A recent Law 360 article by Hugh Marbury and Molly Shaffer, “A Defense Strategy For Addressing Copyright Fee-Shifting”, reports on case strategy in copyright fee-shifting litigation.  This article was posted with permission.  The article reads:

Unlike in Europe, litigants in the U.S. are generally responsible for paying their own attorney fees. Limited exceptions to the American rule exist.  For example, subject to the court's discretion, prevailing parties in Section 1983 patent and copyright litigation are eligible to recover attorney fees.

Although permissive fee-shifting is not isolated to copyright matters, copyright defendants face unique challenges because of the outsized impact Section 505 of the Copyright Act has on the economic incentive structure in all copyright litigation.  Federal Rules of Civil Procedure, Rule 68 could neutralize the omnipresent threat of Section 505 and serve as a mechanism for copyright defendants to recover post-offer attorney fees incurred.

In 2014, the American Law Institute launched a project for developing the first Restatement of the Law, Copyright.  More than 175 elected American Law Institute members — consisting of judges, law professors and experienced copyright practitioners — have spent several years drafting the restatement.  The restatement surveys copyright law as it is applied today, including the conflicting case law regarding fee-shifting and Rule 68.  In addition to the impending restatement, the U.S. Supreme Court has demonstrated some interest in copyright issues.

In Warner Chappell Music Inc. v. Sherman Nealy, the U.S. Supreme Court heard oral argument Feb. 21 to determine the relationship between the discovery accrual rule and the statute of limitations provision contained in Title 17 of the U.S. Code, Section 507(b).  The intersection between Rule 68 and Section 505 is another unclear area of copyright law where copyright lawyers could benefit from the Supreme Court's guidance.

The Intersection Between Rule 68 and Section 505

The U.S. Congress and courts have struggled with economic drivers in copyright cases, the subject matter of which can range anywhere from a single infringing photograph to massive copyright disputes regarding new and emerging software algorithms.  In December 2020, Congress addressed one end of the economic spectrum in the copyright ecosystem by establishing the Copyright Claims Board.

The CCB is a three-member tribunal, which serves as an alternative forum for smaller copyright disputes up to $30,000.  The CCB, while still in its infancy, does nothing to address the pressures associated with fee-shifting in all federal copyright cases, however.  Section 505 permits the "prevailing party" to recover its reasonable attorney fees as part of costs incurred. Unlike in patent cases, where fee-shifting is limited to exceptional cases, there is no such statutory limitation in Section 505.

Without any guidance as to when attorney fees may be awarded under Section 505, copyright plaintiffs threaten attorney fees early and often in settlement negotiations.  The threat of fee-shifting significantly affects the alleged infringer's bargaining power and resolve in defending the case.  Regardless of whether Congress intended Section 505 to provide significant leverage to plaintiffs and shift the focus from the merits of the litigation to the costs associated therewith, the reality is that Section 505 heavily affects settlement negotiations.

Rule 68 was designed to encourage settlement.  Enacted in 1946, Rule 68 permits a defendant to serve an offer of judgment on an opposing party at any point until 14 days before the trial date.  The offeree then has 14 days to accept the offer. If the offeree does not accept the offer within 14 days, the offer is considered withdrawn.  If the final judgment is not more favorable than the unaccepted offer, the offeree must pay the defendant's costs incurred after the offer was made.

Rule 68 is overlooked and underutilized because costs are often insubstantial in most litigation. However, where costs may be inclusive of attorney fees — in Section 505 — Rule 68 is a powerful tool that could minimize the threat of Section 505 in settlement negotiations by weakening the copyright holder's claim to its fees and allow defendants to collect attorney fees incurred after the offer.

In Marek v. Chesny in 1985, the Supreme Court interpreted Rule 68 in connection with a Section 1983 fee-shifting claim.  In Marek, the Supreme Court confirmed that all costs "properly awardable under the relevant substantive statute" fall within the scope of Rule 68.  Where the underlying statute includes attorney fees in its definition of costs, attorney fees are properly awardable under Rule 68.  Section 505 expressly provides that "the court may also award a reasonable attorney's fee to the prevailing party as part of the costs."

