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Cornell Journal of Law and Public Policy

Keywords

Class actions, Class counsel compensation

Abstract

If a deterrence rationale fuels the engine that is class action litigation, then its principles should inform our efforts to cure the imperfections in class counsel compensation schemes. Class action defendants are deterred from wrongdoing when it becomes economically unwise to act as such. For publicly-traded companies, the economic prudence of their conduct depends on shareholder perception. Class actions are bad news for shareholders of the named defendant public company. In response, the market reacts, a company’s share price decreases, and a message is sent to the company about the imprudence of its conduct. A question then arises: should we use the magnitude of a class action’s impact on stock price as a gauge in measuring the reasonableness of class counsel’s fee? In theory, the greater the impact, the worse the market thinks of the defendant company’s actions, and the more the company will suffer—thereby deterring it from similar future wrongdoing. Class counsel’s efforts in litigating a greater-impact claim merit a more substantial award than those litigating lesser-impact claims. Further, a court could theoretically ferret out non-meritorious claims from worthy claims by looking at their impact on stock price; class counsel bringing bogus claims—a real problem in the world of class actions—warrant little-to-no reward in a deterrence-based framework. However compelling this idea may be in the abstract, does it hold up in our practical world? The answer is not so clear.

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