Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

 Two plaintiffs' firms filed nearly identical class actions against a dietary supplement company, alleging that one of its weight loss supplement didn't work. The cases were filed within two weeks of each other, one in federal court (Branca v. Iovate Health Sciences USA, Inc.), and one in California state court (Garcia v. Iovate Health Sciences USA, Inc.). Shortly thereafter, the defendant filed a motion to stay in the federal case, because it had settled the case in state court.

So far, this was all just run-of-the-mill procedural maneuvering. So why make it the subject of a blog post? As the court explained:

Why not stay this case, if one that's virtually identical to it, and would resolve all of the claims, has reached a preliminary settlement that is now awaiting court approval? The real reason, according to Branca, is that the Garcia settlement is collusive, or at least looks really bad.

(Italics in original; bold emphasis added.)  The part that "look[ed] really bad" was that the firm representing the defendant had been about to engage in mediation with opposing counsel when the Garcia case was filed. The opinion implies (but does not state outright) that the quick settlement in the Garcia case might be the result of a reverse auction.

The Court has read the parties' briefs and given considerable thought to them. Here's the basic problem: No matter how hard Iovate tries to argue that a stay is warranted under Landis v. North American Co., 299 U.S. 248, 254, 57 S. Ct. 163, 81 L. Ed. 153 (1936), and no matter how hard Branca tries to argue back that a stay isn't warranted under Colorado River Conservation Dist. v. United States, 424 U.S. 800, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976), the real fight here is for control of a class action between two warring plaintiffs' firms. That fight, moreover, is inseparable from the ostensibly disinterested legal arguments they make for the Court staying or not staying this case.

But, having identified the real stakes of the motion to stay, the court decided to grant it anyway.

The Court's view is that if there's something procedurally or substantively unsavory about the Garcia settlement, even though it appears to be the result of vigorous bargaining before an experienced mediator, Judge de Bellefeuille should be the judge to say so. Garcia is her case. But until Judge de Bellefeuille makes that call, and meaningfully stalls the progress of the Garcia settlement, the Court is inclined to exercise its discretionary power under Landis to stay this case in the interest of judicial economy.

The case is notable because it's not often that a court will pull back the curtain to expose the real interests behind a mundane procedural motion. That kind of realism is always worth a second look. And the takeaway for defense lawyers is one that always bears repeating: don't be afraid of telling the court what's really going on. Courts are often more willing to wave aside legal fictions than we might think.

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 This week, the class action bar and legal blogs have been abuzz with the news that famed plaintiffs' lawyer Stanley Chesley has been disbarred by the Kentucky Supreme Court, a development that will likely lead to his disbarment in his home state of Ohio as well. (PDF of opinion here.)

In the course of laying out its background facts, the opinion confirms several plaintiff firm practices I've documented in the past. Among them:

• Filing on top of other plaintiffs. Chesley's initial involvement with the case came when he was hired to consult on a national settlement. After he did that, he filed a companion fen-phen case and moved to have it consolidated with the larger lawsuit, a motion his eventual colleagues vigorously opposed. This is not an unusual tactic among plaintiffs' firms, but it's rare to see it confirmed in print.
• Division of labor. The various plaintiffs lawyers engaged in a division of labor among firms. One firm prepared for trial; another rounded up the clients: Chesley served as lead negotiator.
• Money undoes everything. According to the opinion, the whistleblowers in the fen-phen case were law-firm partners of several of the disbarred lawyers, who grew suspicious of the new income streams to firm. When the settlement gets too rich, there are usually people around who will scuttle it, either out of a sense of integrity, or because they aren't getting their cut.

But, in this case, far more important than confirming how plaintiffs lawyers litigate are the lessons defense lawyers can learn about how to negotiate class settlements. Lessons

• Do due diligence on the lawyers one faces. It can be tempting to deal with class action lawyers who are inexperienced or have reputations that suggest they will agree to settlement offers quickly. Doing so may effect a settlement quickly, but it does not guarantee a settlement that will stand up to Rule 23(e) scrutiny.
• Require confirmation that the client has received offer. The largest problem with fen-phen settlements was that the defendants made one offer, but the one communicated to the class members was different. To avoid prolonged litigation over a settlement, it makes sense for the defendant to require some assurance that its offers are communicated effectively. Among other ways to do this, one can ask to communicate the offer to the named plaintiff itself, or require the named plaintiff to be present at any mediation. Neither of these tactics interferes with the attorney-client privilege: the plaintiffs counsel can still confer with their client and provide their unvarnished opinion of the offer. It does, however, reduce the errors that might arise in translation.
• Watch out for settlement red flags. When the fees are higher than the relief the class receives, or much of the relief is an intangible injunction, a defendant might infer that counsel is more focused on their own cut than on the interests of the absent class members. Those settlements are the ones most likely to be undone later.

What each of these lessons boils down to is negotiating a settlement with integrity. There are often financial and institutional pressures to settling quickly and cheaply (and fast, inexpensive settlements can be very good for class members, too). But the best way for a defendant to make sure that a settlement does not result in criminal investigations or huge objections is to make sure that--at the very least--its side of the street is clean.

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 So the small corner of the legal world that includes class action lawyers is up in arms this week because Jon King, formerly of Hausfeld LLP, has filed a wrongful termination complaint against his former employer, alleging that he was fired because he complained about ethical conflicts at the firm.

Hausfeld LLP is run by Michael Hausfeld, who has a larger than life reputation. And the complaint certainly contains its share of juicy allegations (Hausfeld LLP tried to spy on its landlord?), although, as Alison Frankel notes, portions of it read more as King's attempt to get back at folks who done him wrong than support for his actual cause of action. That's to be expected: this is a wrongful termination complaint, so King has an incentive to make everything as dramatic and one-sided as possible.

That said, even if one discards the juicy "he said-he said" portions and remains agnostic about the merits of the allegations, there's a lot in King's complaint that one can use to build a more accurate picture of how class action plaintiffs' firms interact, and how they think in strategic situations.  To wit:

• You have to pay to play. You have to spend money to make money. At least, that's what Hausfeld allegedly believed, as he took on a "crushing debt load" in part to create the "appearance of success." (¶ 1.) But participating in large-scale litigation like the antitrust case against the NCAA also requires contributing to the plaintiffs' litigation fund. (¶ 55.) (Indeed, according to those who have commented on this complaint so far, the most shocking allegation in it is that Hausfeld LLP would get other law firms to contribute to the fund while doing nothing himself. (Id.))
• Lead counsel makes the rules. Despite the fact that Hausfeld wasn't paying to prosecute the case, he handed out the work. The complaint alleges he did so as "some form of political deal relating to other matters." (¶ 55.) It also alleges that firms would fall in and out of favor very quickly. (¶ 57.)
• It's important to have a PR strategy. King spends a fair amount of time talking about how part of his role was to cultivate reporters. (¶¶ 64-66.) And he also talks a great deal about how many presentations he gave on panels. (¶¶ 61-63.) It's debatable how much these public-relations strategies actually helped, but there is no question that King at least (and likely Hausfeld) viewed them as important.
• It's about the money. If King is right, then Morris Ratner has it wrong: there's no need for a new model of the plaintiffs' attorney because the old one is still in play. Even if it isn't to start, it becomes so when the money is there. The most surprising revelation may be the degree to which the economic calculation at a large plaintiffs' firm looks like the stereotypical calculation at a defense firm: prioritize the cases that bill the most (or have "more lodestar" in plaintiffs' terms). (¶ 124.) But it does seem like, to a plaintiff, everyone has their hand out. Some attorneys want referral fees for finding clients. (¶ 131.) Other firms want a share of the take for a given case. (¶ 104.) Objectors need "paying off." (Id.)

The biggest takeaway for defense lawyers is not a surprising one. Assuming that the truth is somewhere between King's allegations and Hausfeld's likely denial, it still appears that those drawn to high-stakes plaintiffs' work tend to be people who are ultimately after the big checks and the big ego strokes. And while this insight may not be revolutionary, confirming it is always useful for the next big case.

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In 1998, the class action plaintiffs' firm Milberg Weiss filed sued Computer Associates for violating the federal securities laws by lying about its revenues in order to increase its stock price. In a perfectly unremarkable development, it was appointed co-lead counsel of the consolidated class. (Various firms had filed a total of eleven complaints.) Over the next four years, the pressure on Computer Associates mounted. Thirteen more complaints were filed, and the US Attorney's office (EDNY) and SEC launched a joint investigation of the firm.

So Computer Associates decided to settle the case. After seven months of mediation with the plaintiffs, it announced a settlement where class members would receive 5.7 million shares of stock in the company, then valued at around $140 million. Counsel's fee was 1.4 million shares, valued at approximately $35 million. (One might ask whether a settlement like this either (1) counts as a coupon settlement, or (2) created problems by diluting current shares, but neither of those was raise by the parties, who were all interested in the settlement going through.) By the end of 2003, the court had approved the settlement; there were no objectors.

Four months later, several Computer Associates executives pled guilty to conspiracy to commit securities fraud and obstruction of justice; the firm admitted that its executives had engaged in a multi-billion dollar fraud and coverup, and it restated an additional $2.2 billion in earnings. In addition, the Wall Street Journal reported that Computer Associates had withheld 23 boxes of documents during class-action discovery.

At this point, several of the class-action plaintiffs asked Milberg Weiss to vacate the certification order under Rule 60(b), because they had been deprived of essential information in the 23 boxes. Milberg Weiss declined to do so. So the plaintiffs proceeded on their own. After three years of litigation and discovery, the court dismissed the Rule 60(b) motion, in part because it wished to protect the "finality which a settlement is intended to produce." (It also noted that these plaintiffs had not objected to the settlement at the time.)

At that point, the disgruntled class members filed a malpractice action against Milberg Weiss and others in New York state court, alleging legal malpractice and breach of fiduciary duty. The lawyer-defendants responded by asking the E.D.N.Y. for an injunction against the malpractice action under the All Writs Act and Anti-Injunction Act, defending the settlement approval and the dismissal of the 60(b) motion. The E.D.N.Y. issued the injunction, and the plaintiffs appealed.

Which brings us to this week's case, Wyly v. Milberg, in which the Second Circuit affirmed the injunction. For those interested in the minutiae of the All Writs Act and Anti-Injunction Act, the court held that it could not uphold the injunction under the "in aid of jurisdiction" prong of the All Writs Act, because the court lacked in personam jurisdiction, and the mere connection with a class action was not enough to invoke any of the known exceptions to that rule:

We have never held that a district court's involvement in complex litigation justifies, without more, issuance of an injunction "in aid of" the court's jurisdiction, and we decline to create such a rule here.

Instead, the Second Circuit turned to the "relitigation" exception to the Anti-Injunction Act, which required it to conduct a preclusion analysis of the malpractice case. After determining that res judicata (claim preclusion) did not apply, it reasoned that

Before applying the elements of issue preclusion to this case, we begin with a preliminary observation about the Appellees' argument. In the course of the federal class action litigation, the District Court did not "actually decide" whether the Appellees committed legal malpractice; that claim was not presented, and therefore the Court had no reason to address malpractice as such. The Appellees' issue-preclusion argument is focused not on whether the District Court previously adjudicated a malpractice claim, however, but on whether the Court resolved one of the elements of a malpractice claim--namely, counsel's deficient performance.

(Emphasis in original.)  And it found that the Settlement Order had in fact established that the attorneys had acted in a reasonable manner, precluding a finding that could establish malpractice.

The Settlement Order held, inter alia, that the global settlement of the 1998 and 2002 class actions was "fair, reasonable[,] and adequate," and that class counsel was entitled to an award of fees that the District Court found to be "fair and reasonable." Whether an award of "fair and reasonable" attorneys' fees necessarily decides the deficient-performance prong of a legal malpractice claim is an issue of first impression in this Circuit. We conclude that the deficient-performance prong of New York's legal malpractice rule is identical to the reasonable-performance issue that the District Court decided as a necessary component of the Settlement Order.

(Internal footnote omitted.)  Since the lower court had found counsel to be adequate, and had also found that its performance merited its requested fee, there was no way another court could find that counsel had committed malpractice.

It is possible that the circumstances that gave rise to this case may come up again sometime. But that's not the reason for defense lawyers to focus on it. (After all, here, the defense had pulled off a coup: settling the case for less than it might be worth after the conclusion of a criminal investigation.) Instead, here are four other reasons this case is important for defense lawyers:

1. The full record is fascinating reading, and offers a lot of between-the-lines looks at how a large securities plaintiff's firm operates.
2. The Second Circuit's "relitigation" reasoning may have application in other cases where plaintiffs seek a second bite at the apple in state court. Defendants are often interested in finality, and this is a case that offers some help in achieving that in litigation.
3. We often talk about how plaintiffs in class actions are only nominal, and it is the attorneys who really run the cases.  This case is a stark example of just what that divorce between plaintiff and attorney can mean in a class action.
4. The case is an important reminder that if you do not challenge adequacy of counsel or the level of attorneys' fees when they first arise, you may be precluded from doing so later, when it really matters.

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There is a common perception in complex litigation (not to mention litigation generally) that time favors the defendant. Defendants often counsel clients not to react too quickly: situations that may provoke a fight-or-flight response in the moment often present more strategic opportunities as they unfold. And plaintiffs tend to agree; they often complain that defendants' primary strategy is just to delay litigation for as long as possible.

But is there any basis for this assumption? After all, there are definite cases--like the motion to strike class allegations, or when plaintiffs try to change their theory late in the litigation--where defendants prefer to move faster than plaintiffs to resolve outstanding issues. So why is it that we all assume that plaintiffs want to rush while defendants want to wait?

One of the largest reasons that we assume that plaintiffs want to proceed faster than defendants is because of what economists call the time discount factor. All other things being equal, people value a gain now more than an equal gain in the future. This works in reverse, too. Most people would prefer a loss in the future more than the same loss today. (So you can see why, from the beginning, plaintiffs push for quick trials--they want their payments now, while defendants don't mind putting off losses from litigation.)

