Auctioning Class Action Representation

Abstract

Class actions feature severe agency problems, resulting from divergence of interests between class members and the class attorney. This paper 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, in which lawyers earn a percentage of the class’ common fund, and bear the same percentage over their time investment. To guarantee a maximum expected payoff for the class, we supplement this fee structure with a preliminary auction, in which the role of the lawyer is tendered using competitive bidding. We propose an auction mechanism which elicits bids equal to the net expected value for the class and extracts all rents from lawyers. We then extend the model and apply the proposed mechanism to litigation funding, and to alternative fee-shifting rules.