PREVENTING CLASS ACTION SELLOUTS

Paldor, Ittai and Procaccia, Yuval and Winter, Eyal (2024) PREVENTING CLASS ACTION SELLOUTS. The Journal of legal Studies. (In Press)

Text (Preventing Class Action Sellouts)
Preventing_Class_Action_Sellouts.pdf - Accepted Version
Available under License Creative Commons Attribution.
Download (512kB)

Abstract

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 original class counsel, nullify the settlement, and litigate the case. This is done by paying original class counsel the fees stipulated in the settlement. When litigation concludes, new class counsel is rewarded based on the percentage-increase in the class’s remuneration. The mechanism deters the formation of any settlement that is detrimental to the class, while preserving the incentives to reach all socially desirable settlements.