The forthcoming restatement of the law copyright has addressed this topic.  Although not yet published, the American Law Institute has approved various chapters of the restatement, including the chapter discussing remedies. Comment (h) to the restatement's chapter on remedies acknowledges that Rule 68 affects Section 505.  The restatement discusses the Supreme Court's decision in Marek and presents the competing case law regarding when a copyright defendant is eligible to collect its post-offer attorney fees under Rule 68.

Defensive Strategy: Reining in Overly Aggressive Copyright Plaintiffs

Rule 68 can prevent plaintiffs from recovering attorney fees under Section 505.  Neutralizing the threat of Section 505 shifts the economic structure of the litigation and refocuses the parties' attention on the merits of the action.

Courts are granted broad discretion to award attorney fees under Section 505 and should engage in a "particularized, case-by-case assessment."  Nonexclusive factors for consideration include frivolousness, motivation, objective unreasonableness, and the need in particular circumstances to advance considerations of compensation and deterrence.  Courts should give substantial weight to the objective reasonableness of the losing party's position, while still giving "due consideration to all other circumstances relevant to granting fees."

Unfortunately, the Supreme Court recently rejected the opportunity to clarify further the appropriate standard for awarding attorney fees under Section 505 in Hasbro Inc., et al. v. Markham Concepts Inc.  A reasonable but unaccepted Rule 68 offer does not operate a wholesale bar to a plaintiff's recovery of fees, but defendants should urge courts to consider an offer of judgment as a "circumstance relevant to granting fees."

An unaccepted offer of judgment may trigger several of the nonexclusive factors.  For example, failing to accept a reasonable Rule 68 offer could indicate that a plaintiff's motivation in the litigation is to obtain a windfall.

Relatedly, a plaintiff's failure to come down to a realistic settlement figure could show that the plaintiff presented an unreasonable litigation position.  Moreover, prolonged litigation — a result of an unaccepted Rule 68 offer — could reflect a plaintiff's intent to rack up attorney fees for both parties.  Each of these arguments could serve as a basis for the court to reject a plaintiff's Section 505 request.

Although the exact impact of Rule 68 is unclear in the copyright fee-shifting context, defendants could benefit from making creative arguments grounded in Rule 68 principles in attempt to equalize the bargaining power in copyright infringement negotiations.

Offensive Strategy: Maximize Recovery Opportunity

Circuits are split on the more difficult questions regarding when a defendant may recover attorney fees after an unaccepted offer of judgment.

The U.S. Court of Appeals for the Eleventh Circuit held in Jordan v. Time Inc. in 1997 that the copyright defendant was entitled to costs, including attorney fees, following an unaccepted offer of judgment that was more favorable than the damages awarded.  The court relied upon the mandatory language in Rule 68 and determined that the mandatory costs included attorney fees incurred after the Rule 68 offer.

Other circuits, however, have rejected Jordan, and require that the defendant also be the prevailing party to earn attorney fees incurred after the Rule 68 offer.  Applying Marek, those circuits have generally concluded that attorney fees must be properly awardable under the substantive statute to fall within Rule 68.

Under Section 505, attorney fees are only available to the prevailing party, and therefore, some courts have held that the defendant must be the prevailing party to recover post-offer attorney fees.  What exactly a prevailing party is remains elusive.  Because of the interplay between Rule 68 and Section 505, it seems possible that a defendant could recover post-offer attorney fees.  The Eleventh Circuit considered this argument in February in Affordable Aerial Photography Inc. v. Trends Realty USA Corp.

In that case, the defendant served an offer of judgment, which was not accepted, and the plaintiff later voluntarily dismissed the case without prejudice pursuant to Federal Rule of Civil Procedure 41(a)(2).  Although the court held that Rule 68 was inapplicable, it is conceivable that a copyright defendant could recover post-offer attorney fees under different facts.