In 2007, Rutgers political science professor Jack S. Levy and PhD candidate Phillip Streich looked over the economic literature on time discounting. And what they found was that the classic account of time discounting actually understates how people treat decisions over time. As they wrote in their article Time Horizons, Discounting, and Intertemporal Choice:

The accumulation of experimental research on intertemporal choice has made it increasingly clear that the exponential discounting model that Samuelson (1937) pioneered nearly seventy years ago, which has subsequently dominated economics and economic applications in political science, does not provide a descriptively accurate model of how most people actually behave in making choices over time. Instead of discounting by a constant rate from one period to the next, people tend to discount relatively more heavily the near-term future and to discount relatively less heavily the more distant future, compared to constant-rate exponential discounting. In addition, discounting is not independent of the value of future out- comes. People have greater discount rates for less valuable outcomes than they do more valuable outcomes, and they have greater discount rates for gains than for losses. This asymmetry of losses and gains, so familiar to students of prospect theory, carries over into other manifestations of reference dependence and framing: the anticipated loss of utility of having to wait longer than expected for a future reward is greater than the anticipated gain in utility from receiving a future reward sooner than expected.

(Emphases aded.) All of these phenomena together contribute to what economists call hyperbolic discounting.  These two phenomena (sometimes called the gain-loss asymmetry and the delay-speedup asymmetry) add to the explanation of why defendants appear to prefer delay: plaintiffs value the gains they might receive less the further away they appear, and the mere fact of delay feels like a loss to them. By contrast, the defendant still anticipates that any anticipated loss will close to the amount it hurts today, and it experiences comparatively less gain from the day.

So what does this mean in complex litigation? It means that plaintiffs are in fact likelier to push hard to resolve matters quickly, even when there are sound reasons for proceeding deliberately. And that means that any attempts to slow the litigation to a manageable pace will lead to vigorous protest and strong rhetoric about "delay tactics." This may not be mere rhetoric on the part of cynical counsel; it may represent genuine frustration.

It also means that defendants have some leverage in negotiating how the litigation will proceed. Remember, all else being equal, delays are more immediately painful to plaintiffs than they are immediately helpful to defendants. So, when defendants need important concessions in other areas of the litigation (perhaps in the scope of discovery), they may be able to trade less-valuable (to them) scheduling concessions.

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 I've spent a lot of time over the last two years poking (as best I can) into the head of the entrepreneurial plaintiff's lawyer. That is, the plaintiff's lawyer that treats her lawsuits like business opportunities, keeping a diversified portfolio and working to maximize the profit from each opportunity. But there is another kind of lawyer that brings class actions, one often referred to as the "cause lawyer." Rather than working for profit, this group is motivated by a desire for social change. Cause lawyers are rarer in class action practice, but they're not nonexistent. So, how does the class action defendant deal with a cause lawyer?

Colorado professor Deborah Cantrell has a new article Lawyers, Loyalty and Social Change (Oxford comma omitted in original), which tackles just that question.

According to Professor Cantrell, one can distinguish cause lawyers by their incentives. Cause lawyers are (clearly) not motivated by the money. Instead, they tend to be motivated by the advancement of a single social cause. As Professor Cantrell puts it, it is the

common feature of social change advocacy – that participants, including cause lawyers, identify strongly with their side of the issue and distrust with a similar intensity participants on the other side. In fact, this Article argues that such hyper-loyalty is considered a core condition and baseline requirement of the relationship between cause lawyer and cause client.

(Emphasis added). It is this "hyper-loyalty" that defines the cause lawyer:

In contrast to much for-profit lawyering, cause lawyering brings with it robust notions of solidarity between client and lawyer. The proposition is that there is more solidarity between the cause lawyer and client because both of them understand their work together to be situated within a larger interest in social change. … Independent of their legal relationship, the lawyer and client are loyal to each other because of their shared commitment to their cause (whatever it may be). Their “cause loyalty” is stronger than the typical professional loyalty between lawyer and client. It is hyper- loyalty.

(Emphasis added.) Cantrell traces that hyper-loyalty to a few causes. Since many cause lawyers appear to come from "elite" backgrounds (law school costs a lot of money, and cause lawyering may require some independent income since it pays much less than other legal work), hyper-loyalty may be a compensatory mechanism to assure poorer clients that the lawyer is truly on their side.

Moreover, this hyper-loyalty may also stem from cause lawyers' tendency to the see world as bipolar, divided into a clear "us" and "them."

Additionally, a constitutive part of social change, or cause, work is that cause advocates are pushing against the status quo. In order to mobilize a collective for action, there must be some sense that there is a group pushing for change and a group content with the status quo – in other words, some sense of “us” and “them."

(Emphasis added.) Most lawyers wind up buying into their clients' mindsets to some degree. (It can be hard not to.) But many for-profit lawyers can distance themselves from their clients by noting that every client its day in court, regardless of its views. Cause lawyers, by contrast, may hold a sincere and deep belief that their clients are in the right--why else would the lawyer represent them? In fact, Cantrell notes, some cause lawyers (or cause clients) may have deep suspicion of outside sources of funding, since they may threaten to change a cause into an "industry."

Cantrell identifies two problems with the cause lawyer's hyper-loyalty. First, if the lawyer is hyper-loyal to the cause, she may wind up selling out her individual client:

the worry is that cause lawyers will understand their true loyalty to be to the cause, and thus view their clients as one of several pieces of an advocacy strategy to be deployed. Clients become pawns, not empowered individuals.

On the other hand, if the lawyer is hyper-loyal to the client, not the cause, then she risks a polarized view of the world, in which others are either "friends" or "enemies," with little middle ground, and little room to negotiate. In that case, a cause lawyer may take actions that benefit her individual client, but sacrifice the actual cause. (And, in class action, the cause is likely to include the absent class members.)

So, how does the class-action defense lawyer deal with cause lawyers? Professor Cantrell's analysis suggests a few tactics to keep in mind:

• Focus on non-monetary compensation when negotiating. Courts are often suspicious of non-monetary compensation in class actions. But if one is negotiating with a cause lawyer, actual changes in behavior may be the real relief her client (and the class) seeks. These changes will have to be genuine, of course. Given the tendency for cause lawyers to view "enemies" with heightened suspicion, they're unlikely to be satisfied with lip service, and they have little monetary incentive to accept minor changes so long as there are large fees.
• Focus on the adequacy of the class representative. Given the risk that the lawyer and the client may be too loyal to each other (resulting in, say, demands for outsized incentive payments), it is doubly important that someone--most often the court--is paying attention to the needs of the absent class members.
• Focus on the adequacy of class counsel. If the lawyer is hyper-loyal to the cause, then she may make some moves that show an insufficient regard for her fiduciary duty to either the named plaintiff or to the absent class members (to the extent that they are just another means to support the cause). In those cases, the defense will want to make sure that the Court is paying attention to the needs of the class, as opposed to the lawyer.

It remains a central irony of class action practice that, regardless of whether the plaintiff's lawyer is motivated by money or loyalty to a larger cause, her incentives are not going to line up with her client's much of the time. As a result, it remains the case that the strongest class-action defenses often focus on what is best for the absent class members.

UPDATE - Russell Jackson of Consumer Class Actions & Mass Torts has some additional, less cynical, and of course, well-taken advice on how to deal with cause lawyers (or, as he likes to call them, "true believers").  If you've popped over here from there, welcome!  If not, do check out his take as well. 

(He's also, finally, picked himself up a Twitter feed ...)

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 During the latter half of 2011, I was privy to the following exchange between a well-known law professor and a well-known practitioner:

PROFESSOR: Yes, I wrote a piece which concluded that the class action is dead. You heard it here.
PRACTITIONER: And yet plaintiffs keep filing the things …

That exchange (which I promise actually happened), summarizes the primary trend in class-action scholarship in the last year: declaring the device "dead," either because classes are now too hard to certify because of Dukes, too hard to bring in the first place because of Concepcion, or too expensive because of curtailment of attorneys' fees. Leave aside the fact that these arguments are most likely wrong (because, well, plaintiffs keep filing the things); they're dull as well. So, while the federal court system made it difficult to choose only ten significant cases this year, the rush of early autopsies of the class action made it difficult to scrape up ten interesting articles. That said, here are the Ten Most Interesting Class Action Articles of 2011:

1. Collective Justice or Personal Gain (Akron L. Rev. 2011) - Professor Stephen Meili provides outstanding empirical work on how plaintiffs' lawyers keep class-action plaintiffs involved in their in cases. It provides (1) a fascinating peek behind the curtain, and (2) great fodder for further discussion of whether plaintiffs' counsel are fulfilling their fiduciary duty to the class.
2. Unreliable Securities for Retirement Income Security: Certifying the ERISA Stock-Drop Class (Vanderbilt L. Rev. 2011) - This student comment cogently describes an emerging trend in securities class actions--the ERISA stock-drop class action--and one of the key controversies within that trend. When people ask why we bother having student-run law reviews, a piece like this helps to make the argument in support.
3. Embedded Aggregation in Civil Litigation (Cornell L. Rev. 2011) - The late Professor Nagareda discusses how even seemingly individual litigation can contain issues that require courts to make decisions about aggregating claims -- and he uses those cases to show why the constraints of Rule 23 are more than just "hypertechnical bugaboos." Fascinating reading.
4. Majority of Class Action Publication Notices Fail to Satisfy Rule 23 Requirements (Rev. Litig. 2011) (See also.) - Another excellent empirical study which asks: does class-action notice do what we intend it to? Most practitioners suspect that notice does not in fact actually notify the vast majority of class members about their claims. This study confirms that suspicion with cold, hard facts.
5. Two views of Class Actions (Fordham L. Rev. 2011) - Professor Lahav's article is hardly flawless, but the first half gets at a question that deserves a lot more discussion: are class actions primarily a joinder device or some other kind of legally transcendent entity? These two strains of thought continue to compete with each other as courts debate the propriety of various kinds of class actions, and some of the pre-certification tactics employed by the parties.
6. "Abandoned Claims" in Class Actions: Implications for Preclusion and Adequacy of Counsel (George Wash. L. Rev. 2011) - Abandoning claims (or "claim-splitting") has long been a practice of class-action plaintiffs. For almost that long, it has worried courts, who don't like to leave absent class members in the lurch. Professor Sherman provides a thoughtful review of various preclusion cases, and suggests that the phenomenon may be more of a superiority than an adequacy problem.
7. Financiers as Monitors (WP 2011). After the now-traditional "death of the class action" introduction, Professor Burch provides an interesting justification of third-party litigation financing, arguing that third-party financiers may provide a necessary monitoring role for entrepreneurial plaintiffs' lawyers. Having heard a number of financiers talk about how they fund litigation, I'd say that Burch's argument rings true.
8. Class Action Professional Objectors: What To Do About Them? (WP 2011) - Professor Lopatka and Judge Smith have provided an interesting analysis of class-action objectors. While they're largely critical of objectors, they do recognize that some objections have merit. So the question they seek to answer is: how should judges separate the legitimate objections from the objectors-for-profit? Their answer (large appeal bonds) won't be popular with some non-profit objectors, but they do put forward an intellectually honest proposal for discussion.
9. Overlitigating Corporate Fraud (WP 2011) - Professor Erickson asks a nagging question: do securities fraud class actions really deter corporate misconduct that has fallen through the cracks? Or do they just draft along behind government investigations and other existing enforcement mechanisms? She approaches this from a doctrinal rather than an empirical standpoint, but it's still a valuable first step in testing the deterrence justification that so many class-action proponents put forward.
10. Short Sales, Class-Action Lawsuits, and Potential Information Leakages (WP 2011). Professors Blau and Tew have noticed two interesting phenomena. First, some plaintiffs' lawyers leak their securities class-action complaints to short-sellers, a conclusion the professors reach by looking at spikes in short-sale activity just before a class action gets filed. (The tactic makes sense: short sales of the stock will put pressure on the corporation's management to settle a case. It may also raise some adequacy concerns, since what class counsel has done is to drive down the price of the stock in order to benefit themselves.) They also notice that post-filing short sales tend to correlate with the more successful securities class actions.

I get the impression, even from some of these articles, that academics think class actions aren't so much dead as dull; they're just kind of bored with the device as it stands. These professors tend to think that class actions are cool because of their ability to effect large-scale social change or raise big constitutional issues. Now that the Supreme Court has issued a record five opinions on class-action practice in a single year, I can see where it might be hard for them to identify the next area of constitutional import. Since, as Daniel Girard observed this year, we may have witnessed the end of the "Golden Age of the private attorney general" (a debatable but interesting observation), it's much harder to write articles that recommend new areas in which to file class actions.

Except: plaintiffs do keep filing the things. And, in doing so, they've raised a number of really interesting issues of legal strategy and civil procedure that the professors either haven't noticed, or don't think are worth their time. So here's a list of the ten most interesting articles that didn't get written this year.

1. The changing role of adequacy in class-action practice. Where does one strike the balance between a class representative who can provide discovery and oversight, and the ability to actually bring a class action without investing thousands in finding the "perfect" representative? How much does class counsel's role in the litigation matter? The Seventh Circuit in particular made three key rulings about adequacy this year: CE Design, Creative Montessori, and In re Aqua Dots. What do these cases suggest about the inquiries into adequacy of counsel and adequacy of representation?
2. The changing role of superiority. Should the analysis include the effects on non-parties to class actions? The Sixth Circuit has held that the superiority inquiry can look at the effect of a class action on a state's elderly population. How does the logic of that holding apply in the notoriously circular securities class actions? 
3. The evolving debate over the propriety of the motion to strike class allegations. Currently, the uneven development of motion-to-strike jurisprudence has resulted in vastly different practices across jurisdictions. What does this say about how Rule 1 and Rule 23 can intersect? How will motions to strike affect the kinds of class actions that plaintiffs bring? Do different holdings about the motion to strike result in different certification debates?
4. The emerging circuit split over the treatment of experts at class certification. There's one good article out there already, but it predates the rush of opinions that occurred this year. How do those affect the debate? Does Scalia's dicta in Dukes have any effect?
5. The class action and fiduciary duty. Various courts have recognized that named plaintiffs, counsel, and even judges have fiduciary duties to absent class members. But what are the precise contours of those duties? How (and how often) do courts actually enforce them?
6. The various new challenges to the "feasibility of joinder" aspect of numerosity. This has been a fascinating, though small, development over the last eighteen months, one that warrants more attention.
7. Public relations and class actions. Despite the increasing amount of raw data out there, no one has really done a comprehensive study of the role of public relations strategies in class-action practice, or an empirical study on their effectiveness. Do class actions with media pushes result in settlement or larger awards?
8. Follow-on class actions. Do class actions that follow recalls or investigations get certified as readily as "original" class actions?
9. Copycat class actions. What are the incentives for bringing them? How often do they actually work for the copycats? How do "original" plaintiffs and defendants fight them?
10. Settlement timing. At what point in litigation are class settlements most likely to occur? Most practitioners' intuition is that settlement occurs most frequently after certification. But is that actually the case? If not, what does that mean for class-action strategy?

