Control of conflicts of interest in class-action suits

This paper has presented a simple model of conflicts of interest in class litigations. An agent/attorney represents a number of principals each interested only in maximizing the remedy personal to herself. The agent acts to maximize his own return which depends on the aggregate award. He (in conjunction with the defendant) must propose a settlement. The court, with knowledge of the preferences of class members but ignorant of the value of the claim, must decide whether to accept or reject the proposed settlement. The analysis has been more suggestive than conclusive. While one may object to the particular characterization of acceptable settlements or find the model of the class attorney's choice of proposed settlement too naive, these simple devices do illuminate a variety of perplexing legal and economic questions. First, the model provides insight into the general management problems of class actions. Characterizing the class action as a problem of allocating common costs suggests criteria for class certification. Courts should examine carefully the relation of joinder to the costs of litigation. Similarly, the analysis of the selection of proposed settlements by attorney and defendant suggest that attorney's fees should be calculated on the basis of the total value of the settlement and not on the monetary aspect of the award. Second, and more significantly, the model underscores the importance of the asymmetry of information that exists between court and litigants. Thus, Corollary 3.1 establishes that only substantive rules that require implausible amounts of judicial knowledge will constrain attorneys to propose acceptable settlements. This result is likely to withstand a variety of changes in the narrow model in which it is proven. For instance, it is unlikely to depend significantly on any compensation rule that depends only on the values delivered to the subclasses. Nor should a more sophisticated analysis of the choice of settlement proposal greatly alter the conclusion. Indeed, one expects that the conclusion depends little on the class-action context; substantive rules frequently require courts to act on information they do not have. Third, the model gives some insight into the procedural rules used by courts. Most obviously, the voting and intervention rules may serve in part to mitigate the informational asymmetry noted above. Intervention rules may develop additional information for the court about the value of the claims. Voting rules may reveal the preferences of various subclasses in those instances when the preferences are somewhat obscure, such as when injunctive relief is involved. The investigation of intervention rules, moreover, indicates some possible lines of further study. The interaction among legal allowability, economic feasibility, and the standing rule governing which objections are valid for which objectors is sufficiently rich to suggest that stronger results from the efficacy of intervention rules might be derived. Furthermore, intervention rules are widespread in litigation; the characterization of intervention used here may generalize to other legal contexts. Fourth, the attorney compensation rules were not carefully analyzed. As the litigation progresses the attorney learns about the value of the claim he has brought. It may be that sophisticated compensation rules that exploit the process of gaining information may better constrain the attorney than the simple rule used here. Finally, the analysis may direct attention to two distinct but potentially rich areas of economic research. As noted in the introduction, class actions constitute only one instance of a broad class of situations in which many principals are represented by a single agent. Before we understand this general class of problems, it may be necessary to investigate in some detail selected instances of it. Similarly, such investigation should demonstrate that economic analysis can illuminate legal concerns of fairness and equity as well as legal concerns for efficiency. This paper was written while the author was a Fellow at the Center for Advanced Study in the Behavioral Sciences, for whose support, the support of the Andrew W. Mellon Foundation, and that of the New York University Law School Research Program the author is grateful.