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Category: Historic / Landmark Case

$5B Alternative Fee Proposal in Tesla Case Tests Chancery

March 20, 2024

A recent Law 360 story by Jeff Montgomery, “Epic Tesla Fee Bid May Blaze Extraordinary Chancery Path”, reports that an unprecedented $5 billion-plus stock-based fee award sought by class attorneys who recently short-circuited Tesla CEO Elon Musk's 12-step, $51 billion compensation package has set up an equally unprecedented test for Delaware Court of Chancery fee guidelines and a potential award one law expert described as "dynastic wealth."

Class attorneys who have battled Tesla's compensation scheme for Musk since mid-2018 last week sought more than 11% of the 266,947,208 Tesla shares freed up Jan. 30, when Chancellor Kathaleen St. J. McCormick ordered rescission of the options that Tesla's board awarded to Musk in an all-stock compensation plan.  The value had been estimated initially at $5.6 billion, but would fluctuate with the value of Tesla's stock.

While the process of seeking a stock fee award instead of cash is not unprecedented, it is an unusual posture for Delaware Chancery litigation, and its scale is likely to reopen what were once considered settled questions over counsel risks, rewards, and just how much attorneys can command for corporate benefit fees, experts told Law360.

"Given the order of magnitude here, I suspect that the case will not set any records in terms of percentage of the recovery awarded to the plaintiffs attorneys, but in absolute terms it'll still amount to dynastic wealth," said University of Connecticut School of Law professor Minor Myers. He described the fee as "destined to be epic, if only because it involves the invalidation of a pay package that was itself comically large."

Chancellor McCormick put the fee in play with an order rescinding Musk's 12-tranche, all-stock compensation plan Jan. 30, after a week-long trial in November 2022.  The ruling cited disclosure failures, murky terms, conflicted director architects and Musk's own conflicted influence in Tesla's creation of an Everest-sized mount of fast-triggering stock options.

"Plaintiff won complete recission of the largest pay package ever issued," the fee motion, filed last week, said.  "Our research demonstrates that the court's decree of recission, conservatively valued, was the largest compensatory award in the history of American jurisprudence by multiples," driven by "the gargantuan size of the tort underlying this action."

But class attorneys are seeking an equally gargantuan fee, even after departing from calculation customs that Vice Chancellor J. Travis Laster stressed last year in declining to apply a size reduction to a nearly 27%, $267 million award to stockholders who challenged a Dell Technolgies stock swap in 2018.  In his fee ruling, the vice chancellor said the calls to reduce the Dell fee conflicted with court efforts to reward attorneys for going deeper into litigation and taking greater risks in pursuit of legitimate claims.

"Of course, everyone involved will try to fit this into an existing framework, but the reality is that a $5.6 billion fee award is staggeringly high, whatever factors are considered," said Lyman P.Q. Johnson, Robert O. Bentley professor of law, emeritus, at Washington and Lee School of Law.  "I think Chancellor McCormick will find a way to go a fair bit lower, while still providing the attorneys with a very high award of some amount."  Johnson added: "The shock of Musk's compensation, undone by the chancellor, is unlikely to be followed by what many would regard as a shockingly high $5.6 billion fee award."

Vice Chancellor Laster's most recent big fee ruling established, pending appeal, a $266.7 million fee last year for attorneys who secured a $1 billion settlement for minority stockholders who sued over a $23.9 million Dell Technologies stock swap in 2018.

In Dell, the vice chancellor rejected investor arguments that large "mega-fund" settlements justified throttling back on fee payouts because customary fee percentages can produce massive, windfall payouts.  Instead, Vice Chancellor Laster defended the use of customary, variable percentages, including 15% to 25% shares of awards for settlements after "meaningful litigation and motion practice" and up to 33% post-trial.  He also acknowledged the tension between successful plaintiffs' counsel seeking appropriate compensation and large investors working to minimize carve-outs from court awards.

In Tesla, class attorneys, wary of blowback over big recoveries borne of typical fee ratios, acknowledged the Dell ruling's guidance, but also pointed to an earlier ruling that produced the current largest court-approved fee, a $304 million award approved in 2011 by then-Chancellor Leo E. Strine and upheld by Delaware's Supreme Court a year later.

