Jessica Erickson has just published a fascinating article on the structure of lead plaintiffs’ counsel arrangements in corporate cases. 

Erickson documents how Delaware courts have formally identified “factors” that will be used to select lead counsel, but have informally sent the message that the parties must work out the leadership structure amongst themselves.  This means that multiple law firms have an incentive to file claims with no intention of performing serious legal work, solely to negotiate a position in the leadership structure so that they can collect a portion of the fees.

This practice not only results in duplicative lawsuits, but allows lawyers to engage in rent-seeking – extracting fees without performing serious legal work – that can damage incentives for the “real” lawyers, and harm the class.

At this point, I just have to interject with an account of my experiences.  I was at Milberg Weiss for a few years (though I was more involved in securities cases under the PSLRA than corporate cases).   Milberg frequently worked with co-counsel, and most of the time – no matter which firm was formally appointed lead – Milberg was functionally in charge of the litigation.  Co-counsel generally was added to the case because they had a close relationship with an institutional plaintiff, but they tended to have little skill – or even interest – in the actual litigation.  Due to our fee agreements, we were required to allocate them some amount of work, and it was usually an administrative hassle – co counsel frequently failed to submit their work product by the relevant deadline, and what they did submit was often subpar and needed to be rewritten. 

What this meant, of course, is that the class suffered, through duplicative and unnecessary fees.

Eventually I landed at Bernstein Litowitz, and by then, the landscape had changed.  There were fewer co-lead firms, and the co-leads that existed were more functional – I could rely upon them to do serious work.  So there was a real change in the landscape of securities litigation between the time when I left Milberg in 2005, and when I joined BLBG in 2009.  Erickson’s article confirms my experience; she describes how, over time, judges overseeing PSLRA litigation became more suspicious of complex leadership structures that combined groups of unrelated plaintiffs.

Delaware litigation, however, has not undergone that kind of change, and remains driven by the same dynamics that governed earlier securities litigation – namely, small firms, existing mainly to file complaints, holding larger firms hostage.   In the securities context, small firms could only exert that kind of leverage if they at least had enough credibility to land an institutional client; Delaware, however, doesn’t use the PSLRA’s bright line largest-loss rule, and so any firm can hold up an entire case.  And because Delaware courts avoid injecting themselves in disputes among plaintiffs’ firms, as Erickson points out, firms cannot privately order their arrangements in an optimal matter.

Erickson’s central point is this: if courts are unwilling to enforce the standards they set, parties cannot bargain in the shadow of the law, and parasitic firms have correspondingly greater power.  Courts must demonstrate a willingness to select a single lead counsel when no private agreement is reached, in order to enable attorneys to bargain for optimal results.