U.S. District Judge Colleen McMahon of Manhattan included a highly unusual warning in her recent opinion approving the $15 million settlement of a securities class action against the clothing retailer Aeropostale: She’s no longer following the standard operating procedure of awarding extra fees to plaintiffs who lead class actions. “This opinion should serve notice that this court, at least, will not routinely decide to ‘tip’ lead plaintiffs simply because their names appear in the caption,” she wrote, “and will view with some skepticism conclusory arguments that they actually made a meaningful substantive contribution to the lawsuit.”
The award of incentive fees is apparently something of a bugaboo for McMahon, who said she has “always been troubled by the practice,” though she’s previously approved the payments. Unprompted by Aeropostale or objectors to the settlement, the judge raised doubts at a hearing last week about a request by the City of Providence for $11,000 in reimbursement for the 150 hours its legal department expended on the case. McMahon reluctantly approved the request, but only “after much soul searching” and assurances from class counsel at Labaton Sucharow that it received legitimate help from the city’s legal staff. Going forward, McMahon said, she’s not going to be so amenable. Lead plaintiffs, she said, ought to know what is expected of them in class action litigation and shouldn’t sign up for the job if they expect to be paid for it.
“For the most part, I fail to see why a party who chooses to bring a lawsuit should be compensated for time expended in appearing at a deposition taken in order to insure that he is actually capable of fulfilling his statutory obligations, or responding to document requests, or performing what are essentially duplicative reviews of pleadings and motions that his lawyers are perfectly capable of reviewing for him,” McMahon wrote.
I’ll be curious to see if the judge actually follows through with her threat and disallows an incentive award to the lead plaintiff in a future class action (assuming that any future lead plaintiff decides that recovering a few thousand bucks is worth the risk of a tart opinion denying the request). With all due regard to Judge McMahon, I hope she reconsiders before she refuses to reimburse a lead plaintiff for the time and effort of representing a class that obtains a successful result. As a matter of policy, judges ought to be encouraging class representatives to take an active role in suits brought in their name, not suggesting that their contributions are worthless.
Law professors Theodore Eisenberg of Cornell and Geoffrey Miller of New York University conducted the only major study of incentive awards in class actions — a 2006 paper in the UCLA Law Review. According to their article, federal judges began approving fees to compensate lead plaintiffs for their efforts almost 25 years ago, and by 2000, such payments were considered routine. Even when Congress passed the 1995 law reforming private securities class actions, it left open the prospect of extra compensation for lead plaintiffs. Though the 1995 law was generally “unfriendly to routine incentive payments,” the professors noted, it nonetheless included statutory language indicating that lead plaintiffs may receive “the award of reasonable costs and expenses (including lost wages).”