ASYMMETRIC REWARDS - WHY CLASS-ACTIONS (MAY) SETTLE FOR TOO LITTLE

As the class action device is used with increasing frequency in damage s actions, there is an increasing risk that class counsel may settle t he 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, Profes sor Hay argues that courts tend to ask the wrong question: they focus on the counsel's ''take'' from the settlement in absolute terms, rathe r 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 fe e award that appears to be reasonable in absolute terms, but which may be quite excessive in relative terms, giving the class counsel an inc entive to negotiate a settlement that is too small. In this Essay, Pro fessor Hay illustrates how the current system of policing class settle ments often involves an attorney fee structure that creates an enormou s distortion of the class counsel's incentives. The problem arises fro m an asymmetry or inequality between class counsel's effective share o f a settlement that he negotiates, and his effective share of what the class members would receive if he did not negotiate a class settlemen t. Professor Hay then introduces a simple formula for the courts to em ploy, one that structures class counsel's fee so as to make rewards sy mmetric in the settlement context. Using this approach, a court can re medy the problem of asymmetric shares, within limits, even in situatio ns where the court does not know the actual value of the class's claim s. By thus removing the incentives to settle for too little, the court can better insure that any settlement negotiated by class counsel wil l benefit the class to the full value of its claims.