Task force criticizes auctions in class action cases.

A task force set up by the Third Circuit Court of Appeals has issued a report warning against the burgeoning practice of allowing lawyers to bid on the right to represent plaintiffs in class action cases.

The auction method, in which judges ask lawyers who want to serve as lead counsel to submit bids to the court indicating the fees and expenses they would require, is a relatively new means of selecting attorneys. It has been used by seven U.S. district court judges in the last 10 years, according to the task force, which included attorneys, federal judges, and law professors.

Proponents contend that an auction provides a market test for the real value of lawyers' services and prevents "windfalls" for class counsel. They add that it may lead counsel to "sharpen" their approaches by cutting unnecessary expenses or developing innovative litigation strategies.

But the authors of Selection of Class Counsel: Third Circuit Task Force Report noted that Rule 23 of the Federal Rules of Civil Procedure requires the court to examine the fairness of requested attorney fees at the end of a case, not the beginning.

"At best the benefits of an auction appear speculative, except that it might provide the courts with an additional benchmark against which to judge the reasonableness of a fee," they wrote. "A percentage fee, tailored to the realities of the particular case, remains superior to any other means of determining a reasonable fee for class counsel."

The goal of the appointment process, the task force found, "should be to maximize the net recovery to the class and to provide fair compensation to the lawyer, not to obtain the lowest attorney fee."

The lawyer who charges a higher fee for legal services may earn a proportionately higher recovery for the class than the lawyer who charges a lesser fee, the authors observed.

"The auction process fails to take into account the possibility that a higher bidder may have factored in more resources to be put into the action, or is simply a higher quality firm," thereby increasing the possibility of success, they wrote.

Professor Arthur Miller of Harvard Law School testified at a task force hearing that "questing after the lowest bid ... may be penny-wise and pound-foolish, and not in the best interests" of litigants.

The task force found that auctions are particularly problematic in cases filed under the Private Securities Litigation Reform Act (PSLRA) of 1995.

"Auctions are inconsistent with the goal of the PSLRA, which is to assure that the `most adequate' plaintiff will choose counsel and negotiate a reasonable fee," the report said. "The PSLRA mandates that class actions be client-driven, not court-driven."

The full text of the report is available at www.ca3.uscourts.gov. This site also features a report prepared by the Federal Judicial Center, Auctioning the Role of Class Counsel in Class Action Cases: A Descriptive Study. The center's report does not make recommendations about the auction method but contains extensive information about how it has been used in recent years.