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Category: Mootness Fees

Judicial Review of ‘Mootness Fees’ Before Seventh Circuit

October 24, 2019

A recent Law 360 story by Rachel Graf, “’Mootness Fees’ Are Beyond Court’s Purview, 7th Circ. Hears,” reports that, in what appears to be a first, plaintiffs attorneys are asking a federal appellate court to allow a controversial practice in which they file merger objections that result in a few extra disclosures for investors and privately negotiated "mootness fees" for the lawyers, which they say are out of the lower courts' reach.

Investors represented by Monteverde & Associates and Geyser PC have asked the Seventh Circuit to review an Illinois federal judge’s order revoking $322,500 in attorney fees they had won after securing additional disclosures about Akorn Inc.’s planned merger with Fresenius Kabi AG, arguing the lower court no longer had a say in the proceedings.

As with many of these cases, the defendants’ disclosures “mooted” the investors’ allegations, and the plaintiffs then voluntarily dismissed their claims and negotiated fees with the defendants without the need for a judge’s approval.

In this instance, however, U.S. District Judge Thomas Durkin ordered the attorneys to return their fees, calling the disclosures sought by the plaintiffs “worthless to the shareholders.”  The judge reviewed the resolution after Akorn shareholder Theodore Frank, who founded the Center for Class Action Fairness, asked to intervene in the lower court proceedings to object to the attorney fees — a bid that ultimately failed.

The plaintiffs are now arguing that Judge Durkin had no right to issue the order because the allegations had already been voluntarily dismissed.  “At that point, the court’s jurisdiction had officially lapsed over the merits, and it had no authority to continue,” they said in a brief.  “Its decision to review the merits of the complaint — to determine whether it should ‘abrogate’ the parties’ resolution of the core dispute — is directly at odds with settled law.”  Even if the court did have jurisdiction, it applied the wrong standard when evaluating the significance of the disclosures, the investors argued.

Judge Durkin evaluated whether the disclosures sought by investors were “plainly material,” a standard established in a landmark 2016 Delaware Chancery Court opinion in a case called Trulia.  But the plaintiffs told the Seventh Circuit this standard applies only to settlements that give defendants a broad release of additional claims stemming from the merger, which their resolution did not.

Frank has asked the Seventh Circuit to appoint him as amicus curiae to argue in support of the district court’s ruling, since Akorn and its board don’t intend to defend the decision.  An attorney representing Akorn and its board confirmed they don’t intend to file a brief with the appellate court.

Frank has also argued for sanctions against the law firms and an injunction barring them from securing attorneys fees without court approval.  He said he can’t afford to intervene in each of the many dozens of cases that are resolved with mootness fees.

Mootness fees, like those at issue in the Akorn dispute, have generated a fair amount of controversy in recent years.  Law professors, defense attorneys and even other plaintiffs attorneys contend that everyone but the lawyers filing the complaint loses, because courts become more skeptical of legitimate allegations and defendants have to address frivolous lawsuits.  The significance of the disclosures is up for debate and, unlike in past resolutions, defendants aren’t protected against the possibility of future claims.  In court documents, attorneys have defended their lawsuits by saying that companies are being forced to disclose information that’s important to investors.

The Seventh Circuit seems to be the first federal appellate court to review the practice, said Jill Fisch, a professor at the University of Pennsylvania Law School and joint author of a draft paper about mootness fees.  “They are pretty conscientious in terms of policing what goes on in the court,” she told Law360.  “So to the extent they view this as an effort to evade judicial oversight, they might be skeptical of the claim.”  Either way, the ruling will likely shed some light on whether the practice will be dealt with in the courts or through an amendment to the Federal Rules of Civil Procedure, she said.