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.