United States: How Entrepreneurial Are Entrepreneurial Class Actions?

Last Updated: June 4 2015
Article by Andrew J. Trask

Plaintiffs' lawyer-turned-professor Morris Ratner has published a new article on making litigation costs a profit center for class action plaintiffs. You may remember he wrote about this issue before with Professor William Rubinstein. This new article, titled Class Counsel as Litigation Funders, makes it clearer that he isn't talking so much about allowing plaintiffs' counsel to charge a markup on photocopies as he is trying to establish parity between the lawyers who fund a case by fronting the costs and the lawyers who work a case. (Remember, in larger cases, many lawyers are required by co-counsel to contribute to a litigation fund.) In other words, he wants these lawyers (let's call them the Bank) to be rewarded the way investors are rewarded, instead of simply being stuck with whatever their specific lodestar allows at the end of the case.

Does this matter to plaintiffs' lawyers? Does it ever. A recent fight between Bank lawyers and laboring lawyers on the Neurontin antitrust class action show just how important (1) allocation of fees is, and (2) how much that is influenced by "lodestar"—the plaintiffs' equivalent of the billable hour.

Scholars like Arthur Miller and Alexandra Lahav tend to talk in terms of "public interest" lawyering, eliding the the fact that most class counsel are profit-driven. Ratner's a little more direct. These are entrepreneurs, he says, so let's treat them like they're motivated by profit. Or, as he puts it:

Class actions facilitate private law enforcement by manipulating the financial incentives of entrepreneurial class counsel, prompting them to act as litigation funders by advancing their time and litigation costs.

I should stop here for a moment to say: Professor Ratner's article is well-argued and comprehensively sourced. It's the kind of article where one can admire the scholarship even while disagreeing with the conclusions. Nonetheless, I have to admit I felt a little dirty reading it, and I couldn't quite pin down why. I defend corporations; I'm familiar with the profit motive. And I think it's smart to treat both sides as if they are largely rational, with the same mix of "good" and "bad" actors. So why the visceral reaction to this argument?

I think it's because, when you strip away the mythologizing and the paeans to public interest, and leave yourself with just the entrepreneurial plaintiffs' lawyer, as Professor Ratner does here, it becomes very clear just how little like other entrepreneurs class action plaintiffs' lawyers are.

The story we tell ourselves about entrepreneurs is that they take risks and they build things. They create a good or service, and bring it to the public, and if that good or service is compelling enough, then they succeed. How does the "entrepreneurial" class action lawyer compare? See for yourself.

Their entire infrastructure is subsidized by the taxpayer. Plaintiffs' lawyers claim they offer "enforcement" or "deterrence." But they do so by using the court system. There are, according to the latest estimations, approximately 7,500 class actions filed each year in the federal courts. Serious judicial bandwidth is taken up by the class action, including complex motion practice and discovery. And the plaintiffs get it for the same $100 filing fee as anyone else. Who makes up the overage? Well, it's either other litigants who are paying the same fee for less judicial time, or the taxpayers who pay the rest.

Their operating costs are subsidized by their adversaries. One of the largest operating costs in class action litigation is discovery. And, due to the asymmetric nature of discovery, much of that cost is borne by the defendant, who must pay for identifying custodians, collecting documents, reviewing them for relevance and privilege, and then defending their choices when plaintiffs invariably challenge them. The Advisory Committee's proposed changes to Rule 26 (which will require "proportionality") should address this issue somewhat, although plaintiffs' counsel are already promising to conduct discovery into the discovery they will be allowed. Proposals for a "requester pays" system, where class counsel would pay for the expansive discovery they seek, are rejected out of hand as too expensive.

They force people to buy their product. Ratner is explicit about this in the article. It is next to impossible to get consent up front for a Rule 23(b)(3) class action. So instead, we have "simulated consent" by court order. It is very difficult to think of another business in which one is allowed to charge potential customers for a product they did not ask for without their consent.

I am under no illusion that the entrepreneurial class action is going away any time soon. It's institutionalized at this point; judges can point to the fact that class counsel run class actions instead of their clients, and still do nothing about the underlying issue. And any proposed reforms that would rein in the profit-seeking of class action lawyers tend to be dead on arrival. But it is worth looking at exactly what that "entrepreneurship" actually looks like. And, in general, it looks like exactly the kind of business model that might inspire one to file a class action.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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