A recent Law 360 story by Diana Novak Jones, “7^th Circ. Has Chance to Cut Off ‘Mootness Fee’ Merger Case,” reports that against a backdrop of near-constant shareholder litigation challenging mergers, the Seventh Circuit is the first federal circuit that’s been asked to stop a burgeoning litigation strategy among plaintiffs attorneys that some view as extortion of the merging companies and their shareholders.

The strategy centers on plaintiffs attorneys’ ability to collect so-called mootness fees in exchange for dismissing class actions that accuse merging companies of disenfranchising their shareholders.  The fees come after the companies make some additional disclosures about the deal, mooting the litigation but giving the attorneys a way to get paid in exchange for its purported impact.  Lawsuits and class actions filed after merger announcements are so common that it’s rare to see a major deal go unchallenged, experts say.  Consumer advocates and courts have criticized the cases as “strike suits,” filed only to secure fees for the attorneys.

In what's believed to be the first time a federal appellate court has been given a chance to address the issue, the Center for Class Action Fairness — a group run by the free market advocates the Competitive Enterprise Institute -- on Sept. 10 filed a brief with the Seventh Circuit that attacks the "mootness fee racket."  The suit stems from the dismissal of shareholder suits over the now-scuttled merger of Akorn Inc. with Fresenius Kabi AG, which ended with a $322,500 fee payment to the plaintiffs’ attorneys, according to court records.

Researchers tracking litigation filed after merger announcements say the percentage of mergers with a value of more than $100 million that are the subject of a shareholder suit has been on the rise since around 2003.  By 2013, approximately 96 percent of all mergers at that level attracted at least one shareholder suit, according to a March 2018 Vanderbilt Law Review article, “The Shifting Tides of Merger Litigation,” featuring data compiled by a U.S. Securities and Exchange Commission economist and law professors from the University of Pennsylvania, the University of California Berkeley and Vanderbilt University.

The suits largely accused the merging companies of breaching their fiduciary duties to shareholders, sometimes by failing to secure a high enough per-share price or by withholding information.  They were almost exclusively filed in Delaware courts, where more than 60 percent of Fortune 500 companies are incorporated, according to the state.  A large number of the suits ended in settlements where the suit’s target agreed to amend some of its disclosure statements and pay the class’ attorneys’ fees, according to the economist who worked on the article, Matthew Cain, currently a visiting research fellow at Harvard Law School.

But the popularity of those “disclosure settlements,” as courts have called them, waned after the Delaware state courts issued a series of rulings that sought to restrict their use.  The most significant ruling came from the Delaware Court of Chancery in 2016 in response to litigation over Zillow Inc.’s acquisition of Trulia Inc., with the court saying that attorneys bringing these types of settlements should expect far more scrutiny going forward.

“It is beyond doubt in my view that ... the court’s willingness in the past to approve disclosure settlements of marginal value and to routinely grant broad releases to defendants and six-figure fees to plaintiffs’ counsel in the process have caused deal litigation to explode in the United States beyond the realm of reason,” Chancellor Andre Bouchard wrote.

The number of merger suits filed in Delaware dropped after that and it hasn’t rebounded in the years since, according to the researchers.  Instead, cases are popping up in federal courts across the country, and instead of ending in settlements, they’re ending in dismissals and “mootness fees,” the researchers said.  “The problem that existed in the state courts has now simply migrated to the federal courts,” said Vanderbilt Law School professor Randall Thomas, one of the researchers who wrote the article.

Thomas said he and his colleagues are still gathering the latest data, but his preliminary impression is that the trend is showing no sign of slowing down.  “Deal litigation is almost universal on every sizable deal,” he said, adding that the majority of these suits are being filed by just four law firms. He declined to name the firms, however.  And the majority of the cases are ending in “mootness fees,” resulting in average attorneys’ fees of $265,000 per case in 2017, according to the article.

That’s what happened in the six shareholder suits against Akorn in Illinois federal court, according to Frank.  As an Akorn shareholder, Frank sought to intervene in the cases and asked for a permanent injunction against the shareholders’ attorneys to bar them from accepting payment for dismissing Exchange Act class actions without court approval of their fee award.

But U.S. District Judge Thomas Durkin rejected Frank’s motion in three of the suits.  The Akorn transaction fell apart, and the plaintiffs’ attorneys filed motions disclaiming any right to the more than $300,000 in fees Akorn had agreed to pay, according to court records.  The judge said that disclaimer made Frank’s motion moot.

Frank’s appellate brief says the firms involved in the Akorn litigation are among the most prolific firms in the “mootness fee racket,” an industry of its own.  In filings opposing Frank’s motion to intervene in the Akorn suits, the shareholders called Frank a “paid activist” who was only looking to punish the plaintiffs’ counsel for fees earned following negotiations.