Opinion
00 Civ. 0648 (LAK)
February 22, 2001
David Boies, Richard Drubel, BOIES SCHILLER FLEXNER LLP, Plaintiffs' Lead Counsel Shepard Goldfein, Michael L. Weiner SKADDEN, ARPS, SLATE, MEAGHER FLOM LLP, attorneys for Defendants Christie's International PLC and Christies, Inc.
Richard J. Davis, Steven A. Reiss, Howard B. Comet, WEIL, GOTSHAL MANGES LLP, Attorneys for Defendants Sotheby's Holdings, Inc. and Sotheby's, Inc., (other appearances listed in appendix).
MEMORANDUM OPINION
These are consolidated class actions arising from alleged price-fixing by Christie's and Sotheby's, the two leading houses specializing in the auction sale of fine art and antiques. The allegations that form the basis of this case already have resulted in indictments of and guilty pleas by Sotheby's and its former president, Diana D. Brooks, to criminal price-fixing charges and a grant of conditional amnesty to Christie's and certain of its personnel in exchange for their cooperation with the Department of Justice. The matter now is before the Court on motions to approve a settlement of these actions for cash and other consideration said to total at least $512 million and for related relief.
I
A. Background
Defendants Sotheby's Holding, Inc. and its subsidiary Sotheby's Inc. (collectively "Sotheby's") and Christie's International PLC and its subsidiary Christie's, Inc. (collectively "Christie's") are in the business of providing auction services for the sale of fine and applied arts, furniture, antiques, automobiles, collectibles and other items. The primary source of revenues of the defendant auction houses are so-called buyers' premiums and sellers' commissions. A buyer's premium is, typically, a percentage of the price at which the buyer successfully bids on an item at auction. It is added to the auction sale price and retained by the auction house. A seller's commission is a percentage of the auction sale price that the auction houses deducts from the sale proceeds paid to the seller.
On December 24, 1999, Christie's International's former chief executive officer, Christopher Davidge, resigned abruptly. Subsequently, Christie's reportedly provided evidence of price-fixing with Sotheby's to the Department of Justice and is said to have received conditional amnesty from criminal prosecution in exchange for providing evidence.
B. Initial Proceedings
In late January 2000, following press reports of these events, the first of a large number of individual and class action complaints was filed in this District against Christie's and Sotheby's. All were assigned to the undersigned as related cases and consolidated. The third consolidated amended class action complaint alleges that the auction house defendants conspired to manipulate the prices at which they provided non-internet auction services. The conspiracy allegedly began in 1992 with an agreement to employ a common rate schedule for the premiums charged to buyers, effective in early 1993. It allegedly was expanded in 1995, when the defendants allegedly agreed to use substantially similar rates for sellers' commissions. Further, plaintiffs maintain that the auction houses agreed in 1995 to terminate the previous practice of negotiating the amounts of sellers' commissions with some of their customers.
Carol Vogel, Christie's Says It Is Cooperating with Antitrust Inquiry in Art World, N.Y. TIMES, Jan. 29, 2000, at B4.
Sir Anthony Tennant, A. Alfred Taubman, Christopher M. Davidge, and Diana D. Brooks later were added as defendants.
At the outset of the case, five law firms proposed themselves as plaintiffs' executive committee or co-lead counsel in the case. On April 20, 2000, the Court certified a plaintiff class consisting of "all persons who purchased from or sold through defendants items offered at or sold through defendants' non-internet auctions held in the United States between January 1, 1993 and February 7, 2000." Subsequently, in a process described in an earlier opinion, the Court selected different lead counsel, in part on the basis of an auction pursuant to which lead counsel agreed to handle the case on behalf of the class for a fee (inclusive of expenses) of 25 percent of any recovery in excess of $405 million.
In re Auction Houses Antitrust Litig., 193 F.R.D. 162, 164 (S.D.N.Y. 2000).
In re Auction Houses Antitrust Litig., 197 F.R.D. 71 (S.D.N Y 2000).
On September 22, 2000, the parties advised the Court that they had reached agreements in principle, the details of which are described in greater detail below, to settle the consolidated class actions for consideration said to be worth $512 million. In November, they moved for preliminary approval of the settlement and of the form and manner of notice to the class. The Court granted the motion to the extent that it approved a notice to the class and fixed a schedule for the filing of objections and requests for exclusion from the class as well as a settlement hearing.
C. The Foreign Auction Litigation
In August and September 2000 — just before the announcement of the proposed settlement of these cases, which relate exclusively to U.S. auctions, for $512 million — seven law firms filed three actions, which sought to recover damages under the United States antitrust laws and customary international law on behalf of an alleged class of persons who bought or sold through Christie's and Sotheby's at non-internet auctions held outside the United States. Three of the seven law firms had been unsuccessful bidders in the lead counsel auction. Three had been among the firms that served as interim lead counsel until displaced as a result of the auction that culminated in the selection of new lead counsel. And while those actions recently were dismissed, one of the same law firms actively represents objectors to this settlement.
Kruman v. Christie's Int'l PLC, No. 00 Civ. 6322 (LAK), 2001 WL 77059 (S.D.N.Y. Jan. 29, 2001).
D. The Proposed Settlement
1. Principal Terms as Initially Proposed
The principal terms of the settlement proposed to the Court in late 2000 were as follows:
• Sotheby's and Christie's each would pay $206 million, for a total of $412 million, into an escrow account for the benefit of members of the class.
• Sotheby's and Christie's, within thirty days after district court final approval of the settlement, would pay an additional $50 million, for a total of an added $100 million, into the escrow account for the benefit of class members. The contribution of each, at its option, could be in the form either of cash or of discount certificates usable to reduce sellers' commissions and certain other consignment-related charges at its auctions in the United States and the United Kingdom. The discount certificates would be "in such amounts as to equal a total fair market value of fifty million dollars . . . as determined by the Court . . ."
• Upon final approval of the settlement, the escrow fund would be distributed to class members according to a court-approved plan of allocation and to pay attorneys' fees, among other less significant possible expenses.
• Upon final approval and distribution of the settlement funds, class members who do not opt out would release Christie's, Sotheby's, and certain of their present or former employees, from all claims "based on any allegedly collusive activity or activities . . . wherever occurring or located" with two important exceptions:
(1) All class members would remain free to sue in foreign courts on the basis of foreign law for damages allegedly suffered in foreign auctions.
(2) Class members who choose not to claim benefits under this settlement would retain also whatever rights they otherwise might have to sue in United States courts for damages allegedly suffered in foreign auctions.
The terms are set out in parallel agreements between plaintiffs and each of Sotheby's and Christie's. Copies are Exhibits 1 and 2 to the agreed motion for preliminary approval of settlement (hereinafter "Agreed Motion").
Agreed Motion, Exs. 1 2, ¶ 5(c).
Id. ¶ 11(c) (emphasis added).
The proposed plan of allocation estimated the overcharges to sellers as 1 percent of the hammer price, and those for buyers to be 5 percent of the hammer price up to and including hammer prices of $50,000, and $2,500 for buyers at hammer prices exceeding $50,000. The net settlement fund would be distributed to class members pro rata based upon each class member's overcharges during the relevant period. In the event the settlement fund included discount certificates, the certificates as well as the cash would be distributed pro rata save that no certificates would go to class members with claims below $500. These claimants would be paid entirely in cash. Thus, class members with claims above $500 would receive a somewhat higher proportion of their distributions in certificates than would be the case if all consideration were distributed strictly pro rata.
Plan of Allocation, ¶¶ 2.2, 2.3.
Defendants' Plan for Fair-Market Valuation of Discount Certificates ("Plan for Fair-Market Valuation"), at 3.
The parties submitted also a so-called Plan for Fair-Market Valuation of Discount Certificates which, as initially proposed, was intended to help persuade the Court that the certificates should be valued at their face amount. Among the plan's key provisions, which has survived subsequent amendments, is a provision obligating Christie's and Sotheby's to select and compensate a certificate administrator whose duties will include facilitating the development and operation of a secondary market in the certificates. Among the administrator's duties will be dissemination of information about secondary market sales and development of procedures to connect prospective buyers and sellers of certificates.
