Prof. Myriam Giles and Practitioner Gary Friedman Publish Penn Article Challenging the Class Action Agency Costs "Myth"

Professor Myriam Gilles and Gary B. Friedman have just published an article entitled, Exploding The Class Action Agency Costs Myth: The Social Utility of Entrepreneurial Lawyers, 155 U. Penn. L. Rev. 103 (2006). Here is an excerpt from the Introduction:

John Coffee observed twenty years ago that "[h]igh agency costs" inherent in class action litigation "permit opportunistic behavior by attorneys" and, "[a]s a result, it is more accurate to describe the plaintiff's attorney as an independent entrepreneur than as an agent of the client." Jonathan Macey and Geoffrey Miller picked up on this theme in a highly influential 1991 article, recognizing that "the single most salient characteristic of class and derivative litigation is the existence of 'entrepreneurial' plaintiffs' attorneys [who, because they] are not subject to monitoring by their putative clients . . . operate largely according to their own self-interest . . . ."

Today, these insights have become canonical. No one doubts that class action plaintiffs' attorneys operate, in reality, as independent entrepreneurs guided by self-interest. The conventional wisdom further posits that there is tremendous social disutility in the fact that class actions are "characterized by high agency costs: that is, a significant possibility that litigation decisions will be made in accordance with the lawyer's economic interests rather than those of the class."

The conventional wisdom is half right. Class action plaintiffs' lawyers are indeed independent entrepreneurs driven by the desire to maximize their gain, even at the expense of class members' compensation. Where the conventional wisdom has gone wrong, however, is in condemning this as a bad thing and proposing reforms for class action practice designed to correct this conflict by increasing the compensation of absent class members.

In fact, as we will show, the so-called "agency cost" problem is mostly a mirage. So far as the vast majority of small-claims class actions go, concerns with the undercompensation of absent class members are totally misplaced. In reality, there is generally no legitimate utilitarian reason to care whether class members with small claims get compensated at all. Nor is there any economic reason to fret that entrepreneurial plaintiffs' lawyers are being overcompensated.
There is but one true objective here--one valid normative measure by which to gauge any class action procedure or practice, or any proposed reform. All that matters is whether the practice causes the defendant-wrongdoer to internalize the social costs of its actions. Once this normative polestar is accepted, much of the recent literature on class actions comes up for reexamination.