I'll concede that these topics aren't as sexy as pronouncing on the latest Supreme Court opinions. But they're real trends and controversies, they touch on interesting aspects of representative litigation, and exploring them would be of real use to both practitioners and policymakers.

Regardless of whether those ten topics turn into articles, I have no doubt that the various battles still being fought over class certification on a daily basis will yield further scholarship. And, as soon as some aspect of class-action litigation turns sexy again, I'm pretty sure these same professors who pronounced the device "dead" will talk about its surprising comeback.

When that happens, remember: class actions were never dead. After all, plaintiffs kept filing the things.

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 I've made no secret about the fact that one of the purposes of this blog is to delve into how the other side thinks.  And I've also emphasized the fact that it's important to keep an open mind when considering one's adversaries in litigation.  So I was pleased to hear that plaintiffs'-lawyer-turned-academic Morris Ratner was working on a piece that would discuss how plaintiffs' firms operate today.

Unfortunately, Ratner's working paper--A New Model of Plaintiffs' Class Action Attorneys--promises a heck of a lot more than he delivers. There is no "new model." Instead, he offers a critique of the old "conventional model," and offers an idea for a new model with no details to make it actually useful.

What do I mean by a useful model? A useful model is one that allows you to make predictions. The conventional model (that plaintiffs' firms are rational and profit-maximizing, which usually--given their economic structure--means fee-maximizing) has lasted a while for several reasons:

• It simplifies a necessarily messy set of facts and social forces into a useful account. (A 1:1 mapwill be very accurate, but don't unfold it while you're driving.)  The conventional account offers this.  While individual cases may vary, assuming that a plaintiff's lawyer is looking to maximize fees explains a great deal of behavior in class action litigation.
• It applies equally well to other parties in litigation. (One can also assume that defense firms will be rational and profit-maximizing. And that defendants will be. And that objectors will be.)
• It matches much (though not necessarily all) of the empirical evidence out there. As of this writing, there are a number of books, papers, and reported cases that show that counsel are often looking to maximize fees.
• Most importantly, it allows one to make falsifiable predictions about plaintiff firms' behavior. (All other things being equal, they go for the fees.) This is important for two reasons. (1) It allows litigators to make guesses about what they're going to face. (2) It allows scholars to make predictions about the effects of policy. And when either of these parties turns out to be wrong, it allows them to calibrate their next set of predictions, or it reveals important new questions for research.

So, how does Ratner's model hold up? Not well, unfortunately. It's more of a critique than a model. And, even as a critique, it's not a very informed one.

Ratner's primary observation is that plaintiffs' firms are bigger now than when Professor Coffee first began writing about the entrepreneurial law firm. From that he infers that assuming that everyone in a plaintiffs' firm is "in it for the money" is incorrect. Or, as he puts it:

Large firms possess internal structural complexity that creates diverse incentives other than law firm profit.

And he's right, as far as he goes. But he really doesn't go very far. The real question is, are those diverse incentives relevant to the firm's behavior? (Either in the market for legal services overall, or in individual litigation.) Morris doesn't really offer an answer to that. He argues that, in a given case, the structure of a firm, and the lead attorney's place within that structure, may matter. And he mentions two alternative motivations to profit: (1) he hints that reputation might be important; (2) he observes (in part from personal experience) that "cause litigation" (like the Holocaust bank litigation) might inspire effort not justified by mere fees. But he doesn't really explain how those would play out in litigation generally. What does litigation look like when it's motivated primarily by reputation? How about "cause litigation"? Ratner has little, if anything, to say about either of these "new" incentives.

Ratner also argues that plaintiffs' firms can't be profit-maximizing because they can't predict what their fees will be from a given case.

However the formula for expected fees is stated, it is too imprecise to carry the weight it has been given in the conventional account of how plaintiffs’ attorneys litigate and settle class actions.

It's hardly a surprise to learn that firms can't predict their fees with certainty. The fact that the outcomes of lawsuits are uncertain is well-documented. That's what economists (who tend to insist on profit-maximizing) call incomplete information.  It turns out, there is lots of legal scholarship on how law firms (including plaintiffs' firms) act rationally under conditions of uncertainty or incomplete information. Ratner, though, doesn't address any of this. Instead he assumes that, if one can't predict fees, one must not be engaging in profit-maximizing behavior.

Moreover, this particular criticism tends to show that Ratner doesn't understand an important part of the rational-actor model. Most economists (and most legal scholars) aren't stupid enough to argue that people or firms are actually rational. They argue that people or firms act as if they are rational. Ratner's critiques of the "conventional model" indicate that he hasn't grasped that distinction.  For example, in describing a potential counterexample, he argues that there was never a moment of actual calibration as suggested by 

At no procedural point in Avery did class counsel calibrate case investment along the lines implied by the conventional account ...

There are strong critiques out there of rational-choice models, including of the "as-if" defense of that model. But the fact that a case in real life did not proceed like an idealized graph is not one of them.

Ratner suggests that one way to gather better data on plaintiffs' incentives is to "ask the lawyers who are involved in class litigation." He admits this isn't scientific. But more importantly, he doesn't address any of the issues with self-reported data, even to explain how he would address them in data collection.

Now, some scholars already ask plaintiffs' counsel about how they conduct their practice. Stephen Meili, for example, relied specifically on interviews with plaintiffs' counsel in his account of lawyer-client interactions (and he explained how he addressed self-reporting bias). Richard Nagareda reported discussions that he had with plaintiffs' counsel in working on his book on settlements and complex litigation.  And Lester Brickman relied on public conflicts between plaintiffs' lawyers for some of his data, on the assumption that they would reflect the lawyers making their best arguments for their fees. But Ratner doesn't address any of these examples where data has already been collected, and he doesn't address the questions that those researchers have raised.

In short, while Ratner claims that his model is more "descriptively accurate," it makes things more complex without adding any insight, it doesn't (in its present stage) match much of the empirical evidence out there, and it doesn't allow for falsifiable predictions.

And it also doesn't work for anything other than plaintiffs' firms. As Ratner himself puts it, class-action plaintiffs' firms are uniquely insulated from Darwinian and other economic pressures:

This is especially true among class action plaintiffs’ attorneys generally, who are a relatively independent and colorful lot, and plaintiffs’ firms that specialize in complex or aggregate litigation in particular, which can, by virtue of the pursuit of very large cases, generate enormous revenues for partners who need not devote much effort to achieving the kind of efficiency that economists deem paramount in other settings.

In other words, plaintiffs' lawyers make so much money doing what they do, they don't have to worry about maximizing profit. If this particular critique is true, it's pretty damning. But it doesn't indict the conventional model of plaintiffs' firms, it indicts the firms themselves. After all, if class actions are so profitable that plaintiffs' firms don't have to act efficiently, who's paying for that extra revenue?

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Cardozo law professor Lester Brickman has been a longtime critic of the contingency fee system. So it's no surprise that his latest work, Lawyer Barons: What Their Contingency Fees Really Cost America (introduction here), has a lot to say about how contingency fees skew the incentives of plaintiffs' lawyers. Among the most interesting observations he makes:

Many contingency fees don't reflect actual risk. Brickman documents how often, lawyers don't bear the risk of not getting paid, in part because of "careful case selection." This is not shocking; most plaintiffs' lawyers admit readily to being selective about the cases they take. And that selectiveness is a feature, not a bug. We want plaintiffs' lawyers to be selective, because it will reduce the number of meritless claims clogging the courts. But few have pointed out that this creates a mismatch between the justification for larger fees and the reality of the risk plaintiffs face. Brickman takes a first stab at this; he estimates that lawyers reject two-thirds of the clients who approach them, resulting in a 70-90% success rate for cases taken. And he also estimates the "effective hourly rates" of work on various kinds of cases. According to Brickman, class-action lawyers collect effective hourly rates of between $5,000 and $25,000 from their contingency fees. (Incidentally, Brickman does not address one phenomenon that a number of defense lawyers have reported--and that I've experienced personally. This is the phenomenon of "grossing up" the fee. Instead of calculating a fee as 1/3 of the plaintiff's recovery, a plaintiff's lawyer will take the recovery as a given, and then tack on another 30%-50%, "grossing up" the amount so that this additional amount is 25%-33% of the "total amount." Using this method allows a $500,000 fee to be "33%" of a $1 million recovery. It's safe to say that this calculation does not reflect risk so much as it does Hollywood-style accounting.)

Contingency fees result in acceptance of inferior settlements. Brickman's logic here is simple. One would assume the better the offer, the better the fee. But that's not quite right. A lawyer's calculation as to whether an offer is good is not OFFER/3, but (OFFER/3)-HOURS-OTHER COSTS-OPPORTUNITY COSTS. The longer a case goes on, the more HOURS and OTHER COSTS rise; and the more OPPORTUNITY COSTS he incurs. So a lawyer may very well counsel his client to accept a smaller offer, because his fee net hours and costs will be higher. (In a particularly interesting moment, Brickman compares these incentives to those created by using stock options as corporate compensation.)

Contingency fees (and reimbursement of costs) provide incentives to inflate costs. If a fee is driven by the amount awarded, and the amount awarded includes reimbursement of medical costs (for a plaintiff) or a separate reimbursement of costs (for class actions), then plaintiffs lawyers will maximize those costs to maximize their fees. This is also hardly shocking. After all, the inflation of costs and hours worked is a commonly-observed phenomenon among lawyers who charge by the hour. One supposed advantage of the contingency-fee system is that it bypasses this problem. But, as Brickman observes, it just shunts it to other places. For medical torts, lawyers don't inflate their costs, medical experts inflate theirs (which inflates the total award). For class actions, Brickman unearths some surprisingly brazen evidence from a case in the early 2000s that securities plaintiffs' firms were deliberately inflating the costs of reviewing discovery. And he also provides some examples from one of the most valuable sources of documenting plaintiff tactics in class actions: fights among plaintiffs' lawyers over fees.

Contingency fees inflate costs by justifying themselves. One of Brickman's most interesting observations is that, in class actions in particular, lawyers will hire experts whose sole purpose is to justify the fees they are charging. (He calls these "bless the fee" experts.) These experts don't work for free, of course. And their costs tend to get folded into the costs submitted by the plaintiffs' counsel.

So what use is Brickman's work to defense counsel? On one level, it's a great resource for understanding the incentives that drive plaintiffs' counsel. While he's clearly penning an indictment of the contingency-fee system, Brickman is a careful researcher, and takes great pains to document his findings. And he's excellent at drawing connections that many others have not, even though they may have the same information at hand. But as Brickman himself observes, in class actions, most fee requests are one-sided affairs: by the time they occur, the defendant has already graduated to just wanting to get rid of the case, and most class members don't have enough skin in the game to opt out of their $1, let alone object to the fees.

That said, Brickman's book also has some practical benefits. In those rare cases where the defendant is actually defending against a fee request after a plaintiffs' verdict, the book provides a clear roadmap to the tricks of the trade. Less obvious, but still important: when a defendant is engaged in settlement negotiations where its incentive is to minimize trial costs as opposed to settle a clear case of liability, Brickman's work may help it to reduce the amount it has to pay. After all, when a defendant is working out a nuisance settlement or a cost-of-litigation settlement, it actually has incentives to maximize the recovery to the class (to get the settlement approved) and minimize the lawyers' recovery (to minimize their incentive to bring another nuisance lawsuit). There, it makes a lot of sense to make sure that the lawyers are not inflating their fees.

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Richard Nagareda's object in Mass Torts in a World of Settlement, his only book-length theoretical work, was to show how settlements operate in a world in which aggregated litigation is common, and trial almost unheard of.

One of Nagareda's primary observations is that settlements of mass torts are best handled by some administrative apparatus. In the meantime, the legal system is evolving to become more administrative in response to these mass torts.

Nagareda starts from the premise that mass torts deal with "generalized" wrongs. (He argues that this phenomenon arises largely from industrialization, which allows for both wide distribution of products, and large-scale accidents. In other words, mistakes are bigger in the industrialized world.) He also points out that the vast majority of tort claims are resolved by settlement rather than trial, and that the settlement agreement "describes a business transaction." That fact, the transformation of legal controversy into business transaction, explains much about how class-action and mass-tort firms operate.

So, according to Nagareda,

Mass torts accentuate the role of lawyers as agents. As in traditional tort litigation, the endgame for a mass tort dispute is not trial but settlement. But the scope of the settlement differs. Here, the most ambitious settlements seek to make and enforce a grand, all-encompassing peace in the subject area of the litigation as a whole. Lawyers, once again, act as the designers of these deals, and the strategic motivations of lawyers on both sides shape the design of the peace.

(Emphasis added.) On the plaintiff side, entrepreneurial lawyers create the connections among individual mass-tort plaintiffs. As a result, they wind up with the best information about the "price" of the legal claims each plaintiff is asserting. That price is the price the defendant pays for a release from all claims related to the subject matter of the litigation. So the business deal that these lawyers are looking to strike is cash for the plaintiffs (and their lawyers) in exchange for peace from litigation for the defendants.

