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Category: Fees & Judicial Discretion

Tesla Investors Weigh in on $5B Alternative Fee Proposal

March 13, 2024

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 class attorneys sought a stock-based fee potentially worth more than $5 billion at current share prices following the Court of Chancery's reversal of Elon Musk's $55.8 billion stock-based pay plan on Jan. 30.  Chancellor Kathaleen St. J. McCormick said in a letter that the judicial code bars her from considering communications outside the case process.  But she directed attorneys for the class to come up with a method for "handling" the stockholder communications ahead of a yet to be scheduled hearing and argument on the fee.

Nothing in the chancellor's letter characterized the aims or identities of those attempting to contact the court.  Founder Elon Musk owns 20% of Tesla's shares followed by institutional investors, with individuals accounting for less than 1%.  The proposed fee seeks just over 11% of the total formerly earmarked for Musk and now available for company use, well below the 33% sometimes awarded in complex cases that proceed through a full trial.

"I have not read these communications because, as you all are aware, Rule 2.9 of the Delaware Judges' Code of Judicial Conduct prohibits me from considering ex parte communications concerning a pending proceeding," the chancellor wrote in the latest entry of a derivative action launched in 2018.  Some of the letters apparently originated with small stockholders, some of whom have gravitated to X, formerly known as Twitter, to share thoughts on Tesla, Musk, the case, the fee and letters sent to the chancellor.  Some, using the hashtag #DelawareCourt81, have proposed sending letters directly to the parties or to Tesla for forwarding.

Tesla's top five institutional holders hold about 19% of the business, led by The Vanguard Group at nearly 7%.  Blackrock accounts for 5.8%, with State Street Corp. at 3.3%, Geode Capital Management at about 1.6% and Capital World Investors at about 1.3%.  None of the top five immediately responded to requests for comment and counsel for the stockholders did not provide details.

Lawrence Hamermesh, former director of the University of Pennsylvania Carey Law School's Institute for Law and Economics and professor emeritus at Widener University Delaware Law School, said he would not be surprised if the letters Chancellor McCormick referred to were sent by larger investors opposing the requested fee.

"That'd be my guess," Hamermesh said. "Without knowing everything about it, I harbor a certain lack of sympathy with them.  The upshot of the case is they're avoiding dilution" that would have resulted had Musk won.  "The award would dilute them back in a real small way, at least in terms of proportional interest. They're way better off" with the decision.  Nevertheless, Hamermesh said, given the 29,402,900-share cut of the 266,947,208 shares freed up by Chancellor McCormick's decision, the court is certain to be pondering the billions involved.

"She has to be thinking to herself: 'There's no case, no effort, no measure of success that's worth that much to lawyers. You don't need to give them that much to incentivize them to take this case."  In the absence of precedent or clear rules, he added, "it's a gut-level, gut-check thing. How much is enough? Either they become more rich, or fabulously rich."

Chancellor McCormick put the fee in play with an order rescinding Musk's 12-tranche, all-stock compensation plan on 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 a mountain of fast-triggering stock options.

At the time of the ruling, Tesla's stock was trading at more than $191 per share, putting the potential maximum award at around $5.6 billion.  Slipping since has pruned the potential maximum by hundreds of millions.  Costs for the derivative case 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.

Chancery Court: No More Fee Windfalls for Easy Cases

February 28, 2024

A recent Law 360 story by Jeff Montgomery, “Chancery Says ‘Game Over’ On Fee Windfalls For Easy Cases”, reports that a Delaware vice chancellor has publicly slammed stockholder attorneys who sought an $850,000 fee for "minuscule" hours spent on a corporate benefit case after a recent string of suits filed to police stockholder rights to separate class votes on company transactions.

Vice Chancellor Morgan T. Zurn, in an unusual and blunt "Statement of the Court" transcript made public, declared that the "game is over" on relatively large fee claims based on limited hours devoted to enforcing common shareholder rights to vote as a stand-alone, rather than consolidated, class on some deals and charter amendments.

The comments, given in court Feb. 15, called out Smith Katzenstein & Jenkins LLP and Purcell & Lefkowitz LLP in a ruling that rejected an $850,000 fee request for efforts that prompted car-sharing venture Getaround Inc. to revise voting plans for a share increase developed as part of its reverse, take-public merger, approved by stockholders in December 2022.

