee Note to the proposed amendment to Rule 23 states: "The fact that a given attorney filed the action, for example, might not weigh heavily in the decision [to appoint] if that lawyer had not done significant work identifying or investigating claims."
305. The specific criteria for appointment set forth in the proposed amendment to Rule 23 are: "(i) counsel's experience in handling class actions and other complex litigation, (ii) the work counsel has done in identifying or investigating potential claims in this case, and (iii) the resources counsel will commit to representing the class...." These criteria are not exclusive, however, as the proposal goes on to provide that the court "may consider any other matter pertinent to counsel's ability to fairly and adequately represent the interests of the class." The Task Force believes the criteria set forth in the text are consistent with and supported by the proposed amendment to Rule 23.
306. See, e.g., Feldman v. Hanley, 49 F.R.D. 48, 51 (S.D.N.Y. 1969) (one counsel chosen over another due to the firm's "long experience and demonstrated skill").
307. HERBERT B. NEWBERG & ALBERT CONTE, 3 NEWBERG ON CLASS ACTIONS § 9.35 at 9.97 (3d ed. 1992) (relevant factors in the selection of lead counsel "include experience and prior success record").
308. See TCW Technology Limited Partnership v. Intermedia Communications Inc., 2000 WL 1654504, at *4 (Del. Ch.) (stating that "the Court should give weight to the shareholder plaintiff that has the greatest economic stake in the outcome of the lawsuit."). Consideration of this factor is not inconsistent with the Task Force position, supra, that the "most adequate plaintiff model of the PSLRA should not be extended to other cases. Under the PSLRA, economic loss is the sole factor used to establish the presumptive lead plaintiff. The Task Force position is that the plaintiff's economic stake in the action is a relevant but not dispositive factor.
309. See TCW Technology Limited Partnership v. Intermedia Communications Inc., 2000 WL 1654504, at *4 (Del. Ch.) (stating that the court should "accord some weight" to whether counsel has performed with more energy and vigor than other contestants).
310. See FJC Report, at 91 (noting interviews with a small number of judges experienced in class actions; those judges consider it highly relevant that counsel has previously prosecuted other class actions before the court and fees were reasonable and counsel performed effectively in those actions).
311. In re Cendant Corp. Prides Litig., 243 F.3d 722, 742-43 (3d Cir. 2001) (requiring an ex post assessment of the reasonableness of a fee even where the fee was set ex ante through an auction).
312. See MANUAL FOR COMPLEX LITIGATION (Third) § 24.21 at 195 ("At the commencement of the litigation, the court should also establish guidelines, ground rules, and procedures that will lighten the burdens on the participants, clarify expectations, and reduce the opportunities for disputes. This should be done at an early conference after consultation with counsel"). See also In re First Fidelity Bancorp Securities Litig., 750 F. Supp. 160, 162 (D.N.J. 1990) (setting a fee structure at the outset of the case); Seinfeld v. Coker, Civ. No. 16954, 2000 Del. Ch. LEXIS 172, at *26, n.36 (recognizing that an auction system "may not lead to a fully motivated class counsel, especially if the auction process has caused counsel to discount aggressively their bid," and concluding that negotiated fee arrangements "may provide a superior ex ante approach to creating the proper incentives"); RESTATEMENT OF THE LAW GOVERNING LAWYERS § 251, Comment f. ("A more appropriate arrangement [in class action representations], where possible, is for the lawyer's fee to be negotiated initially by the client and the lawyer at the onset of the relationship, it being understood and disclosed to the client that the award may be scrutinized by the opposing party and approved by the court."). The Task Force recommendation is basically consistent, in our view, with the recommendations of the 1985 Third Circuit Task Force. The 1985 Task Force suggested, as we do, that the subject of fees should be addressed early in the case. The 1985 Report also suggested that a court might want to consider appointment of a representative to negotiate a fee at the outset with class counsel. We do not reject such an approach, but feel bound to note that we cannot find any instances in which courts have experimented with it. In some cases, the recommendation might work, but even without the appointment of a class representative, the court can engage in preliminary discussions with class counsel as to how the court will approach a fee determination if the class prevails.
313. th Cir. 2001) ("Before the litigation occurs, a judge can design a fee structure that emulates the incentives a private client would put in place."). Model Rule 1.5 requires that fees be set before or a reasonable time after commencing representation in situations where the lawyer has not regularly represented the client. It also provides specific protections to clients paying contingent fees.