That decision required Grupo Mexico to return to Southern Peru Copper Corp. nearly $1.3 billion worth of Southern Peru stock — rather than cash — after finding that Southern Copper had been coerced by a conflicted, controlling stockholder into overpaying for a Grupo Mexico mine in 2005.  With pre- and post-judgment interest, the award reached more than $2 billion, with class attorneys awarded 15%, or $304 million, for fees and expenses.

Tesla class attorneys referenced the 15% fee carve-out approved in Southern Peru, but adjusted even that percentage downward — to just over 11% — to reflect value added by the absence of a holding period for any award of Tesla shares before they could be sold.  Case costs included more than $13.6 million in attorney fees and more than $1.1 million in expenses during the multi-year Chancery action.  Requested fees would equal a $288,888 hourly rate that the fee motion said was justified by the case's complexity, results and attorney skill levels, among other factors.

Jill E. Fisch, Saul A. Fox distinguished professor of business law at the University of Pennsylvania Carey Law School, said use of stock for attorney fees was once "kind of frowned upon," but is not unprecedented.  "They are repeat players" in Delaware's courts, Fisch said of the attorney teams that prevailed in the Tesla case.  "They want credibility before the court.  The numbers, I think, reflect the benefit and risk of this kind of litigation, and traditionally, Chancery Court has acknowledged those risks."

The suit, led by stockholder Richard Tornetta, branded Musk's compensation package as unprecedented and unfair, noting that Musk had already qualified for some $20 billion in awards by the time the suit was filed, "making him one of the richest men on Earth" at the time.  It alleged in part that he relied on two in-house Tesla attorneys for work on the plan before the board's conflicted compensation committee took up the issue.

Ann M. Lipton, the Michael M. Fleishman associate professor in business law and entrepreneurship at Tulane University Law School and associate dean, pointed to another Tesla- and Musk-related case to illustrate the risks stockholder attorneys take.

Last year, after about seven years of litigation, Delaware's Supreme Court upheld a post-trial dismissal of a suit filed by stockholders of rooftop solar venture SolarCity, seeking damages tied to Tesla's $2.6 billion purchase of the company, for which Musk was CEO and also held a big share of company stock.

At one point during the case, the SolarCity stockholders suggested a damage award amounting to a $13 billion giveback of Tesla stock Musk received for his SolarCity shares. Dismissal of the case and rejection of class claims, however, wiped out class attorneys' hopes for a share of a big award.

In the more-recent scuttling of Musk's Tesla stock awards, Lipton said, shareholders benefited from the stock award cancelations by being dramatically less diluted in their holdings.  "That the attorneys are asking for a little bit of dilution" through their fee, "but far less than the shareholders would otherwise have suffered, seems like a real benefit that was provided, from a financial point of view."

Lipton said she was not familiar enough with the current Tesla fee motion to comment on the percentage sought, but cited the enormous risk and stockholder counsel loss in SolarCity and said that "attorneys deserve to be compensated" when they prevail.

University of Michigan Law School professor Gabriel Rauterberg said the fee bid in Tesla appears excessive, despite the importance of fee as a motivator.  "It seems to me extremely implausible that an award this large is necessary to provide the right incentives, given that plaintiffs attorneys' fixed costs for investigating lawsuits, conducting research, and prosecuting cases can be significant but not on this scale," Rauterberg said.  "It seems like a windfall to me. You can give the attorneys a large award, while still falling short of billions."

Counsel for the Tesla stockholders have pointed out that Delaware's Supreme Court has in the past declined to replace the current fee approach with declining percentages.  "Under Delaware law, the unprecedented size of the benefit conferred does not alter plaintiff's counsel's entitlement to 33% of that benefit," attorneys for the Tesla stockholders wrote.  They also pointed to voluntary concessions reducing the total ask to around 11%, with features that reduce the cost to the company.

Some of the sting felt by Tesla, the brief indicated, could be taken away by federal tax law terms that will make 21% of the fee award cash tax-deductible, reducing the post-tax fee award cost from $5.63 billion to $4.45 billion.  State corporate income tax and payroll tax deductions and allowances also could offset the share payout.

