Milberg's case for kickbacks

The WSJ has an article on the Milberg kickback case. The article says:

A soon-to-be-published law-review article by professors Larry Ribstein and Bruce Kobayashi posits that the sort of fee-sharing alleged in the Milberg case could, if legalized, actually increase the payoff to all class members. Without the chance of earning a special incentive bonus beyond the expenses and nominal amounts that courts are permitted to approve, the argument goes, a plaintiff may not have the incentive to file a case and undertake the role of lead plaintiff. The result: Some meritorious class actions would never be filed, and class members would thus recover zero.case.

The article is The Hypocrisy of the Milberg Indictment: The Need for a Coherent Framework on Paying for Cooperation in Litigation. The paper was previously discussed on the Law Blog, as noted here.  For some other discussions of the many ironies in the Milberg prosecution, see here, here, here, here, and here.

At the risk of beating a dead horse, two points made in many of the above posts bear quick repeating. First, the paper isn't a defense of illegal practices, or for that matter of Milberg. Rather, it's a call for consistency. As we say in the abstract,

This case illustrates the need to develop coherent standards regarding payments to litigants and witnesses. These standards should be based on the incentive effects of the payments rather on a desire to discourage or encourage particular types of actions.

Bruce and I are working on a more formal general model that furthers this project.

Second, it is important to emphasize the danger in these payments. The WSJ story quotes Geoff Miller as saying that "[t]he concern is that a lead plaintiff won't be a vigorous monitor of the lawyer if the plaintiff shares the lawyer's fees." That's true (though it's also worth noting that Miller has co-authored with Ted Eisenberg a study of lead plaintiff bonus awards in which, as we summarize in our paper, "they find evidence consistent with using these payments to solve the collective action and free rider problems, as by reimbursing lead plaintiffs for non-pecuniary costs."

The key is that these payments need to be disclosed and monitored. Yet illegalizing the payments actually frustrates monitoring. As Bruce and I point out:

legislative or judicial rules preventing sufficient awards clearly increase lawyers’ incentives to engage in illegal behavior in order to solve the free rider problem with lead plaintiffs. The illegality of this behavior, in turn, triggers efforts to conceal the payments and the demand for more remedies, including federal criminal sanctions, to prevent such arbitrage.

So one of the many ironies of the Milberg case is that current law actually exacerbates the problem the law is intended to address.  That's an aspect of a more general problem I've discussed repeatedly:  the criminalization of business behavior.