Id., at 8; Amended Plan for Fair-Market Valuation, ¶ 11; Second Amended Plan for Fair-Market Valuation, ¶ 11.
2. The Class Notice
Once the foreign auctions suits were brought, attention was focused on the fact that the class includes both persons who bought or sold only at U.S. auctions and persons who bought or sold not only at U.S. auctions, but also at auctions held abroad ("Mixed Class Members"). The class notice carefully explained the consequences of the various options presented to prospective class members, including Mixed Class Members, by the structure of the release. For example, the first page of the printed version of the notice that was sent to class members stated in bold type:
Lead counsel's memorandum in further support of motion for final approval of settlement, etc., PX 1(B).
"Class members will not be paid from the Settlement Fund for any claims based on auctions held outside the United States. Accordingly, any Class Member who believes he or she may have a claim arising out of auctions held outside the United States should consider whether or not to forego the benefits of the proposed settlement . . . and to exclude themselves from the Class . . . taking into consideration, among other factors, the likelihood of recovering damages for such foreign auction claims and each Class Member's anticipated recovery from this Settlement Fund . . ."
The notice went on to set out almost verbatim the terms of the release:
"Upon final approval by the Court of the settlement and distribution of the Settlement Fund, [defendants] . . . shall be released by the Class and by each Class Member who has not validly excluded himself or herself from the Class, from any and all claims, causes of action, demands, rights, suits, and liabilities, including damages, costs, and attorneys' fees, in law or equity, based on any allegedly collusive activity or activities by, between, or among any of the Christie's Released Parties and/or any of the Sotheby's Released Parties, wherever occurring or located, except that Class Members who do not make a claim and receive any payment pursuant to the settlement do not release claims arising from purchases and sales at auctions conducted outside the United States."
Finally, it described the foreign auction litigation and spelled out in detail the possible ramifications of those cases for class members.
3. Appointment of Court Experts
In its effort to evaluate the proposed settlement, the Court appointed Kenneth G. Elzinga, Ph.D., of the University of Virginia and Denise Neumann Martin, Ph.D., of National Economic Research Associates as experts pursuant to FED. R. EVID. 706. They were charged with advising the Court concerning the defendants' plan for fair market valuation and the competitive consequences of the issuance of the discount certificates as well as the propriety and fairness of the 80 percent-20 percent split of the proposed settlement consideration between cash and discount certificates and the defendants' financial exposure if the case were tried successfully to judgment.
4. Subsequent Changes in the Settlement
The Court's appointment of Drs. Elzinga and Martin and other indications that the Court was troubled by the proposed issuance of the discount certificates and by the defendants' contention that the certificates should be valued at their face amount prompted renewed negotiations between lead counsel for plaintiffs and the auction house defendants. In consequence, a number of important changes were made to the proposed settlement over time:
• The discount certificates issued by Sotheby's would be usable to pay charges incurred at Christie's and vice versa. If either of the two firms failed, the outstanding certificates it had issued would remain usable to offset sellers' commissions and related consignment charges at the survivor throughout the five year period.
• All unused certificates could be redeemed for cash at their face amounts four years after their issuance. Cash redemption, however, would be available only from the defendant who had issued a given certificate.
• The principal amount of discount certificates that could be issued by each house in lieu of $50 million in cash was increased from $50 million to $62.5 million for a total of $125 million. This increased the nominal size of the settlement to $537 million, $412 million in cash and $125 million in certificates.
5. The Experts' Report
The court-appointed experts rendered a report and two supplemental reports. The principal conclusions were as follows:
First, they do not regard the issuance of these discount certificates, usable only at Sotheby's and Christie's, as likely to have significant anticompetitive effects in the market for auction services, principally because the settlement is predominantly in cash, the volume of business done by the auction houses in recent years is more than sufficient to absorb the certificates, the certificates are usable at either Sotheby's or Christie's, many class members who would receive certificates do a sufficient level of continuing business with these houses to use the certificates without increasing the extent of their historical dealings with them, and unused certificates are redeemable for cash or salable in an anticipated secondary market.
The Court initially was troubled by the possibility of anticompetitive effects, particularly given the high concentration of this industry. Responding to the Court's solicitation of its views, see Order, Nov. 13, 2000, ¶ 4, the Antitrust Division of the United States Department of Justice did not oppose the settlement on this ground. In view of this response and the experts' views, accepted by the Court, no further comment on this point is necessary.
Second, they believe that a secondary market for the certificates is likely to develop, especially given the ultimate redeemability of the certificates for cash.
Finally, they valued the certificates — based on redeemability for cash after five years, the period offered by defendants at the time the initial report was written — at approximately 84 percent of their principal amount.
The report states that the certificates are valued at between 81 and 89 percent of their face value, depending on whether the risk adjusted or risk free rate is used. It concludes that $118 million in principal amount of certificates should be issued to bring the fair market value of the certificates to $100 million. This implies a valuation of 84 percent of their face value.
Subsequent to the delivery of the experts' initial report, defendants agreed to make the certificates redeemable for cash after four, rather than five, years. This of course increases their value, assuming that the speedier redemption schedule does not materially worsen the solvency risk. Taking into account the four-year period, the court-appointed experts valued the certificates at approximately 87 percent of their principal amount.
The second supplemental report concludes that, with cash redemption after four years, $115 million in principal amount would suffice to bring the fair market value of the certificates to $100 million.
E. The Criminal Cases
The Antitrust Division of the Department of Justice was not idle while these civil cases proceeded. On October 5, 2000, Sotheby's and its former president, Diana D. Brooks, pleaded guilty to price-fixing in violation of Section 1 of the Sherman Act. Significantly, the informations charged price-fixing only with respect to sellers' commissions and made no mention of buyers' premiums.
United States v. Sotheby's Holdings, Inc., 00 Crim. 1081 (LAK); United States v. Diana D. Brooks, 00 Crim. 1084 (RMB). The Court accepted Sotheby's plea on February 2, 2001 and sentenced it to pay a fine of $45 million.
II
A. The Standard
Class actions are strong medicine. They may confront defendants with potentially ruinous financial exposure, so much so that some have argued that many class action defendants are forced to settle irrespective of the merits of the case. But they also subject absent class members, who typically have no role in supervising the litigation brought on their behalf, to the risk that their rights will be lost, prejudiced, or sold out too cheaply through inadequate representation. In consequence, Rule 23 provides that no class action may be dismissed or settled without court approval, typically after notice to the class and an opportunity for its members to object and often after affording class members the right to exclude themselves from the case.
E.g., Blair v. Equifax Check Servs., Inc., 181 F.3d 832, 834 (7th Cir. 1999) ("Many corporate executives are unwilling to bet their company that they are in the right in big-stakes litigation, and a grant of class status can propel the stakes of a case into the stratosphere."); In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1298-99 (7th Cir.) (to same effect), cert. denied, 516 U.S. 867 (1995); In re General Motors Corp. Pick-Up Truck Fuel Tank, 55 F.3d 768, 784-85 (3d Cir.), cert. denied, 516 U.S. 824 (1995); Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 STAN. L. REV. 497 (1991); Reinier Kraakman, Hyun Park Steven Shavell, When Are Shareholder Suits in Shareholder Interests?, 82 GEO. L.J. 1733 (1994); Roberta Romano, The Shareholder Suit: Litigation Without Foundation?, 7 J.L. ECON. ORG. 55 (1991).
The judgment a court confronted with a class action settlement is called upon to make is whether the settlement is "fair, adequate, and reasonable" to class members, a standard that includes both procedural and substantive components. Assessing procedural fairness requires attention to such matters as the negotiation history and adequacy of class representation. Factors pertinent to substantive fairness are included among those set out in City of Detroit v. Grinnell Corp.:
"(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through the trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation."
In re NASDAQ Market-Makers Antitrust Litig., 187 F.R.D. 465, 473 (S.D.N.Y. 1998).
E.g., Malchman v. Davis, 706 F.2d 426, 433 (2d Cir. 1983); see D'Amato v. Deutsche Bank, 236 F.3d 78, 85-86 (2d Cir. 2001).
495 F.2d 448 (2d Cir. 1974), abrogated on other grounds by Goldberger v. Integrated Res., Inc., 209 F.3d 43 (2d Cir. 2000).
