Auctioning fees and legal damages – an appropriate treatment for the auction houses???

This article in NY Times highlights the case when a federal judge (Kaplan) gave final approval yesterday to a $512 million settlement of the lawsuit against the Sotheby’s and Christie’s auction houses by customers who said they were cheated in a price-fixing conspiracy that lasted several years.

The interesting aspect of this case from a game theory point of view was how In this class action, U.S. District Judge Lewis Kaplan sought bids from leading law firms on fees they would charge the plaintiffs, looking to tap a qualified firm at the lowest cost to the class. After receiving the bids from about 20 firms, Judge Kaplan appointed Boies, Schiller, which wasn’t involved in the case at the start, as lead counsel in May.” Read this article here.

The anatomy-of-the-rise-and-fall-of-a-pricefixing article illustrates all the events from start to finish in a very compehensive manner.

Following is the description of how the law firm was chosed based on bids from various parties, the following text has been taken from page 515, Microeconomics 7th Ed by Pindyck & Rubinfeld:

Judge Kaplan entertained secret bids from 20 Law Firms. Each firms was told to offer a fee arrangement consisting of a base and a percentage. A settlement or trial award at or below the base would be given entirely to the plaintiffs, with the law firm receiving nothing. If the settlement or award was higher than the base, the law firm would receive the stated percentage of the amount over the base. Many attorneys operate under a contingent fee system in which they offer a base of zero and expect to receive one-third of the award.

The winning bid was the law firm of Boies, Schiller & Flexner, which bid a base of $405 million and a percentage of 25% to be earned on any award above $405 million. Some of the losing bidders were outraged that BSF had bid so high to get the business. Indeed, some suggested that the firm might not work hard in the plaintiff’s interest because the minimum might be unachievable. Prior to the bidding, observers expected the case to generate a settlement of $130 million. In the end, it appears that Judge Kaplan, the plaintiff’s class, and BSF were all winners. Months after taking on the case, BSF settled with defendants for $512 million, earning the attorney’s a $26.75 million fee (25% of excess of base) and generating just over $475 million for the class members.

Vamsi Duvvuri

MBA Class of 2009

Goizueta Business School