What's Next?

Rule 68 and Section 505 certainly overlap, but exactly how they interact is less than clear.

Copyright practitioners would benefit from the Supreme Court's guidance on if and how Rule 68 affects permissive fee-shifting.  The Supreme Court has shown renewed interest in copyright cases generally, having reviewed fair use in Andy Warhol Foundation for the Visual Arts v. Goldsmith last May and the timing of damages in Warner Chappell Music Inc. v. Sherman Nealy in February.

Given the Supreme Court's recent interest in copyright issues and the many billions of dollars potentially at stake in attorney fees — particularly in the massive artificial intelligence copyright cases being filed in all circuits — the Supreme Court should give guidance on the relationship between Rule 68 and Section 505.  But all copyright defendants should seriously consider the role of Rule 68 in their litigation strategy.

Hugh Marbury is a partner and co-chair of the copyright practice at Cozen O'Connor.  Molly Shaffer is an associate at the firm.

A recent Law 360 story by Celeste Bott, “Ill. Judge Needs More Info To OK $57M Chicken Antitrust Fee”, reports that an Illinois federal judge overseeing a sprawling antitrust litigation against broiler chicken producers said he couldn't rule on class counsel's renewed bid for a $57 million attorney fee award thrown out by the Seventh Circuit last year without more information on one of the firm's graduated fee arrangements in a similar 2015 antitrust case, which wasn't disclosed in the first go-around.

U.S. District Judge Thomas Durkin said during a remote hearing that he wanted more briefing from the both plaintiffs' firms — Hagens Berman Sobol Shapiro LLP and Cohen Milstein Sellers & Toll PLLC — and from class objector John Andren as to what effect the 2015 case has had in assessing the attorney fee award in the $181 million deal for chicken buyers.

In the earlier case, Cohen Milstein took on some of the nation's largest investment banks while representing the Public School Teachers' Pension and Retirement Fund of Chicago, a sophisticated plaintiff which negotiated attorney fees ex ante, or ahead of case resolution.

In that case, the plaintiff adopted a graduated scale.  If the same scale were to be used in the chicken case, class counsel estimated they would be entitled to $44 million for the $181 million settlement, or roughly 26%.  But the counsel argued they would have negotiated a higher rate in the broiler chicken case because it doesn't involve a trillion-dollar financial market.

Andren, meanwhile, said Judge Durkin should apply a similar fee schedule agreed to by Chicago Teachers, which entail fee brackets that decline both by the size of the settlement and by the stage of settlement.

"The latter is as important as the former, because sophisticated plaintiffs realize that trials are expensive and risky," Andren said in his opposition to the firms' renewed bid for a $57 million fee award in the chicken case.  "To align the incentives of class and counsel, attorneys need to receive a larger share of the recovery for more procedurally-advanced settlements and verdicts. This cannot occur when relatively early settlements are paid at 33%."  Judge Durkin also noted Tuesday that both are large, complex antitrust cases with many defendants and astronomical damages.  "There's enough similarities where I want to hear from both sides," he said.

The law firms, however, have contended "there is an ocean" between the size of the potential recovery, and potential fee awards, in both cases, and noted that in the chicken case, they represent indirect purchasers, which increases the risk relative to the banking cases.

"Indirect purchasers face defendant attacks that direct purchasers do not, and these attacks increase the chance of waking away with nothing.  And even though they take on this additional risk, the total damages indirect purchasers can recover based on state law claims is about half of what direct purchasers can recover for their federal claims," the firms said in a renewed fee motion filed in September 2023.

In that motion, they argued the court applied the correct methodology for determining fees the first time and came to the correct conclusion in awarding just over 33% of the settlement fund.  "Not only does the original award align with other awards in this specific case, it also aligns with the best available data on negotiated rates in antitrust cases," the class counsel said.  The fee award is back for reconsideration by Judge Durkin after the Seventh Circuit held last year that he failed to adequately consider bids made by class counsel in auctions in other cases and fee awards in different circuits.