These transactions take considerable resources to set up. Plaintiffs' firms have to invest considerable resources into demonstrating causation, which they generally separate into "general" and "specific" causation. General causation shows the capability for harm. (There is a link between cigarettes and lung cancer.) Specific causation shows the harm actually occurred. (These cigarettes caused this case of lung cancer.)

But developing a theory of causation--particularly general causation--takes money. Experts need to be paid. So do those people who process the discovery the plaintiffs get from defendant corporations. It also points out that it costs money to recruit clients (which helps explain the rise of plaintiff "referrer" firms).

Moreover, plaintiffs who assume control of mass-tort litigation are asserting control not just against the defendant, but also against other plaintiffs' lawyers and even--to some extent--against the courts. And, if mass torts go on long enough, the endgame for the litigation may not be settlement, but bankruptcy, another administrative-like function of the courts.

So why do plaintiff lawyers spend so much money? Because it pays, richly. As several legal scholars have revealed, the "effective hourly rate" [http://www.manhattan-institute.org/lawyer_barons/index.html] of mass-tort lawyers is usually in the tens of thousands of dollars. (More about Professor Brickman's work next month.) As a result, Nagareda observes, a law firm's investment in litigation does not necessarily track the specific substantive merits of the case. Instead it tends to track the likelihood that a specific litigation will pay off in fees.

On the defendant side, the largest influence on settlement strategy is insurance. So Nagareda spends considerable time on the role of insurance in creating mass tort settlements and, in particular, the phenomenon of "stacking insurance." Stacking insurance means buying primary insurance, then excess insurance. Insurers in turn will buy reinsurance. What all this means is that a number of entities beyond the defendant may have an interest in the final settlement. And many of them have to invest resources in monitoring the progress of the litigation. (This is not always the case. In smaller class actions or mass torts, the defendant may be effectively self-insured.)

Nagareda does address classwide settlements specifically: he considers them good enforcement mechanisms for bought peace. (This is, in fact, how Amchem and Ortiz wound up in front of the Supreme Court; each case involved a court that took legal shortcuts in order to resolve a mass tort through a classwide settlement.) The primary problem with class settlements, however, (as Judge Easterbrook once pointed out) is that there's no chance to go through the "pricing" phase. But what classwide settlements do offer is preclusive effect. If the settlement doesn't prevent further lawsuits, it's not of much value to the defendant. (And this helps to explain the rash of recent cases involving preclusion.)

In general, Nagareda's insights are useful for defense attorneys. The more a defense attorney understands the "business plan" that drives plaintiffs in aggregated litigation, the better equipped she is to defend against it.

Nagareda's book also helps to explain why attempts at true administrative settlements, such as the BP spill fund, are not more successful. The plaintiffs' trial bar has a powerful financial incentive to oppose more administrative settlement mechanisms. Those mechanism may be more efficient, and they may get more money to claimants in less time and with less conflict, but they do so at the expense of attorneys' fees.

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 "Hey man, I don't practice law. I talk on the phone." -- Richard Scruggs, on federal wiretap

This week, Class Action Countermeasures introduces another regular feature: book reviews. Once a month, I'll be reviewing a book that has some relation to class action litigation. The primary purpose of the review will be to determine what class-action lawyers can learn that will assist them in formulating class-action defense strategies. (I've done this once or twice before.) First up is The Fall of the House of Zeus: The Rise and Ruin of America's Most Powerful Trial Lawyer, by Curtis Wilkie.

The Fall of the House of Zeus tells the story of Richard Scruggs. Scruggs began his career as a trial attorney in Pascalouga, Mississippi. He became one of the most financially successful attorneys in the country by extracting huge settlements from both the asbestos and tobacco industries. And he ended his career as a felon, convicted for attempting to bribe a judge.

Early in his introduction, Wilkie describes his subject as:

a remarkable story of personal treachery, clandestine political skullduggery, enormous professional hatred within the legal community, a zealous prosecution--all with ramifications that extended to high levels in Washington.

Wilkie delivers on that promise. The book is a fascinating portrait of Mississippi backroom politics, the plaintiffs' trial bar, and a single man wrestling with the effects of sudden wealth and gradual drug addiction. While the book is definitely sympathetic towards Scruggs, it whitewashes neither the crimes he committed nor his motives for doing so.

That said, the title of the book is a misnomer: by his own admission, Scruggs was no "trial lawyer." He was first and foremost a dealmaker whose most common tactics included:

• making large campaign contributions to various judges and prosecutors in Mississippi; and
• coordinating plaintiffs' counsel on large cases, including paying a number of lawyers not to interfere with his litigation.

Scruggs arguably was not even effective in his chosen role. Some of what he did to extract large settlements was either unethical or outright illegal:

• He bought documents from whistleblowers in at least two cases. (He bought 1,500 pages from a Brown & Williamson paralegal in the tobacco litigation; and paid the Rigsby sisters to be "consultants" so he could use their documents against State Farm in Katrina-related litigation.)
• He paid hush money to lawyers and politicians (including some no-interest loans) in order to cover up some of his conduct.
• And, of course, he famously tried to bribe a judge.

As a result, the litigation tactics Wilkie does describe largely involve setting up large, profitable agreements rather than trying to establish facts in a court of law.

• Scruggs consolidated cases that linked "a few strong cases with hundreds of lesser claims" as a means of inducing settlements from large defendants.
• He used smaller cases as "discovery engines" for larger planned litigation.
• And he passed along documents he did uncover to prosecutors to fuel investigations that would maximize the pressure on defendants to settle.

Ultimately, as Wilkie tells it, Scruggs's dealmaking was his undoing. Many of his alliances split up over the division of fees. And the crime that ultimately sent him to jail--trying to bribe a judge--arose from an effort to influence litigation over one of his fee agreements.

So what can defense lawyers learn from this book? The primary lesson is that--far more than most defense lawyers--class action plaintiffs' practice involves multiple fronts. Plaintiffs who follow Scruggs's model must coordinate with local officials, other lawyers who want a share of their action, the local press, and local politicians. (This lines up with the extensive email traffic Scruggs exchanged with the Rendon Group.) Moreover, plaintiffs lawyers may not always engage in direct tactics. Scruggs extracted large settlements by doing just about everything BUT the traditional practice of law. Clearly, not every plaintiffs' lawyer will follow the Scruggs model, but as Scruggs's career--and Wilkie's account of it--show, the backroom dealmaker fills an important niche in the ecology of the plaintiffs' bar.

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As I've discussed before, there are few areas of law as polarized as class actions. The plaintiff and defense bars in class-action law rarely agree on anything, from the proper scope of Rule 23 to what a class action is in the first place. And I'm not the only one to have noticed this divide. Connecticut law professor Alexandra Lahav recently published an essay in the Fordham Law Review on "Two Views of the Class Action."

Lahav's essay could improve from more focus.  She winds up talking about two different pairs of competing views--one of class actions, and one of class-action lawyers lawyers--that don't line up perfectly themselves.

The first set of competing views she discusses are often called the "entity" and the "joinder" views of class actions. The entity view (often espoused by plaintiffs in briefing) argues that a class is a single entity that exists independently of the class representative. This label is often helpful for courts trying to certify a class, or lawyers seeking greater control over their case. (If a class is an entity, then there is little need to listen to a rebellious class representative, or even objectors.) By contrast, defense lawyers often invoke the joinder analogy to remind the court that a mere joinder device cannot and should not change the substantive rights of the parties.

The second set of competing views involve how to look at class-action lawyers. One school of thought looks at these lawyers as entrepreneurs, businessmen who conjure cases and then find plaintiffs to staff them; the others as private attorneys general who serve the public good for a profit.

Lahav's account of these two sets of competing views gets confused in a few places. For example, she describes both the entity and the entrepreneur tropes as defendants' views of class actions, even though defendants traditionally do not argue (or believe) that litigation classes are cohesive entities. Instead, they often see--and point out to the court--a loose collection of people with different problems and different claims, not all of equal merit. Similarly, while plaintiffs may on occasion argue that a class action is just a joinder device, they are far more likely to describe a class as a coherent entity that exists independently of the class representative.

Moreover, rather than really explore how these conflicting views have informed class-action doctrine, Lahav then embarks on a completely different discussion. Relying heavily on references to poets Wallace Stevens and Percy Shelley, and novelist Nikolai Gogol, she asks whether plaintiffs' lawyers are rogues harnessed for a useful purpose, or a redemptive force that deserves more respect. (Personally, If we're going to make poetry out of something as prosaic as lawyering, I'd prefer Anna Barbauld's approach myself.)

The point that Lahav is leading up to (after invoking Gogol's novel Dead Souls) is that the law often treats class-action lawyers as greedy men whose greed is harnessed for the public good. In Lahav's view, this is a problem, not because class-action lawyers may in fact step over the line, but because seeking to limit their wrongdoing apparently causes the problem in the first place.  As she puts it:

The lawyer is sometimes a rogue, but the more our system accepts this as true and seeks to harness the rogue, the more our system creates roguish behavior.

There are two problems with this final argument. First, literary references or no, Lahav doesn't explain how treating class actions as susceptible to abuse winds up creating those abuses, and that failure to identify how the process works undermines her credibility. It also means her logic could apply to anyone, including defendant corporations. By Lahav's logic, treating corporations like criminals by regulating them just encourages them to commit illegal acts--a conclusion I doubt she would agree with. And that's the second problem with Lahav's article: it provides a one-way ratchet that gives plaintiffs' lawyers the benefit of the doubt, but no one else. Courts, she argues, should view the class-action lawyer as "capable of redemption," but not the defendant (who should be deterred from exploiting others).

As I've explained before, law (not to mention legal strategy) works best when it recognizes that everyone has a little rogue in them. Corporations are capable of good and bad things, and so are the self-appointed cops who police them. Assuming that one side can do no right and the other can do no wrong very rarely leads to accurate descriptions or good policy outcomes; while it may encourage the side that can do no right to clean up its act, it usually results in the side that can do no wrong testing exactly how far it can go.

I'm not saying Lahav's essay is useless. The first half contains an interesting (if somewhat muddled) description of several rhetorical tropes used in class-action practice. I just wish that the second half had stuck with analyzing the rhetoric instead of indulging in it.

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 Brian Fitzpatrick's argument that courts should approve more fees for class action plaintiffs' lawyers has generated its share of discussion. And a few months ago, the Seventh Circuit weighed in (sort of), during an argument about fees for objectors in In re Trans Union Corp. Privacy Litigation.

Judge Posner (who has decided a number of class action appeals this year) wrote the opinion, and observed:

It is a curiosity of class action litigation that often there is greater ferocity in combat among the class lawyers over the allocation of attorneys' fees than there is between the class lawyers and the defendants. The contest among the lawyers is a zerosum game. But the contest between them and the defendants is a positive-sum game because the class lawyers are naturally very interested in the fee component of any settlement, while the defendants care only about the size of the settlement, including fees. So the lawyers may be willing to settle for less for the class if the defendants will help them obtain a generous fee award, and the defendants will be happy to help them if the sum of the fee award and the relief granted to the class is smaller than it would be if the class lawyers pressed for more generous relief for the class. ...

Indeed, class lawyers may try to fend off interlopers who oppose a proposed settlement as insufficiently generous to the class; and given the role of such interlopers in preventing cozy deals that favor class lawyers and defendants at the expense of class members, their requests for fees must not be slighted.

(Emphasis added.)  In this case, the original class action involved the leaking of confidential personal data. The appellant was an objector (Dawn Wheelahan) who had been awarded $2.7 million in fees after challenging the original Trans Union settlement. (Pre-objection, the lawyers were going to settle for $40 million--$20 million in cash and $20 million in in-kind relief. Post-objection, the case settled for $110 million--$75 million in cash, $35 million in in-kind relief.) Wheelahan argued that $2.7 million was not enough; she should have received $14 million--20% of the additional $70 million she got for the class.  And, in a twist peculiar to class actions:

She is not opposed by the class action defendant, Trans Union, because this is a "common fund" suit; attorneys' fees come out of the amount of damages awarded the class, and so Trans Union has no stake in the dispute over fees. Wheelahan's only opponents are some of the other class lawyers, who fear that an increase in the amount of fees awarded to her would come at their expense. They don't object to an increase in the total fees awarded, or indeed to an increase in the share awarded to her that would not reduce their fees. With the class members unrepresented and the defendant indifferent to the overall award of attorneys' fees, we must decide the appeal with limited assistance from an adversary presentation. But this is a standard dilemma in class action adjudication, as we noted at the outset, and may be unavoidable without elongating the litigation disproportionately to the stakes in the fee dispute.

(Emphasis added.) Much of Judge Posner's discussion focuses on the special master's method of determining fees in the case (which, in typical Posnerian fashion, contains an excellent summary of research on the subject). I won't further summarize an already-dense explanation, but I will highlight two comments the opinion makes on the special masters. First, the opinion points out that courts need not place much weight on the previous arrangement between class-action lawyers and plaintiffs:

The special master arrived at these figures by first determining the total amount of attorneys' fees that would be reasonable to award and then allocating that amount among the lawyers. He placed little weight on the contingent fee agreements between the lawyers and the "clients" (the named plaintiffs in the class actions), recognizing that named plaintiffs are usually cat's paws of the class lawyers.

(Emphasis added.) The opinion also tries to untangle the knotty question of how much value an objector adds to an improved settlement. Is it just the difference between the two settlements? Judge Posner thinks that may overstate the case:

In making these adjustments the special master was wrestling with a problem of joint causation. The final settlement was the result of the combined efforts of MDL counsel and of the other two class lawyers. The fact that these efforts were successive rather than simultaneous has no significance. The MDL counsel created an asset—the expected gain from the lawsuits— the value of which they did not realize. The efforts of the other lawyers enabled the full value to be obtained.

