Tag Archives: Class Counsel/Attorney’s Fees

Business Court Approves Disclosure-Only Settlement, But Postpones Consideration of Attorneys’ Fees Request

View Mark Hiller’s Complete Bio at robinsonbradshaw.comThose who follow class action law probably will be familiar with In re Trulia (2016), the seminal decision of the Delaware Court of Chancery that put the brakes on disclosure-only settlements.  Before Trulia, these controversial settlements were ubiquitous in deal litigation, in which shareholders of a company file a class action lawsuit seeking to stop the company from engaging in a merger or acquisition on the ground the company failed to disclose sufficient information about the transaction.  Under a typical disclosure-only settlement, the company agrees to supplement its disclosures and pay the (often hefty) fees of class counsel.  In return, the company obtains a release from the shareholder class, and the deal can proceed.

That changed with Trulia.  The court lamented that disclosure-only settlements are often raw deals for shareholders, who release potentially valuable claims in exchange for no monetary compensation, but only additional disclosures that may be insignificant.  Compounding the problem is that, because both class counsel and the company are aligned in supporting the settlement, the court is on its own to determine whether the settlement is fair and reasonable to absent shareholders.  True, the Trulia court noted, courts face that task any time they evaluate a proposed class action settlement that has no objectors.  But the court said the task is especially difficult in deal litigation, because disclosure-only settlements are usually reached quickly, before there has been any significant discovery into the potential value of the shareholders’ soon-to-be-released claims.  The Trulia court drew a line in the sand, holding that Delaware law looks with “disfavor” on these settlements and would allow them only if the supplemental disclosures were “plainly material” and the shareholder releases were “narrowly circumscribed.”

Court watchers viewed Trulia as the death knell to deal litigation in Delaware and have wondered whether the plaintiffs’ bar would migrate to other jurisdictions that might be more hospitable.  That is why the Business Court’s recent approval of a disclosure-only settlement in the Krispy Kreme shareholder litigation provides a significant data point.  The litigation arose from a shareholder challenge to Krispy Kreme’s proposed acquisition by another company.  The settlement called for supplemental disclosures and payment of class counsel’s fees, in return for a shareholder release.

Chief Judge Gale analyzed Trulia and discussed the standard North Carolina law should apply to review the reasonableness of disclosure-only settlements.  Judge Gale said he is “fully in accord with Trulia’s enhanced scrutiny to determine whether the release is narrowly circumscribed.”  At the same time, however, he said that “[a]s the scope of the release narrows,” the “Court’s inquiry as to the materiality of supplemental disclosures and their adequacy to support the release tends to a more traditional settlement inquiry where the judgment of competent counsel is accorded significant weight.”  Here is how he summarized the test:

In sum, the Court must examine the materiality of any supplemental disclosures and find that they provide reasonable consideration for the class release. But where there is little or no opposition by class members, the Court is reluctant to set aside a fair arm’s length settlement negotiated between competent counsel if the disclosures are not plainly immaterial and the release is reasonable. The Court is less reluctant to exercise a more searching inquiry when deciding upon a fee request that does not depend on the validity of the settlement.

Judge Gale then applied this test and concluded that the release at issue was reasonable in view of Krispy Kreme’s supplemental disclosures. He focused mainly on the company’s disclosures about the discounted cash flow (DCF) analysis performed by its financial advisor. In a nutshell, the proxy statements had disclosed that the DCF estimate was based on certain projected free cash flows, but did not disclose the cash flows themselves. As it turned out, the cash flows described in the proxy statements differed somewhat from the cash flows the financial advisor used in its actual calculation. As Judge Gale noted, “[c]ounsel acknowledged that while the differences may be slight in any particular year, the differences over time have greater significance.” Judge Gale concluded from this that the company’s supplemental disclosures, which contained cash flow information not found in the proxy statements, were material and supported the shareholder release, which was “not significantly broader than the effect of the Shareholder Vote” approving the merger.