Id. at 463 (citations omitted).
Moreover, the settlement court must assess the fairness of a proposed settlement in a practical way on the basis of reasonably available information. It should not attempt to approximate a litigated determination of the merits of the case lest the process of determining whether to approve a settlement simply substitute one complex, time consuming and expensive litigation for another.
See West Virginia v. Chas. Pfizer Co., 440 F.2d 1079, 1085 (2d Cir.), cert. denied, 404 U.S. 871 (1971).
B. Procedural Fairness
There is no doubt about the procedural fairness of this settlement. Plaintiffs' lead counsel was not appointed until after the class was certified, so the discussions that led to this agreement post-dated the class determination. The settlement was reached among exceptionally able counsel, experienced in litigation of this sort. Moreover, the fee of plaintiffs' lead counsel was fixed as a flat percentage of any recovery in excess of $405 million by the auction the Court held shortly after the class was certified. In consequence, the negotiations that produced this proposed settlement could not have been influenced adversely by considerations of counsel's compensation. Indeed, there could be no greater testament to the process than some of the comments made at the settlement hearing by two of the interim lead counsel who were ousted as a result of the Court's decision to hold an auction to select lead counsel. Mr. Furth, on behalf of all of the interim lead counsel, said that he "never in [his] fondest dreams . . . believed that these defendants would pay $512 million" and that this settlement "is the most outstanding result I have ever heard of in the history of the antitrust laws." Another of the interim lead counsel noted that he and his colleagues had been negotiating with defendants prior to the appointment of plaintiffs' lead counsel, that they "had really good hard solid numbers from [defendants], and we didn't think we could have accomplished what Mr. Boies did."
Tr., Feb. 2, 2001, at 92-93.
Id. at 93-94.
C. Fairness of Aggregate Consideration
Many of the City of Detroit factors favor acceptance of this settlement quite strongly. Litigation of this sort is lengthy, difficult and expensive. The reception of the settlement by the class has been overwhelmingly favorable. Of approximately 130,000 class members, only 916, or 0.7 percent), have requested exclusion, and only 61 have filed objections. No one has contended that the aggregate consideration is inadequate although, as will appear, a number of other points have been raised. Plaintiffs have conducted extensive document discovery and had the benefit of the plea allocution of Ms. Brooks as well as extensive and detailed press reporting concerning the events at issue. Moreover, as noted previously, the terms of the accepted bid by plaintiffs' lead counsel gave them a very substantial economic incentive to maximize the class' recovery.
About half of the 61 objectors are members of the British Antique Dealers' Association and signed identical form letters.
Tr., Feb. 2, 2001, at 5.
See, e.g., Leslie Eaton Carol Vogel, Sotheby's and Christie's Face Mounting Suits in Antitrust Case, N.Y. TIMES, Feb. 21, 2000, at A1; Ralph Blumenthal Carol Vogel, Auction Case Prosecutors Are Pressed by Deadline, N.Y. TIMES, June 12, 2000, at A1.
See In re Auction Houses Antitrust Litig., 197 F.R.D. 71, 83-84 (S.D.N.Y. 2000).
The assessment of the proposed settlement against the maximum recovery, discounted for the litigation risk, is more complex. Plaintiffs' lead counsel have submitted an affidavit of Jeffrey J. Leitzinger, Ph.D., an economist and consultant, with respect to the issue of damages. He estimates that buyers were overcharged approximately $201 million and sellers approximately $85 million during the class period. Thus, he estimates total damages at $286 million. Significantly, none of the objectors to the settlement quarrels with these conclusions, although defendants vigorously contend that they are too high. While they have not submitted comprehensive alternative figures, a rough estimate of their position would be $37.7 million on the seller side and $88.9 million on the buyer side, or a total of $126.6 million.
Defendants' Memorandum in Support of Final Approval, at 5; Sentencing Memorandum for Defendant Sotheby's Holdings, Inc. ("Sentencing Mem."), at 6-7 in United States v. Sotheby's Holdings, Inc., No. 00 Crim. 1081 (LAK).
Sotheby's asserts that the damages it caused on the seller side were $22 million. Sentencing Mem. at 6. The Court assumes arguendo that the alleged overstatement in Dr. Leitzinger's estimate of buyer side damages is proportionately the same, which would yield buyer side damages attributable to Sotheby's of $49.5 million. Assuming further that the same level of overstatement affected Dr. Leitzinger's estimates of damages caused by Christie's would yield buyer and seller side damages attributable to Christie's of $39.4 million and $15.7 million, respectively.
Given these parameters, the proposed settlement would result in a recovery by the class of perhaps 1.8 times to 4.0 times the damages it suffered. And if this were not an antitrust case, in which damages would be trebled in the event the class prevailed at trial, the fairness of the aggregate settlement amount would be obvious. What, however, is to be made of defendants' exposure to treble damage liability?
The received wisdom is that the adequacy of antitrust class action settlements is to be tested against an estimate of single rather than treble damages. This view rests almost entirely on City of Detroit v. Grinnell Corp., where the Second Circuit took that position in dicta that have been followed widely in subsequent years. It based its conclusion on tradition and on the proposition that consideration of trebling would "distort the entire theoretical foundation which underlies the settlement process" because it would "require defendants to admit their guilt for the purpose of settlement negotiations."
495 F.2d 448 (2d Cir. 1974).
See In re Domestic Air Transp. Antitrust Litig., 148 F.R.D. 297, 319 n. 25 (N.D.Ga., 1993); Fisher Bros. v. Phelps Dodge Indus., 604 F. Supp. 446, 451 (E.D.Pa. 1985); In re Art Materials Antitrust Litig., 100 F.R.D. 367, 371 (D.C. Ohio 1983).
The justifications offered for the single damages standard for approval of antitrust class action settlements, this Court respectfully submits, are not persuasive. The theoretical foundation that underlies the settlement process is not a tradition that a plaintiff's asking price may not exceed single damages — a point vividly demonstrated by this very proposed settlement, in which plaintiffs have secured a settlement of 1.8 times their estimate of single damages. Rather, the theoretical foundation of the settlement process is that plaintiffs and defendants all are rational economic actors. Each makes its own assessment of the maximum possible net recovery. Each discounts the maximum possible recovery by the estimated probability of that outcome. Each thereby comes to its own view of what it is prepared to accept or to pay — in the vernacular, its own view of what the case "is worth" or, in the language of some of the decision analysis literature, its expected value. If the ranges of the two sides overlap, a case usually settles. If they do not, a case usually is decided by litigation. To ignore the fact that plaintiffs and defendants both consider the possibility of trebling in coming to their respective assessments is to ignore economic reality. Tradition has nothing to do with it.
See, e.g., HOWARD RAIFFA, THE ART AND SCIENCE OF NEGOTIATION c. 5 (1982); Marjorie Anne McDiarmid, Lawyer Decision Making: The Problem of Prediction, 1992 WIS. L. REV. 1847; Marc B. Victor, The Proper Use of Decision Analysis to Assist Litigation Strategy, 40 BUS. LAW. 617 (1985); Note, Settling for Less: Applying Law and Economics to Poor People, 107 HARV. L. REV. 442, 444 (1993) ("HARVARD NOTE").
In fact, one may estimate not only the maximum possible recovery, but other possible recoveries as well, discounting each by the probability of its occurrence. But the same general principle described in the text applies.
It should be noted that this model disregards the fact that preferences and aversions unique to the actors in a particular case, notably risk aversion, may cause them to settle for more or less than their expected value in a given situation. See, e.g., Victor, supra, at 621 n. 6; HARVARD NOTE, at 445-53.
Nor, in this Court's view, does consideration of trebling require a defendant to admit guilt at the outset of settlement negotiations. It requires only that the defendant take into account the undeniable fact that damages will be trebled if the plaintiff prevails at trial. And defendants in fact do take that into account, at least in their private calculations, every day in formulating their settlement positions in antitrust cases.