314. See In re Unisys Corp. Retiree Medical Benefits ERISA Litig., 886 F. Supp. 445, 461 (E.D. Pa. 1995) (observing that "a negotiated agreement would infuse simplicity, certainty, and fairness into the attorneys' fees process.").
315. The Committee Note to the proposed amendment to Rule 23 provides: The court may...direct counsel to propose terms for a potential award of attorney fees and nontaxable costs.... [A]ttorney fee awards are an important feature of class action practice, and attention to this subject from the outset may often be a productive technique for dealing with these issues. Paragraph (2)(C) therefore authorizes the court to provide directions about attorney fees and costs when appointing class counsel. The Committee Note to the proposed subdivision (h), providing procedural guidelines for the award of attorney fees, declares that one of the intentions of the proposal is to "afford an opportunity for the court to provide an early framework for an eventual fee award, or for monitoring the work of class counsel during the pendency of the action." The suggestions in the Committee Note to the proposed amendment are consistent with the position of the Task Force that the topic of fees should be addressed at an early stage and throughout the class proceedings.
316. th Cir. 1991) ("Henceforth in this circuit, attorneys' fees awarded from a common fund shall be based upon a reasonable percentage of the fund established for the benefit of the class."); Swedish Hospital Corp. v. Shalala, 1 F.3d 1261, 1272 (D.C. Cir. 1993) (holding that the percentage of the fund method is the only permissible method for awarding attorney fees in common fund class actions); Chatelain v. Prudential-Bache Sec, Inc., 805 F. Supp. 209, 215 (S.D.N.Y. 1992).
317. th Cir. 1998) (approving a fee awarded by use of the lodestar method, and noting that the district court has discretion to use either the lodestar method or the percentage of the fund method for determining fees). For a circuit-by-circuit survey of percentage versus lodestar approach to fee determinations, see HERBERT B. NEWBERG & ALBERT CONTE, 3 NEWBERG ON CLASS ACTIONS Appendix 14-1 (3d ed. Supp. 2000).
318. See Court Awarded Attorney Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237, 255 (1985) (criticizing the lodestar approach and recommending the use of the percentage of the fund method in common fund cases).
319. See, e.g., Gunter v. Ridgewood Energy Corp., 223 F.3d 190, 198 (3d Cir. 2000).
320. See In re Cendant Corp. Prides Litig., 243 F.3d 722, 735 (3d Cir. 2001) (noting that a lodestar cross-check is the "suggested practice for district courts setting fee awards by the percentage-of-recovery method."). See also In re Prudential Ins. Co. of Am. Sales Practices Litig., 148 F.3d 283, 333 (3d Cir. 1998) (stating that "it is sensible for a court to use a second method of fee approval to cross check its initial fee calculation.").
321. See, e.g., LaChance v. Harrington, 965 F. Supp. 630, 649 (E.D. Pa. 1997) (applying the lodestar cross-check to ensure that the percentage awarded did not create an unreasonably high fee). See also In re Cendant Corp. Litig., 264 F.3d 201, 285 (3d Cir. 2001) (the goal of the lodestar crosscheck "is to ensure that the proposed fee award does not result in counsel being paid a rate vastly in excess of what any lawyer could reasonably charge per hour, thus avoiding a 'windfall' to lead counsel.").
322. See, e.g., Swedish Hospital Corp. v. Shalala, 1 F3d 1261, 1269 (D.C. Cir. 1993) (noting that it "matters little to the class how much the attorney spends in time or money to reach a successful result."); in re SmithKline Beckman Corp. Securities Litig., 751 F. Supp. 525, 554 (E.D. Pa. 1990) ("it would be the height of folly to penalize an efficient attorney for settling a case on the ground that less total hours were expended in the litigation.").
323. See, e.g., In re Cendant Corp. Litig., 264 F.3d 201, 285 (3d Cir. 2001) (noting that the lodestar cross-check is "very time consuming.").
324. See In re Cendant Corp. Prides Litig., 243 F.3d 722, 735 (3d Cir. 2001) (referring to lodestar cross-check as a "suggested practice."). The Task Force does not believe it dispositive that the Court in In re Cendant Corp. Litig., 264 F.3d 201, 285 n. 57 (3d Cir. 2001), speculated that the Court in Cendant Prides may have raised the lodestar cross-check from discretionary to mandatory. The Court in Cendant Prides referred to the lodestar as a "suggested," not "mandatory" practice. Given all the problems involved in the use of the lodestar, and the solid precedent endorsing the use of the percentage method, the Task Force believes that the Court in Prides would have had to be more explicit than it was to conclude that the lodestar cross-check is now mandatory. The Court in In re Cendant Corp. Litig. only raised the inference of a mandatory lodestar in a sentence that begins, "Arguably...". In re Cendant Corp. Litig., 264 F.3d at 285 n.57.
