We have a system of justice featuring both public attorneys general and private attorneys general.
Columbia University Law Professor John Coffee is out with a new book about private attorneys general — it’s called – Entrepreneurial Litigation: It’s Rise Fall and Future (Harvard University Press, 2015).
“The unique thing about the American legal scene is that high stakes litigation is frequently controlled, financed and organized by the attorney who invests in the action,” Coffee told Corporate Crime Reporter in an interview last week. “The attorney does more to hire the client than the client does to hire the attorney. It is lawyer run, lawyer dominated litigation. It is effective in terms of raising the stakes and enabling people who have what I will call negative value claims — claims that cost more than what the recovery would be — to be able to take their case to court. But it also has a number of conflicts of interest and problems, including the attorney subordinating the client’s interests to his own.”
Why in the United States and hardly anywhere else?
“We are seeing the rest of the world beginning to copy some features of entrepreneurial litigation,” Coffee says. “But it has historical origins. It goes right back to our Constitution. From our earliest days, people regarded the jury trial as a fourth branch of government. There were the three branches set forth officially in the Constitution. There was a right to jury trial, which in many parts of our country — particularly the frontier area — was seen as a way of tempering federal control with local initiative and the ability of the local community to, in effect, govern itself by enforcing the law.”
You point out in your book that the central government was more powerful in Europe. You write — in Europe, “the masses might revolt, but they did not sue.”
“In Europe, that was certainly true. And in Europe, the government wanted control. And that was true whether the government was on the right — the royalists — or the left — the revolutionaries. They wanted control and the right to speak for the masses. Once you admit class actions and group litigation brought by an attorney, you are decentralizing power. You are letting others speak for the people. And that’s not desired by a centrist regime that wants to hold the power in its own hands — whether they are conservative or revolutionary.”
You both like the idea of the bounty hunter or private attorney general and dislike it at the same time. Why is that?
“The idea has its costs and its benefits. I want to preserves its benefits and reduce some of its costs. But for the bounty hunter, we would probably not have significant investment in certain kinds of litigation. These are class actions, but there are also cases called qui tam actions, in which the bounty hunter goes out and tries to prove a violation of law.”
“There are a variety of actions in which the enforcer is compensated to enforce the law. And sometimes the private enforcer does a better job than the public enforcer — either because it is less politically captured, or because it sees enough profit that it will invest more resources in pursuing the wrongdoer.”
“The other side of the coin is that the attorney is ultimately interested in maximizing its fee more than maximizing the recovery to the class. And we see attorneys in effect being bribed in a variety of class action settlements. We have had now fifty years of experience with things like coupon settlements and disclosure only corporate settlements, where there is no benefit to the class and the defendant is effectively buying immunity and preclusion by paying off a class action attorney to enter into a binding preclusive settlement.”
Ideally, wouldn’t we be better off with enforcement by an accountable public attorney general?
“There is always the risk of capture. There is always the possibility that someone will capture the public enforcer. That happens more at the state than at the federal level. But there is always that risk.”
“There are intermediate alternatives. Something I suggest in this book is public agencies hiring private attorneys on a contingency fee basis. Then we have the attorney motivated to seek the maximum recovery. Whereas if we have public enforcement, and this applies to agencies as old as the Securities and Exchange Commission (SEC), we often see the agency just trying to deal with an overwhelming caseload by settling everything according to a standard formula and not generating much deterrence.”
When the Federal Deposit Insurance Corporation (FDIC) hires the private attorney general, do they pay them an hourly fee, or do they let them go out and pursue it on a contingency?
“They don’t want it publicly disclosed because they will be embarrassed, but they are increasingly using contingent fees — they call them success fees,” Coffee says. “That’s a little bit more polite than calling it a contingent fee. But the best law firms don’t want to be paid hourly. They have an hourly rate higher than the public would want to hear. We are seeing contingent fees used by a number of agencies. The Federal Housing Finance Administration pursued all of the major banks after 2008 for packaging together real estate mortgage securitizations that went toxic. They hired a very well known law firm — Quinn Emanuel — and it has been successful in getting multi-billion dollar recoveries. The SEC has done nothing comparable. And it has had a great deal of difficulty in getting any significant judgment. It has a role — to get an injunction against ongoing fraud, for example. But it has not done well in recovering damages.”
What does the SEC say when it is asked?
“They have answered me. They say — we don’t like this idea of Coffee’s using private law firms. We think it would mean the end of prosecutorial discretion. I sure think that prosecutorial discretion remains. It remains there in the general counsel of the agency who supervises things. He doesn’t have to attend every deposition or review the third amended complaint in every case. But he has to give some general review. And he has to decide if it’s a meritorious case before it gets brought. But then, when you really want a recovery that has both compensatory meaning and deterrent value, you want to use attorneys who have experience in suing in major damage cases. And that’s not typically what most in house lawyers in government agencies have experience doing.”
Is there a chance that there is a political question here — the SEC doesn’t want to upset the apple cart?
“You can say that. There is also another answer that is also a little depressing. It would demoralize the agency if we said — SEC, you handle these injunction cases and the plain vanilla standard recurring case. But give the really big case to outside specialists. That would suggest that the SEC staff was more humdrum journeymen than star litigators. And they don’t want that message presented. But I’m afraid reality is that there are star litigators. And if you really want to recover a large amount in an important action, you should use the very best.”
“If you were a multimillionaire and needed brain surgery, you wouldn’t go to the government surgeon — you would find the best person in the marketplace. And if we really want the government to secure deterrence and large recoveries, a similar approach should be considered.”
[For the complete q/a format Interview with John Coffee, see 30 Corporate Crime Reporter 6(9), February 8, 2016, print edition only.]