Preventing Class-Action Sellouts

When class actions settle, the defendant and class counsel have a strong joint incentive to appropriate part of the class’s entitlement. The problem is long recognized, but neither existing mechanisms nor those suggested in the literature address it effectively. The current article proposes a market-based solution to the problem: Once a settlement is struck, any attorney of the plaintiffs’ bar may replace the original class counsel, nullify the settlement, and litigate the case. This is done by paying the original class counsel the fees stipulated in the settlement.

When litigation concludes, the new class counsel is rewarded on the basis of the percentage increase in the class’s remuneration. The mechanism deters the formation of any settlement detrimental to the class while preserving the incentives to reach all socially desirable settlements.