Corporate Governance

The Chamber of Commerce and Excessive Litigation: Be Careful What You Wish For (Part 7)

By J. Robert Brown

So, what are the proposed reforms that could solve the excessive litigation problem?  As we have noted, the Chamber Study nowhere suggests the imposition of liability directly on those responsible for the false disclosure, despite noting that this is a failing of the system.  The Study contains no proposal for reforming the system of D&O insurance or limiting indemnification rights. 

The Study calls for the adoption of legislation that would require substantial additional disclosure about the relationship between counsel and client, including campaign contributions.  In some ways, the legislation seeks to fight the last war, attempting to stamp out the type of behavior engaged in by Milberg et al, without any evidence that the behavior continues or ignoring the ability of the existing system to penalize those who engage in the behavior. 

Buried in the proposal, however, is approval for increased interference by the courts in the right of private parties to select counsel.  Rather than have the presumptive plaintiff select counsel (often a large institution), the Chamber supports a proposal that would require courts to "employ a competitive bidding process as one of the criteria in the selection and retention of counsel for the most adequate plaintiff".  The irony in that approach, beyond the call for a form of federal preemption of the right of parties to select their own counsel, is that it will likely trigger the rule of unintended consequences. 

A bidding process will probably favor the largest firms.  Indeed, it may result in the creation of a firm as large and as dominant as the Milberg Weiss of yore.  In other words, the "reform" sought by the Chamber will likely result in the class action business becoming even more concentrated, with companies finding themselves confronting deep pocket law firms more often.  The Chamber Study is so interested in somehow penalizing the plaintiffs' bar, that it has suggested reforms that will only make matters worse for issuers.  This has happened before.  The provisions in the PSLRA designed to give control over litigation to institutional investors were really meant to make life hard for law firms that relied on professional plaintiffs.  But with institutional investors in charge, issuers have had to pay even more.  Unsurprisingly, the Chamber has become critical of the use of institutions (under the rubric of pay to play) and will in time become critical of any proposal to require an auction among law firms, should it ever become law. 

Mostly though the reforms call for a dramatic increase in the number of procedural hurdles forced on shareholders in bringing and maintaining an action.  One of them, the overruling of Makor v. Tellabs, would effectively require Congress to overturn a provision adopted in the PSLRA.  But the irony in all of this is that the approach would add delay and cost to the litigation process which in turn would increase the amount lawyers were paid.  In other words, the very "reform" proposed by the Chamber likely causes an increase in the fees earned by plaintiff's counsel.  Certainly this was one of the impacts of the PSLRA.  The Study, however, omitted any responsibility on the part of the Chamber for these increases. 

Finally, be careful what you wish for.  There is no question that the PSLRA made it harder to bring securities fraud suits.  But it had an unintended consequence.  The Act caused lawyers for the plaintiff to do substantially greater due diligence before bringing a suit.  They often hire investigators and contact anonymous informants.  In other words, they bring better cases and do more homework.  As a result, it is no big surprise that those cases able to survive a motion to dismiss can induce larger settlements than before. 

If the PSLRA is any indication, the Chamber will be back in a few years arguing for changes to reforms that it wanted in 2008 and arguing that shareholders are disadvantaged by the high fees paid to plaintiffs counsel that were at least in part induced by the reforms that it suggested. 

Full post as published by The Race to the Bottom on September 06, 2008 (boomark / email).