After Getaround relented and lined up a separate vote for common stockholders, the battle shifted instead to the size of the fee for the corporate benefits gained in stockholder Robert Garfield's suit.  On that issue, the vice chancellor described David Jenkins of Smith Katzenstein and his plaintiffs attorney colleagues as having "lost all perspective" after "having had a really good run making a literal fortune off a minuscule number of hours of work" on charter cases and class vote challenges.

"Seeking a fee that a company CFO has affirmed in a sworn affidavit would render the company insolvent appears to be a betrayal of the stockholders you purport to represent and a betrayal of the functions that plaintiffs counsel plays in the broader ecosystem," the vice chancellor said.  In a brief filed with the court in October, attorneys for Getaround argued that the $850,000 fee requested equals $35,789.47 per hour "for 23.75 hours worked with no disclosure of how the time was actually spent."

The company also argued that more than 94% of Class A shareholders redeemed their holdings for $10.11 per share before closing, and only 181,199 remaining shares were traded on the single day afterward when the price was higher than $10.11, equating to a combined $10,872, or 6 cents per share, loss.

 "In this case, plaintiff does not contend, nor could he, that the outcome of the stockholder vote was altered in any way" because of objections raised before the vote in July 2022 by the attorneys who would later sue, the company argued.  "The Class A stockholders, in a class vote, approved the charter amendment with 89% approval (as compared to the 92% approval of all stockholders)."

Getaround hit the court months after Vice Chancellor Zurn's relatively earthshaking decision in Garfield v. Boxed in December 2022, which found that common shareholders have a right to vote as a single class, rather than in a multiclass pool, on proposals to increase the number of company shares under Delaware's General Corporation Law.  The finding triggered a surge in charter changes and litigation aimed at revising charters and correcting share counts.

The Boxed decision also upheld an $850,000 attorney fee for counsel representing stockholder Garfield, also represented by Smith Katzenstein and Purcell & Lefkowitz. Vice Chancellor Zurn concluded at the time that the Boxed case "conferred a substantial benefit" to shareholders and prevented a cloud or "ticking time bomb" of invalid shares from hanging over the company's capital structure.

Vice Chancellor Lori W. Will weeks later applied a fix to part of the threatened chaos in a ruling on In re: Lordstown Motors Corp., declaring that companies can retroactively validate wrongly issued shares.  In the Getaround transcript, Jenkins pointed out to the vice chancellor that the $850,000 fee in Boxed disappeared when the company sought bankruptcy protection, "and we got nothing."

Federal Circuit: More Fees Even With ‘Exceptional’ Ruling is ‘Nightmare’

February 16, 2024

A recent Law 360 story by Andrew Karpan, “Dish’s Bid for More Fees Called ‘Nightmare’ By Fed. Circ. Judge”, reports that a Federal Circuit judge told counsel for Dish Network LLC that to secure more fees after the cable giant defeated a patent case in district court that was found to be "exceptional" to cover the costs of challenging the patent at the patent board would create "an effing nightmare."

Dish had argued to the three-judge panel that it should be able to bill a shell patent company for expenses incurred challenging the patent through an inter partes review at the Patent Trial and Appeal Board after Dish defeated the related patent suit against it.  The patent company, Dragon Intellectual Property LLC, was also appealing the $1.45 million in fees that Dish already won, along with the $1.86 million won by attorneys for Sirius XM Radio Inc. in a different case over the same patent.

But the hearing was dominated by arguments over efforts by Dish's lawyers to score more money out of Dragon IP and potentially its lawyers — taking up over an hour of debate among the panel of judges.

In that endeavor, Dish had cited the 1989 Sullivan v. Hudson ruling from the U.S. Supreme Court, which gives the courts discretion to award fees to lawyers in a Social Security administrative proceeding.  According to the filings, Baker Botts LLP billed Dish for $673,905 in fees from patent board proceedings and wanted that money added to the $1.45 million. Sirius XM was hoping to clock $134,272 in additional fees.