(Emphasis added.) All told, the opinion concludes that objectors' counsel was underpaid by approximately $1.4 million. In fact, it concludes that all of the attorneys may may have been underpaid, but only those who appealed (here, objector's counsel) are entitled to any extra money. Judge Posner is no stranger to the effects monetary incentives can have on litigants; here's hoping he's prepared for the logical consequence of that part of his ruling.

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 As I've written before, guessing at the motives and methods of plaintiffs' lawyers in class actions can be much like old-style Kremlinology. But every once in a while, we get a little more information. The most recent comes from University of Minnesota Law School professor Stephen Meili, who just published his article Collective Justice and Personal Gain? An Empirical Analysis of Consumer Class Action Lawyers and Named Plaintiffs in the Akron Law Review.

Professor Meili's methodology is not ideal: he basically just sent a series of open-ended questions to class-action plaintiffs and their attorneys, asking them about their perceptions of how a given case proceeded, and how fair the process was. As he admits, that means that no one talks about unsuccessful cases. Moreover, the self-reporting means that the plaintiffs' lawyers may try to make themselves sound more noble than they are otherwise. (For example, only 5 of 33 lawyers mentioned making money. There may be that many noble plaintiffs' attorneys, but they seem to disappear around the time they make fee requests.)

Nonetheless, because of its open-ended nature, Professor Meili's survey elicited some revealing statements from the plaintiffs attorneys, and he does not shy away from the implications of what those attorneys told him. Among them:

Unlike conventional plaintiffs' lawyers, class-action lawyers inflate the expectations of their clients.

[C]onsumer class action lawyers often deliberately inflate the expectations of their clients, encouraging them to look beyond individual monetary compensation and focus instead on relief for the entire class, which sometimes includes non-monetary awards. In this way, class action lawyers do more than merely manage their client's expectations, a well-documented process in individual litigation. Instead, they consciously urge their clients to expand those expectations. If their clients refuse to be so encouraged, the lawyers opt not to include them as named plaintiffs.

Class-action lawyers prefer ignorant clients because they are easier to control.

[I]t appears that in choosing a suitable class representative, consumer class action lawyers seek someone willing to represent large numbers of persons but who was unaware of such willingness before they talked to the lawyer. The lawyers find it easier to keep such named plaintiffs focused throughout the typically long class action process.

Class-action lawyers don't communicate with their clients.

This awareness of named plaintiff motivation is particularly noteworthy because most of the lawyers in the study said that they spend less time communicating with named plaintiffs than they do with their clients in individual cases.

What does these findings mean for defendants? They do confirm some of defense lawyers' suspicions. Class actions are usually manufactured cases, and it is really the lawyer driving the case, not the client. But the most disturbing conclusion is not that the lawyers are in the drivers' seat. After all, for many defense lawyers and judges, that is hardly news.   Instead, it is the finding that many class-action lawyers deliberately screen for the most ignorant and malleable clients, so that they'll be easier to control. In the day-to-day conduct of the litigation, this may not mean much. But should the parties try to reach a settlement, this means that the named plaintiff is more likely to serve the plaintiff attorneys' interests than those of the class. And that is exactly what courts try to guard against.

It also means that plaintiffs' counsel continue to treat the adequacy of their clients as a hurdle, rather than a requirement. As a result, as both zealous advocates and officers of the court, it is critical that defense lawyers probe the adequacy of the proposed class representative. In particular, defense attorneys should be asking:

• Was it the client's idea to bring the case as a class action?
• Was the client recruited to the case?
• How often does the client communicate with her lawyer?
• What were the client's expectations at the beginning of the litigation?

Defense counsel have long argued that ignorant plaintiffs are inadequate plaintiffs, often with little success. Professor Meili's study shows that, once again, defendants should not focus on the ignorance itself, but its effects. The reason ignorant plaintiffs are inadequate is not because they are ignorant, but because they lack the independence to stand up to their lawyers.

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Florida State law professor Elizabeth Chamblee Burch is the latest to weigh in on the problem of how to make sure class actions are adequately governed.  In an forthcoming article from the Vanderbilt Law Review, she asks what makes an optimal lead plaintiff in a securities class action.

Burch focuses on the the difficulties raised by what she refers to as plaintiffs' law firms "courting process," particularly the use of "pay to play" practices and investment monitoring agreements.  Her discussion of these issues is worth quoting at length:

After the PSLRA, plaintiffs’ law firms sought to maintain their competitive advantage by courting large institutions, developing repeat relationships with them, and encouraging them to serve as lead plaintiff. Law firms’ courting process may involve “pay-to-play” practices where plaintiffs’ law firms contribute to the political campaigns of those selecting counsel for public or labor pension funds and lobbying the officials who control public pension funds. Lobbyists encourage pension funds to serve as lead plaintiff and to then select the lobbyist’s law-firm employer as lead counsel. These practices forge repeat relationships and inhibit competition in ways that lack merit and transparency. And because other eligible institutions like banks, mutual funds, and insurance companies maintain commercial relationships with the defendants or defendants’ customers, public and union pension funds are the institutions that typically take on the lead-plaintiff role.

Law firms’ courting process also involves “portfolio monitoring,” where the law firm keeps abreast of the institution’s holdings and notifies it whenever it suffers a significant enough loss that it could serve as the lead plaintiff in a related class action. Portfolio monitoring is a preexisting contractual relationship between the lead plaintiff and class counsel. Preexisting relationships typically give courts pause, particularly when counsel has no relationship with other class members and no subclassing exists. But most courts find free portfolio monitoring in exchange for retaining the law firm unproblematic; they look for something more, like long-term friendships or familial relationships.Although courts have been slow to recognize it, portfolio monitoring is both widespread and troubling. The few courts who agree reason that the practice “creates a clear incentive for [the law firm] to discover ‘fraud’ in the investments it monitors” and thereby “fosters the very tendencies toward lawyer-driver litigation that the PSLRA was designed to curtail.” Plus, regularly depending on the same law firm makes it unlikely that institutions will bargain for lower attorneys’ fees or monitor trusted counsel. To be fair, some pension funds, such as MissPERS, use plaintiffs’ firms for free investment monitoring, but rely on multiple law firms and guarantee none that it will be selected as lead counsel. On one hand, portfolio monitoring is commendable—it encourages institutional investors to get involved, enforces substantive rights, and may uncover and deter fraud. But on the other, ongoing business relationships between the lead plaintiff and counsel appear improper, may cause counsel to maximize the institutional lead plaintiff’s return to the class’s detriment, and may encourage counsel to litigate in ways that establish favorable precedent for the institution.

(Emphases added.)  Burch has several suggestions for addressing these issues. Her most interesting is to recommend that securities class actions should be headed by plaintiff groups rather than lone plaintiffs, so long as the group reflects the diversity of the class.

Ideally, group members represent the class’s diverse interests such that when each member pursues her own self-interest, the group resembles a microcosm of the whole class.

Burch is not blind to the problems that plaintiffs' groups can pose. Nor is she a lone voice advocating for diversity. That said, she tends to be optimistic about how diverse stakeholders may interact in overseeing a class action. 

Put simply, class counsel should consult and take direction from the lead-plaintiff group on matters that implicate members’ values and litigation objectives or affect the case’s merits in much the same way that an attorney consults with her client in individual litigation. In short, if lead plaintiffs are to adequately represent class members’ interests, monitor the lawyers, and minimize agency costs, then, consistent with the PSLRA’s goal of increasing client control, they should have more decision-making authority.

While it would be helpful to know whether Burch is advocating a doctrinal or legislative reform (in other words, should courts just start enforcing this proposal, or does Congress need to amend the PSLRA?), the policy arguments she raises can prove useful for securities defense lawyers. At the very least, they exemplify a trend of continued concern about the adequacy of securities lead plaintiffs, and provide several examples of why one should not assume that institutional investors are always adequate lead plaintiffs.

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 Paul Karlsgodt of Classactionblawg.com got there first (in a post that should win "Title of the Month" hands-down), but Judge Posner's opinion yesterday denying rehearing (and announcing there will be no en banc rehearing) in Thorogood v. Sears Roebuck & Co. is still worth an extra post.  Not just because Judge Posner discusses the results of an informal poll of the panel's wives, not just because he cites a YouTube link of Simon Cowell, and not just because the ever-irreverent Above the Law is likely to feature the opinion as a classic benchslap.    

The primary reason to read the opinion is because it so thoroughly documents both the strategic choices plaintiffs' counsel may make, and the strategic incentives they face.  Some of this discussion is all the more credible because it comes from counsel's inadvertent disclosures:

Krislov says that “Sears’ resort to this Circuit for the preclusive shot is transparent forum shopping, looking for this Court’s derisory view of the claim to influence it into binding all class  members nationwide, because the Ninth Circuit’s standards are decidedly more favorable to plaintiffs’ claims.” This is what is known as chutzpah, since Krislov brought his copycat suit in California because, as he says unguardedly, “the Ninth Circuit’s standards are decidedly more favorable to plaintiffs claims.”

And some of the discussion is just the result of Judge Posner's typically prodigious research:

Krislov is concerned with harsh language in our opinion, but overstates the case when he decries “characterization of plaintiff class action lawyers as inherently corrupt and motivated primarily to sell out the class in order to gain large fees.” What we said was that the structure of class actions under Rule 23 of the federal rules gives class action lawyers an incentive to negotiate settlements that enrich themselves but give scant reward to class members, while at the same time the burden of responding to class plaintiffs’ discovery demands gives defendants an incentive to agree to early settlement that may treat the class action lawyers better than the class. Class action attorneys have an “inherent motivation” to enrich themselves at the expense of the class (and with the connivance of defendants), but motivation is not a synonym for action; any actual corruption or selling out is gauged case by case. The Boling letter is some indication that the present case is such a case. 

The criticisms in our opinion of the tactics employed by some class action lawyers are not criticisms made by judges alone, let alone by judges of the Seventh Circuit alone or members of this panel alone.

(Extensive citations omitted.)  I'll leave you with one further quote from the opinion, which comes after the extensive string cite I cut: 

Want more?  There is plenty more ...

Go, read the opinion.  It's a perfect starting point for understanding the strategic incentives plaintiffs' lawyers face.

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Today, The Class Action Playbook is available for sale.  Yesterday, I posed what is probably the biggest objection to buying the book: why would plaintiffs' lawyers be interested in what a pair of defense lawyers have to say bout class action?  So, from the introduction:

Our best answer is that we hope the proof is in the reading. In writing this book, we have aimed to provide an unbiased analysis of the strategic choices involved for both sides in class actions. To that end, we have tried not to speculate about plaintiffs or their motives. Our discussions of the plaintiff’s side of class-action litigation rely heavily on personal interviews with plaintiff’s lawyers, or statements or writing by plaintiff’s lawyers. We also have tried to be explicit about our assumptions and our biases.

In the end, we have either succeeded in providing an unbiased analysis or we have not. If we have, that should be reason enough to trust our analysis. If we have not, our biases still may make for useful reading. Defendants should get a good sense of strategy from their fellow-traveler authors, and plaintiffs should get an extensive view of how the other side thinks.

And what does that "unbiased approach" look like?

There is a deep ideological divide between plaintiffs’ and defense lawyers. Given the high stakes and high visibility of aggregated litigation, it is not surprising that class actions are controversial. Advocates see class-action litigation as a way for large numbers of victimized “Davids” to collectively obtain justice from a misbehaving “Goliath” when individualized lawsuits are economically impractical. Opponents see class-action litigation as a means by which profit-motivated lawyers exploit the in terrorum nature of an aggregated case to extort windfall settlements from unpopular companies or industries. The primary reason for these different caricatures of class actions is that plaintiffs and defendants live in worlds that are structured differently. (There are arguably different personality types separating most plaintiffs’ lawyers from most defendants’ lawyers, which result in each side approaching the risks of litigation in different ways. But it is difficult to say whether the structures attract the personality types, or are the product of them.)

In this book, we refrain from judging the motives of either side. Rather than argue about whether class actions prompt greedy plaintiff’s lawyers to extort nuisance settlements from blameless defendants, or empower socially conscious plaintiff’s lawyers to take on unethical corporations, we assume that some lawsuits are closer to the former caricature, and some to the latter. From a strategic standpoint, it matters less which side is in the right than which side is making the right moves. We will talk about goals and incentives, but those discussions are general and descriptive. Generally, plaintiffs’ counsel wants to win the largest possible recovery for his clients at the minimum possible expense, while defense counsel wants to put the litigation behind his client with a minimum of expense and effort.

Ideally, that approach should sound familiar to readers of this blog.  

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 With the exception of Supreme Court rulings or groundbreaking appellate opinions, there is little that counts as "breaking news" in the class-action world. But a lead-counsel appointment in the Southern District of New York has drawn so much coverage in the last twenty-four hours that it seems worth at least a brief discussion on a Friday morning.

The case is In re Gildan Activewear Inc. Securities Litigation. Judge Baer's order appoints class counsel, and imposes a diversity requirement on the plaintiffs' firms (Robbins Geller and Labaton Sucharow). The relevant language:

"WHEREAS this proposed class includes thousands of participants, both male and female, arguably from diverse backgrounds, and it is therefore important to all concerned that there is evidence of diversity, in terms of race and gender, in the class counsel I appoint, see In re J.P. Morgan Chase Cash Balance Litigation, 242 FRD 265, 277 (S.D.N.Y. 2007); it is hereby"

"ORDERED that Co-Lead Counsel, Robbins Geller Rudman & Dowd LLP and Labaton Sucharow LLP, shall make every effort to assign to this matter at least one minority lawyer and one woman lawyer with requisite experience; and it is further ..."

"ORDERED that the parties shall appear for a preliminary approval hearing on October 7, 2010, at 12:30 p.m., at which point Plaintiffs' compliance with the diversity requirement, as well as the other requirements listed here, will be evaluated ..."

