The Allocation Problem in Multiple-Claimant Representations

Abstract:     
Multiple-claimant representations - class actions and other group lawsuits - pose two principal-agent problems: Shirking (failure to maximize the aggregate recovery) and misallocation (distribution of the aggregate recovery other than according to the relative value of claims). Clients have dealt with these problems separately, using contingent percentage fees to motivate lawyers to maximize the aggregate recovery and monitoring devices (disclosure requirements, settlement vetoes, and third-party review) to encourage appropriate allocations.

The scholarly literature has proceeded on the premise that monitoring devices are needed to police misallocations, because the fee calculus cannot do the entire job. This paper shows that this premise is mistaken and that its consequence has been to misdirect our understanding of the importance of information problems and bargaining costs in attorney-client relationships. In fact, it is relatively straightforward, as a mathematical matter, to design a two-part contingent fee arrangement that incentivizes a lawyer to both maximize an aggregate recovery and allocate it according to relative claim values. The failure of the market for multiple-claimant representations to generate fee arrangements of this type therefore reflects the operation of empirical factors, not the inherent limits of contingent fees.

We believe the principal barriers are information and bargaining costs. Two-part contingent fee arrangements require more information than claimants or attorneys are likely to possess and require more expensive negotiations than the monitoring devices the market actually employs. Monitoring devices are thus cheaper substitutes for more refined contingent fee arrangements, rather than unique solutions to allocation issues.

Keywords: Attorneys fees, contingency fees, principal-agent, allocation, class actions, aggregate settlements

Working Paper Series