It’s a matter of conventional wisdom that class action settlements rarely benefit absent class members as much as they could. Despite a valid fear of either explicit collusion or bad incentives, courts will often rubber-stamp class settlements that provide wide releases and lucrative attorneys’ fees, but little value to the absent class member. And, over the years, there have been a number of proposals for addressing this issue.
Professor Tidmarsh’s proposal, in a nutshell:
When the parties in a class action arrive at a settlement, the court should put the settlement up for auction. If third parties bid more for the case than the settlement offer, the proceeds of the highest bid are distributed to the class. Ownership of the class’s claims shifts to the winning bidder, who has an incentive to monitor counsel while continuing to press the case against the defendant.
While this proposal allows a “winning bidder” to reap the excess value of the settlement (while offering some of that surplus to the class), Professor Tidmarsh believes that the real benefit will be the effect on the plaintiffs’ and defendant’s incentives:
Faced with the prospect of being outbid by others, and thus foreclosed from realizing a full fee for the work put into the case, counsel has little incentive to agree to a sweetheart deal. The same is true of the defendant, who cannot be assured of escaping the litigation unless it pays fair value for the class’s claims.
Professor Tidmarsh also delves into a number of the possible logistical issues to such an auction, such as timing and funding. (Oddly, he doesn’t really explain what transaction costs might result from administering the auction, although given his analysis, one can largely infer them.)
The primary issue to note is that this isn’t too far off from the current process of objection, where a class member will object that the terms of the auction are not generous enough, and, if successful at convincing the court, can collect fees for adding value to the settlement. Objectors, however, rarely receive kudos. So one has to ask the question, why doesn’t the objection process have the salutary effect Professor Tidmarsh ascribes to his settlement auction?