(Emphasis added.)  This is not the first time Judge Baer has imposed this requirement. (And I'm not sure why this order has drawn more attention than the last one.) Nonetheless, it's clear that the discussion around this particular order raises at least three questions:

Can Judge Baer do this? Yes. Leaving aside the fact that he's a judge, he's got discretion to do something exactly like this according to Rule 23(g), which regulates the appointment of class counsel.  That rule, in full:

(g) Class Counsel.
(1) Appointing Class Counsel.
Unless a statute provides otherwise, a court that certifies a class must appoint class counsel. In appointing class counsel, the court:
(A) must consider:
(i) the work counsel has done in identifying or investigating potential claims in the action;
(ii) counsel's experience in handling class actions, other complex litigation, and the types of claims asserted in the action;
(iii) counsel's knowledge of the applicable law; and
(iv) the resources that counsel will commit to representing the class;
(B) may consider any other matter pertinent to counsel's ability to fairly and adequately represent the interests of the class;
(C) may order potential class counsel to provide information on any subject pertinent to the appointment and to propose terms for attorney's fees and nontaxable costs;
(D) may include in the appointing order provisions about the award of attorney's fees or nontaxable costs under Rule 23(h); and
(E) may make further orders in connection with the appointment.

Most lawyers focus on 23(g)(1)(A), which gives the factors they must meet, and there's nothing about racial or gender diversity there. But, 23(g)(1)(B) mentions that the Court "may consider any other matter pertinent to counsel's ability to fairly and adequately represent the interests of the class." This is the justification Judge Baer used back in 2007 in In re JP Morgan ("The proposed class includes thousands of Plan participants, both male and female, arguably from diverse racial and ethnic backgrounds. Therefore, I believe it is important to all concerned that there is evidence of diversity, in terms of race and gender, of any class counsel I appoint.") Class counsel are aware, at least on a visceral level, that this requirement can include almost anything.  So it would appear that Judge Baer has the discretion to do so.

Should he do this? That really depends on one's political outlook. I'm a practicing class action lawyer; I'm more interested in strategy than policy. But, it appears that the strongest arguments on each side are probably:

• "Public lawyers" ought to be diverse. Governments everywhere have minority contracting requirements or opportunities. Why should courts be any different when they appoint class counsel? Many class-action lawyers already claim to be "public lawyers." [http://www.classactioncountermeasures.com/2010/06/articles/certification-1/are-class-actions-public-or-private-cases/] If so, there's no reason not to impose some of the same conditions we impose on government contractors.
• Diversity doesn't have much to do with securities law. In re JP Morgan (which was an age discrimination and ERISA case) the link between the diversity of counsel and the diversity of the class was at least marginally stronger. (Although Judge Baer did not require the firms to provide any aged lawyers.) It's harder to say why one's gender or racial background would affect their understanding of the securities laws, particularly when their clients are institutional investors, as opposed to individuals. And my guess is that, to the extent that either firm opposes the order, this is the line of argument they follow.

What does it mean that he did this? First, Judge Baer's order may tip the balance to Robbins Geller being lead counsel. A (very) quick trawl through both Robbins Geller's and Labaton Sucharow's websites shows that Robbins Geller has the requisite levels of diversity. Labaton, however, does not appear to have any female partners or senior partners. (It does have two female "Of Counsel.") If Judge Baer decides that partnership is the "requisite level of experience" (no guarantee), Labaton may have difficulty meeting that criterion.

Second, given how competitive plaintiffs' counsel already are in seeking lead counsel appointments, Judge Baer's order changes the game, at least for firms in the class-action-rich Southern District of New York. Expect to see a number of plaintiffs' firms reevaluating their hiring and attorney-development policies. And I would also guess we may see some firms use their diverse teams as a selling point in lead-counsel battles.

Finally, Judge Baer's order suggests a possible adequacy-of-counsel argument for defendants. Given the personal and political volatility of diversity debates, it's an argument that counsel should deploy carefully. But, if a firm finds itself defending a Title VII class action in the Southern District of New York, it may well be worth it to bring plaintiffs' counsel's lack of diversity to the court's attention.

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John J. Mearsheimer is one of the foremost modern proponents of the theory of "offensive realism" in international relations. While he has written extensively on foreign policy and strategy, the best summation of his theory is in his 2001 book The Tragedy of Great Power Politics.  The theory, in a nutshell, is that great powers (like the United States and China) are ultimately doomed to resolve their differences in violent clashes. Why?

The structure of the international system forces states which seek only to be secure nonetheless to act aggressively towards each other. Three features of the international system combine to cause states to fear one another: 1) the absence of a central authority that sits above states and can protect them from each other, 2) the fact that states always have some offensive military capability, and 3) the fact that states can never be certain about other states' intentions. Given this fear--which can never be wholly eliminated--states recognize that the more powerful they are relative to their rivals, the better their chances of survival.

According to Mearsheimer, this fear for survival inevitably pushes great powers into violent conflict with each other, and pursuing noble goals like spreading democracy will not prevent the tragic outcome.

This gloomy view of international relations is based on three core beliefs. First, realists, like liberals, treat states as the principal actors in world politics. Realists focus mainly on great powers, however, because these states dominate and shape international politics and they also cause the deadliest wars. Second, realists believe that the behavior of great powers is influenced mainly by their external environment, not by their internal characteristics. The structure of the international system, which all states must deal with, largely shapes their foreign policies. Realists tend not to draw sharp distinctions between 'good' and 'bad' states, because all great powers act according to the same logic regardless of their culture, political systems, or who runs the government. It is therefore difficult to discriminate against states, save for differences in relative power. In essence, great powers are like billiard balls that vary only in size.

Mearsheimer explains the implications of his theory throughout the book, and while I don't agree with all his conclusions, he makes a persuasive case.  I'd heartily recommend it to anyone looking for a thoughtful take on international relations.

So why am I talking about this book in a blog about class-action strategy? Am I so dense as to argue that class-action plaintiffs and defendants are like great powers in the international system? Almost. I think Mearsheimer's theory of "offensive realism" offers at least two insights to class-action defendants.

The first insight is that one doesn't necessarily need to know what the other is actually thinking to make informed guesses about the strategy it will employ. I've written before about how, to defendants, plaintiffs' lawyers' motives often seem as opaque as the Soviet Union's did during the Cold War.  As a result, it is worth looking at the constraints that plaintiffs' lawyers face when trying to guess how they might act. Looking at the structure of the plaintiffs' world (instead of at their motives) also helps defendants avoid the mistakes that can come with lazy demonizing. It doesn't matter whether plaintiffs' lawyers are "good" or "bad," what matters is how they react to their environment.

And that's the second insight offensive realism can provide. I'm not so foolish as to argue that Mearsheimer's theory describes class-action plaintiffs and defendants. But I do think it comes awfully close to describing class-action plaintiffs by themselves. (For a dissenting metaphor, see the Manhattan Institute's various Trial Lawyers Inc. reports.) There is no central authority that regulates plaintiffs' lawyers. In fact, a common complaint among defendants is that class-action plaintiffs' lawyers are not even regulated by their clients. Every plaintiffs' firm has some offensive capability (the ability to file lawsuits). And entrepreneurial plaintiffs' counsel often must compete fiercely against each other. Given the need to grow or die, it's no wonder that class-action firms file lawsuits that outside observers may consider meritless or overblown. The analogy is far from perfect, but frankly, it's not a bad place to start.

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 Adequacy can be a difficult concept to get one's head around. And, as a result, courts and parties have found a number of different ways to frame the question of whether a named plaintiff is an adequate class representative. They can look at whether the named plaintiff knows enough about the case to oversee her counsel (although some courts are sometimes reluctant to disqualify a plaintiff on these grounds). Courts can also ask whether the plaintiff has enough independence from counsel to oversee them when their interests may diverge from the class's.   And sometimes courts can just look at the personal character of the named plaintiff. 
Another way of framing the issue is to look at whether the named plaintiff is committed to protecting the interests of the class. What do I mean by "committed"? Take the case of Buettgen v. Harless, 263 F.R.D. 378 (N.D. Tex. 2009). Buettgen was a securities case, involving allegations that the defendants had, through various misrepresentations, artificially inflated the stock price of phone directory company Idearc, Inc. A number of different plaintiffs filed class actions against Idearc and its officers, including a group of individual investors calling themselves the "Buettgen Group," another group of individual investors calling themselves the "Lyman Group," and two institutional funds, one Swiss and one American.

Each of these four plaintiffs filed a motion to be considered as lead plaintiff for the consolidated class actions, a position that carries with it control of the litigation, and a larger share of fees for plaintiffs' counsel. The court, in deciding the motions, pointed out that the Private Securities Litigation Reform Act (PSLRA):

"requires a court to presume that the most adequate plaintiff is the person or group of persons that:
(1) filed the complaint or a motion in response to a notice;
(2) has the largest financial interest in the relief sought by the class; and
(3) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.
Id. § 78u-4(a)(3)(B)(iii)(I).

This presumption can be rebutted only by proof offered by a class member that the presumptively most adequate plaintiff:
(aa) will not fairly and adequately protect the interests of the class; or
(bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class.
Id. § 78u-4(a)(3)(B)(iii)(II)."

In this case, all four plaintiffs had filed the appropriate motions. The court ranked the plaintiffs by the size of their losses (the Buettgen Group had sustained the largest loss, followed by the Swiss fund, the Lyman Group, and the American fund). But when the court looked at each plaintiff's adequacy, the analysis got more difficult. The Swiss fund was vulnerable to unique defenses, and therefore not adequate. But the Court also expressed reservations about the two investor groups, because neither was cohesive enough to represent the class. (Why would cohesiveness matter? Because if a group is not cohesive, then it is likely that it was put together by plaintiffs' counsel to meet the "largest financial interest" prong of the PSLRA, implying that the counsel controlled the plaintiffs.) As the court observed:

"[T]he Buettgen Group fails to present evidence that the members of the group have ever communicated in a meaningful way. For example, instead of explaining how they are prepared to work together to manage this litigation on behalf of the proposed class, the Buettgen Group submitted essentially boilerplate certifications discussing their stock purchases and alleged losses. ... Additionally, the Buettgen Group's motion is undermined by the group's invitation to the Court to hand-pick one of its constituents to serve as lead plaintiff if the Court deems the Buettgen Group inappropriate. Buettgen Group Such a willingness to abandon the group only suggests how loosely it was put together. ...
Likewise, the Lyman Group suffers from the same grouping issues that apply to the Buettgen Group. The Lyman Group consists of two individuals that provided similar boilerplate certifications as the Buettgen Group. Also, the Lyman Group states, "if the Court is inclined to appoint only one Lead Plaintiff, each of the Movants moves in the alternative for appointment individually as Lead Plaintiff." As stated above, when a group shows willingness to abandon the group the Court is lead to believe the group was only loosely put together. "

(Internal quotations and citations omitted, emphasis added.)

What does this ruling mean for defendants? It provides another way of looking at adequacy of named plaintiffs. If the named plaintiffs are not sufficiently committed to the litigation to talk to each other, then it is unlikely that they can oversee their counsel independently. And that is a good reason to find them to be inadequate class representatives.

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I’ve written before that plaintiffs’ lawyers consider public relations to be an important weapon in their arsenal. But how, exactly, do they use it when they’re involved in a case?

Recently, a collection of emails between the former Scruggs Katrina Group (the firm former lawyers Richard and Zach Scruggs put together to prosecute class-action and qui tam claims related to Hurricane Katrina) and PR firm The Rendon Group were made public, providing an inside look at how the relationship can work. (For the story on why these emails were made public, see Rendon Group, Inc. v. Rigsby, 2010 U.S. Dist. LEXIS 60138 (D.D.C. Jun. 17, 2010).) The emails were first made available by Mississippi’s YallPolitics blog, and have also drawn comment from the bloggers at Overlawyered and The Insurance Coverage Blog. (In fact, the Insurance Coverage Blog features prominently in the emails themselves.)

So, assuming the normal warnings in a case like this (every case is unique, blogger may not have perfect information, be careful what you read on the internet …), what can we learn from these emails?  (Citations are to Bates numbers in the collection.)

• Public relations does not mean just press relations. It should come as no surprise that many of these emails between a plaintiffs’ firm and a PR firm concerned newspaper coverage. But some involved less traditional media. As Overlawyered and The Insurance Coverage Blog note, some of the emails discussed ways of countering the ICB's coverage of SKG.  And, more interesting, some emails reported on how Rendon employees built a favorable Wikipedia page on qui tam plaintiffs the Rigsby sisters. (TRG 000957)
• Negotiating around public officials can be difficult. I’ve written before about how plaintiffs’ lawyers seem to have a love-hate relationship with public officials and politicians. On the one hand, they can be a valuable source of information and pressure.  On the other, they can have different, conflicting agendas. As one of the PR executives describes it: "This is a lawsuit. The game is that the lawyers and judge surprise attack each other constantly. Throw in a Senator, Congressman, Attorney General, Governor and about 2 dozen major news outlets....much less State Farm's PR engine...you never know what's going to happen or when." (TRG 001118)
• Plaintiffs' lawyers have differing agendas. This should come as no surprise to most defense lawyers. But watching the mechanics from the inside is always instructive. As Scruggs himself puts it: "Maybe I should resume trying to build plaintiff lawyer consensus, although SF has hitherto opposed it, probably because there were already too many moving parts. Senter wants peace--not process, e.g., our class bringing only the latter. Walker would be given orders to broker peace, altho Merlin and the like want only piece and Judy/Anita only blood." (TRG 001145)
• Sometimes, the PR target is not the defendant, but the judge. It’s no secret that plaintiffs frequently look for intelligence on judges. (And there are emails in this collection that discuss the judge’s age, his class action experience, and the fact that he “Gets overturned a lot.” But what may be surprising is that plaintiffs also use public relations as a way of putting pressure on the judiciary to rule their way. As one email from Rendon reveals, "We think SF should not be the focus but the judiciary." (TRG 001598) What does that mean? From the same email: “Getting the Wash Post, Legal Times, National Law Journal etc to be interested in the issue. Maybe court TV... client wants John Roberts to be aware of the dysfunction.”

What’s the lesson we can learn from this? For class-action plaintiffs, litigation can be a multi-front war. While the defendants may not choose to fight on every front, they should at least be aware of what those fronts are. 

