Supreme Court Has Chance to Curb Self‐​Dealing by Lawyers Bringing Class Actions

Ilya Shapiro and Spencer Davenport

What happens when the counsel for a class action lawsuit doesn’t represent the best interests of the class members? The scenario begins simply (if not mundanely). Bank of America charges a $35 fee anytime a deposit account holder writes a check against insufficient funds. When an overdraft occurs, the bank can honor the check by advancing funds. If the Bank does so, the account holder must pay back the Bank’s advance plus any fees incurred. Failure to do so within five days triggers a second $35 fee.

A group of account holders filed a class action complaint, arguing that the second fee violated the anti‐​usury provision of the National Bank Act. Eventually, they and Bank of America agreed to a $37.5 million settlement. While each class member received a refund of about $1.07 for each $35 fee paid, the district court awarded $14.5 million in attorneys’ fees, coming directly from class members’ recovery.

Accordingly, Rachel Threatt and other class members objected to the settlement and appealed to the Ninth Circuit. In a split decision, the court affirmed the fee amount, finding that the district court’s method of approving the settlement request was proper. In dissent, Judge Andrew Kleinfeld took issue with the amount of money the class counsel was to receive, and the level of compensation earmarked for the class members.

Cato has filed an amicus brief urging the Supreme Court to review the case to ensure that all class members are afforded their due process rights. Class action lawsuits are often the only way to feasibly redress wrongs inflicted on many victims. But the present federal class action regime is fraught with conflict as counsel face perverse incentives.

While class counsel have proper incentive to bargain for a larger settlement, they do not face a similar incentive about how to allocate the payments as between class members and their own fees. Every dollar reserved to the class is a dollar not going to counsel.

Our adversary system depends on unconflicted counsel’s zealous advocacy for their clients. Accordingly, courts must act as fiduciaries for class members and apply a rigorous analysis to all aspects of litigation and settlements, to prevent self‐​dealing and other improper behavior. Only meaningful and rigorous review of class counsel’s actions can minimize the danger that class counsel is not representing the interests of the class—whether with respect to class members’ compensation or counsel’s own compensation.

The Supreme Court will likely decided before the end of its current term in June whether to take up the case of Threatt v. Farrell.