U.S. Circuit Judge Kara Farnandez Stoll told Baker Botts lawyer Lauren Dreyer that she had a "practical" question about this argument.  "The district court is in the best position to determine whether or not something is exceptional or not because they're in the day-to-day running of the case.  That's not so with an IPR," she said. "The district court knows nothing about what happened at the IPR."  U.S. Circuit Judge Kimberly Moore was more wary of the possible effect of Dish's request in a legal climate where "every single patent litigation has a companion IPR now."

This would open up an entirely new avenue for victorious patent lawyers to litigate further, Judge Moore said.  "So, what you're now asking for is every time we're thinking about attorney's fees, anytime an IPR is successful, you're going to have the district court being put in what Judge Stoll was just articulating [is] the very awkward position of trying to evaluate the exceptionality of what was argued and decided, not in his or her forum but in an administrative forum," Judge Moore said. "That sounds like I'm creating an effing nightmare."

In response, Dreyer tried to argue that these motions would not come all the time if Dish succeeded just this once.  "I think [this case] is the exception; it's not the rule, and it only occurs in the rare cases in which there is frivolousness and an unreasonable manner of litigating," she said.  That didn't go down well with Judge Moore.  "With all due respect, every time you guys win, that's what you claim," Judge Moore told her, audibly annoyed at Dreyer's repetition of legalese.

U.S. District Judge Cathy Ann Bencivengo, on the panel by designation, acted to move the lawyers along in talking about "the circumstances in this case" and said there could be some general grounds for "sweeping the IPR" into a fee bid, as it "wasn't a waste of time [since] you didn't lose there."

Judge Bencivengo appeared occasionally mystified at the larger legal effort by Dish to go after Dragon in the first place.  "Basically, you have a hollow victory here if you win because plaintiff Dragon is a shell.  An empty shell. ... You can get zero.  They're judgment proof," she told Dreyer.

In addition to asking for more money, Dreyer said Dish was also hoping to get the appeals court to hold Dragon IP's lawyers liable for paying those fees.  But Dreyer made little headway again.  "All of what you discussed [with Judge Bencivengo] is not in this record.  You attempted to supplement this record with a deposition that would have brought to light all of those points.  They are not before this court, are they?" Judge Moore asked.

Dreyer acknowledged they were not.

"So we can't rely on any of that," the judge told her.

Judge Moore also took issue with how defense-side patent lawyers use "exceptionality" findings in federal courts.  "It feels like in a lot of these exceptional case findings, what really bothers me is that you all come in, and you complain that the district court should have done some sort of redo of all the things it didn't do in order to conclude that the originally asserted positions should have been deemed exceptional," she said.  "You're asking us to adopt a rule in which district court judges are now going to have to evaluate conduct, behavior and an outcome in a proceeding they had no involvement with and determine whether fees should be awarded for that in their forum, which would have evaluated the exact same issues under an entirely different burden of proof."

Attorney Keeps $1.15M Fee Award Despite Tossing Billing Record

February 9, 2024

A recent Law 360 story by Madison Arnold, “Atlanta Atty Keeps $1.15 Fee Award Despite Tossing Notes”, reports that a Georgia state appellate court has upheld an award of $1.15 million in attorney fees to a solo-practice attorney, saying an Atlanta-based airport travel spa operator he did work for failed to show the trial court was wrong in finding the attorney didn't have to save notes about the legal services he provided.

In its ruling, a three-judge panel upheld the attorney fee award for Gebo Law LLC and its only member, Carl Gebo, who provided five years of legal services for Cordial Endeavor Concessions of Atlanta LLC.  The appellate court didn't buy Cordial's argument that the trial court erred by not giving jury instructions related to the "spoliation of evidence," meaning Gebo's tossing of his notes, among other concerns.  "But the court did not abuse its discretion in refusing to give a spoliation instruction or in refusing to allow an expert to opine on an irrelevant issue, and the jury's award was within the range of damages shown by the evidence.  So we affirm the trial court's judgment," the panel said.

Cordial was hoping to overturn the award for nearly 2,000 hours of work performed by Gebo Law, saying the attorney intentionally destroyed time records and that the award was excessive, according to the appeal Cordial filed in May.  At the heart of Cordial's appeal are the notes Gebo made detailing the date, length of time and the description of legal services he provided to the company, the panel said.  In an affidavit, Gebo said it was his normal practice to create invoices based on notes and then discard the notes afterward.

