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UC Law Journal

Bruce L. Hay

Abstract

As the class action device is used with increasing frequency in damages actions, there is an increasing risk that class counsel may settle the claims of the class members for too little, or for less than their expected value at trial. One task of the courts is to protect against this danger, and this includes the policing of the "reasonableness" of the class counsel's fee in settlement. In doing so, however, Professor Hay argues that courts tend to ask the wrong question: they focus on the counsel's "take" from the settlement in absolute terms, rather than focusing on his "take" relative to what he would have gotten if the case had gone to trial. This misplaced focus can result in a fee award that appears to be reasonable in absolute terms, but which may be quite excessive in relative terms, giving the class counsel an incentive to negotiate a settlement that is too small.

In this Essay, Professor Hay illustrates how the current system of policing class settlements often involves an attorney fee structure that creates an enormous distortion of the class counsel's incentives. The problem arises from an asymmetry or inequality between class counsel's effective share of a settlement that he negotiates, and his effective share of what the class members would receive if he did not negotiate a class settlement. Professor Hay then introduces a simple formula for the courts to employ, one that structures class counsel's fee so as to make rewards symmetric in the settlement context. Using this approach, a court can remedy the problem of asymmetric shares, within limits, even in situations where the court does not know the actual value of the class's claims. By thus removing the incentives to settle for too little, the court can better insure that any settlement negotiated by class counsel will benefit the class to the full value of its claims.

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