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When we talk about complex litigation, we usually refer to the legal issues involved in joining a large number of varied claims. But the legal debates are not the only issue that makes complex litigation so complicated; sometimes it’s just the lawyers. Because class actions involve such high stakes, they often require more than just one attorney or one law firm. On the defense side, lawyers may find themselves dealing with discovery counsel, with co-counsel, or with large client teams. And, because of differing roles, differing client agendas, or just plain old competition, those lawyers may not always work together smoothly. 

So, how can lawyers on each side best work with their co-counsel? We can glean some insight from a working paper from business professors Kristin Behfar, Ray Friedman, and Jeanne Brett.  “The Team Negotiation Challenge: Defining and Managing the Internal Challenges of Negotiating Teams” draws on open-ended interviews with a number of business executives to identify the issues that arise within teams. While the paper focuses specifically on negotiation within teams engaged in putting together a business deal, the dynamics will ring familiar to any lawyer who has ever had to coordinate a joint scheduling order, negotiate a common settlement, or file a joint brief.

Among the professors’ findings:

• Some of the largest challenges are posed by scheduling. In any large organization, simply coming up with the time to discuss issues can itself require a separate round of negotiations. (See also most lawyers’ Outlook inboxes.)
• Confusion over roles may create conflict. Not a surprising result, but still worth some attention. Among the issues the authors identify were negotiation among team members that must be ratified by separate department heads (read “each law firms’ partners).
• Personality conflicts are the greatest danger to negotiation. The authors found that teams that suffered relationship conflicts were less likely to be prepared for negotiations (since they were spending their time on the conflict instead of the substantive issues), suffered more stress and anxiety, and were more likely to escalate conflicts with the other side.
• Substantive differences make negotiation easier. One might not expect this to be the case, but it actually makes logical sense. If a team must negotiate substantive differences before presenting its public stance, it must – at least temporarily – resolve any toxic personality conflicts. (This jibes with the old saw that “Academic politics are so vicious precisely because the stakes are so small.”)

There are any number of takeaways from the article (its advice to develop nonverbal signals for “public” negotiations is particularly interesting), but the most important conclusion is one that I recognize from some of the mentors I’ve been blessed with over the years: reducing internal drama makes a litigation team more effective.

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A number of legal blogs have already noted a study published last month on attorneys’ ability to predict the outcomes of their cases. Titled “Insight or Wishful: Lawyers’ Ability to Predict Case Outcomes," it found that lawyers systematically overestimate their chances of success in litigation.

The design of the study was elegant. The authors (from Charles Sturt University, University of Gothenburg, John Jay College of Criminal Justice, and the University of California) asked 481 lawyers to predict the success of a matter they were currently working on. (The lawyers gave the matters code names to preserve client confidentiality.) Then, the authors waited. After the matters had been concluded, they went back and asked the lawyers how the cases had gone. Comparing the outcomes to the predictions yielded the result that has prompted all the discussion. In general, the lawyers predicted between 64% and 70% confidence in succeeding at their clients’ goals, but they actually succeeded only about 54% of the time.

This result should not be surprising, even to most attorneys. The profession attracts overconfident personalities. (I don’t know about you, but it seemed at least 75% of my law school class entered expecting to graduate in the top 10%.) Several of the specific findings are particularly interesting. Namely:

• More experienced attorneys are not immune from the effect. In fact, experienced attorneys were as likely to be overconfident as they were to estimate their success correctly.
• Attorneys got overconfident as they got closer to trial. This result makes sense. Leaving aside any investment (financial or emotional) the attorney has made in the case as it progresses, most lawyers refine their case to its most persuasive as they approach trial.  When you're that intent on selling your story, you run the risk of buying into it yourself.
• Looking at reasons why they might not succeed did not affect attorneys' overconfidence. What’s really surprising in this result was that attorneys rarely considered either their client’s culpability or their own comparative abilities as possible reasons they might not succeed.

What does all this have to do with class action strategy? For defendants, it may counsel launching strong challenges against the case earlier rather than later. The logic behind that recommendation: class-action plaintiffs’ lawyers are not immune from these effects. In fact, since they tend to be entrepreneurs who have to sell their partners and clients on a legal theory, they may be even more conditioned to overestimate their chances of success. (Lawyers in the mold of Bill Lerach may be particularly prone to this problem.) As a result, these lawyers are less likely to respond to reasonable settlement offers, or to discovery that reveals flaws in their cases. That means that the feedback they are most likely to respond to will come directly from the court. In other words, strong, early merits challenges are not just a defendant’s best chance to win on the merits, but also to settle on fair terms.

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Back in 2001, Bruce G. Murphy, a California attorney, contacted the San Diego office of then-firm Milberg Weiss. He claimed to have several clients who had bought stock in Tut Systems, a technology company that had announced it was not going to meet its earning estimates for the fourth quarter of 2000. Murphy, who had provided clients for Milberg’s securities class actions before, wanted to know if the firm wished to pursue the case and pay him his customary 10% referral fee.

Four years later, Lerach Coughlin (which had broken off from Milberg) settled a securities class action against Tut Systems. But Lerach did not pay Murphy.

Murphy filed an application for attorneys’ fees in the trial court, claiming that he was contractually entitled to fees for referring clients. The trial court rejected the application. So Murphy appealed the application to the Ninth Circuit, which tersely rejected his arguments. In re Tut Systems, Inc. Securities Litigation,No. 07-16282, 2009 WL 725104 (9th Cir. Mar. 19, 2009)

So what's remarkable about the case? It provides another glimpse into how cases are brought, and the structure of class-action plaintiffs' consortia. Most opinions relating to class actions operate under the legal fiction that class actions, like other litigation, involve an injured plaintiff who seeks out a lawyer and then sues the defendant. In many ways, that fiction is a useful one -- it allows courts to focus on the legal issues of the case, instead of constantly refereeing disputes defendants might raise about whether the class counsel are really acting in their putative client's best interests. (The court will ultimately decide that issue when it decides whether to certify the class.)

But that fiction is not always accurate. Class actions rarely arise from an injured plaintiff seeking out counsel. Instead, counsel finds the basis for a class-action suit, and then searches for clients. And, as Tut Systems fee dispute illustrates, there are different kinds of counsel in the class-action ecosystem. One kind is the Referrer: counsel who may not have much Rule 23 or subject-matter expertise, but who -- for whatever reason -- are good at finding clients. Referrers may have contractual arrangements with counsel who specialize in securities class actions to provide them with possible clients. Despite Bill Lerach's famous pronouncement that class-action litigation requires no clients, clients are essential to a class-action lawsuit. But, as In re Tut Systems indicates, the Referrer faces a number of risks -- simply finding a client and figuring out whether they have a claim may not be enough to eventually earn fees. And, as this case implies, given the intense competition among plaintiffs’ firms, the Referrer may not be able to rely on any contract with the ultimate Class Counsel to collect fees, either.

What’s the lesson here for defendants? The plaintiffs’ side of the case is rarely monolithic. While often the infighting among plaintiffs’ firms won’t affect the defense, it is important to know when disputes may challenge the resolution of a case.

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A little while ago, I reviewed Circle of Greed, the story of William Lerach’s rise and fall in the world of the class-action plaintiffs’ bar. The posts on the subject drew some criticism from some plaintiffs’ lawyers, but I still think it was worth it to see how at least one plaintiffs’ counsel treated his class actions.

But Circle of Greed is not the only book to have been published taking an “inside the plaintiffs” view of class-action practice. Another, Inside a Class Action: The Holocaust and the Swiss Banks, by Jane Schapiro, looks at the litigation that then then-Cohen Milstein lawyer Michael Hausfeld filed (pro bono) against various Swiss banks for alleged mismanagement of funds during World War II. While the litigation did not progress very far before it was settled, Schapiro’s account of Hausfeld’s behind-the-scenes maneuvering provides a number of insights for defense counsel:

• Being first to file can bring disproportionate leverage for some plaintiffs. Plaintiffs’ attorney Ed Fagan filed before Hausfeld, in the same district he was intending to. Throughout the litigation, Fagan and Hausfeld clashed repeatedly over tactical decisions (such as whether to include compelling but difficult-to-prove slave labor claims).
• Government action can cause headaches for plaintiffs as well as defendants. While Schapiro does describe some coordination between the plaintiffs’ consortium and New York Senator Alfonse D’Amato, she also takes pains to describe how the consortium would hold its breath over various State Department actions, hoping that State would not interfere (inadvertently or otherwise) with the prosecution of the lawsuit. (The lawyers wound up having the same problems with some non-governmental organizations that became involved in the case.)
• The more lawyers involved, the harder it is to coordinate litigation. Schapiro reports that throughout the litigation Hausfeld, Fagan, and other attorneys would worry every time a new attorney was added to the Executive Committee. The lawyers attracted to this high-profile litigation tended to have large egos and conflicting agendas, and coordinating among them grew exponentially with each new addition.
• Settlement is still the endgame for plaintiffs. Given the size of this litigation, Schapiro reports that the plaintiffs seriously talked settlement at various preliminary stages, including during jurisdictional motions. Hausfeld was convinced for a long time that the mere threat of discovery would be enough induce the banks to negotiate.

Schapiro’s book isn’t perfect. For one thing, she seems unsure whether she’s writing about Holocaust victims or the workings of a class-action lawsuit, an ambiguity that tends to undercut the objectivity of her reporting as well as the power of her advocacy. But lawyers looking for an account of how driven lawyers interact in a single piece of high-profile litigation can find a lot of resources here.

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 Officially, I'm still on hiatus.  (Although the author-reviewed copy edits for The Class Action Playbook went in to the publisher yesterday.)  But today's article in the Wall Street Journal: "Lawyers Wrestle Over Driver's Seat in Litigation Against Toyota" deserves a brief post, if only to highlight some of the unusual qualifications plaintiffs' lawyers are touting in their applications to get lead counsel status on what they believe to be a very high-reward case.  Among other accomplishments that might make for a good lead counsel:

• Daniel Becnel Jr. donated a kidney to his brother, and can still work amicably with his ex-wife.
• Mike Eidson once got the key to Miami Beach.  
• Anita Jaskot speaks Polish, and is single.  
• Richard Arsenault knows Arianna Huffington, Kenneth Starr, former President Bill Clinton, and the late President Gerald R. Ford.

All of these facts were disclosed in the lawyers' applications to Judge Selna.  What do these personal tidbits tell us?  One, in the words of Hollywood screenwriter William Goldman, "Nobody knows anything."  Each of these lawyers is guessing at what might set them apart in a crowded field, but at the end of the day, that's all they can do -- guess.  Two, people will brag on some strange things.

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Over the last week, I provided a brief review of the new biography of disgraced (but largely successful) class-action plaintiff’s lawyer William Lerach, and a discussion of some of his psychological quirks that one might encounter in some other plaintiffs’ lawyers. Today, I’m closing out my discussion of Circle of Greed by looking at some of the strategies that class-action plaintiffs’ lawyers employ that may not make it into reported cases. As with the “psychology” post, I’ve included page references to the book for those following along at home.

• Smaller settled cases fund larger, riskier cases. One business strategy that plaintiffs’ firms employ is to take on a number of smaller cases that may settle more easily (say, because they involve straightforward issues or technical statutory violations). These settlements provide a steady income stream that can fund larger, riskier cases (like Lerach’s pursuit of Enron). (165)
• Smaller settlements with minor defendants can fund pursuit of larger targets. This same tactic applies within a larger case. In a case with multiple defendants, if some defendants are willing to settle early, the plaintiffs may be able to leverage larger settlements from later settlors. (380)
• Publicity is a major tool for plaintiffs’ lawyers. Lerach viewed leaking information to the media as a valid tactic for putting pressure on defendants. (177) And often, a sustained publicity campaign would also help him win battles to be appointed lead counsel. (330)
• Making the fight personal can be an effective tool. Lerach’s teams would sometimes file fraud claims against directors so that they could not invoke their D&O insurance policies, putting their personal finances on the line. (162) He would also seek to make trial as embarrassing as possible for the defendants, in order to increase the leverage in settlement discussions. (116) In one case, he went so far as to retain a fellow trial counsel whom he viewed as particularly obnoxious in depositions, specifically so that he would get under the defendants’ skin, provoking them into making errors in their testimony. (120)
• The strongest plaintiffs’ cases are often the simplest. Lerach was notorious within his own firm for “the chart”: a simple presentation that contrasted a defendant’s stock price with the allegedly dishonest statements its executives made. (116) It was a compelling trial exhibit, settlement tool, and organizing principle for Milberg’s (and later, Lerach Coughlin’s) stock-drop cases. And the primary reason it was compelling is that it laid out a simple, hard-to-contradict story.

None of these strategies were unique to Lerach. And while some may seem like “dirty pool” to some defendants, it’s important to keep in mind that they serve larger purposes – some are part of the business model, some are part of the competition among plaintiffs’ lawyers, and some are aimed more at settlement than winning an immediate tactical battle. The better a class-action defendant understands the strategies the other side employs, the better it will be able to counter them. And while it may not have been their primary goal, Patrick Dillon and Carl M. Cannon have given defendants a good resource for deepening that understanding.

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On Tuesday, I provided a brief review of the Lerach biography Circle of Greed. Today, I want to focus on what some of the stories about Lerach can reveal about the psychology of the class-action plaintiffs’ lawyer.

