Private Monitoring in Common Fund Class Actions

Alon Klement
2001 Social Science Research Network  
Class actions have come to play a significant role in American legal system. Law enforcement is no longer left to the state alone, as private pursuit of self interest is harnessed to promote the common good. But private law enforcement has also had its down sides. Lawyers' gain has often come at the price of class members' loss, and misalignment of interests has many times resulted in less compensation and deterrence and more private attorney profits than desired. The question therefore has
more » ... n therefore has been how to guarantee that lawyers pursue their self interest yet leave society at large and class members in particular as well off as possible. This paper analyzes the different monitoring schemes that have been unsuccessfully applied in class actions, namely, monitoring by courts and by class members. Building on this analysis it then proposes a workable alternative: private monitoring by self interested individuals and organizations, not necessarily class members, who would compete and pay to obtain the monitoring position, and would receive a share of the class recovery in return. class attorneys, set their fee, and review all settlements they propose. 5 Courts have been granted these powers only to ensure that lawyers do not take advantage of class absence, and that they do not appropriate class members' rights. Yet, courts have not performed these functions well enough. Constrained by the institutional requirements of neutrality and passivity set by the adversary system, on the one hand, and lacking sufficient adversity between the defendant and the class attorney whenever attorney fees and proposed settlements are concerned, on the other, courts have been left by and large uniformed about the parameters necessary to effectively regulate class attorneys. Taking also into account their constrained resources and overburdened dockets, it is not surprising that courts have failed to adequately monitor class actions. But courts are not the only ones who may monitor class counsels. Class members are also expected to directly supervise their appointed lawyers. Named plaintiffs are required to render adequate representation to the class if the outcome of the class action is to have a binding and preclusive effect on all class members, and unnamed class members are supposed to provide an external check on the class action litigation or settlement. Yet, the former are usually chosen by class attorneys, are passive, unsophisticated, and completely disregarded by courts, all because their interests in the class action are too small to justify appropriate investment of time and money in supervising class attorneys. As for the latter, their information and opportunities to affect the actual outcome are scarce, and they usually abstain from any true involvement, preferring to free ride the class action without risking any costly active involvement in it. 5 See Fed. R. Civ. P. 23 [hereinafter "Rule 23"]. 4
doi:10.2139/ssrn.262336 fatcat:qfnkueagh5ardaau5f4ahzzqfq