As to the question of attorneys’ fees, Judge Gale deferred ruling on that issue. One shareholder had filed an objection opposing the award of fees but not otherwise opposing the settlement. Judge Gale concluded that he could “uncouple” the fee request from the rest of the settlement because the settlement expressly said that its approval was not dependent on a fee award. This uncoupling would have the benefit of allowing the company to advocate on the fee question without fear of jeopardizing the settlement and release.1

Takeaway

Time will tell whether deal litigation and the accompanying disclosure-only settlements, which now are disfavored in Delaware, will find a home in North Carolina. Nominally, Judge Gale’s formulation of the standard for reviewing these settlements—which favors approval so long as the disclosures are not “plainly immaterial”—seems more deferential than Trulia’s—which requires the disclosures to be “plainly material” (my emphasis). But at least arguably, the Krispy Kreme disclosures might have satisfied the Trulia standard too. And, settlement approval was facilitated by the fact that Judge Gale was able to reserve decision on the request for fees; had he been forced to rule on the reasonableness of the fees and supplemental disclosures together, he may have shown greater skepticism of the settlement. Regardless, Judge Gale’s approval of the Krispy Kreme settlement shows that North Carolina law has, at minimum, not sworn off approval of disclosure-only settlements.

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1 Judge Gale noted that the Court of Chancery has approved of a “mootness dismissal” procedure that allows the court to evaluate the fee request independent of the substantive settlement. Under that procedure, the “selling company issues supplemental disclosures, the class representative dismisses the class action with a release that binds only the named plaintiff, and class counsel applies for a fee award based on efforts to secure the supplemental disclosures.” Judge Gale explained that North Carolina law “has not expressly adopted such a process or procedure,” and he found it unnecessary to decide whether to recognize the procedure in this case.

Cy Pres Settlements Under Attack Again

View David Wright's Complete Bio at robinsonbradshaw.comA good while ago, we reported in this space, about so-called “cy pres” settlements. We highlighted the Chief Justice’s cautionary comments about this practice – under which third parties, not class members, are compensated by defendants. See Marek v. Lane, 134 S.Ct. 8 (2013). After the Ninth Circuit recently approved a cy pres settlement, In Re Google Referrer Header Privacy Litigat., 869 F.3d 737 (9th Cir. 2017), which awarded plaintiffs’ counsel $3.5 million, and six nonprofits/educational institutions another $5.3 million – all while awarding class members the proverbial goose egg – two objectors filed a cert petition. The objectors are backed by the Competitive Enterprise Institute’s Center for Class Action Fairness. The case, which grew out of a challenge to Google’s transmission of a user’s search terms through a “referral header,” proved beneficial for the alma maters of class counsel, which received nearly half of the settlement fund. That proved too much for one of the judges on the Ninth Circuit, who commented in dissent on the “unseemly occurrence of cy pres funds being doled out to interested parties’ alma maters,” here Stanford, Harvard and Chicago-Kent College of Law.

The Center for Class Action Fairness argues the case “presents an ideal and timely opportunity for the Court to resolve a deep circuit split over the use of cy pres awards in class action settlements and provide much-needed guidance to the lower courts on a recurring issue of substantial importance.” The petition argues that, absent resolution of this issue by the Supreme Court, counsel will “flock[] to the Ninth Circuit” to achieve “collusive settlements.” Specifically, the Center argues, that – under the Ninth Circuit decision – only cy pres settlements will occur in consumer class actions because it will not be “feasible” under the Ninth Circuit’s standard to compensate all consumers in a large class action. The Center is unsparing in its advocacy, arguing that “[t]he availability of cy pres relief only accentuates the[] pathologies of the class action procedure that provide substantial benefits to defendants and class counsel, at the expense of class members.”

It is unclear whether this will be one of the few petitions acted upon by the Court during this term, and there is no shortage of issues which need nationwide judicial resolution. But when the litigants don’t receive a dime, have to release their claims, and the only persons who benefit are lawyers and their favorite law schools, something seems awry. Stay tuned.