Andren had taken issue with the roughly one-third cut of the settlement that Hagens Berman and Cohen Milstein were to receive in a deal the firms had struck with Fieldale Farms Corp., Peco Foods Inc., George's Inc., Tyson Foods Inc., Pilgrim's Pride Corp. and Mar-Jac Poultry.

Private plaintiffs began suing the nation's largest broiler-chicken producers in September 2016, claiming the producers coordinated and limited chicken production to raise prices and exchanged detailed information about capacity, sales volume and other data through statistical research compiler Agri Stats Inc.

The settlements at issue in this appeal were reached with Tyson for $99 million, Pilgrim's for $75.5 million, Peco for $1.9 million, George's for $1.9 million, Fieldale for $1.7 million and Mar-Jac for $1 million.  The agreements were awarded final approval by a district judge in December 2021.

A three-judge Seventh Circuit panel complimented the lower court in August 2023 for its "fine job of shepherding" the complex litigation, but said it made a mistake when it discounted bids made by one of the two firms serving as class counsel in other cases because the proposals had declining fee scale award structures.

Andren had also argued that the lower court should have taken into account that class counsel frequently did work in Ninth Circuit district courts, which employ a lower 25% "benchmark" for presumptively reasonable attorney fees.  The Seventh Circuit panel agreed the Illinois district judge shouldn't have categorically assigned less weight to Ninth Circuit cases in which counsel was awarded fees under a mega-fund rule.  In addition to vacating the fee award, the panel remanded the matter for "greater explanation and consideration" of the factors it laid out, noting it expressed no preference as to the amount or structure of the award, just the need for further review.

A recent Law 360 story by Lauraann Wood, “Ill. Justices Weigh Whether Rule Violation Merits Fee Award”, reports that the Illinois Supreme Court has questioned whether two law firms should be allowed to preserve their $1.7 million fee award for their work on a family dispute that settled after they were fired, as the justices asked whether fees are appropriate if the firms never disclosed how they would split the money.

Every justice on the state high court bench offered either a question or a criticism during oral argument as they weighed whether the quantum meruit claim by Stephen J. Schlegel Ltd. and Andrew W. Levenfeld & Associates Ltd. was correctly sent back to the trial court for an award that ignores their illegal fee agreement with former clients Maureen V. O'Brien and her nephew Daniel O'Brien III.

Some justices highlighted on one hand the 3,000 hours and years of work the firms put into the O'Briens' underlying family dispute before they were fired and the case settled about two weeks later.  Other justices, including Justice Joy Cunningham, noted the firms' failure to properly disclose their fee-sharing agreement to the O'Briens and questioned whether allowing them to recover fees essentially rewards them for violating a rule of professional conduct.

"Rules exist for a reason," Justice Cunningham said.  "It seems to me from looking at the figure that … they basically got what they would have gotten anyway, so the rule means nothing, and as a Supreme Court, are we supposed to agree that it's OK not to follow our rules?"

Representing the firms, Jeremy Boeder of Tribler Orpett & Meyer PC argued that his clients should receive an equitable fee award for their work because the trial court considered their rule violation and its potential effects before awarding their fees.  Pressed by Justice Cunningham to identify the consequence they would then face for violating the state's fee-sharing disclosure rule, Boeder said there would be none.  "And it's our position that there shouldn't always be a consequence in a case like this for a violation of a rule of professional conduct," he argued.

Acknowledging Justice Lisa Holder White's suggestion that the trial court could award the firms the same amount in fees even without considering their client contract, Boeder argued that spending the time "to get to the point that we've already reached" is unnecessary.  That process would also be wrong because sending the case back would essentially tell the trial court that it "has to go with the second-best option" despite considering all the relevant evidence in a six-day bench trial, he told the justices.  "Why should that be a command upon a trial court of equity, who really was in the best position to evaluate all of the issues here?" the attorney said.