Given this reality, there are few perceptible justifications of the single damages standard for the determination of the fairness of antitrust class actions. One is the long established policy of favoring settlements. The effect of the single damages standard is to lower the bar that must be surmounted in order to settle a class action and thus to promote negotiated rather than litigated determinations of these matters. Perhaps that is a sufficient basis for adopting such a rule. After all, class actions are complicated and take up a great deal of trial court time, not to mention resources of the parties. There are, in consequence, arguable benefits to setting the bar low. If courts are to do so, however, they should recognize also that there are costs. In non-representative private antitrust cases, no one is prohibited from considering the prospect of treble damages in determining whether to settle a case. In other words, a non-representative plaintiff will determine what the case is worth, having full regard to the possible recovery of treble damages. The single damage standard for class action settlements, however, places the settlement court, which acts as a fiduciary for the absent class members, in a position in which it may be forced to approve a settlement that no non- representative plaintiff would accept in similar circumstances. And it does not suffice to say that counsel for a plaintiff class will guard against such a result. The agency costs of class actions are too well established to permit such a broad conclusion.
Some have argued forcefully that federal courts have acquired a strong institutional bias in favor of negotiated rather than adjudicated dispute resolution. Judith Resnik, Trial as Error, Jurisdiction as Injury: Transforming the Meaning of Article III, 113 HARV. L. REV. 924 (2000).
In re Auction Houses Antitrust Litig., 197 F.R.D. 71, 75-78 (S.D.N.Y. 2000).
Another possible explanation for the single damages standard is a belief, unarticulated in this context, that the class action device, by aggregating multitudes of claims and thereby sometimes subjecting defendants to the possibility of catastrophic liability, compels defendants who cannot afford to take even a remote risk of a ruinous outcome to settle even where they would be quite likely to prevail on the merits. Setting a lower threshold for approval of a class action settlement perhaps has been thought to redress this imbalance, at least to some degree. But if the single damages standard for approving class action settlements is so intended, it has been adopted without explicit recognition of the purpose of doing so and without any recourse to theoretical or empirical basis for determining that it does not go seriously beyond the desired effect.
The literature on litigation decision making recognizes that risk averseness may have such an effect. E.g., Victor, supra, at 621 n. 6 (risk averseness may cause defendant to pay more in settlement than expected value to avoid risk of extremely adverse result); HARVARD NOTE, at 444-49 (arguing that risk averseness induces the poor to accept inadequate litigation settlements).
Whether the benefits of setting the settlement standard low are sufficient to outweigh the costs to absent class members in terms of possibly inadequate settlements is an arguable question. Fortunately, it is one that need not be answered in this case. For this settlement is adequate even if measured against a treble damage standard.
We start with Professor Leitzinger's damage assessment, recognizing that it may be too high and thus may bias the subsequent analysis against acceptance of the settlement. If he is right and plaintiffs were to recover treble damages, the recovery would consist of three times $85 million on the sellers' side, or $255 million, plus three times $201 million on the buyers' side, or $603 million, for a total of $858 million. On the other hand, a rough estimate of defendants' position on damages would yield recoveries of $113.1 million ($37.7 million trebled) on the seller side and $266.7 million on the buyer side ($88.9 million trebled), or a total of $379.8 million.
The fact that defendants have agreed to pay substantially more than $379.8 million could mean that they view their realistic exposure as closer to Dr. Leitzinger's estimate than their own, that they prefer the certainty of this expensive settlement to even a small risk of a more expensive judgment, or a combination of both. Without using the term too literally, this is a "bet the company" case, a term used to describe cases in which an adverse result would seriously threaten the survival of a corporate defendant. Plaintiffs in such cases arguably may obtain settlements higher than the defendant's expected value of the case (i.e., the likely exposure discounted by its probability) in consequence of the defendant's aversion to catastrophic risk. Perhaps the classic example of a "bet the company" case — and one in which the defendant did indeed "bet the company" by going to trial — is Pennzoil Co. v. Texaco, Inc., 481 U.S. 1 (1987). The lead defendant there elected to go to trial on a multibillion dollar tort claim, reportedly after rejecting a settlement offer, Robert H. Mnookin Robert B. Wilson, Rational Bargaining and Market Efficiency: Understanding Pennzoil v. Texaco, 75 VA. L. REV. 295, 303 n. 66 (1989) (citing THOMAS PETZINGER, JR., OIL AND HONOR: THE TEXACO-PENNZOIL WARS (1987)), only to suffer an adverse judgment of $11 billion which resulted in the bankruptcy of the defendant and, eventually, a reported $3 billion settlement, Allanna Sullivan Thomas Petzinger, Jr., Giant Steps: Settlement Achieved, Texaco and Pennzoil Face New Challenges, WALL ST. J., Dec. 21, 1987.
If the case were to go forward, plaintiffs would be very likely to establish liability on the seller side, as Sotheby's and Ms. Brooks already have pleaded guilty. Thus, there is a high likelihood of a judgment on the seller side in the range of $113 to $255 million. The buyer side, however, presents substantially greater litigation risk. No one, as far as the Court is aware, has admitted price-fixing on the buyer side. There is no governmental decree entitled to prima facie effect under Section 5(a) of the Clayton Act. The fact that the information concerning collusion between Sotheby's and Christie's appears to have been held tightly at high levels of both companies presents significant difficulties, particularly as the pertinent Christie's executives are not in the United States and may be expected to resist efforts to obtain their testimony and as Sotheby's former chairman, A. Alfred Taubman, reportedly is a target of a grand jury investigation and would be likely to invoke his privilege against self incrimination. Further, if Mr. Taubman is indicted, proceedings in that case would be likely to delay the progress of this action significantly. Thus, while there is a prospect of a recovery as high as $600 million on the buyer side, a finding of liability is not assured and likely would be established only after considerable time and additional effort. Moreover, Sotheby's, at least, appears unlikely to be able to respond fully to a judgment for the full amount of trebled damages were plaintiffs to prevail after trial.
The amount of damages on the seller side is hotly disputed and difficult to quantify. Because sellers' commissions were subject to negotiation both before and after the alleged collusion, and because they vary depending on the value of the goods offered for sale and the type of seller (i.e., private seller, dealer, or museum), a regression analysis must be used to estimate this amount. See generally Tr., Feb. 2, 2001, at 9; Leitzinger Aff. ¶¶ 13-14.
For example, Christie's resisted efforts to compel it to provide discovery of information obtainable from Mr. Davidge by seeking to invoke his privilege against self incrimination. In re Auction Houses Antitrust Litig., 196 F.R.D. 444 (S.D.N.Y. 2000).
See Sentencing Mem. 9-11.
In all the circumstances, the aggregate amount of this settlement is well within the range of fairness. While there is a very strong likelihood of a recovery of $113 to $255 million at trial and a possibility of an overall recovery of as much as $858 million, recovery in excess of the $113 to $255 million range is uncertain. A settlement of $512 million in these circumstances is eminently reasonable by any standard.
D. Valuation of the Discount Certificates
The use of discount coupons — broadly speaking, any form of scrip that permits the holder to receive a discount or satisfy charges imposed by the issuer — as currency in class action settlements has increased in recent years. It has become an object of intense criticism, as coupons may be worth little if anything, and plaintiffs' lawyers who have agreed to accept them may receive substantial cash fees, a situation that can present a serious conflict of interest. Indeed, defendants often regard such coupons as marketing devices to the extent that they are redeemed and rely on class members to lose or neglect to use them in order to keep costs low. This settlement, however, does not fall into that abusive pattern for two fundamental reasons. First, it is to be paid predominantly in cash; the cash component alone exceeds plaintiffs' estimate of the total damages sustained by the class. Second, the agreement here is unique in that it requires issuance of certificates, assuming the defendants elect that option, having a fair market value of $100,000. Thus, the Court — not the parties or the lawyers — ultimately determines the value of the certificates. And while valuation often can be a complex matter, the task has been simplified here by modifications to the settlement and by the position taken by plaintiffs' lead counsel.
Severin Borenstein, Settling for Coupons: Discount Contracts as Compensation and Punishment in Antitrust Lawsuits, 39 J.L. ECON. 379, 379-80 (1996); see also Geoffrey P. Miller Lori S. Singer, Nonpecuniary Class Action Settlements, 60 J.L. CONTEMP. PROB. 97 (1997) (hereinafter "Miller Singer").
Miller Singer, at 98 n. 10.
