The two sides in the potentially massive class-action lawsuit by silicon-valley engineers against Google, Apple, and other big tech companies reached an agreement, but that settlement was rejected by the judge. New York Times:
After the plaintiffs’ lawyers took their 25 percent cut, the settlement would have given about $4,000 to every member of the class.
Judge Koh said that she believed the case was stronger than that, and that the plaintiffs’ lawyers were taking the easy way out by settling. The evidence against the defendants was compelling, she said.
I would like to be able to explain this by understanding the economic/sociological motivations of the lawyers. People often complain about a huge chunk of the money going to the class-action lawyers who are too eager to settle, but the traditional argument is that a fixed percentage structure (rather than an hourly or flat rate) gives the lawyers the proper incentive to pursue the interests of the class by tying their compensation directly to the legal award. So this should lead to maximizing the award to the plaintiffs.
My best guess, doubtlessly considered by many others, is this: Lawyers, like most people, are risk adverse for sufficiently large amounts of money. (They would rather have $10 million for sure than a 50% chance at $50 million.) On the other hand, the legal award will be distributed over many more plaintiffs. Since it will be much smaller per person, the plaintiffs are significantly less risk adverse. So the lawyers settle even though it’s not in the best interests of the plaintiffs.
This suggests the following speculative solution for correctly aligning the incentives of the lawyers and the class action plaintiffs: Ensure that the person with the final decision-making power for the plaintiff legal team receives a percentage of the award that is small enough for that person’s utility function to be roughly as linear as the plaintiffs’. This could mean (a) spreading the legal work over many lawyers such that the potential compensation for each is smaller, (b) compensating the lead lawyer less than his colleagues, or (c) turn the class-action lawsuit legal team into a corporation with a director that must answer to many shareholders.
Proposal (a) has problems because it might require the number of lawyers to be comparable to the number of plaintiffs, which could be thousands or millions. Proposal (b) is awkward for the lawyer pecking order, and could lead to bad lead lawyers or the lead lawyer being pressured by his colleagues to settle. Proposal (c) strikes many people as weird, and introduces other principal-agent problems, but it does have precedence.