Class actions were designed to provide injured parties with a more efficient means of accessing justice by aggregating claims for violations of individual rights.
Although most successful class action litigation under Rule 23 is resolved in the form of a class settlement, such class settlements frequently provide little or no meaningful compensation to consumers. Indeed, a significant number of consumer class settlements do not provide consumers with any monetary relief whatsoever. This systematic undercompensation is the product of two structural problems in class actions. First, because class attorneys’ fees generally come from the same source as the class members’ compensation—the defendant—class attorneys settling class claims have a fundamental conflict of interest. Second, to the extent class attorneys exploit that conflict of interest, judges lack the necessary information or incentive to rectify self-dealing in most cases. The principal reason for the failure of many class settlements to provide meaningful compensation is obvious: class attorneys have incentives to engage in selfdealing during the negotiation of class settlements.
Because class members, especially those in a small-claims consumer class action, have small stakes in the case and therefore usually do not closely monitor their attorneys’ conduct, class attorneys often are able to obtain high fees without obtaining meaningful compensation for class members.
Indeed, all three branches of government have recognized this economic reality. In enacting the Class Action Fairness Act of 2005,7 Congress found that “[c]lass members often receive little or no benefit from class actions, and are sometimes harmed, such as where . . . counsel are awarded large fees, while leaving class members with coupons or other awards of little or no value.”
Similarly the FTC has recognized that “[e]xcessive class action attorney fee awards represent a substantial source of consumer harm.”
Courts also have recognized the harm to consumer welfare caused by the class attorney’s conflict of interest: “the negotiator on the plaintiffs’ side, that is, the lawyer for the class, is potentially an unreliable agent of his principals” given the possibility that he may trade a small class award for the relatively certainty of a high fee award.
One of the leading ways for self-dealing class counsel to benefit themselves at the expense of the class is through what are called cy pres settlements.