The O'Briens' counsel argued that the firms should not receive any fees even if the justices agree they should go back to the trial court for a new award. Indeed, the O'Briens believe the firms' work is worth "less than zero," partly because they advised Maureen O'Brien to resign as the coexecutor of her parents' estate, which was her "only source of leverage, or power, or control" in the underlying dispute, John Fitzgerald of Tabet DiVito & Rothstein LLC told the justices.  "It is impossible to overstate how catastrophic that legal advice was," he told the court.

The state high court has previously voided a fee agreement that violated professional conduct rules in a case between a litigation consultant and an expert search firm, and the reasoning then should still apply because "there's no public policy reason or any other reason to treat lawyers differently from anyone else who enters a contract that violates public policy," Fitzgerald argued.  "Quantum meruit means 'as much as he or she deserves. 'No one deserves anything that violates public policy," he said.

Fees are also inappropriate because although the firms litigated some issues in the O'Briens' underlying dispute and made some settlement offers, there is no proof the O'Briens' subsequent counsel relied on the firms' earlier work to eventually reach their $16.85 million settlement, Fitzgerald argued.  Any outstanding settlement offers had been withdrawn, and no new offers had been made for weeks by the time the firms were fired, so any potential numbers had gone back to zero by the time the O'Briens' subsequent counsel began handling their case, he said.  "The fact that the next lawyer was able to settle the case on certain terms, I don't think that necessarily means these plaintiffs could have gotten that deal done on the same terms or comparable terms," Fitzgerald said.

Blasting that contention on rebuttal, Boeder argued that it was the firms' settlement back-and-forth that ultimately brought the underlying litigants to their agreeable meeting points and resolve their family dispute.  The firms had made an $18.3 million demand that was met with a $16.25 offer, which then prompted a $16.75 million counter-demand the firms were prepared to send back before they were ultimately fired, he said.  "The settlement was on almost exactly the same terms as the counter-demand that my client proposed," Boeder argued.  "Why wasn't that counter-demand made?  Because Dan and Maureen O'Brien refused to allow my clients to make it on their behalf."

A recent Law.com story by Lisa Willis, “New Ruling Affects Fees For Lawyers Who Serve as Expert Witnesses”, reports that, an appeal in Florida’s Fourth District Court of Appeals— challenging a trial court’s decision to award appellate attorney fees and include an expert witness fee as a cost—has been affirmed.

One South Florida attorney said this appeals case ruling seemingly undid the Florida Supreme Court’s 1985 decision in Travieso v. Travieso, which had found that such fees were awarded at the court’s discretion.  Now, the new opinion clarifies whether an expert witness is necessary to confirm the amount of fees being claimed.

“Basically, they said they’re kind of overruling the 1985 Supreme Court case, saying that if you have an attorney testifying as an expert, [the] fees must be awarded as costs,” Palm Beach County attorney Peter M. Feaman said.  Feaman and Nancy E. Guffey of Peter M. Feaman P.A. in Boynton Beach represented the appellee, Suzanne J. Trombino.  The ruling was entered pursuant to the Fourth DCA’s reversal opinion and attorney’s fees order in Trombino v. Echeverria from 2022.

In affirming the lower court ruling, the appeal court stated, “Our order permitted the trial court to award attorney’s fees to appellate Suzanne J. Trombino (individually and as trustee of two family trusts) if it found that the equities favored the imposition of fees. … The trial court determined Trombino was entitled to fees.”

Feaman, who has been practicing law more than 40 years, said the body of case law that has developed since the 1985 ruling says attorneys must have an independent expert every time to testify to the reasonableness of fees.  “So that’s why the 1985 Supreme Court opinion can be interpreted differently now because the law has changed and been clarified via this ruling as to whether an expert witness is necessary to corroborate the amount of fees being claimed,” Feaman said.  “The Fourth DCA appears to be saying is not discretionary any longer.”  “I think that’s a significant part of the ruling, which is kind of a departure from the 1985 Supreme Court case, where they ruled it was discretionary with the trial court,” Feaman said.

