Third Circuit Limits Court-Imposed Auctions for Lead Counsel in PSLRA Class Actions

Third Circuit Limits Court-Imposed Auctions for Lead Counsel in PSLRA Class Actions

Introduction

The case in question, IN RE CENDANT CORPoration Litigation, presented significant questions regarding the selection and retention of lead counsel in class actions governed by the Private Securities Litigation Reform Act of 1995 (PSLRA). The appellants challenged the United States District Court for the District of New Jersey's approval of a substantial settlement and an unusually large fee award to the lead counsel, which was determined through an auction method. This commentary delves into the Third Circuit's comprehensive review of the decision, elucidating the implications for future class action litigations under the PSLRA.

Summary of the Judgment

The District Court approved a $3.2 billion settlement in a securities fraud class action against Cendant Corporation and its auditors, Ernst & Young (EY). Additionally, the court awarded a staggering $262 million in fees to the lead counsel, determined through an auction process. The appellants contested both the settlement's fairness and the fee award's propriety.

Upon appeal, the United States Court of Appeals for the Third Circuit affirmed the settlement's approval, finding it fair, reasonable, and adequate based on the established Girsh factors—a nine-factor test used to evaluate class action settlements. However, the appellate court found fault with the District Court's use of an auction to appoint lead counsel, deeming it inconsistent with the PSLRA's structured approach. Consequently, while the settlement stood, the fee award was vacated and remanded for reconsideration in alignment with the PSLRA's guidelines.

Analysis

Precedents Cited

The judgment extensively referenced GIRSH v. JEPSON, which established the nine-factor test for assessing the fairness of class action settlements. Additional cases like General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litigation (GM Trucks) and GUNTER v. RIDGEWOOD ENERGY CORP. were pivotal in shaping the court's approach to evaluating settlement adequacy and attorney fees.

Legal Reasoning

Central to the Third Circuit's reasoning was the stipulation within the PSLRA that the lead plaintiff is responsible for selecting and retaining lead counsel, subject to court approval. The PSLRA was designed to empower institutional investors as lead plaintiffs, anticipating their capacity to effectively negotiate and monitor legal representation.

The District Court's deviation—using an auction to determine lead counsel fees—was scrutinized for not adhering to the PSLRA's prescribed process. The appellate court emphasized that while courts retain the authority to approve or disapprove a lead plaintiff's choice of counsel, imposing an auction undermines the legislative intent of the PSLRA. The court underscored that such auctions could erode the lead plaintiff's role, potentially misaligning counsel's incentives away from the class's best interests.

Moreover, the Court of Appeals highlighted that the presumption of fairness in settlements under the PSLRA should extend to the fee arrangements negotiated between lead plaintiffs and their attorneys. Overstepping this boundary by holding auctions could disrupt the delicate balance intended by the legislation.

Impact

This judgment serves as a pivotal reference for future class action litigations under the PSLRA. By limiting the courts' ability to impose auctions for lead counsel selection, the Third Circuit reinforced the statute's framework, ensuring that lead plaintiffs retain their intended authority and responsibility. This decision promotes consistency with legislative intent and protects the interests of class members by preserving a direct line of accountability between lead plaintiffs and their legal representatives.

Additionally, the vacating of the $262 million fee award underscores the necessity for adherence to statutory guidelines in fee determinations. It signals to courts that while they possess oversight authority, it must be exercised within the confines of the law, respecting the negotiated agreements between lead plaintiffs and counsel.

Complex Concepts Simplified

Private Securities Litigation Reform Act of 1995 (PSLRA)

The PSLRA was enacted to overhaul securities class action litigation, aiming to curb frivolous lawsuits and enhance the efficiency of genuine claims. It introduced detailed procedures for selecting lead plaintiffs and regulating attorney fees to ensure that settlements genuinely reflect the class's interests.

Lead Plaintiff and Lead Counsel

In class actions, the lead plaintiff represents the collective interests of all class members. Under the PSLRA, it's typically an institutional investor with substantial stakes, tasked with selecting and retaining lead counsel. Lead counsel are the primary attorneys responsible for negotiating settlements and representing the class in court.

Girsh Factors

Derived from GIRSH v. JEPSON, the Girsh factors are a framework for courts to evaluate whether a class action settlement is fair, reasonable, and adequate. These nine factors assess aspects like the complexity of the litigation, the settlement's impact on class members, and the proportionality of attorney fees.

Auction Method for Lead Counsel Selection

An auction method involves soliciting bids from law firms to determine lead counsel based on cost and perceived competence. While theoretically promoting cost-efficiency, this approach can conflict with the PSLRA's intent of empowering lead plaintiffs to choose counsel aligned with the class's best interests.