UConn's Myers said the Tesla stockholder attorneys won a landmark victory and "deserve to be compensated handsomely" for taking a risky case through trial, while also predicting that the court will "take a hard look at the magnitude of the benefit actually achieved here — that may be a figure in some dispute."  The case nevertheless also stands as an example of "how the Delaware system effectively harnesses the efforts of folks like the plaintiffs attorneys to generate powerful incentives for good governance at public companies," Myers said.

Second $185M Attorney Fee Request Called ‘Indefensible’

March 6, 2024

A recent Law 360 story by Jack Karp, “Quinn Emanuel’s 2nd $185M Fee Bid Blasted as ‘Indefensible’”, reports that Quinn Emanuel Urquhart & Sullivan LLP's second attempt to win $185 million in attorney fees in $3.7 billion litigation over the Affordable Care Act still fails to justify the "indefensible" amount and barely pays "lip service" to a reevaluation ordered by the Federal Circuit, health insurers told the federal claims court.

The Federal Circuit already wiped out the $185 million attorney fee that the U.S. Court of Federal Claims awarded to Quinn Emanuel and directed the claims court to reexamine objecting class members' insistence that the firm hadn't justified its fee request, Kaiser Foundation Health Plan Inc. and UnitedHealthcare Insurance Co. said.

"Despite this clear direction, class counsel's second petition again fails to justify its lodestar and again seeks to avoid a lodestar cross-check.  It instead asks the court to rubberstamp the same $185 million award," the health insurers said in their opposition to the firm's latest motion for approval of its fee request.

That motion for approval fails to support the 10,000 hours Quinn Emanuel says it spent on the case, suggests that the firm double-counted hours by including time spent on a separate multibillion-dollar class, and tries to skew its rates higher by seeking 2023 rates, even though its first fee petition was filed in 2020, according to the insurers.

"Trying to reverse-engineer defenses for its indefensible fee demand, class counsel uses inflated and unproven hours, multiplies those alleged hours by unprecedented rates, and then proposes a multiplier that is miles outside accepted norms.  That is akin to applying no cross-check at all," the insurers said.

Quinn Emanuel and a group of healthcare plan insurers the firm represents have insisted the firm used a novel claim and achieved a 100% recovery for the class in litigation over so-called risk corridor payments under the ACA.  But objectors Kaiser Foundation, UnitedHealthcare and others have argued that class counsel was entitled to just $8.8 million after a lodestar cross-check.

A Court of Federal Claims judge granted Quinn Emanuel's request for $185 million, or 5% of the total $3.7 billion settlement, in 2021 finding that a lodestar cross-check was unnecessary.  But that conclusion "was legal error," according to the Federal Circuit, which vacated the award in 2023.

That $185 million amount was inconsistent with promises made in class opt-in notices, and the "extraordinarily high award" wasn't justified, the three-judge panel ruled, ordering the fees to be recalculated.  But Quinn Emanuel's renewed request for $185 million "does little more than pay lip service" to the Federal Circuit's order, according to the insurers.

While the insurers still think their original $8.8 million fee request is reasonable, they are willing to agree to a fee award between $11.77 million and $23.14 million in "the interest of finality," they told the claims court.  "[T]he objectors sincerely want class counsel to be handsomely rewarded.  $11.77 [million] to $23.14 million represents an incredibly large fee award that also fulfills class counsel's promise of a lodestar cross-check," the insurers said.

Class Counsel Seek $94M in Fees in DuPont PFAS Settlement

October 17, 2023

A recent Law 360 story by Adrian Cruz, “Attorneys Seek $94 Million From DuPont PFAS Settlement”, reports that attorneys representing municipalities suing DuPont and other chemical companies over contaminated drinking water from PFAS chemicals have asked a South Carolina federal judge for $94 million in attorney fees.  In a memorandum, the group of attorneys from FeganScott LLC, Douglas & London PC, Napoli Shkolnik PLLC and Baron & Budd PC said their request of $94.8 million in fees is only 8% of the $1.19 billion settlement that was reached with Chemours, DuPont and Corteva in June.  The attorneys added that the 8% request is significantly below the 25% limit allowed by the Fourth Circuit.