The appeal was Dale Echeverria v. v. Suzanne J. Trombino as trustee of The Family Trust Created Under the Jose I Echeverria 2006 Trust, and as trustee of the Dorothy Jeanne 2006 Trust.  It stems from a prior decision in Trombino v. Echeverria, where the appeals court had reversed a ruling and allowed for the potential awarding of attorney’s fees to Suzanne J. Trombino under specific statutory conditions.  Palm Beach County Circuit Court Judge Charles E. Burton was the presiding judge in the Palm Beach County case.

Judge Alan O. Forst wrote the opinion with judges Martha C. Warner and Dorian K. Damoorgian concurring specially with opinion.  “Hearings for the assessment of reasonable attorney’s fees have become much more complicated and time consuming since 1985 when the supreme court decided Travieso,” Warner wrote in concurring with opinion.

The jurist said that time spent reviewing an attorney’s work and testifying at a fee hearing has increased substantially.  “No longer does one find an attorney at the courthouse on the day of the hearing to briefly review the case file and opine on the fee,” Warner said.  “More likely, this case is an example of a typical contested fee hearing.”

The appellee’s attorney is in agreement.  “When an attorney is testifying as an expert, his fees must be taxed as costs as part of the award,” Feaman said.  “Previous to this, all the judges thought that it was discretionary.  I think in the fourth district, that’s no longer the case.”

Upon remand to the trial court, Trombino sought attorney’s fees, arguing that the circumstances warranted such an award.  However, the trial court sided with Trombino, finding she was entitled to the fees.  Echeverria appealed.

Feaman said this ruling makes sense because, in 1985, the law was unsettled as to whether you needed an expert witness to corroborate your fee request.  “Since that time, the law has developed now quite clearly, you must have an expert witness,” Feaman said. “So now that you must have an expert witness to corroborate your fee requests, it only makes sense that those fees incurred by that expert be taxed as cost because now it’s mandatory that you have an expert fee witness.  So his charges or her charges should be mandatory as well that those charges get taxed.”

Trombino presented evidence of the costs incurred during the appeal process and introduced an expert in attorney’s fees, who testified that the requested amount was reasonable.  Dale Echeverria also brought forth an expert, advocating for a lower fee, but the court ultimately ruled in favor of Trombino’s original request and included the full amount of the expert’s fee as a taxed cost.

Echeverria’s appeal raised three primary issues: the timing of the equity determination for the fee award, the evidence supporting the fee award, and the inclusion of the expert’s fee as a taxable cost.  In affirming the trial court’s decision, the appellate court noted Echeverria’s own use of an expert witness to challenge the fee amount, which further justified the trial court’s discretion in this matter.

“The parties getting fees shouldn’t have to bear the brunt of the expert that now must testify to support those fees,” Feaman said. “Because if you’re the prevailing party and you’re getting fees, why should you have to be penalized for bringing in an expert witness? It should all be part of the cost incurred.”

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.

A recent Law 360 story by Emily Sawicki, “NJ Ethics Board Says Referral Fees Only For In-State Attys”, reports that new guidance provided by the New Jersey Supreme Court's Advisory Committee on...

Read Full Post

A recent Law 360 story by Jeff Montgomery, “Tesla Investors Weigh In On $5B Fee Proposed For Class Attys”, reports that Tesla Inc. stockholders are sounding off to Delaware's chancellor after...

Read Full Post

A recent Law.com article by Adam J. Levitt, “Arguing Class Actions: Why the Catalyst Theory Matters”, examines the catalyst theory in class action litigation.  This article was posted with...

Read Full Post

A recent Law 360 story by Ivan Moreno, “Justices Pass On Hasbro’s Atty Fee Fight in Copyright Win”, reports that the U.S. Supreme Court denied Hasbro Inc.'s appeal to review the First Circuit's...

Read Full Post