Defendants have taken the position that the certificates are worth their full principal amounts on the theory that they can be used, dollar for dollar, to offset seller commissions and other consignment costs. See, e.g., Plan for Fair-Market Valuation, at 4; Landes Decl., at 2. The term "fair market value," however, has a well understood and long established meaning. "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Schonfeld v. Hilliard, 218 F.3d 164, 178 (2d Cir. 2000) (quoting United States v. Cartwright, 411 U.S. 546, 551 (1973)).
The value of the certificates is relevant here for two purposes — determining the principal amount of certificates to be issued pursuant to the settlement agreements and fixing the amount of lead counsel's fee, which is fixed as a percentage of the gross recovery. The parties have agreed, however, that if the option to pay part of the settlement in discount certificates is exercised, each defendant exercising the option will provide $62.5 million in principal amount of certificates in lieu of $50 million in cash. If the certificates are worth more than 80 percent of their principal amount, any excess would benefit the class. Similarly, plaintiffs' lead counsel has taken the position that the settlement is worth $512 million and that its fee should be based on that amount. In consequence, plaintiffs' counsel too will be taken care of as long as the certificates are worth at least 80 percent of their principal amount. There is, accordingly, no need to reach a precise valuation of the certificates as long as the Court is satisfied that they are worth at least 80 percent of their principal amount.
Lead counsel's memorandum in further support of motion for final approval of settlement, etc., at 46-47.
In considering this issue, it is helpful to focus first on two subsidiary conclusions:
First, the value of the certificates as initially proposed did not remotely approach their principal amounts. They were usable only at the issuing house. There was no cash redemption option, which certainly would have discouraged, and perhaps prevented altogether, the development of a secondary market despite the fact that they were transferrable and "stackable."
That is, certificates could be aggregated to satisfy sellers' commissions and other consignment charges.
Second, the subsequent changes in the certificates have addressed many of these problems. The certificates are usable at either house, regardless of which house issued them. They are redeemable for cash by the issuing house after four years. And this latter change has dramatic effects. It permits recipients to get cash for the certificates, albeit after a period of time. Perhaps even more important, it creates an economic incentive for one or more entrepreneurs to make a market in the certificates, thus establishing a liquid secondary market.
A market maker creates a market in an instrument or commodity by buying and selling constantly for its own account, thereby providing liquidity. E.g., Gross Decl. ¶ 9.
We come, then, to the question whether the certificates are worth at least 80 cents on the dollar. The Court's well respected and highly qualified appointed experts concluded that they are worth approximately 87 percent. Although one expert proffered by an objector has argued for a lower figure, the Court is more persuaded by its own independent experts. It recognizes, however, that its own experts' opinion rests in part on their conclusion that "it seems likely that a secondary market will develop in these certificates" and that this conclusion comes with the caveat that the certificate administrator will be paid by the defendants and therefore may not pursue the development of a secondary market as aggressively as they otherwise might.
The experts stated that the principal amount of $115 would be required for the value of the certificates redeemable for cash after four years to reach $100 million, implying a valuation of 87 percent of face value. The experts valued the certificates with the four-year period at 77.3 to 86.2 percent if no secondary market develops and 90 to 94 percent of their principal amount if an efficient market for coupons develops. See Economic Assessment of Proposed Class Settlement: Addendum, at 2.
James Tharin argues that the value of the certificates is 55 percent of principal amount, assuming that no secondary market develops, and 70 percent if such a market does emerge. Tharin Decl., Jan. 31, 2001. His methodology, however, understates the value.
Tharin values the certificates by treating them as four-year, single payment debt obligations and discounting them to present value at a rate selected by comparing them to Sotheby's outstanding bonds, adjusted for the difference in time to maturity. Id. ¶¶ 4-6. He overlooks the fact, however, that the discount certificates at issue here are usable immediately, a fact of substantial value to a prospective purchaser above and beyond the value inherent in the ability to redeem for cash at the end of four years. This characteristic is not shared by the four-year, single payment debt obligations Mr. Tharin uses as his yardstick of value, thus strongly biasing his conclusion against the value of the discount certificates. To illustrate the point, consider a $10,000 zero coupon note, payable in four years. Assuming a discount rate of 7 percent, the present value of the note is $7,563.99. If that same $10,000 zero coupon note were usable immediately by a purchaser, dollar for dollar, to offset sums owed by the purchaser to the obligor on the note, the purchaser would profit by buying the note for quite substantially in excess of $7,563.99. This in substance is the situation presented here. Because the certificates are usable immediately for 100 percent of their principal amounts to offset consignment charges, persons who have incurred or expect to incur consignment charges are likely to pay substantially in excess of the discounted present value of the certificates, computed solely on the basis of their future cash redemption.
The Court has considered the comments that a number of objectors made on the experts' report and have taken them into consideration in reaching this conclusion. The comments are not in all cases utterly devoid of merit. Nevertheless, the concerns are allayed by the range of values proposed. The court-appointed experts' value the certificates at 87 percent. The most thorough of the objector's experts, James Tharin, values them at 55 to 70 percent of face value, which, as detailed in the previous footnote, understates the value. In all the circumstances, the Court remains persuaded that the certificates' value is above 80 percent of the principal amount.
Economic Assessment of Proposed Class Settlement, at 18.
In the circumstances, the Court finds that the value of the certificates equals or exceeds 80 percent of their face value provided adequate steps are taken to ensure the development and maintenance of a secondary market.
A number of submissions address the circumstances necessary to promote the development of a secondary market. All agree that the basic ingredients — transferability, stackability, and adequate redemption period — are present here. But the likelihood of the development of a strong secondary market depends upon widespread dissemination of the availability of the certificates and the means of buying and selling them. Class members and the public with which the auction house defendants deal, which after all is the vitally important source of prospective certificate buyers, must be informed of the certificates, their terms, and their availability. They must be given the names and contact information for the certificate administrator and any market makers throughout the period in which certificates are outstanding, perhaps as suggested by one of the objector's experts. Among other measures, a notice with this information should be included prominently both in the auction catalogs and on sellers' invoices.
See Tharin Decl., Jan. 4, 2001, ¶¶ 19-20. Tharin suggests including an offer letter from market makers in the mailing of certificates to class members, including market makers' telephone numbers and web addresses on the face of the certificates, and giving market makers access to the class list.
As the valuation of the certificates depends in no small measure upon the development of a secondary market for the certificates, any approval of this settlement must be conditioned on appropriate improvement in the proposed mechanism for such development.
E. Objections to the Settlement
1. Scope of Release
The release contained in the proposed settlement would surrender all claims of class members that were asserted in this action — i.e., claims for damages caused by defendants' collusion with respect to auctions held in the United States. All class members thus would retain the right to bring foreign-law claims in foreign courts to recover damages allegedly sustained in foreign auctions, regardless of whether they collect from the settlement fund in this case. Those who collect from the settlement fund, however, would be foreclosed, in addition, from suing in the United States for alleged overcharges sustained in foreign auctions.
A number of Mixed Class Members have objected to the scope of the proposed release. They argue, in substance, that the proposed settlement provides no consideration for overcharges in foreign auctions and that Mixed Class Members should not be forced to surrender claims for such injuries as the price of receiving compensation for injuries allegedly suffered in U.S. auctions.
It is important at the outset to recognize that many of the objectors misunderstand the effect of the proposed release. No one is being asked to surrender all claims with respect to foreign auctions. Mixed Class Members may claim the benefit of this settlement and sue abroad under applicable foreign law to recover injuries allegedly sustained abroad. All that is sought in exchange for the settlement consideration is a release of the right to pursue claims based on foreign auctions in courts in this country and under U.S. law in foreign courts. But that is not dispositive.
On the terms of the settlement, class members who claim the benefit of this settlement cannot sue with respect to foreign auctions under U.S. law in foreign courts, but such claims are likely to be dismissed by application of res judicata.
