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A sizable literature on class actions has long suggested that the plaintiff’s attorney is an independent entrepreneur over whom the class members have only limited control. But the analysis cannot stop here. Why does this state of affairs exist? This essay will give two connected answers to this question as a prelude to evaluating what reforms are likely to work:

(1) The rules of "litigation governance" differ diametrically from those of corporate governance. An entrepreneur seeking capital for a business venture must convince investors to "opt in" and buy the securities of the entrepreneur's start-up corporation. In contrast, a plaintiffs attorney can file a class action which, if successful, will entitle this legal entrepreneur to a mandatory court-awarded fee, and class members can escape inclusion only by "opting out.” This stark difference between an "opt in" rule for corporate governance and an "opt out" rule for litigation governance explains, at least in part, why agency costs are higher in the latter context.

(2) The market for class action counsel has long been characterized by relatively weak competition. To be sure, some competition exists, but, as explained later, it is today fought, not for the loyalty of class members, but rather over the choice of the lead plaintiff.

Brief and incomplete as these two assertions are, they frame important policy questions. Because the "opt out" rule for class actions gives plaintiffs attorneys much of their bargaining leverage in class actions, it is not easily modified or discarded. However, it also implies imperfect accountability and high agency costs because class members did not select their attorney, did not choose to sue, and were not necessarily even aware of the existence of the action. Thus, the usual vocabulary used to describe the attorney/client relationship fits only awkwardly with this joint venture in which the attorney represents a class that has not retained the attorney in return for a basically predictable share of the recovery that the court (and not the class) will award if the action settles. Still, what alternative is there? Can we design alternative institutional arrangements that will reduce the agency costs surrounding reliance on the attorney/entrepreneur who today dominates class action practice? This essay's answer is that by encouraging opt outs, public policy can stimulate greater competition and compel class attorneys to become more faithful champions.


Law | Securities Law