Opinion ID: 555766
Heading Depth: 2
Heading Rank: 2

Heading: Should Jurisdiction Have Been Exercised Here?

Text: 19 It is within this framework that we examine the idiosyncrasies of the case at bar. Here, plaintiffs' counsel abjured a claim for fees under the common benefit doctrine, instead negotiating the arrangement which we have described. There was no actual agreement as to the specific amount G-P would pay, only a clear sailing agreement: G-P would not contest the petition and would pay any sum up to $2,000,000 awarded by the district court. 7 Appellants then asked the court, in conjunction with its required consideration of their motion for leave to discontinue the class action, Fed.R.Civ.P. 23(e), to decide the matter of fees. Such an undertaking was certainly within the court's equitable jurisdiction even in the absence of a common fund, see supra Part II(A); and there are compelling reasons why courts should ordinarily review all fee agreements negotiated ancillary to class action settlements. The district court should have done so in this instance. 20 Over a decade ago, we first spoke about the important nexus between judicial scrutiny and the avoidance of excessive or undeserved fee awards in the class action environment. Furtado v. Bishop, 635 F.2d 915, 919 (1st Cir.1980). Since then, the fear that class actions will prove less beneficial to class members than to their attorneys has been often voiced by concerned courts, e.g., Piambino v. Bailey (Piambino II ), 757 F.2d 1112, 1143-44 (11th Cir.1985), cert. denied, 476 U.S. 1169, 106 S.Ct. 2889, 90 L.Ed.2d 976 (1986), and periodically bolstered by empirical studies, e.g., Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan.L.Rev. 497 (1991); Rosenberg & Shavell, A Model in Which Suits are Brought for Their Nuisance Value, 5 Int'l Rev.L. & Econ. 3 (1985). The problem has two aspects: extortion (that is, the prosecution of strike suits) and collusion (that is, the tension which necessarily arises between class members and class counsel when settlements and attorneys' fees are negotiated simultaneously). While the conflict between a class and its attorneys may be most stark where a common fund is created and the fee award comes out of, and thus directly reduces, the class recovery, there is also a conflict inherent in cases like this one, where fees are paid by a quondam adversary from its own funds--the danger being that the lawyers might urge a class settlement at a low figure or on a less-than-optimal basis in exchange for red-carpet treatment on fees. See Saylor v. Lindsley, 456 F.2d 896, 900-01 (2d Cir.1972); see also Coffee, The Unfaithful Champion: The Plaintiff as Monitor in Shareholder Litigation, 48 Law & Contemp.Probs. 5, 26-33 (1985). It is because of the potential risk that plaintiffs' attorneys and defendants will team up to further parochial interests at the expense of the class that the Rule 23(e) protocol employed by several circuits explicitly includes scrutinizing settlements for indicia of collusion, see, e.g., Plummer v. Chemical Bank, 668 F.2d 654, 658 (2d Cir.1982); Pettway v. American Cast Iron Pipe Co., 576 F.2d 1157, 1169, 1215-16 (5th Cir.), cert. denied, 439 U.S. 1115, 99 S.Ct. 1020, 59 L.Ed.2d 74 (1978), including collusive fee settlements. E.g., Ficalora v. Lockheed California Co., 751 F.2d 995, 997 (9th Cir.1985). We approve the protocol and believe it can logically be extended to the situation at hand. 21 Here, as in any similar case, G-P's agreement not to contest fees up to a stated maximum exacerbated the potential conflict of interest between the plaintiff class and class counsel. See Malchman v. Davis, 761 F.2d 893, 906-08 (2d Cir.1985) (Newman, J., concurring), cert. denied, 475 U.S. 1143, 106 S.Ct. 1798, 90 L.Ed.2d 343 (1986); In re WICAT Secur. Litigation, 671 F.Supp. 726, 729 n. 1 (D.Utah 1987). Moreover, timing is crucial to a tender offer and any delay can be fatal. See Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 853 (1st Cir.1988); San Francisco Real Estate Investors v. Real Estate Invest. Trust, 701 F.2d 1000, 1002-03 (1st Cir.1983). We think the district court was constrained to recognize as a practical matter that the lawyers were in a position to coerce a fee agreement from G-P regardless of whether there was any merit to their claim against the increased price of the shares. Payment of a fee--even a fee reaching $2,000,000--would be a relative pittance to G-P when contrasted with the ominous prospect of a multi-billion-dollar tender offer faltering on the very brink of success. While we do not in any way imply that either collusion or extortion took place here, the scenario was such as to suggest, strongly, that the fee request be placed under the microscope of judicial scrutiny. 22 This course was particularly indicated because of the presence of the clear sailing agreement. Such a clause by its nature deprives the court of the advantages of the adversary process. The source of the proposed payment renders it improbable that class members will come forward to challenge the reasonableness of the requested fee. Meanwhile, the payor is bound by contract not to contest the application. The absence of adversariness makes heightened judicial oversight of this type of agreement highly desirable. Furthermore, the very existence of a clear sailing provision increases the likelihood that class counsel will have bargained away something of value to the class. See Malchman, 761 F.2d at 908 (Newman, J., concurring) (It is unlikely that a defendant will gratuitously accede to the plaintiffs' request for a 'clear sailing' clause without obtaining something in return. That something will normally be at the expense of the plaintiff class.). We believe it to be self-evident that the inclusion of a clear sailing clause in a fee application should put a court on its guard, not lull it into aloofness. 8 Cf. Note, Abuse in Plaintiff Class Action Settlements: The Need for a Guardian During Pretrial Settlement Negotiations, 84 Mich.L.Rev. 308, 322 (1985). To the extent that the court below felt that the parties' accord relieved it of any obligation to scrutinize the fee arrangement, it was wrong.