Is the Price Right? An Empirical Study of Fee-Setting in Securities Class Actions

Abstract

Every year, fee awards enable millions of people to obtain access to justice and strengthen the deterrent effect of the law by motivating lawyers to handle class actions. But little research exists on why judges award the amounts they do or whether they size fee awards correctly. The process remains a black box. Through a detailed study of 431 securities class actions that settled in federal district courts from 2007 through 2012, this Article presents the first empirical study to peer inside that black box. In contrast to prior analyses, this study relies on the actual court filings in each case to create an original, comprehensive data set on all points at which federal judges are likely to consider issues relating to fees. These data enable us to paint a picture of the feesetting process that is unusually detailed and nuanced — and that falsifies many common beliefs. Among this Article’s major findings are that: (1) federal judges often deviate from the path Congress laid out in the Private Securities Litigation Reform Act of 1995 (PSLRA), which requires lead plaintiffs to set the terms of class counsel’s retention and federal judges to serve as backstops against abuses; (2) fees are generally lower in federal districts that see a high volume of securities class actions than in districts that handle lower volumes; (3) judges in high-volume districts are significantly more likely to cut fees than low-volume judges; (4) the “decrease-increase” rule, according to which fee percentages decline as settlements become larger, operates mainly in high-volume districts; and (5) judges appear to cut fees randomly, typically with very little explanation for why they did so. Finally, this Article finds that so-called “lodestar crosschecks,” which are supposed to help judges moderate fee awards, have unintended effects. All else equal, fee awards are significantly higher when fee requests include cross-checks than when lawyers use only the percentage method. A plausible explanation is that lawyers are anticipating judges’ reactions to fee requests and acting strategically. They include lodestar information when their requests may appear excessive and they omit it either when they expect judges to grant their requests or they think that the lodestar data will not help their cause.

In sum, there is little evidence that courts’ current actions in securities class actions move class counsel’s fees closer to the “right price.” This Article therefore proposes a set of procedural reforms, which courts could easily adopt, to make fee-setting in securities class actions more transparent, more compatible with the PSLRA’s normative goals, and more predictable. The reforms would encourage lawyers to invest in class actions at more appropriate levels, with salutary effects for plaintiffs and the integrity of the financial markets.

Keywords: securities, class action, PSLRA, attorneys' fees, lodestar