325. See, e.g., Di Giacomo v. Plains All American Pipeline, Civ. No. H-99-4137, at 23 (S.D. Tex. 2001) (Court conducts a lodestar cross-check but notes that it "will not conduct a detailed analysis of charged hours and hourly rates" because to do so "would undermine the utility of the percentage method.").
326. See In re Dreyfus Aggressive Growth Mutual Fund Litig., 2001 WL 709262, at *6 (S.D.N.Y.) (awarding attorney's fees amounting to 15% of the fund, citing the "emerging trend within the Circuit of awarding attorneys considerably less than 30% of common funds in securities class actions, even where there is considerable contingency risk.").
327. See Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 52-53 (2d Cir. 2000) (criticizing the use of a "benchmark" percentage as an "all too tempting substitute for the searching assessment that should properly be performed in each case" and stating that "a fee award should be assessed based on scrutiny of the unique circumstances of each case, and a jealous regard to the rights of those who are interested in the fund.").
328. See Mashburn v. National Healthcare, Inc., 684 F. Supp. 679, 692 (M.D. Ala. 1988) ("There is no general rule of what percentage of a common fund may reasonably be awarded as a fee because the amount of any fee must be determined upon the facts of each case."). See also Bruce Hay, Contingent Fees and Agency Costs, 25 J. LEG. STUD. 503, 521 (1996) (optimal contingent fee, providing the best incentive to the lawyer and maximum return to the client, depends on the characteristics of the case and thus varies from case to case).
329. 223 F.3d 190, 195 n.l (3d Cir. 2000).
330. See also In re Cendant Corp. Prides Litig., 243 F.3d 722, 737-38 (3d Cir. 2001) (applying the factors set forth in Gunter and reversing a fee award where the district court apparently failed without explanation to consider a number of the factors); Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 50-54 (2d Cir. 2000) (citing the Gunter factors with approval). The Task Force notes that the factors listed in Gunter are similar to the factors enumerated in the Rules of Professional Conduct governing the reasonableness of attorney fees generally. See Model Rule 1.5.
331. See also In re Cendant Corp. Prides Litig., 243 F.3d 722, 737 (3d Cir. 2001) (declaring that "a district court may not rely on a formulaic application of the appropriate range in awarding fees but must consider the relevant circumstances of the particular case."). The Conference Report to the PSLRA states, consistent with this precedent, that judges awarding fees are not to be locked into a benchmark. The Report observes that the PSLRA does not fix the percentage of fees and costs counsel may receive, and states that the intent of the Committee was "to give the court flexibility in determining what is reasonable on a case-by-case basis." H.R. CONF. REP. 104-369, at 36.
332. See Testimony of Professor Joseph A. Grundfest at 9, noting that some courts employ a benchmark of 25%, and that there is "no persuasive argument that the norm was ever a reasonable approximation of the fee that would result from an arm's-length bargain over representation in a securities fraud class action lawsuit." For cases departing far downward from any such asserted benchmark, see the cases cited in note 121, supra. See also In re Prudential Ins. Co. of Am. Sales Practices Litig., 148 F.3d 283, 339 (3d Cir. 1998) (noting that the district court in that case "examined the fee awards in class actions with recoveries exceeding $100 million and found the fee percentages ranges from 4.1% to 17.92%"); Shaw v. Toshiba America Information Systems, Inc., 91 F. Supp. 2d 942, 946 (E.D. Tex. 2000) (14% awarded; court finds it unnecessary to conduct a lodestar cross-check). The Task Force also notes some substantial evidence that institutional investors have reached fee agreements that award attorneys significantly less than any supposed 25% "benchmark." See State of Wisconsin Investment Board v. Godfield, Civil No. 3:96-CV-1353-R (N.D. Tex.) (18%) ; In re Physicians Computer Network Securities Litig., Civil No. 98-981 (D.N.J.)(15%) ; In re Orbital Sciences Corp. Securities Litig., Civil Action No. 99-197-A (E.D. Va.) (15%); In re UCAR International Inc. Securities Litig., 3098-CV-00600 (D. Ct.) (22.5%); In re California Micro Devices Securities Litig., 965 F. Supp. 1327, 1331-32 (N.D. Cal.) (less than 8%). See also Statement of Lawrence Sucharow, submitted to the Task Force, at 6 (counsel who represented several institutional lead plaintiffs in class actions concludes that "they frequently interview several firms before selecting one to represent them in a litigation and they often aggressively negotiate the maximum amount lead counsel may seek upon the successful conclusion of a litigation."). While the fee negotiated by an empowered plaintiff must be reviewed for reasonableness at the end of an action under Rule 23 and Cendant Prides, the point is that these cases indicate that there is no need for rigid adherence to a benchmark.