The Case of the $5 Footlong*

View Adam Doerr's Complete Bio at robinsonbradshaw.comFor what appears to have been a frivolous lawsuit, In re: Subway Footlong Sandwich Marketing and Sales Practices Litigation generated an interesting opinion from the Seventh Circuit full of class-action issues. The case originated when an Australian teenager posted a photo of an 11-inch Subway sandwich, with a tape measure, on his Facebook page. Coming in the midst of Subway’s $5 FootlongsTM campaign, the picture went viral, and class-action cases were soon pending.

After early discovery showed that most “footlongs” were, in fact, 12 inches long, plaintiffs’ counsel ran into a series of problems with their damages class under Rule 23(b)(3), including:

    • commonality (“The overwhelming majority of Subway’s sandwiches lived up to their advertised length, so individual hearings would be needed to identify which purchasers actually received undersized sandwiches. But sandwich measuring by Subway customers had been a fleeting social-media meme; most people consumed their sandwiches without first measuring them”);
    • materiality under state consumer protection laws (“Individualized hearings would be necessary to identify which customers, if any, deemed the minor variation in bread length material to the decision to purchase”); and
    • damages (“[A]ll of Subway’s raw dough sticks weigh exactly the same, so the rare sandwich roll that fails to bake to a full 12 inches actually contains no less bread…. As for other sandwich ingredients, class members could be as profligate or as temperate as they pleased: Subway’s ‘sandwich artists’ add toppings at the customer’s request.”)

The plaintiffs shifted strategy, moving from a damages class to a Rule 23(b)(2) class for injunctive relief. Following mediation, the case settled for a series of “procedures designed to achieve better bread-length uniformity,” including bread oven inspections and use of a “tool” (perhaps a ruler?) to measure compliance. To deal with deficient rolls that slipped past the watchful eyes of the inspectors, a poster would be prominently displayed at each restaurant: “Due to natural variations in the bread baking process, the size and shape of bread may vary.”

The settlement provided for $520,000 in fees for plaintiffs’ attorneys, enough for nearly 20 miles of sandwiches, and incentive payments of $500 each for the class representatives. But one class member—Theodore Frank—objected. He argued that the settlement was worthless to the class of Subway customers, who still faced a non-neglible (and relatively meaningless) risk of a short sandwich despite the large payment to class counsel. The attorneys for the class responded that if Subway continued to sell sandwiches less than 12 inches long, failure to comply with the settlement could be punished by contempt. The Seventh Circuit was not persuaded: “Contempt as a remedy to enforce a worthless settlement is itself worthless. Zero plus zero equals zero.”

That the Seventh Circuit even heard an appeal from a settlement approved by the district court also reveals an interesting dynamic in class-action settlements. Class members generally have the right to object to a proposed class-action settlement, and they can attempt to appeal a settlement approved over their objections. Class member objections often involve the fees to be paid to the plaintiffs’ attorneys, especially when the settlement appears to benefit attorneys more than the members of the class. Mr. Frank, the objector in the Subway case, is an attorney who has objected to dozens of class-action settlements as the director of the Center for Class Action Fairness, a nonprofit that describes itself as challenging unfair class-action procedures.1 Interestingly, although Mr. Frank is generally a nonprofit objector, in 2015 he was involved in a situation he described as “lurid” and “Grishamesque” when his $250,000 consulting agreement with a professional serial objector (an attorney who objects to class-action settlements in hopes of being paid to drop the objection by the lead attorneys) became public, as reported by Alison Frankel at Reuters.

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1 The Center for Class Action Fairness is part of the Competitive Enterprise Institute, a conservative organization that advocates for issues including tort reform. Critics of these tort reform efforts contend that by selectively focusing on unrepresentative cases, like litigation over the length of a Subway sandwich, tort reformers are attempting to paint a distorted picture of the legal system that ignores the important role that class actions play in protecting consumers and enforcing civil rights.