Some of the reasons cited for the attorneys' fee request include a workload of nearly 415,000 combined billed hours, the novelty and complexity of the questions being asked throughout the litigation progress, the added challenges posed by the COVID-19 pandemic, and the end result, which settled one of the nation's largest multidistrict litigations, which they said benefits over 100 million Americans due to the drinking water improvements that will be made as a result.

"The DuPont settlement was the result of a years-long, multitrack effort by plaintiffs' counsel who expended hundreds of thousands of combined hours on multiple fronts, including settlement efforts, litigation efforts and MDL case administration, without any guarantee of a recovery," the memorandum said.  "This three-pronged approach was necessary given the highly complex nature of this MDL involving so many defendants, and in order to meet the challenges and obstacles presented by this MDL, including, of course, litigating in the midst of a global pandemic."

Along with the $94.8 million in fees, the attorneys also requested $2.1 million in costs, noting that the amount covers about 10% of the total out-of-pocket costs spent on the litigation.  The attorneys added that because of the case's size and the involvement of large corporations, it was a risky one for the firms involved as they ultimately spent over $21 million without any guarantee of recouping those costs.

"Considering the expense and time involved in prosecuting this case against well-resourced defense counsel on a purely contingent basis, with no guarantee of a positive result and ever-mounting litigation costs in excess of $21 million, risky cases such as this are not for the faint of heart," the memorandum said.  "Whereas many shied away from this litigation, the court-appointed counsel poured their heart and soul into this litigation and should be rewarded accordingly."  In June, the municipalities reached a $10.3 billion settlement with 3M, which was also sued for its role in manufacturing products using PFAS and the ensuing water contamination that allegedly happened as a result of the chemicals.

"Addressing the PFAS settlements with DuPont and 3M, this wasn't just a case for us at the PEC [plaintiffs' executive committee], but a long, uphill battle spanning half a decade," plaintiffs' attorney Paul Napoli told Law360.  "For five strenuous years, we worked relentlessly without immediate compensation, pouring significant financial resources into the case.  This endeavor saw us navigating vast expanses of documents, managing an overwhelming amount of data, and facing formidable defenses that often seemed insurmountable.  Our proposed 8% fee is not just competitive within the industry, but it reflects the hardships we faced, the risks we took, and the substantial investments we made."

Lead plaintiffs’ counsel spent nearly 415,000 hours on the litigation, according to their fee motion, with a lodestar of more than $300 million, far more than what they were asking for in the DuPont settlement.  The lodestar is the number of hours spent on a case multiplied by the average hourly rate of the lawyers.

In a declaration attached to the fee motion, Vanderbilt Law School Professor Brian Fitzpatrick said the fee request was below the norm, even for settlements worth $1 billion or more.  The average award in 36 class action settlements of that size, between 2006 and 2023, was 12.1%, he wrote.  “Arguably, an even greater percentage fee is warranted,” the motion says, “but class counsel recognizes that their efforts to resolve these claims against DuPont parallel the claims being resolved against 3M.  To request a different percentage of the fund simply because of the size of the fund was not deemed justified.”

The motion states that the fees would be considered common benefit fees and deducted from retainer fees that firms already received through their own contingency contracts.  Lead plaintiffs’ lawyers also asked for $2.1 million in costs relating to the DuPont settlement, about 10% of their total expenses when including the 3M deal.

$185M Fee Award in $725M Meta Privacy Class Settlement

October 13, 2023

A recent Law 360 story by Lauren Berg, “Facebook Users’ Attys Get $185M In $725M Meta Privacy Deal”, reports that counsel representing a class of more than 200 million Facebook users will take home nearly $181 million in fees and $4 million in costs after a California federal judge granted final approval to the $725 million deal resolving privacy claims over the Cambridge Analytica data harvesting scandal.  U.S. District Judge Vince Chhabria put his final stamp of approval on the $725 million settlement that the preliminarily certified class reached with Meta Platforms Inc. in December.  Judge Chhabria also awarded class counsel $180.4 million in attorney fees, which equals 25% of the settlement fund, and almost $4 million in costs, according to the simultaneously filed orders.

The fee and costs take into account amounts previously awarded to class counsel as sanctions, according to the order, including in February when Meta and its attorneys at Gibson Dunn & Crutcher LLP were ordered to pay $925,000 over their "unusually egregious and persistent" misconduct delaying discovery and gaslighting of opponents in seeking to extract a lower-priced settlement.