333. th Cir. 2001) (noting that data about fee arrangements between counsel and institutional investors "have been widely available since the changes to securities practice wrought by legislation in the mid 1990s."). The Task Force commends all of these factors for consideration by district courts. Another possible factor to consider in setting the fee, which raises complex issues beyond the scope of this Report, is whether the class action resulted in improvements in corporate governance. See In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) (approving a settlement including corporate governance changes).
334. th Cir. 2001) (outcome of auctions can provide some relevant information for the court in awarding fees ex post).
335. See In re Cendant Corp. Litig., 264 F.3d 201, 220 (3d Cir. 2001) (holding that under the PSLRA, "courts should accord a presumption of reasonableness to any fee request submitted pursuant to a retainer agreement that was entered into between a properly-selected lead plaintiff and a properly-selected lead counsel."). See also In re California Micro Devices Securities Litig., Reporter's Transcript of Proceedings of May 24, 2001, Final Fairness Hearing, at 20 (Judge Vaughn R. Walker, N.D. Cal.) ("the best indication that the fee requested is a reasonable one is that it was calculated under a fee arrangement negotiated by sophisticated, informed institutional investors serving as lead plaintiffs.").
336. The PSLRA requires the court to determine that fees do not exceed "a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class." 18 U.S.C. § 78u-4(a)(6). This language does not permit strict scrutiny review of the fee award, given the general premise of the PSLRA that it is the lead plaintiff, and not the court, that is to choose counsel and negotiate the fee. However, the language does justify rejection of fees that are clearly excessive in relation to the amount awarded to the class. See In re Cendant Corp. Litig. 264 F.3d 201, 283 (3d Cir. 2001) (noting that the presumption that a negotiated fee was reasonable "may be rebutted by a prima facie showing" that the agreement is "clearly excessive").
337. For example, if the case appeared at the time of the fee negotiation to be quite difficult and then a bombshell development (such as a public concession from the defendant) resulted in a substantially easier case, a fee award of a high percentage might no longer be justified. See In re Cendant Corp. Lirig., 264 F.3d 210, 282-83 (3d Cir. 2001) (the presumption that the negotiated fee is reasonable "could likely be abrogated entirely were the court to find that the assumptions underlying the original retainer agreement had been materially altered by significant and unusual factual and/or legal developments that could not reasonably have been foreseen at the time of the original agreement."). Even if the assumptions underlying the original agreement have not materially changed, there may be cases in which subsequent events suggest that some modification - perhaps not huge in percentage or actual terms - might be appropriate. Our assumption is that most of these changes would result in a reduction of fees, a result sought by the objectors in the Cendant litigation. It is possible, however, that litigation might well be so much more onerous or affected by mid-stream changes in the law that both the empowered plaintiff and lead counsel would join in an effort to raise the percentage originally agreed upon. There may also be cases in which lead counsel seeks an increase because of changed circumstances and the empowered plaintiff objects.
338. If the court had found at the time of appointment of the lead plaintiff that the fee agreement reached with counsel was not the result of bargaining, then that would have been a reason to hold the lead plaintiff inadequate under the terms of the PSLRA, or to order such negotiations to take place. It is possible, however, that information about the fee negotiation might not be presented at the time of appointment. See In re Cendant Corp. Litig., 264 F.3d 201, 257 (3d Cir. 2001) (noting that the PSLRA does not require the putative lead plaintiff to volunteer information concerning fee negotiations at the outset of the case). The fact that a failure to negotiate comes to light in an ex post review does not diminish its importance. Moreover, if there is an allegation of "pay-to-play" that arises late in the litigation, the court may want to hear evidence with regard to the allegation because such evidence may undermine a claim of arm's-length, good faith bargaining.