Any claim based on collusion in the setting of buyers' premiums and sellers' commissions charged in foreign auctions would be based upon U.S. law (the Sherman Act), international law, or the law of a foreign nation. This Court already has dismissed such claims based upon the Sherman Act and customary international law in Kruman v. Christie's International PLC. Nor is there any reason to suppose that Mixed Class Members would be permitted to maintain suits based on foreign law to recover damages suffered in foreign auctions in courts in this country, as any such claims almost certainly would be dismissed on the basis of the forum selection clauses in the terms and conditions employed by both Christie's and Sotheby's or, alternatively, on the ground of forum non conveniens. Hence, Mixed Class Members would not be required, as a condition of collecting settlement proceeds in this case, to give up anything of great value. Moreover, the practical reality this situation is that defendants have offered the class a huge sum of money. The incentive to do so was to purchase a certain measure of peace. It is far from unreasonable in these circumstances to ask that those who accept the offer deliver the peace that is the quid pro quo. Nevertheless, the objectors' point is not without merit.
No. 00 Civ. 6322 (LAK), 2001 WL 77059 (S.D.N.Y. Jan. 29, 2001).
Terms and conditions were published in the catalogs defendants prepared for each auction. Regardless of whether bidders and consigners had actual notice, these terms are likely to be binding. RESTATEMENT (SECOND) OF CONTRACTS, § 28; cf. Finnish Fur Sales Co., Ltd. v. Juliette Shulof Furs, Inc., 770 F. Supp. 139 (S.D.N.Y. 1991) (enforcing choice of law clauses in Finnish auction terms).
See, e.g., Piper Aircraft Co. v. Reyno, 454 U.S. 235, 254 n. 22, 102 (1981); Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 506-07, 508-09 (1947); Koster v. American Lumbermens Mut. Cas. Co., 330 U.S. 518 (1947); Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88 (2d Cir. 2000); Capital Currency Exchange, N.V. v. National Westminister Bank PLC, 155 F.3d 603 (2d Cir. 1998), cert. denied, 526 U.S. 1067 (1999).
The lynchpin of the objection is National Super Spuds, Inc. v. New York Mercantile Exchange, where the Court of Appeals reversed an order approving a class action settlement on a ground directly applicable to this case. The case was brought on behalf of a class of persons who had held and liquidated long positions in a particular futures contract during a specific period. The judgment entered upon approval of the class action, however, released the defendants "not only from bringing the claims asserted in the . . . action — claims based on liquidated contracts — but also from bringing any other claims against the defendants with respect to the events described in the . . . complaint — including claims based on contracts that were not liquidated" during the relevant period.
660 F.2d 9 (2d Cir. 1981).
Id. at 14.
In an opinion by Judge Friendly, the Court of Appeals held that the approval of the settlement with this release was improper. It pointed out that the class notice "did not adequately apprise [sic] class members who also held claims in respect of unliquidated contracts that these . . . were being placed on the block although these class members were to receive nothing in return." It then held that the class plaintiffs "were . . . empowered to represent members of the class solely with respect to the contracts in which all members of the class had a common interest: contracts liquidated" during the relevant period, and therefore "had no power to release any claims based on any other contracts" although it did acknowledge that "a settlement could properly be framed so as to prevent class members from subsequently asserting claims relying on a legal theory different from that relied upon in the class action complaint but depending upon the very same set of facts."
Id. at 16.
Id. at 17-18 n. 7.
Super Spuds is very comparable to this case in one of the respects relied upon by the Court of Appeals and very different in another. The Super Spuds settlement would have given up a claim upon which the action had not been brought and with respect to which the interests of the plaintiffs and some of the class members were not identical. Similarly, this release would require Mixed Class Members who wish to benefit from the settlement to give up such rights as they might have to sue in the United States with respect to foreign auctions although (a) the foreign auctions were not a subject of this action, and (b) the plaintiffs here do not all share the concerns of the Mixed Class Members with respect to foreign auctions. On the other hand, the class notice in this case shares none of the deficiencies of that in Super Spuds. There simply is no question that the Mixed Class Members here are on notice that the effect of collecting settlement proceeds will preclude the United States as a forum for any claim they may bring with respect to foreign auctions. But this distinction, although it has some appeal, is not entirely persuasive.
Some of the plaintiffs here, including some lead plaintiffs, are Mixed Class Members. Some but not all of those plaintiffs have objected to the settlement on this ground.
The core proposition underlying Super Spuds is that "[t]here is no justification for requiring [persons in objectors' position] to release claims based on unliquidated contracts as part of a settlement in which payments to class members are to be determined solely on the basis of the contracts they liquidated." In other words, there is no reason why some class members should be forced to give up something of value to enable other class members to benefit from a settlement made richer at their expense. "An advantage to the class, no matter how great, simply cannot be bought by the uncompensated sacrifice of claims of members, whether few or many, which were not within the description of claims assertable by the class."
National Super Spuds, 660 F.2d at 18.
Id. at 19.
To be sure, the Super Spuds release in effect would have required class members with claims based on unliquidated contracts to surrender their claims based on those contracts whereas the release here, particularly in light of the clear class notice, does not require Mixed Class Members to give up whatever rights they may have to a U.S. forum for their foreign auction claims. Rather, they are given the choice between preserving those rights and accepting the proceeds of this settlement. But that distinction, in this Court's view, does not save the situation for the proponents. Indeed, one of the very cases upon which they rely — Weinberger v. Kendrick — demonstrates this.
698 F.2d 61 (2d Cir. 1982), cert. denied, 464 U.S. 818 (1983).
In Weinberger, the case was expanded to include the released claims before the class was certified and "the settlement made provision for payments to holders of the [additional released] claims . . ." Moreover, the Circuit made clear that it had "no intention to depart in any way from National Super Spuds." Thus, the key point is that an expanded release requires the allocation of at least some of the settlement consideration to the holders of the claims prejudiced by the expansion unless the class action judgment would bar the released claims by application of principles of former adjudication. That requirement is not satisfied here.
Id. at 77.
Id.
TBK Partners, Ltd. v. Western Union Corp., 675 F.2d 456 (2d Cir. 1982), another case defendants rely upon, did no more than reiterate Super Spuds' acknowledgment that a release in a class action settlement properly may preclude unasserted claims that "hinge on the identical operative factual predicate" — there the correct value of particular securities — while at the same time once again cautioning against releases of claims not shared by the entire class in circumstances that confer an "advantage to the class . . . by the uncompensated sacrifice of claims of members, whether few or many." Id. at 460-61 (quoting National Super Spuds, 660 F.2d at 19). Unlike TBK Partners, Ltd., the foreign auction claims, although they allegedly arise by reason of the same conspiracy, do not rest upon "the identical factual predicate" as this case.
Finally, it might be argued on behalf of the proponents that Super Spuds, Weinberger and their progeny all are distinguishable on the ground that those cases involved releases of claims that went beyond those asserted in the settled class actions whereas this release expressly would preserve the foreign auction claims of the Mixed Class Members; it merely would restrict the venues in which those claims might be brought. Acceptance of such an argument, however, would require blindness to practicalities. Defendants, the Court is told, bargained hard for this release. Objectors regard the retention of their option of a seeking a United States venue for the foreign auction claims as worth fighting for, some to the extent of substantial investment in litigation expense in opposing the settlement. Thus, there is at least some indication that the settlement fund defendants propose to create for the benefit of the class has been enhanced, even if only in a very small way, by defendants' perception that they thereby would gain a benefit at the expense of those with foreign auction claims. In these circumstances, approval of the settlement as long as it contains this objectionable feature of the release would be inappropriate.
Tr., Feb. 2, 2001, at 10-12.
2. Objections Regarding Discount Certificates
Objectors have raised several issues regarding the discount certificates. A few protest that the certificates are not worth their principal amounts. Several express concern that no efficient secondary market will be created and that the certificates lock them in to dealing with the defendants. Some object to the issuance of coupons usable only to offset sales commissions and other seller side consignment charges, arguing in substance that they are principally or exclusively buyers and therefore have no use for such certificates. Still others go farther, contending that cash is the only appropriate medium of compensation.
As the settlement initially was proposed, some of these objections had varying degrees of merit. Subsequent events, however, have overtaken the meritorious complaints.
