A recent Reuters’ On the Case story “3rd Circuit Dings Trial Judge for Unjustified Cut of Class Counsel Fees,” by Alison Frankel reports that U.S. District Judge Richard Andrews of Wilmington, Delaware, was not bowled over by the work performed by plaintiffs lawyers who reached a shareholder derivative settlement in 2013 with board members of AmerisourceBergen Corporation, or ABC. The settlement agreement — in which ABC agreed to cancel the grant of more than 272,000 stock options, worth about $5 million, to its CEO — said ABC would not oppose a few award of $1 million to Levi & Korsinsky and Farnan. Judge Andrews awarded only $550,000 — and said he would have granted only $250,000 had it not been for ABC’s acquiescence to the higher fee.
The judge hinted that plaintiffs lawyers were in a hurry to settle the case ahead of developments in two parallel shareholder proceedings, a similar derivative class action in federal court in Philadelphia and a Delaware Chancery Court suit demanding access to ABC’s corporate books and records. The Delaware federal case was filed in February 2013, just after the Philadelphia case. It settled in May. Plaintiffs lawyers spent only $150,000 worth of time on the litigation before settlement talks began, Judge Andrews said. And though the settlement restored $5 million to the company through the cancellation of options granted in violation of the shareholder-approved executive compensation plan, it was a simple case, according to Judge Andrews.
“The case was developed from public disclosures, and the only complexity was the jockeying among the shareholders’ attorneys for their pieces of the pie,” the judge wrote. “In my opinion, this matter would have been an appropriate matter for a demand on the board. It was a ‘one-off’ mistake by ABC. ABC should, of course, have been more careful, but what happened here was not corporate malfeasance, it was corporate carelessness. The relative straightforwardness of this case suggests a smaller fee award.”
It could have been worse for Levi & Korsinksy and its co-counsel: Judge Andrews granted nothing at all to lawyers from Prickett, Jones & Elliott and Kessler Topaz Meltzer & Check, who represented the lead plaintiff in the parallel Pennsylvania case and argued that their initial objection to the Delaware settlement benefited ABC shareholders because it led to a narrower release of claims. (Shareholder lawyers in the Chancery Court books-and-records case did not ask for fees and dropped a motion to intervene in the Delaware federal court litigation.)
Nevertheless, Farnan and Levi & Korsinsky appealed the slashed fee award to the 3rd U.S. Circuit Court of Appeals, arguing that Judge Andrews underestimated the creativity of their case, failed to take into adequate account the value of the corporate governance reforms they obtained, and abused his discretion by granting them such a small percentage of the money they won. ABC, which, after all, had already paid plaintiffs lawyers $1 million, as the company had promised in the settlement agreement, did not file an opposing brief.
On Thursday, the 3rd Circuit agreed that the record of the case does not support several of Judge Andrews’ assertions in his fee ruling. In an unpublished opinion written by Judge Luis Restrepo for a panel that also included Judges Michael Chagares and Franklin Van Antwerpen, the court vacated the fee award and sent the issue back to Judge Andrews.
According to the opinion, the judge failed to explain why he did not credit class counsel for originating the litigation, since they claimed to have developed the theory of the case before any other plaintiffs lawyers; didn’t provide an adequate explanation for why he did not credit the lawyers’ hours negotiating a settlement; and didn’t say what evidence in the record supports his conclusion that ABC’s excessive stock option grant was a one-time incident of corporate carelessness.
The 3rd Circuit agreed that the case “was not particularly complicated,” but said one section of Judge Andrews’ ruling “gives us pause.” The judge said he based the fee award on the premise that the benefit to the company was a little more than $5 million, the “spread value” of the cancelled stock options on the day they were returned to the company. But on other days, the value of options in a volatile stock would have been worth much less, the trial judge wrote. The 3rd Circuit said the purpose of the trial court’s musing “is not altogether clear” and that it “would be error in that it is inconsistent with the District Court’s explicit finding that the value to ABC of the cancellation of the excess shares was $5.048 million.”
In the end, the appeals court sent the fee issue back to Judge Andrews, concluding that it didn’t have a full enough record to find the judge abused his discretion. But he’s going to have to provide a lot more explanation if he wants the fee cut to hold up.