EVENTS

Date:	Friday, February 20, 2004
Time:	3:00 PM -- 4:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

February 2004
Have Attorney's Fees Risen in Class Action Settlements?

Professor Theodore Eisenberg discussed his new article "Attorney's Fees in Class Action Settlements: An Empirical Study" (coauthored with Geoffrey Miller), which argues that attorney's fees have not been growing over the past decade, contrary to conventional wisdom.  Eisenberg's research suggests that the general assumption that attorneys receive about one-third of the amount awarded to plaintiffs in class actions greatly exaggerates actual fees.  The discussants critiqued the paper's statistical methods and conclusions at a February 20 AEI event.

Theodore Eisenberg
Cornell Law School

We wanted to write a paper that would help judges assess fees in common fund cases. We used the same universe of cases that judges have ready access to; and while published opinions are, in some senses, a nonrandom sample of cases, they are certainly the appropriate sample for learning about legal doctrine. We used two major data sets: our own, based on Geoff Miller's reading of every case he could find for ten years, and Class Action Reports, which has been in the business of collecting class action data for many years.  Most of the results that we find are consistent, with their awards being a bit higher, their sample being a bit more dominated by securities cases than ours is.

Fee-shifting cases tend to be civil rights, consumer law, or employment discrimination cases where federal or state statutes dictate the method of computing the fee.  They also tend to be cases with much lower awards than the mass class action cases, and so the fees tend to be much higher. The mean is 37 percent. Looking at the non-fee-shifting cases, we see that there the mean is 21.9 percent, giving very little support to the standard one-third of the reward contingency fee notion. The median is 23.2 percent, and there is no class of cases, except the two civil rights cases, in which fees get to even the 30-percent range.

Looking at the time trend in recoveries, there is an upward trend from 1995 to 1999, but the median recovery in millions in 2002 was the same as it was in 1994. The major story that emerged from the data was the incredibly strong relation between the fee amount and the client recovery.  Another important result is the scaling effect.  As the client recovery goes up, the percent recovered by the lawyer goes down.  Therefore, aggregated actions producing a larger recovery for the clients result in the lawyers earning less.

Courts and lawyers often spend many hours calculating fees by the loadstar method. The lawyers figure out their hours, the court scrutinizes them and attempts a calculation.  It is elaborate and time-consuming, and judges must hate serving as accountants.  But we found that basing compensation on the clients' recovery results in better models explaining the level of the fee award to the lawyer. That suggests that courts and lawyers can save some time by simply asking, "What did you recover for your clients?" 

In terms of jurisdiction, we found that although state courts are regarded as tort and class action hell, in fact, all else being equal, federal courts are actually awarding significantly higher fees than state courts in class actions. 

Paul Rubin
Emory University

Most of my comments are about issues that are either not addressed or questions that are not answered. First of all, the time period-why start with 1993?  If these are class actions where settlements were too high, they went up in the '80s, became too high in the '90s, and then leveled off. We could still have a policy problem, but a study looking at just a ten-year period might not pick it up.

A second problem is the lack of any information about the number of cases.  We do not know if it has been going up or going down. The paper makes judgments about trends in fees and trends in relief based on its own sample.  And based on that same sample, it seems to me it could have made some inference or evidence about the number of cases per year, a very important variable, and one that is simply not addressed.

A third point: in two places, there are troublesome quotes referring to public belief or perception.  Neither of these statements is sourced.  Lawyers are more famous than economists for giving sources, but in both of these cases, the authors are addressing what they view as the popular or policy perception of problems without grounding them in verifiable reality. That is important because Footnote 43 refers to "a sudden rise in jury awards, as well as increased risk of class action." So the one source that is offered for public opinion (a newspaper article) addresses not only higher awards, but higher numbers of cases-data that, as I noted before, the paper does not include. 

Another important issue is the comparison between state and federal cases.  In the world of cases, there are more state than federal, and within that world, state cases are less likely to be reported unless they are appealed.  So perhaps a higher percentage of state cases are appealed than are the federal cases.  The data might suggest a correlation between the state and appellate cases, but no mention of such a possibility is made in the paper.

John Beisner
O'Melveny & Myers

I want to start by complimenting the study.  I think that this effort should be applauded, and with respect to the analysis of the federal courts, it is an appropriate approach to learning what fee amounts are out there.  The problem that I have comes with the attempt to compare what is going on in federal courts with what is going on in state courts.  I think that there are some real issues as to whether the study appropriately analyzes that comparison.

The authors' hypothesis is that fees may be higher in state courts because counsel can file in remote jurisdictions with few judges and significant potential home-court advantage.  These attorneys likely select state-court jurisdictions that they believe will be generous with fee awards. (They may also consider the likelihood of a reverse auction, in which a court would approve a suit-ending settlement and fee at the lowest possible cost to defendants.)  So one would expect, coming from this hypothesis, that the data analysis would be focused on those courts which have come to be known as magnet state courts.

However, if you look at the Westlaw and Lexus research source, one of the problems is that neither contains trial-court decisions for most jurisdictions.  That data set includes the federal-court decisions from all fifty states and the territories-but if you look on the state side, there are only a handful of jurisdictions whose trial-court decisions are reported on Westlaw and Lexus at all.  If you think about the state-court systems that have been identified in other research as being magnets for class actions, those states are excluded from the research: Alabama, Arkansas, California, Florida, Illinois (home of Madison County), Louisiana, Oklahoma, South Carolina, Texas, West Virginia, etc.  I really question whether the authors have looked at any significant amount of data that would address their hypothesis.

The Class Action Reports data, presents a similar issue.  The total number of cases in that study is 630.  Only sixty-seven of those were from state courts, around ten percent.  And if you look through all sixty-seven of the state-court settlements included, they do not include cases from the magnet-court jurisdictions we were talking about.  Ten of these cases come from the Delaware Chancellery Court, which handles largely securities cases that have their own particular baggage.  But perhaps the most interesting piece of the Class Action Reports data is that they excluded class settlements that were coupon settlements.  In short, the cases in which you have the greatest risk of the lawyers getting all of the money from the settlement and the consumers getting little or nothing were not included in the study at all.

Why didn't the authors look at the House and Senate reports concerning state-court settlements that those two committees have found to be abusive?  If you just took fifty of those settlements, and added them to the data from the Class Action Reports materials, the mean attorney's fee at that point moves up to around 58 percent. That result would have to raise real questions about any conclusions that state courts are managing the attorney's fee issue better than federal courts in terms of the amounts that are being awarded.

I would not advocate an analysis that would view the congressional compilations as being comprehensive-but these two data sets that were used in this study, can hardly be called comprehensive either because they excluded all of the abusive settlements.

AEI research assistant Kate Rick prepared this summary.