As previously indicated, the Court agrees that the certificates are not worth their principal amount. But defendants have increased the principal amount of certificates to be issued, assuming they take the certificate option, to $125 million, which is more than sufficient to ensure that the certificates will have an aggregate fair market value of at least $100 million. Unused certificates will be redeemable for cash after four years, thus ensuring that even those who have no use for the certificates ultimately can get cash for them, at least absent the insolvency of the issuer. Nor need such persons wait the four-year period. The Court is persuaded that there will be a relatively efficient secondary market for the certificates in the event defendants agree to the conditions referred to above, so that no one who receives certificates and does not wish to use or hold them need do so. They will have a ready alternative in selling into the secondary market.
The redeemability of the certificates for cash after four years and the availability of sale in a secondary market fully answers the point of those who complained that the certificates are usable only to offset sellers' commissions and other consignment charges or that the defendants should pay only cash consideration. As long as the certificates are valued properly, as the Court has endeavored to do, they are a cash equivalent.
3. The Getty Objection
The J. Paul Getty Trust, which operates the Getty Museum, objects to the settlement insofar as it limits the overcharge recoverable for works of art purchased through the defendant auction houses to $2,500, thus assuming that there was no price-fixing, or providing no compensation for price-fixing, on buyers' premiums with respect to value in excess of $50,000. It argues that the record does not justify a conclusion that there was no such price-fixing. In any case, it contends, the effect of the alleged conspiracy on buyers cannot be assessed solely by looking at buyers' premiums and buyers should receive a substantially larger share of the overall settlement. Much of its position rests on the affidavit of Dr. Frederick R. Warren-Boulton.
Plaintiffs' counsel examined the evidence on liability and their expert, Dr. Leitzinger, examined the evidence on damages. Counsel found no evidence to support the conclusion that there was price-fixing for buyers' commissions in excess of those paid on the first $50,000, which was not surprising because both auction houses had been charging the same 10 percent buyers' premium on value in excess of $50,000 at least since 1978, long before the start of the conspiracy here, and made no changes during the relevant period. While Getty, despite its protestations, has not seriously disputed lead counsel's conclusion that there is little or no evidence to support a claim of price-fixing in the relevant hammer price bracket, Dr. Warren-Boulton challenges Dr. Leitzinger's analysis.
Tr., Feb. 2, 2001, at 83-85; Leitzinger Aff. ¶ 11.
Id. at 86, 87.
He begins by asserting that "the effect of the conspiracy on buyers cannot be determined simply by looking at the effect . . . on buyers' premiums" because the extent of the harm to a particular buyer "depends not on how much was directly collected from that [buyer], but on the increase in the costs incurred by [it] as a result of the conspiracy. [It is the] effect on the full cost to that buyer of the article purchased, not just the effect on the buyer's premium that is paid to the auction house." This in turn depends, according to Dr. Warren-Boulton, on the relative elasticities of supply of and demand for art works. Accordingly, he challenges Dr. Leitzinger's focus on the absence of any difference between buyers' premiums on value above $50,000 before and during the allegedly conspiracy in concluding that the conspiracy did not extend to that price bracket. But he makes an even broader argument — that the division of the aggregate settlement between buyers and sellers may be incorrect because it does not take relative elasticities of supply and demand into account. The consequences of that broader argument, however, are not very clear. Dr. Warren-Boulton offers no alternative division based on his reasoning because he acknowledges there is no evidence of the relative elasticities of supply and demand. So he simply asserts that, in the absence of such evidence, "the most appropriate division of the burden between buyers and sellers would be to divide estimated damages equally between buyers and sellers." There are several problems with these contentions.
Warren-Boulton Aff. ¶¶ 6, 9.
Id. ¶¶ 10-11.
Id. ¶ 12.
To begin with, insofar as Dr. Warren-Boulton argues that the straightforward comparison of buyers' premiums before and during the conspiracy period on value exceeding $50,000 is inconclusive as to whether those premiums were affected by the conspiracy, the argument fundamentally is that a different and, at least in his view, more sophisticated economic analysis of the evidence might yield some inferential support for the contention that those buyers' premiums were affected. Even if he is right, however, he has no answer for lead counsel's conclusion that there simply is no evidence of price-fixing with respect to buyers' premiums on value above $50,000.
As the Second Circuit has made clear more than once, the job of a settlement court is not to try the case. As long as counsel representing the class is experienced and able and is not laboring with a conflict of interest, counsel's judgment is entitled to deference. There simply is no sufficient reason to quarrel with counsel's judgment here.
See, e.g., Weinberger v. Kendrick, 698 F.2d 61, 74 (2d Cir. 1982) ("The Supreme Court could not have intended that, in order to avoid a trial, the judge must in effect conduct one."), cert. denied, 464 U.S. 818 (1983); City of Detroit v. Grinnell Corp., 495 F.2d 448, 456 (2d Cir. 1974); West Virginia v. Chas. Pfizer Co., 440 F.2d 1079, 1085-86 (2d Cir.), cert. denied, 404 U.S. 871 (1971).
E.g., In re Austrian German Bank Holocaust Litig., 80 F. Supp.2d 164, 173-74 (S.D.N Y 2000) (SWK), aff'd, D'Amato v. Deutsche Bank, 236 F.3d 78 (2d Cir. 2001); In re Milken Assoc. Sec. Litig., 150 F.R.D. 57, 66 (S.D.N.Y. 1993); In re Warner Comm. Sec. Litig., 618 F. Supp. 735, 746 (S.D.N.Y. 1985), aff'd, 798 F.2d 35 (2d Cir. 1986).
The contention that the aggregate settlement should be allocated differently between buyers and sellers is at least triply flawed. The first problem, of course, is that Dr. Warren-Boulton admits that there is no supply and demand elasticity evidence from which any conclusion might be drawn about where the ultimate economic incidence of the alleged conspiracy fell. His argument for equal division of the aggregate settlement is an ipse dixit. Second, he ignores entirely the fact that while liability on the seller side is virtually conceded and, in any case, virtually certain, the claim of buyer side collusion is hotly disputed, a factor that would have to be taken into account even if Dr. Warren-Boulton's argument were accepted as a theoretical matter and supported by evidence rather than assertion. Finally, the argument is problematic as a matter of law. The Supreme Court's decisions in Hanover Shoe and Illinois Brick, as Getty conceded, stand for the proposition that courts will not engage in complex econometric analysis in attempts to determine who ultimately bears the economic harm caused by price-fixing; the recovery, if any, goes to the person who was overcharged directly by a price-fixer irrespective of whether that person passed the overcharge wholly or partly to someone further down the chain. This position rests significantly on the unmanageability of any other rule. And precisely the same considerations apply here. To suggest that buyers should recover part of overcharges imposed on sellers because the economic conditions of the relevant market permitted sellers to pass those charges on to buyers flies in the face of the rationale that led the Supreme Court to reject the passing on defense and to preclude recovery for price-fixing by indirect purchasers.
Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 490-92 (1968).
Illinois Brick Co. v. Illinois, 431 U.S. 720, 735 (1977).
Tr., Feb. 2, 2001, at 81.
E.g., Hanover Shoe, 392 U.S. at 493.
The Getty objections are overruled.
4. The Relationship Between Discount Certificates and Lead Counsel's Fee
A number of objectors dissatisfied with the discount certificates contend that plaintiffs' lead counsel acted improperly in accepting them and, if the settlement is approved, should be paid their fee exclusively or predominantly in the form of certificates. Lead counsel acknowledge that their fee should be paid in cash and discount certificates in the same proportions received by class members, which would result in their receiving about 80 percent in cash and the balance (which will amount to more than $5 million, no small sum) in certificates. The question therefore is whether they should receive a higher percentage in the form of certificates, assuming that the defendant auction houses elect the certificate option.
Of course, it is possible that only one house will exercise the certificate option, in which case the settlement fund would receive $462 million in cash and $62.5 million in principal amount of discount certificates or that either or both houses will issue less than $62.5 million in principal and make up the difference in cash. These permutations are ignored in the text for ease of expression but would be governed by the same principle.
The order that set the terms for the lead counsel auction and therefore the terms of the successful bidder's compensation provided that lead counsel would receive a fee of one fourth of the gross recovery in excess of the X amount bid by the successful bidder. The order presupposed that the term "gross recovery" referred to money. In any case, it reserved to the Court the right to compensate lead counsel on a different basis in the event the litigation were resolved in a manner that did not permit determination of a gross recovery by the class or justice otherwise required.