"The court does not take lightly the concern that a fee award equaling 25% of the settlement fund can be inappropriate in cases involving a massive monetary recovery for the class," Judge Chhabria said in the order.  "In many such cases, the 25% benchmark will be too high."  "As a result, the court has viewed the proposed fee award with greater skepticism, and less deference to the 25% benchmark, than in a typical case," he added.  "That said, the court finds that the attorneys' fee award is fair and reasonable under the percentage-of-the-recovery method."

The fee amount represents a 1.99 lodestar multiplier for roughly 150,000 hours of attorney work done over the past five years, which is below average in settlements of comparable size, the order states.  The judge said the settlement is a substantial portion of the maximum amount of damages the class could have recovered after trial and an appeal.  Novel legal issues and complicated facts, as well as Meta's resources and "aggressive approach to litigation," created a risk that the class would take home nothing — a risk shouldered by Bleichmar Fonti & Auld LLP and Keller Rohrback LLP, according to the order.  "The magnitude of the settlement fund is due more to the efforts of counsel than the size of the class," Judge Chhabria said.

The parties secured preliminary approval of the $725 million deal in March, before asking for final approval in July, in which the users touted the nearly 6% claims rate as "well above claims rates approved in other large settlements."  But objectors told the court later that month that the deal was overly broad and unfairly favorable to certain Facebook users.

Class members Stewart Harris and Ryan Cino argued that the likelihood that someone's data was compromised "almost certainly depends" on how many Facebook friends they had, which means users with fewer friends are getting just as much compensation despite having faced less risk.  And Sarah Feldman argued the settlement is too small, saying the potential damages in the case could be $6.25 billion.

At a final approval hearing in September, however, Judge Chhabria lauded the high rate of class participation, saying he was "blown away" that over 17.7 million valid claims have been submitted in what may be the largest response to a U.S. class action.  The judge granted final approval to the settlement, finding that more than 93% of the target audience of 253 million Americans had received notice of the settlement.  He also overruled the settlement's objectors.

$90M in Fees in Kraft-Heinz Shareholder Class Settlement

September 20, 2023

A recent Law 360 story by Ryan Harroff, “Kraft-Heinz Shareholder Class Counsel Gets $90M in Fees”, reports that an Illinois federal judge awarded $90 million in fees to class counsel for the Kraft Heinz Co. investors who accused the company and a Brazilian private equity firm of hiding the snack food maker's cost-cutting measures after a merger to cover up a $15.4 billion goodwill impairment.

U.S. District Judge Jorge L. Alonso said in his order that the investor class' counsel from Kessler Topaz Meltzer & Check LLP, Bernstein Litowitz Berger & Grossmann LLP and other firms worked with "skill, perseverance, and diligent advocacy" to secure the $450 million total settlement that their clients agreed to with Kraft Heinz and 3G Capital Partners, the private equity firm that guided the 2015 merger between H.J. Heinz Co. and Kraft Foods Group Inc.  According to Judge Alonso's order, class counsel will also receive $2.6 million to cover litigation expenses on top of its 20% cut of the settlement fund.

The settlement is believed to be one of the largest pretrial securities deals in history and is the largest deal of its kind in the Seventh Circuit. Judge Alonso gave his preliminary approval to the agreement in May and issued final approval in a minute order Sept. 12.

Investors first filed suit in 2019, alleging Kraft Heinz engaged in shady accounting practices and cost-saving strategies that harmed its own supply chain, lost it customers and made potential new investors too nervous to buy in to the company, all while publicly stating it was saving money because of "synergies" from the 2015 merger.

3G Capital — which according to the suit owned 24% of Kraft Heinz and installed seven of its own partners as the new company's senior executives or board members — had directed Kraft Heinz's actions and overseen its belt-tightening moves, the investors had said.  Those cost-cutting measures lost shareholders a net $12.6 billion after the resulting supply chain and customer issues caused the company to write down the value of its own brands by $15.4 billion, they alleged.

Attorneys for the shareholders had asked the court in August for the $90 million they have now been awarded, estimating that their firms had collectively spent over 112,000 hours working on behalf of their clients to get the settlement on the books.  Judge Alonso also noted the substantial time investment in his order granting their request.