Auctioning Class Action Representation

Abstract

Class actions feature severe agency problems, resulting from the divergence of interests between class members and the class attorney. This article proposes a novel mechanism for selecting the class attorney and aligning her interests with those of the represented class. The mechanism applies a combined percentage and hourly litigation fee structure, suggested by Polinsky, Mitchell A., and Daniel L. Rubinfeld. 2003. “Aligning the Interests of Lawyers and Clients,” 5 Am Law Econ Rev 165, in which lawyers earn a percentage of the class’ common fund, and bear the same percentage over their time investment. To maximize the expected payoff for the class, we supplement this fee structure with a preliminary two stages auction, in which the role of the lawyer is tendered using competitive bidding. We prove that the proposed auction approximates the highest possible net payoff for the class as the number of lawyers who compete for the right to represent the class increases. The percentage taken by the lawyer would be the lowest possible, and the winning lawyer would be the one who produces the highest expected net payoff for the class. We then extend the model to cases where the attorney files the class action is compensated for her pre-filing investment, and to settlements (JEL K41, K22)