Order, May 17, 2000, at 1, ¶ 2.
See id., at 2, ¶ 3.
Id., at 2, ¶ 4.
If the houses exercise their certificate options, the recovery will be $412 million in cash plus $125 million in principal amount of discount certificates. Plaintiffs' lead counsel bid X equal to $405 million. Some objectors argue that the settlement should be treated as if the cash were entitled to priority of consideration in determining the gross recovery. They contend that the first $405 million in cash should go to the class, free of attorney's fees, and that counsel should receive one fourth of the balance of $7 million in cash ($412 million less $405 million) and $125 million in principal amount of certificates, i.e., $1.75 million in cash and $31.25 million in principal amount of the discount certificates. This is not an entirely unreasonable construction of the order. But it is not the only reasonable construction. Precisely the opposite approach — one that would give priority to the certificates, and thus give the class all of the certificates (worth $108 million assuming a valuation of 87 percent) plus an additional $297 million in cash, free of attorney's fees, and then pay counsel's fee entirely in cash — would be equally consistent. But each of these extreme positions has its drawbacks.
Paying plaintiffs' lead counsel principally in discount certificates probably would have an adverse impact on the short term secondary market value of the certificates. Plaintiffs' lead counsel have a law firm to run, which means rent, salaries and expenses to pay and profits to distribute to partners. Even if some of them collect art, the strong likelihood is that plaintiffs' lead counsel soon will sell whatever certificates they receive. If the objectors' position that the first $405 million in cash all should go to the class were accepted, the $31.25 million in principal amount of certificates paid to plaintiffs' lead counsel probably would be on the market promptly and exert strong downward pressure on the secondary market price.
Cf. Gurary v. Winehouse, 190 F.3d 37, 40 (2d Cir. 1999).
The opposite position, although equally tenable as a matter of logic, would be at least as unreasonable. Plaintiffs' counsel negotiated this settlement and agreed to accept discount certificates as part of the consideration. To construe the order so as to pay them their fee entirely in cash while the class received all of the certificates would set a precedent that could lead to conflicts of interest in future situations.
The solution proposed by plaintiffs' lead counsel is far better than either of the proffered alternatives. Plaintiffs' lead counsel would receive their fee of approximately $26.75 million in the same ratio of cash and certificates as the class members — approximately $21.53 million in cash and $5.22 million worth of discount certificates (i.e., certificates with a principal amount of $6.53 million). While they would have the same incentive to sell the certificates quickly, the downward pressure on the market of a sale of $6.53 million in principal amount of certificates would be far smaller than that of a sale of $31.25 million. And this allocation would give plaintiffs' counsel exactly the same proportionate stake in the value of the certificates as the class they represent, an entirely appropriate outcome.
This figure assumes a valuation of 80 percent.
See In re Brown Co. Sec. Litig., 355 F. Supp. 574, 593 (S.D.N Y 1973) ("[B]ecause [counsel] have expressed faith and confidence in the value of the settlement for their clients, it is not unreasonable to require them, to some extent, to stand equally with plaintiffs in sharing in the distribution in kind.").
It is immaterial whether this result is viewed as an application of the compensation paragraph of the bid terms (i.e., whether the "gross recovery" is viewed as including the certificates for purposes of compensating counsel) or as an exercise of the Court's reserved power to compensate counsel appropriately. The plaintiffs' lead counsel will be paid in the same ratio of cash to certificates as is received by the class generally.
5. Other Objections
The Court has consider objectors' other contentions and found them uniformly to lack merit.
III
The method used by the Court in selecting plaintiffs' lead counsel and the rationale for it have been dealt with extensively and need not be repeated here. A brief concluding word, however, is appropriate, particularly as courts continue to experiment with such procedures.
In re Auction Houses Antitrust Litig., 197 F.R.D. 71 (S.D.N Y 2000).
The Court invited bids from interested counsel on the following basis: The fee (inclusive of all expenses) for lead counsel would be 25 percent of the difference between the class' recovery and "X." Thus, the class would receive 100 percent of any recovery up to "X" and 75 percent of any excess. Counsel were invited to bid on the "X" at which they were willing to take on the litigation.
As the Court previously disclosed, the "X" bid by the attorneys selected by the Court from among 20 bids was $405 million. In consequence, the class will receive the first $405 million of this settlement plus 75 percent of the excess. Valuing the settlement at $512 million, plaintiffs' lead counsel will receive a fee of $26.75 million, or 5.2 percent of the recovery. As a percentage of the recovery, this is among the lowest fee awards ever in comparable litigation.
See John C. Coffee, Jr., Untangling the `Auction Houses' Aftermath, N.Y. L.J., Nov. 30, 2000, at 1.
It is interesting, moreover, to compare the successful bid with the universe of bids received. As described in a prior opinion, the attorneys for the various plaintiffs in these class actions organized a proposed executive committee consisting of five firms (to which the Court added a sixth) and sought to have that committee designated as lead counsel. Four of those six firms submitted timely and conforming bids for the lead counsel position when the Court held its auction. The mean "X" bid by the four bidding members of the self-appointed group of lead counsel was $96 million. Had the Court accepted a $96 million bid, the attorney's fee in this matter, assuming the same settlement were achieved, would have been $104 million, or 20.3 percent of the recovery. A similar conclusion is evident even if one focuses on a broader group of bids. The mean "X" of all the conforming bids (apart from the successful bidder) was $130.3 million. Had the same settlement been achieved by lead counsel submitting such a bid, the attorney's fees would have been $95.4 million, or 18.6 percent of the recovery. Viewing it somewhat differently, if the Court had accepted a bid of $96 million, the successful bidder would have secured a fee of $26.75 million by securing a settlement of only $203 million. A successful bid of $130 million would have earned the same fee by settling at $237 million.
For the sake of completeness, the Court notes also the following: The range of all timely and conforming bids received was from $1 million to $405 million; the mode was $75 million. The range among the four bidders who were interim lead counsel was from $44 million to $170 million.
The benefit of the successful bid, as compared with others that were submitted, is not the only relevant consideration. It may well be questioned whether an attorney who had secured the lead counsel position with a bid in the $90 to $150 million range ever would have held out for a settlement remotely approaching that achieved in this case. Indeed, the comments of interim lead counsel at the settlement hearing tend to confirm the Court's view that this case would have been settled for hundreds of millions of dollars less than the settlement now before it absent the lead counsel auctions. Thus, while lead counsel auctions are no panacea and are not appropriate in all class action litigation, the Court is persuaded that the result of the lead counsel auction in this case was exceptionally beneficial to the class.
Tr., Feb. 2, 2001, at 92-94.
IV
For the foregoing reasons, the applications for final approval of the settlement, the second amended plan for valuation of the discount certificates, and the plan for allocation of the settlement all are granted on the conditions that the parties, no later than March 1, 2001, amend:
1. The settlement documents to conform the releases to the requirements of this opinion, and
2. The second amended plan for valuation of the discount certificates (the "Certificate Plan") to contain provisions satisfactory to the Court to maximize the value of the certificates, the prospects for the development of an efficient secondary market, and the likelihood that one or more qualified persons will make a market in the certificates.
Subject to the satisfaction of these conditions, Messrs. Boies and Drubel of the firm of Boies Schiller Flexner LLP are awarded attorney's fees, pursuant to the bid accepted by the Court, of $26.75 million plus 25 percent of the interest earned on the escrow fund from its establishment to date, payable from the escrow fund in cash and discount certificates in the same ratio as is received by class members with claims exceeding $500. For purposes of determining counsel's fee, the certificates will be valued at 80 percent of their face amount.
One objector contends that all interest should go to the class because interest is not part of the "gross recovery" and the funds are intended to compensate plaintiffs for loss of use of their money.
Assuming that the conditions set forth above are satisfied, the parties shall submit an agreed form of judgment which, among other things, shall include appropriate provisions directing compliance with the Settlement Agreements, the Certificate Plan, and the plan of allocation and ensuring that sufficient funds are withheld from any initial distributions to cover such attorney's fees and disbursements as the Court may award pursuant to pending applications by counsel other than plaintiffs' lead counsel.
SO ORDERED.