Congress Considering Major Class Action Reform Legislation

View Adam Doerr's Complete Bio at robinsonbradshaw.comRep. Bob Goodlatte (R-Va.), the Chairman of the House Judiciary Committee, recently introduced a bill that would make significant changes to federal class action litigation. The Fairness in Class Action Litigation Act of 2017 (H.R. 985) states that it is intended to allow prompt recoveries to plaintiffs with legitimate claims and “diminish abuses in class action and mass tort litigation that are undermining the integrity of the U.S. legal system.”

In its current form, the draft bill would likely eclipse the 2005 passage of the Class Action Fairness Act as the most significant legislation on class actions in decades. Rep. Goodlatte has introduced similar legislation in previous years, but passage is considerably enhanced with unified Republican control of the House, Senate, and Presidency. Among other changes, the bill would enact the following:

  • Prevent certification of a class seeking monetary relief unless the plaintiff “affirmatively demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative or representatives.” (§ 1716) In other words, classes could not include individuals who have not suffered damage, or where damage is not yet clear.
  • Require class counsel to describe how the named plaintiff agreed to be included in the complaint, identify any other class action where the named plaintiff had a similar role, and disclose any family or employment relationship between class counsel and the named plaintiff (in which case certification must be denied). (§ 1717)
  • Require the party seeking certification to show a “reliable and administratively feasible mechanism” for (a) determining whether class members fall within the class definition and (b) distributing monetary relief to “a substantial majority of class members.” (§ 1718(a)). This provision appears to be an effort to impose a formal ascertainability requirement on class certification, as the Fourth Circuit has done in some cases.
  • Make significant changes to attorneys’ fees, including (1) preventing any payment or even determination of fees to class counsel until the distribution of monetary recovery to class members is complete, (2) limiting fee awards to “a reasonable percentage of any payments directly distributed to and received by class members,” and (3) limiting the payment of attorney’s fees based on equitable relief to “a reasonable percentage of the value of the equitable relief.” (§ 1718(b)).
  • Require courts to report, and the Federal Judicial Center to track, disbursements to class members. The Federal Judicial Center would prepare an annual report summarizing how funds paid by defendants in class actions have been distributed, including the largest and smallest amounts paid to any class member and payments to class counsel. (§ 1719) Alison Frankel of Reuters, who writes often and well on class actions, referred to this as “most intriguing idea in House Republicans’ bill to gut class actions.”
  • Bar certification of issue classes (§ 1720), an issue we have previously covered in both a district court case regarding the relationship between predominance and issue certification and when the Supreme Court declined to resolve a circuit split over issue certification.
  • Stay discovery while preliminary motions are pending. (§ 1721) (Interestingly, this provision formally recognizes a “motion to strike class allegations,” a motion that is not currently listed by name under Rule 23, although such motions may be permitted under Rule 23(d)(1)(D), which allows the Court to enter an order to “require that the pleadings be amended to eliminate allegations about representation of absent persons.”)
  • Provide for appellate review of orders granting or denying class certification as a matter of right. (§ 1722) This would be a significant departure from current practice under Rule 23(f), which gives Courts of Appeal substantial discretion in deciding whether to permit such interlocutory appeals.

The bill would also allow more personal injury cases to stay in federal court by changing the diversity jurisdiction analysis in multiple plaintiff cases, and it would make significant changes to multidistrict litigation practice, including barring the transferee judge from conducting a trial unless all parties consent.

The draft legislation is already generating controversy, and this will significantly increase as it advances. In particular, basing attorney’s fee awards on a percentage of the “value of the equitable relief” will be hotly debated. Equitable relief is, by nature, difficult or impossible to value in financial terms. The Washington Lawyers’ Committee for Civil Rights has already registered its opposition, noting the difficulty of putting a value on a class relief protecting disabled individuals from abusive conditions or providing them access to treatment, transportation, and community services.

The bill was introduced on February 9. On February 15, following a series of failed attempts by Democrats to introduce amendments, the Judiciary Committee voted on party lines (19-12) to forward to the bill to the full House. We’ll continue to track this legislation and bring you significant updates.

