Auctioning Class Settlements

Abstract Although class actions promise better deterrence at a lower cost, they are infected with problems that can keep them from delivering on this promise. One of these problems occurs when the agents for the class--the class representative and class counsel--advance their own interests at the expense of the class. Controlling agency cost, which often manifests itself at the time of settlement, has been the impetus behind a number of class action reform proposals. This Article develops a proposal that, in conjunction with reforms in fee structure and opt-out rights, controls agency costs at the time of settlement. The idea is to allow the court, once a settlement has been achieved, to put the class's claims up for auction, with the settlement acting as a reserve price. An entity that outbids the settlement becomes owner of the class's claims and may continue to pursue the case against the defendant. A successful auction results in more compensation for the class. On the other hand, if no bids are received, the court has evidence that the settlement was fair. The prospect of a settlement auction also deters class counsel and the defendant from negotiating a sweetheart deal that sells out the class. The Article works through a series of theoretical and practical issues in settlement auctions, including the standards that a court should use to evaluate bids, the limitations on who may bid, and ways to encourage the emergence of an auction market. TABLE OF CONTENTS Introduction I. Potential and Pitfalls in Class Litigation II. Ensuring Fair Settlements III. Practical Aspects of Settlement Auctions A. The Auction's Purpose B. Bidding 1. Standards for Bids 2. Partial Bids 3. Settlements with Injunctive Relief 4. Making Payment C. Bidders D. The Emergence of an Auction Market E. The Timing of Opt-Outs F. Apportioning Fees Conclusion Introduction The cases and literature on class actions contain some radical ideas. Among them are auctioning the class's claims to the highest bidder; (1) auctioning the position of class counsel to the lowest responsible bidder; (2) employing third-party financiers, who take a share of any class settlement in return for providing funds to prosecute the case; (3) and handing over the victims' small-stakes claims to a charity or advocacy group. (4) All of these ideas have two premises at their foundation. First, class actions are valuable because they can achieve significant deterrence, especially in small-value cases for which individual litigation is not an option. (5) Second, class actions are dangerous because individual plaintiffs have either limited capacity or an insufficient financial stake to monitor the work of their agents--the class representatives and class counsel. (6) Without monitoring, representatives or counsel may engage in self-dealing, reaping a large recovery or fee for themselves while settling the claims of class members for pennies on the dollar. (7) The trick is to harness the deterrence potential of class actions while slashing agency costs to a minimum. Auctioning the position of class counsel seeks to control agency costs directly by subjecting attorneys' fees to market competition. (8) The other three proposals--auctioning the class's claims, using third-party financing, and giving the right to recover on the class's claims to a charity or advocacy group--control agency costs indirectly by steering the claims into the hands of a single person (a bidder, a financier, or a charity) with a sufficient stake to monitor counsel effectively. (9) This Article suggests a simple strategy to control agency costs that blends aspects of all four approaches. 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. …