"A lawyer who fails to secure an engagement agreement, fails to communicate his hourly rate to the client, and then discards his contemporaneous time records when fee litigation is likely does not get to recover unpaid fees at the upper range of what might be considered a reasonable hourly rate," the spa operator said in May.

Gebo added that when he threw away the notes, he believed Cordial would soon be paying for his legal services since the company had confirmed a payment plan, the panel said.  That meant Gebo was not yet thinking about or anticipating any litigation, and he only filed after months of unsuccessful negotiations with the company about receiving payments, the panel said.  That turned out to be central to the panel's ruling.  In its eight-page opinion, the panel said the term "spoliation" is used to refer to the destruction of evidence that is relevant to "contemplated or pending litigation."

"Such conduct may give rise to the rebuttable presumption that the evidence would have been harmful to the spoliator.  However, in order for the injured party to pursue a remedy for spoliation, [including a jury charge on the rebuttable presumption,] the spoliating party must have been under a duty to preserve the evidence at issue," the panel said.

The panel found the trial court was within its bounds to decide that a duty to preserve notes was not triggered at the time Gebo pitched them because he used them to create invoices as part of his normal practice.  "[T]here was evidence that Gebo did not contemplate litigation when following its practice of discarding notes after memorializing them in invoices, the trial court did not abuse its discretion in denying Cordial's spoliation motion," the panel said.

The appellate court separately held that Cordial failed to show the lower court abused its discretion in approving the jury's award of $1.15 million in quantum meruit damages.  "[T]he jury did not understand that Gebo disregarded an important rule of professional responsibility and thus did not understand Gebo should be awarded recovery at the lower range of what otherwise would be a reasonable negotiated fee," Cordial said in May.

That award equals a fee rate of about $630 per hour and that rate is within the range of evidence presented at trial, with expert testimony saying the going rate should be between $500 and $800 per hour.  "[W]e cannot say that the trial court, who saw the witnesses and heard the testimony, abused its discretion in [approving the verdict]," the panel said, quoting a precedential case.

Insurer Ordered to Pay Casino’s 'Fees for Fees'

January 30, 2024

A recent Law 360 story by Alexa Scherzinger, “Insurer Ordered To Pay Casino $55K in Attorney Fees”, reports that an insurer must pay a Las Vegas casino and resort more than $55,000 in attorney fees after a Nevada federal judge sanctioned the carrier in September, ruling that the insurer failed to produce relevant portions of its claims manual during a COVID-19 coverage dispute.  In an order, U.S. Magistrate Judge Elayna J. Youchah ordered Affiliated FM Insurance Co. to pay Treasure Island LLC the fees within a month, exercising her discretion and awarding the resort "fees on fees" in addition to traditional fees for hours billed by counsel.

Neither Affiliated nor Judge Youchah objected to the rates charged by Treasure Island's counsel, according to the order, so the court was tasked with deciding whether the hours billed were reasonable and whether the casino was entitled to recover additional attorney fees incurred from the preparation of its memorandum seeking fees.

Judge Youchah reduced the total amount billed for preparing the motion for sanctions, reviewing the opposition and preparing the reply from nearly 90 hours to just over 67, reducing the fees by about 25% from $55,000 to $42,000.  However, the judge said, in the absence of an award for fees incurred in preparing the memorandum, the court would effectively reduce the award by another 30%, undermining the intent of the fee award granted.

Accordingly, Judge Youchah awarded Treasure Island $13,000 in fees-on-fees, bringing the total award back up to just over $55,000. In September, Affiliated was ordered to pay the fees and costs associated with the motion for sanctions, but not for past motions by the resort seeking to compel production of the insurer's claims procedures.

Treasure Island originally sued Affiliated in May 2020, alleging that the insurer wrongfully denied coverage for its pandemic losses and claiming that it was entitled to recover more than $1 billion in damages from the "communicable disease" under its all-risk policy.  The court's ruling on sanctions barred Affiliated from arguing that physical loss or damage can't be caused by a communicable disease, according to the order.