Conclusion

The Third Circuit's ruling in IN RE CENDANT CORPoration Litigation reaffirms the structured approach mandated by the PSLRA for selecting lead counsel in class actions. By invalidating the use of auctions, the court upholds the lead plaintiff's central role in representing the class's interests and ensures that attorney fee arrangements remain a product of negotiated agreements rather than market simulations.

This decision not only aligns judicial practice with legislative intent but also safeguards the interests of class members by maintaining a direct and accountable relationship between lead plaintiffs and their legal representatives. Future litigations under the PSLRA will undoubtedly reference this judgment to navigate the complexities of lead counsel selection and fee determination, ensuring that the class action mechanism functions as intended—effectively serving the collective interests of investors without undue interference from judicial market-based interventions.

Case Details

Year: 2001
Court: United States Court of Appeals, Third Circuit.

Judge(s)

Edward Roy Becker

Attorney(S)

Howard B. Sirota (Argued), Sirota Sirota, New York, NY, Counsel for Appellant Joanne A. Aboff Family Trust. Edward W. Cochran (Argued), Cochran Cochran, Shaker Heights, OH, Frank H. Tomlinson, Pritchard, McCall Jones, Birmingham, AL, Paul S. Rothstein, Gainesville, FL, Counsel for Appellant Betty Duncan. C. Benjamin Nutley (Argued), Kendrick Nutley, Beverly Hills, CA, Richard Galex, Galex, Tortoreti Tomes, Brunswick, NJ, Counsel for Appellant Tere Throenle. Gerald W. Palmer (Argued), Ricky L. Shackelford, Eugenia L. Castruccio, Jones, Day, Reavis Pogue, Los Angeles, CA, Counsel for Appellants Robert and Janice Davidson. Lawrence W. Schonbrun (Argued), Law Office of Lawrence W. Schonbrun, Berkeley, CA, Counsel for Appellant Faye Schonbrunn. John Halebian (Argued), Wechsler, Harwood, Halebian Feffer, Kenneth A. Elan, Law Offices of Kenneth A. Elan, New York, NY, Counsel for Appellant Ann Mark. Michael D. Hess, Leonard J. Koerner, Lorna B. Goodman, Elizabeth S. Natrella (Argued), Leslie Conason, Corporation Counsel of the City of New York, New York City Law Department, New York, NY, Counsel for Appellants New York City Pension Funds. Max W. Berger, Daniel L. Berger (Argued), Jeffrey N. Leibell, Bernstein, Litowitz, Berger, Grossman, LLP, New York, NY, Leonard Barrack, Gerald J. Rodos, Jeffrey W. Golan, Barrack, Rodos, Bacine, Philadelphia, PA, Counsel for Appellees California Public Employees' Retirement System, New York State Common Retirement Fund and The New York City Pension Funds. Arthur R. Miller (Argued), Cambridge, MA, Counsel for Appellees Barrack, Rodos, Bacine and Bernstein, Litowitz, Berger Grossmann, LLP. Alan N. Salpeter (Argued), Michele Odorizzi, Caryn L. Jacobs, Mayer, Brown Platt, Chicago, IL, Douglas S. Eakley, Peter L. Skolnik, Lowenstein, Sandler, PC, Roseland, NJ, Kathryn A. Oberly, Robert G. Cohen, William P. Hammer, Jr., Ernst Young, LLP, New York, NY, Counsel for Appellee Ernst Young, LLP. Carl Greenberg, Michael M. Rosenbaum, Budd, Larner, Gross, Rosenbaum, Greenberg Sade, Short Hills, NJ, Samuel Kadet, Skadden, Arps, Slate, Meagher Flom, New York, NY, Counsel for Appellee Cendant Corporation. Herbert J. Stern, Stern, Greenberg Kilcullen, Roseland, NH, Counsel for Appellee James E. Buckman. David M. Becker, General Counsel, Meyer Eisenberg, Deputy General Counsel, Eric Summergrad, Deputy Solicitor, Luis De La Torre (Argued), Special Counsel, Nathan A. Forrester, Senior Counsel Securities and Exchange Commission, Washington, DC, Counsel for Amicus Curiae Securities and Exchange Commission. Joseph A. Grundfest, The William A. Franke Professor of Law and Business, Stanford, Law School, Stanford, CA, Melanie M. Piech, Lieff, Cabraser, Heimann Bernstein, LLP, San Francisco, CA, Counsel for Amicus Curiae Barclays Global Investors, N.A., Franklin Resources, Inc., New Hampshire Retirement System and Public Employees' Retirement Association of Colorado.

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