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A study commissioned by the 3rd U.S. Circuit Court of Appeals concludes that competitive bidding for class action counsel positions is generally a bad idea, but the findings are unlikely to deter the two judges outside the circuit who have used bidding the most. The Task Force on Selection of Class Counsel concluded in its final report Jan. 17 that “the risks and complications associated with a judicially-controlled auction counsel against its use except under certain limited circumstances.” How limited? Of the 14 cases in which competitive bidding was used, only one fit the panel’s criteria. While the circuit’s chief judge, Edward Becker, has said the task force doesn’t speak for the court, the report gives class action lawyers with cases in New Jersey, Pennsylvania, Delaware and the Virgin Islands weighty ammunition for arguments against bidding for work. Time will test how other circuits react, but U.S. Judges Vaughn Walker of the Northern District of California and Milton Shadur of the Northern District of Illinois are already on record as saying the panel’s work was flawed and failed to give credit to the good points of bidding. “It is a piece of advocacy and a poor one, at that,” Walker said in a written comment to the task force in December. He said the report, “because it flies under the flag of a respected circuit court,” will discourage judges from attempting to improve on traditional methods. “To rule out competitive bidding as one approach, and especially to do so on the flimsy grounds of the task force draft report, would ill serve the administration of justice,” Walker wrote. Walker, who has used bidding in five cases, and Shadur, who has used it in three, made their comments about an October draft, but the central conclusions they criticized weren’t altered in the final report in January. Temple Law Review, for example, has enlisted Walker, Shadur and critics of bidding to contribute to a special issue on the subject. In the meantime, the main forum will be federal appeals courts. The 9th Circuit is to hear arguments Feb. 15 on whether bidding falls afoul of the Private Securities Litigation Reform Act of 1995. In In re Cooper Mountain Networks Securities Litigation, Walker used bidding to select, as lead counsel, New York’s Beatie and Osborn, whose client lost $59,000. A losing bidder, class action giant Milberg Weiss Bershad Hynes & Lerach of New York, represents a plaintiff who lost $1 million and is appealing on grounds that the PSLRA instructs judges to select as lead counsel the firm that represents the plaintiffs with the greatest financial interest in the case. Name partner Melvyn Weiss is a member of the 3rd Circuit task force. That panel says the goal of the PSLRA was to put plaintiffs, not lawyers, in control of class actions and to ensure that the “most adequate” plaintiff will choose counsel and negotiate a reasonable fee. That purpose is furthered by having large institutional investors take the lead in such cases, a process easily disturbed by competitive bidding that makes cost too large a factor, the task force said. Beyond possible conflicts with securities law, the panel concluded that the best method is “private ordering,” in which the marketplace, not a judge, picks the counsel. The panel also concluded: � Competitive bidding doesn’t necessarily maximize net recovery or guarantee reasonable fees. At the same time, there’s a risk of low-quality representation and a risk that the bids will be distorted by lack of information at the early stage of the litigation. � Bidding could reduce the investigation of claims; law firms would be unwilling to expend resources out of fear of being a losing bidder. � Auctions may discourage qualified prospective lead plaintiffs. Institutional plaintiffs told the task force that auctions interfered with their ability to take an active role in the litigation, the report said. “They uniformly counseled against shotgun marriage of a lead plaintiff with counsel whom it did not choose,” the report said. Panel co-chair Stephen Saltzburg, a professor at New York University School of Law, says some of the more critical passages in the draft were eliminated in the final report in an attempt to be “careful about being too negative.” He says the report also points out that there’s a small base of cases on which to judge bidding. One passage in the draft that bothered Shadur — it suggested judges might have turned to bidding because they were incited by bad publicity about large legal fees — was eliminated in the final report. Still, the main points remained. The only cases suitable for auction would be those in which a public investigation had made the facts clear, in which liability and damages were obvious and a settlement with money rather than equitable relief was envisioned, the panel said. The task force’s reporter, Fordham University School of Law Professor Daniel Capra, says the only case that fit those criteria was In re Auction Houses Antitrust Litigation, 197 F.R.D. 71 (S.D.N.Y. 2000), the case involving price fixing by Sotheby’s and Christie’s. Walker commented that the task force was too limiting in its description of the so-called paradigmatic case. “The important point is that the opportunity to represent the class be exposed to obtain as good a measure of the fair market value of the services to be rendered as possible and to permit all who have an interest and the ability to do the job have an opportunity to come forward,” he said. The report and critiques of the draft are available at www.ca3.uscourts.gov. – David E. Rovella ofThe National Law Journal contributed to this report.

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