Federal Rule of Civil Procedure 23 ("Class Actions") recently was amended to require a court to consider certain factors in appointing class counsel, including the "work counsel has done in identifying or investigating potential claims" and its overall expertise. As part of this process, the court can direct potential class counsel "to propose terms for attorney fees and nontaxable costs." If there is more than one adequate applicant for class counsel, the court must appoint "the applicant best able to represent the interests of the class." See FRCP 23(g).
Under the PLSRA, the lead plaintiff generally must satisfy "the requirements of Rule 23." The statute also states, however, that the lead plaintiff "shall, subject to approval of the court, select and retain counsel to represent the class." Many courts have interpreted this provision as granting them relatively little discretion over the appointment of lead counsel. Is that still true following the implementation of the Rule 23 amendments?
To date, only two courts have discussed the interaction between new Rule 23(g) and the PSLRA. In In re Cree, Inc. Sec. Litig., 219 F.R.D. 369 (M.D.N.C. 2003),* the court noted that it had an "obligation to assure that lead plaintiff's choice of representation best suits the need of the class" and it was "guided in the exercise of its discretion by the provisions of the new Rule 23(g)." The court previously had requested that the potential lead counsel submit information concerning its experience, resources, and proposed fees. After reviewing this information, the court found that it was satisfied with the proposed lead counsel, but warned that it "will take its obligation seriously to see that any fees sought by counsel are just and reasonable under the circumstances."
In In re Copper Mountain Sec. Litig., 2004 WL 369859 (N.D. Cal. Feb. 10, 2004) (discussed at length in this recent post), the court addressed the 9th Circuit's decision in In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002) on remand. In reversing the lower court's earlier lead plaintiff/lead counsel decision, the Cavanugh panel had held that information about fee arrangements "is relevant only to determine whether the presumptive lead plaintiff's choice of counsel is so irrational, or so tainted by self-dealing or conflict of interest, as to cast genuine or serious doubt on that plaintiff's willingness or ability to perform the functions of lead plaintiff." After stating that "Cavanaugh would seem to establish that the largest stakeholder's selection of counsel must be approved unless that selection is either mad or crooked," the lower court noted that "the continuing vitality of the Cavanaugh test may be questioned in light of recent amendments to FRCP 23."
It seems likely that these cases are the tip of the iceberg on this issue. Stay tuned.
*Disclosure: The author of The 10b-5 Daily represents the defendants in the Cree securities litigation.