Restitution, Rent Extraction, and Class Representatives: Implications of Incentive Awards

Abstract

This essay - part of a class action symposium - discusses the normative implications of new empirical research by Professors Ted Eisenberg and Geoffrey Miller on incentive awards to class representatives and a prominent earlier study by the same authors on class counsel fee awards. Part I of the essay highlights the respects in which incentive awards to class representatives parallel class counsel fee awards - specifically, by providing restitution for costs and risks uniquely borne by such persons by comparison to absent class members. This Part discusses how systematic examination of incentive fees has the potential to move judicial administration of awards on that subject in the same direction as recent developments regarding class counsel fees.

Part II supplies the natural counterpoint, identifying aspects of incentive fee awards with no close analogues in the world of class counsel fees. The first such aspect relates to the aspiration to induce high-quality monitoring of class counsel by the class representative, not just by way of a restitutionary award but also, potentially, by providing some manner of reward or bounty. The essay criticizes the stance of the Private Securities Litigation Reform Act of 1995 (PSLRA), which authorizes restitutionary awards to lead plaintiffs in securities class actions but disallows awards in the nature of a reward for high-quality monitoring. This stance is ironic, at the very least, given that other features of the PSLRA actually celebrate the ideal of high-quality monitoring by institutional investors. Research on the role of such investors as lead plaintiffs under the PSLRA, if anything, suggests that the incentives for them so to serve may be too low under current law.

Part II goes on to discuss what one might call the "gatekeeping" function of the class representative - whether to defeat the removal of a class action to federal court (at least, prior to the Class Action Fairness Act of 2005) or to enable class counsel to secure control of the litigation vis-a-vis competitor firms within the plaintiffs' bar. The essay notes that, in the latter situation, there is a substantial prospect that class representatives might engage in rent extraction by demanding side payments from class counsel. The essay concludes with reflections on the normative implications of such payments, referencing the ongoing criminal investigation commonly understood to concern the pre-PSLRA conduct of the prominent securities plaintiffs' law firm formerly known as Milberg Weiss Bershad Hynes & Lerach.

Keywords: CAFA, class counsel, class actions, attorneys' fees, gatekeeping, incentive awards, Milberg Weiss, PSLRA, rent extraction, restitution