Lawyers on the Auction Block: Evaluating the Selection of Class Counsel by Auction

Abstract

The lead counsel auction has recently achieved increased visibility as a possible way of improving the selection and compensation of plaintiffs' counsel in class action litigation. Supporters of the auction approach, including judges who have used lead counsel auctions, claim that the lead counsel auction introduces competitive market forces into the selection process, and that these forces can address many existing problems with class action procedures and the jurisprudence of fee awards. The benefits of the auction, they claim, include lower legal fees and better representation of the plaintiff class. These claims have not been subject to careful scrutiny. Indeed, auction advocates have overlooked substantial methodological problems with the design and implementation of the lead counsel auction. Even if these problems were overcome, limitations of the auction procedure hamper its ability to function as an effective method of selecting class counsel. In particular, auctions are poor tools for selecting firms based on multiple criteria, such as price and quality, auctions potentially compromise the judicial role, and lead counsel auctions are unlikely to produce reasonable fee awards. Although the existing record in auction cases is insufficient to permit a rigorous empirical evaluation, early results raise concerns. This article therefore considers an alternative method for selecting and retaining lead counsel: negotiation by an empowered lead plaintiff. The article describes recent developments in institutional activism under the Private Securities Litigation Reform Act of 1995, and argues that these developments demonstrate that client empowerment is a more effective way of incorporating market forces into the selection and compensation of class counsel. The article concludes with interpretive guidance for the courts to facilitate further development of the PSLRA model and with an analysis of how the empowered lead plaintiff model can be extended beyond securities litigation.