Business Court Warns of Enhanced Scrutiny for Disclosure-Only Merger Settlements

View David Wright's Complete Bio at robinsonbradshaw.com We have previously commented about “disclosure only” settlements in class action merger cases, and the increasing scrutiny provided to them by courts here and in Delaware. Judge Bledsoe entered the fray yesterday, approving a settlement of litigation involving the merger of Yadkin Financial Corporation and NewBridge Bancorp in a 44-page order. In a stark preamble to his findings, Judge Bledsoe gave warning that the Business Court would likely be joining their brethren in Delaware in strictly reviewing such settlements in the future. The Court characterized such a shift as a “marked departure from [the Business Court’s] past practices in connection with the consideration of such motions,” and therefore “decline[d] to apply enhanced scrutiny to its consideration of the Motions” in the case before it.

But that reprieve is likely short-lived. In the next sentence, Judge Bledsoe “expressly advises the practicing bar that judges of the North Carolina Business Court, including the undersigned, may be prepared to apply enhanced scrutiny of the sort exercised in In re Trulia Stockholder Litigation, to the approval of disclosure-based settlements and attendant motions for attorneys’ fees hereafter.” We characterized this Delaware authority as “sound[ing] a trumpet of skepticism concerning ‘disclosure only’ settlements.”

The Settlement Agreement reviewed by the Business Court in the NewBridge Bancorp case provided that the Defendants would not object to a fee petition up to $300,000, and—to a penny—that’s what Plaintiffs’ counsel sought in the case. In this space, we have observed that the entry into a disclosure-only settlement “is a ‘kumbayah’ occasion for plaintiffs’ and defense counsel,” and Judge Bledsoe reiterates this point, albeit it in a less colloquial manner, agreeing with the Delaware courts that “the trial court’s assessment typically occurs, as it does here, without the benefit of an adversarial process.”

The Court, after reviewing applicable authority, cut the requested fee award from $300,000 to about $160,000. There were two principal reasons for the reduction. First, the Court concluded that “collectively, the Supplemental Disclosures were only of marginal benefit to the Class.” Indeed, the Court found no “substantial evidence that any of the Supplemental Disclosures were significant to a reasonable shareholder’s decision in voting on the Proposed Transaction.” Second, the Court observed that the average hourly rate charged by Plaintiffs’ counsel was “above the hourly rate customarily charged in North Carolina for similar services” and that “the demands of the Consolidated Action did not require Plaintiffs to retain counsel from outside North Carolina in order to prosecute” the case.

The Court, in contrast to Delaware decisions like Trulia, did not closely scrutinize the claims released by class members as part of the settlement. Judge Bledsoe, in two footnotes, indicated that future requests for approval of disclosure-based settlements will involve such consideration. He stated that the scope of the release needs to be an express factor in the Court’s analysis in future cases, but that the Court was “reluctant to set aside the settlement in light of the approval of prior similar settlements by the Business Court.” In this regard, Judge Bledsoe’s Newbridge Bancorp decision is similar to the Chancery Court’s ruling in In re Riverbed Technology, Inc. Stockholders Litigation, where Chancellor Glasscock explained that, “given the past practice of this Court in examining settlements of this type, the parties in good faith negotiated a remedy—additional disclosures—that has been consummated, with the reasonable expectation that the very broad, but hardly unprecedented, release negotiated in return would be approved by this Court.”

In Delaware, the Chancery Court—having apparently concluded that counsel and the parties were sufficiently on notice following its warning in Riverbed—refused to approve a settlement outright in Trulia, just four months later. Merger challenges in Delaware have significantly declined in the months since that decision.

The effect of Judge Bledsoe’s decision on merger litigation in North Carolina remains to be seen, but this admonition from the Business Court must be reckoned with by shareholders considering class filings in future North Carolina merger litigation.

(Adam Doerr and Tommy Holderness of our firm represented the members of the NewBridge Bancorp Board of Directors in this litigation.)