Brian Fitzpatrick (of "Objector Blackmail" fame) has published another article in the University of Pennsylvania Law Review asking the provocative question: are class-action lawyers paid too little? His provocative answer: yes they are. According to Fitzpatrick, in small-stakes class actions, lawyers should collect a 100% contingency fee. What’s his justification? An argument he refers to as "insurance-deterrence theory." Fitzpatrick assumes that any money that goes to class-action lawyers serves a deterrence function, because not only does it cost the defendant money, it also funds further opposition to corporate wrongdoing. (Fitzpatrick is not the only person to make this kind of argument; many plaintiffs’ lawyers and academics argue that class actions primarily serve as a public deterrent to corporate wrongdoing.) He also assumes that, if a harm is too small for a class member to reasonably buy insurance to prevent, then that money is better spent on the "deterrence" of paying the class lawyer than the "insurance" of compensating the class member.
Fitzpatrick dismisses most arguments to cap fees (for example, that class actions exist to compensate class members rather than enrich lawyers, or that giving plaintiffs’ lawyers further incentives to file questionable cases might lead to further abuse) as "political." However, even leaving aside these arguments, Fitzpatrick’s argument runs afoul of the basic structure of Rule 23.
- 100% fees make inadequate settlements. Rule 23(e) requires a settlement to be "fair, reasonable, and adequate." One way the court measures these criteria is by determining whether a proposed settlement represents good value to the proposed class. A class settlement that provided the members with nothing, and the lawyers with everything would be unlikely to pass this test. (It also would not pass the settlement-approval requirements of the Class Action Fairness Act. If courts are legally required to scrutinize settlements that give class members only coupons, then they certainly can’t rubber-stamp settlements that give the lawyers everything and the class nothing.)
- 100% fees require inadequate class representatives. Fitzpatrick’s proposal is also flawed because there is no reasonable class member that would willingly agree to forgo any possibility of recovery so that her counsel could be paid more. In essence, Fitzpatricks proposal relies on a class representative that would be willing to say "I understand I was defrauded for $100, but instead of getting that money back, I’d rather you just gave it all to my lawyer. And I’m confident everyone else like me will feel the same way." For many courts, that kind of statement would serve as evidence that the class representative was not sufficiently independent of her counsel.
- 100% fees indicate inadequate class counsel. Under Rule 23(g), "Class counsel must fairly and adequately represent the interests of the class." That means that they must watch out for the class’s best interest, not their own. From that standpoint, a 100% fee clearly does not look out for the best interests of the proposed class instead of the lawyers.
One has to admire Fitzpatrick’s chutzpah; agree or not, he’s made a bold proposal. But he’s completely ignored the existing Rule 23 requirements to get there. As it turns out, Fitzpatrick’s proposal is inadequate, in every sense of the word.