I freely concede that this is about as unscientific an inquiry as one can make. For better or for worse, William Lerach was an extreme case. (He was extremely successful plaintiffs’ lawyers, but the extremes he went to also landed him in jail for two years.) So, many plaintiffs’ lawyers may have some of these characteristics, but likely not to the same degree as Lerach did. Nonetheless, the insight into Lerach’s psychology provides a few insights into what may make one kind of successful plaintiffs’ lawyer (page cites are from the book):

• Plaintiffs’ lawyers are competitive, even with each other. Lerach’s “firm so dominated the field of class action securities lawsuits that ‘if other firms did not come to us with California cases, they very much risked being excluded altogether from these cases.’” (89)
• You don’t have to be paranoid to be a plaintiff’s lawyer, but it helps. “Lerach's mind was conditioned to think of the possible grift first, the innocent explanation second.” (79)
• Plaintiffs’ lawyers are not above making the fight personal. After Lerach had clashed with defense expert Daniel Fischel of Lexecon, he authorized “opposition research” to build a dossier on Fischel, worrying even his partner, Mel Weiss. (Disclosure: Daniel Fischel was my Corporations professor in law school.) (160)
• Sometimes, very personal. In a case against the Washington Public Power Supply System, Weiss and Fischel crossed paths. Fischel held out his hand and introduced himself. “‘I know who you are,’ Weiss sneered, ‘And I will destroy you.’” (164)

Why bother to look at how two plaintiffs’ lawyers (Lerach and Weiss) looked at the world? Because some of what we learn may apply more broadly. Milberg Weiss was not the only plaintiffs’ firm that played hardball with other plaintiffs’ firms. Nor is Lerach likely to be the only plaintiffs’ lawyer who winds up viewing all corporations with suspicion. (Much as many defense lawyers are eventually conditioned to view plaintiffs’ lawyers with suspicion.) Understanding what drives one’s adversary allows one to better respond to their strategies, whether in the courtroom or across a settlement table.

Next Tuesday, I’ll take one last look at this book, and pull out some of the more common tactics class-action plaintiffs (including Lerach) have used.
 

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I’ve written before about how – the odd beauty contest aside – the plaintiffs’ bar often seems as opaque as the Cold War Kremlin to defense lawyers. Journalists Patrick Dillon and Carl M. Cannon have done their part for class-action glasnost, however, with their new biography of William Lerach, Circle of Greed: The Spectactular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees. 

Bill Lerach (pronounced LEER-ach) – who was to become one of the most feared lawyers in the class-action plaintiffs’ bar – was born in Pittsburgh, and graduated from the University of Pittsburgh Law School. (While he was there, he wrote a law-review comment critical of class-action settlements.) He started his career at Reed Smith, before joining forces with Mel Weiss of Milberg Weiss, and moving to San Diego to open Milberg’s west coast office.  (That office later split to form Lerach Coughlin, now Coughlin Stoia.)

From that point, Lerach’s career took off. He was at the forefront of a number of big moments in class-action litigation. He perfected the pre-PLSRA securities suit. He helped develop the “fraud-on-the-market” theory that allows plaintiffs to presume reliance in certain kinds of securities class actions. He was a pioneer in developing “scheme liability.  And he took on a number of large corporations, including NuCorp, Worldcom, and Enron. He was poised to sue contracting giant Halliburton when he finally pled guilty to criminal conspiracy.

Ultimately, Lerach was undone by his own excesses. In his race to the courthouse to be the first to file, he had kickback agreements with several named plaintiffs. He paid one of his experts on contingency (a practice discouraged by most ethics rules). His early strategies gave rise to the Private Securities Litigation Reform Act (sometimes known colloquially as the “Get Lerach” Act). And his lawsuit against Lexecon consultant (and University of Chicago law professor) Daniel Fischel ultimately backfired and cost him and his firm more than $50 million in cash.

The authors tell the story well. They’re prone to easy moralizing in places (both against Lerach and the corporate defendants he sued), but for the most part they confine themselves to the facts they have unearthed. And they do provide an informative portrait of the development of much of today’s securities class-action practice.

The book’s biggest draw for class-action practitioners, however, is that it offers an invaluable, up-close portrait of one of the leading plaintiffs’ lawyers, and even an occasional look into plaintiffs’ tactics and strategies.

What lessons can we learn from this biography? Come back on Thursday to find out.

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For the defendant, lead-plaintiff motions in class actions can often seem like a small sideshow to the real litigation. (Indeed, in many kinds of class actions, where only a single firm or consortium has brought a lawsuit, the lead-plaintiff motion may only be pro forma.) For plaintiffs however – particularly securities plaintiffs – lead-plaintiff motions lie somewhere between corporate merger and bloodsport. The consequences to winning or losing these motions can have effects for years, and the efforts to win have landed more than one attorney in ethical trouble, and sometimes prison.

But how important is the lead-plaintiff motion really? NYU Professor Stephen Choi offers one look (based on a survey of lead-plaintiff motions between 2003 and 2005) in a working paper entitled Motions for Lead Plaintiff in Securities Class Actions. His conclusion? Getting appointed lead plaintiff is still critically important to plaintiffs’ attorneys, primarily because it allows them to command higher fees.

Professor Choi also found that plaintiffs’ counsel – particularly experienced attorneys with lots of repeat interactions with co-counsel – will enter into side deals to determine who will be lead plaintiff, and with it, lead plaintiffs’ counsel. As a result, the plaintiffs with the largest losses are not always appointed lead plaintiff, and their attorneys are often able to command higher fees for fewer hours worked.

What use is Professor Choi’s study to the securities class-action defendant? The paper does provide valuable intelligence on how plaintiffs' counsel operate, something that defendants always need more of.  But, more importantly, Professor Choi’s data suggests a possible argument at class certification. His data on fees and hours worked can operate as a rough proxy for client supervision. If there is evidence that plaintiffs’ counsel cut a side deal to determine who would be lead plaintiff (for example, if an investor with larger losses stepped aside to allow another investor represented by a larger firm to be lead plaintiff), that may indicate that the lead plaintiff does not have the independence to adequately oversee its attorneys. In that case, the defendant may argue that the named plaintiff is not an adequate representative of the class.

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Last month, when the Florida SBA held its “beauty contest,” a number of plaintiffs’ firms put their internal workings on display in the hopes of securing its business. At the time, I noted that many of these firms offered investment monitoring services to their clients. In return for this free “investment monitoring,” the investor presumably would make the plaintiff’s firm its counsel in any securities-fraud suits it ended up filing.

Described that way, the monitoring agreement sounds like a win-win. The institutional investor gets a watchdog, and the plaintiff’s firm gets a potential lead plaintiff. The Southern District of New York (no stranger to securities class actions) saw it differently.

In Iron Workers Local No. 25 Pension Fund v. Credit-Based Asset Servicing & Securitization, LLC, plaintiffs represented by two different firms – Bernstein Litowitz and Coughlin Stoia – competed to be named lead plaintiffs for a securities class action. During the course of determining which fund should be lead plaintiff,

the Court was made aware of an arrangement between the Iron Workers Fund and its counsel, Coughlin Stoia Geller Rudman & Robbins LLP ("Coughlin Stoia"), that cast in doubt the adequacy of the Fund to serve as lead plaintiff in any event. … As Dennis Kramer, the Fund's administrator, testified:

Q. [by the Court] ... what you've chosen to enter into, as I understand it, is a contract where the monitoring counsel will also be the counsel who represents you if a lawsuit is brought, is that right?
A. [by Mr. Kramer] Yes, that's true.
Q. And the only way they get paid is if they bring such a lawsuit and recover, is that right?
A. Correct.

Going far beyond any traditional contingency arrangement of which the Court is aware, this practice, on its face, creates a clear incentive for Coughlin Stoia to discover "fraud" in the investments it monitors and to recommend to the Fund's non-lawyer administrator (and, through him, to the trustees) that the Fund, at no cost to itself, bring a class action lawsuit. In other words, the practice fosters the very tendencies toward lawyer-driver litigation that the PSLRA was designed to curtail.

(Internal citation omitted, emphasis added.) The court invited further briefing on adequacy, as well as on the ethical implications of the agreement. While the briefing cited several cases in which courts had commented favorably on the monitoring agreements (and an affidavit condoning the practice by ethics guru Geoffrey Hazard), the court remained unconvinced, and awarded lead plaintiff status to Bernstein Litowitz’s client. (The court noted that Bernstein Litowitz also offered investment monitoring, but did so without the same explicit quid pro quo.)

Investment monitoring agreements are still common. And most plaintiffs’ firms prize their reputations for integrity as critical for winning lead counsel slots, so they’re likely to try to avoid the appearance of conflict. But, that said, the S.D.N.Y.’s unease suggests that defense counsel may find ammunition for opposing class certification if they probe further into the nature of the monitoring agreement in each case.

 

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Last week, I wrote that in class actions, divining the motives of plaintiffs’ firms can feel like Kremlinology; this week it seems more like missology. The Florida State Board of Administration (which oversees Florida’s retirement funds) has conducted a “beauty contest” for its next securities counsel, and done so with what various observers have called unparalleled transparency. The result is a trove of publicly-available data on the securities plaintiffs’ bar’s practices and priorities.

The American Lawyer’s Litigation Daily managed to obtain the various submissions from the securities firms that bid for the SBA’s business. And the submissions – from noted plaintiffs' firms Coughlin Stoia, Lieff Cabraser, Barrack Rodos & Racine, Berman DeValerio, Bernstein Liebhard, Bernstein Litowitz, Entwistle & Capucci, Granet & Eisenhoffer, Kaplan Fox, Labaton Sucharow, and Pomerantz Haudek – reveal a number of interesting facts about the competing firms. Among them:

• A number of plaintiffs’ firms have their own proprietary software systems for monitoring their clients’ investments. When an investment loses value, and the firm can correlate it to some fraud or other mismanagement, they recommend filing a lawsuit.
• In addition to monitoring investments, a number of these firms employ teams of in-house forensic accountants. At least one (Lieff Cabraser) also employs a former FBI agent for “identifying and conducting interviews with witnesses and performing other investigative tasks.”
• In response to the SBA’s question about litigation financing, most firms answered that they were sufficiently capitalized to handle motions practice, discovery, and the retention of experts.
• The SBA is very concerned with dismissal rates of lawsuits.
• Despite the fact that they weren’t asked, a number of firms discussed the number of times that they had been appointed Lead Counsel or – more interesting – the number of times they had won Lead Counsel motions.

There are a number of inferences defense firms can draw from the information in these submissions. Among them:

• Intelligence is very important to plaintiffs’ firms. Each of these firms invests a lot of money in monitoring stock prices and performing preliminary research
• For plaintiffs, the Motion to Dismiss is the critical motion. Because class-action defense firms want to rid themselves of a case early and completely, they often structure their defense around each of the dispositive motions that occur in a class action, starting with the motion to dismiss, but including the certification motion and summary judgment. Securities plaintiffs and their lawyers really emphasize the 12(b)(6) motion.
• Plaintiffs’ counsel are subject to intense competition. The other motion that the various firms tout is the Motion for Lead Counsel, which indicates that this is another landmark. (The intense investment in pre-lawsuit research also suggests intense competition to be “first to file.”)
• Reputation is paramount. Firms that compete regularly to represent public pension funds must work extremely hard to avoid the appearance of impropriety. (This beauty contest offers two examples. One firm was anonymously accused of various shady practices – including diverting cy pres settlement funds to a partner’s synagogue – into which the SBA is looking. In addition, Coughlin Stoia’s response to questions on restructuring and ethics issues labors to avoid mentioning founding partner William Lerach’s legal difficulties.)
• These firms’ business models are built around settlement. When touting their “wins” each of these firms promoted settlements that had resulted in large payments, as opposed to trial wins. This is no surprise (very few securities class actions go to trial), but it is helpful to remember that securities class-action practice is less about trial victory than it is about leveraging a successful settlement.

These aren’t universal observations. These are the firms at the top of the food chain, so their practices will not be the same as other plaintiffs’ firms. Also, these were submissions for beauty contests, which – as defense lawyers know – require a firm to put its best face forward. Still, knowing the structural differences between plaintiff and defense firms can be instructive in figuring out how best to respond to plaintiffs.

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 Despite the amount of time defense counsel spend handling class actions, one aspect often continues to frustrate analysis – plaintiffs’ counsel. Studying how plaintiffs’ counsel operate in class actions (which is, of course, essential to opposing them in individual litigation) can sometimes feel like Kremlinology, or reading tea leaves. Since plaintiffs’ counsel have a strong interest in presenting their best possible face to the world – and defendants often feel strong distrust of plaintiffs’ PR – defense counsel risk predicting the moves of a caricature, rather than a fully-fleshed opponent.

Fortunately, a number of academics have begun to examine the ways in which plaintiffs’ counsel interact, find clients, and build their cases. One of the more prolific scholars of class-action practice, Stephen Choi, has teamed with longtime co-author A.C. Pritchard and judicial clerk Drew T. Johnson-Skinner to perform an analysis of “pay to play” practices among plaintiffs’ counsel and state pension funds. 

As Choi and company describe it, since the passage of the Private Securities Litigation Reform Act (which heavily favors institutional investors over individual investors as class representatives, on the theory that they are more likely to be independent of class counsel):

Most of the institutional investors that have agreed to serve as lead plaintiffs have been government-sponsored pension funds. Many of these funds are managed directly by politicians, such as state comptrollers, who must campaign to retain their current positions, or may have designs on higher offices. Alternatively, these funds are managed by political appointees, who typically owe their position to the state’s governor. The presence of political influence over these funds naturally raises the question of whether law firms are making political contributions to the politicians who wield that influence in order to enhance their chances of being selected to represent the pension funds. Simply put, are law firms buying lead counsel status with campaign contributions, i.e., do class action lawyers pay to play?

(Emphasis added.) Their conclusion? Yes. Class-action lawyers do. And firms that appear to win their work as a result of “pay to play” practices generally receive higher attorneys’ fees than those that don’t.

So what are the strategic implications of this finding? For defendants, Choi and company’s analysis implies that it's worth serving discovery exploring the various relationships plaintiffs’ counsel may have had, even with larger institutional investors. Commentators (and courts) had previously presumed that institutional investors would be more adequate than smaller clients because they had the incentive to oversee counsel (because they had a larger stake in the litigation), and the investing knowledge required to do it effectively. However, Choi and company's analysis implies that pension funds that accept “pay to play” contributions may lack the financial independence to oversee class counsel. If they lack that independence, they may not be adequate fiduciaries of the interests of the class. And that's a powerful argument against certifying a class.

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