Federal judges have a new tool for selecting plaintiffs' lead counsel in class actions. "Auction bidding" occurs after filing when the district judge accepts bids from potential plaintiffs' counsel. The most competitive fee structure from a qualified firm is awarded the case.

Pioneered by San Francisco District Judge Vaughn Walker almost 10 years ago in a securities class action against Oracle Corp. [In re Oracle, 131 F.R.D. 688 (N.D. Cal. 1990)] as a free market approach to awarding the potentially lucrative cases, competitive bidding is gaining popularity across the country. Used to date in almost a dozen cases, the mechanism has been adopted by Judge Walls in the District of New Jersey in the recent In re Cedant Corp. Litigation, 182 F.R.D. 144 (D.N.J. 1998) securities fraud case, and by Judge Kaplan in the Southern District of New York in the In re Auction Houses Antitrust Litigation, 197 F.R.D. 71 (S.D.N.Y. 2000) antitrust class action.

As a new tool for the bench, auction bidding is being used differently by the federal judges. In a June order naming counsel to the Quintus securities fraud class action, Judge Walker, the originator of the auction approach, likened the process to awarding assets from a trust. Highlighting a federal judge's duty to secure a fair fee for the class, Walker explained "adherence to an arbitrary 25% percent benchmark does not square with courts' fiduciary responsibilities to the class in the face of mounting evidence that this benchmark is often too high". Walker relied on free market competition to get the class their best deal, with Weiss & Yourman submitting the successful bid with a sliding scale fee arrangement. (In late August, the 9th Circuit denied a writ position in to review the counsel award in the case.)

Last year, David Boies' new law firm, Boies Schiller & Flexner LLP, won the auction for the Sotheby's-Christie's antitrust class action by submitting the lowest bid, 5% of the total settlement, in accord with a scheme Judge Kaplan devised. Kaplan asked firms to submit a fee structure estimating a minimum settlement amount, earmarked exclusively for the class. The firms would then take 25% of any money beyond that target amount, with the remaining 75% exclusively benefitting the class.

Some criticism is building against auction bidding. Third Circuit Judge Becker commissioned a task force to study its constitutionality and application. Critic Jill Fitch Fisch, a professor at Fordham Law School, testified before the task force panel, stating: "Price tends to dominate the selection criteria in an auction, and price is not the most important criterion when choosing a lawyer." The Third Circuit also directly attacked the auction bidding process in late August when it reversed the Cendant decision in part, stating that the District Court "erred in holding an auction to select and retain lead counsel" based on counsel's determination of its fee.

The Task Force released its report on November 5, 2001. Although hesitant to "restrict the use of new initiatives at such an early age of their development," the Task Force unanimously concluded that "the risks and complications associated with a judicially-controlled [sic] auction counsel against its use except under certain limited circumstances[.]" (p. 17). The Task Force identified the "paradigmatic case in which an auction might be considered" as one in which the defendant's liability appears clear, the damages appear to be both very large and collectible, and the lead plaintiff is not a sophisticated litigant that has already obtained counsel through arms-length negotiations. (p. 17) The Task Force further observed that it has yet to be established that the auction process will save judicial time and resources, and announced that auctions are inconsistent with the goals of the Private Securities Litigation Reform Act, which requires class actions to be "client-driven, not court-driven." (p. 18) The Report, entitled "Selection of Class Action Counsel," can be found at the Third Circuit's Web site www.ca3.uscourts.gov.