On The Case

Shareholders' lawyers to 7th Circuit: Trial judges have no power to police mootness fees

(Reuters) - In a newly filed brief at the 7th U.S. Circuit Court of Appeals, shareholders' lawyers contend that trial judges have no inherent power to oversee the private fees that plaintiffs' counsel receive from defendants in exchange for dropping M&A class actions.

The brief, filed by Daniel Geyser on behalf of the shareholders' firms Monteverde & Associates and Kahn Swick & Foti, argues that U.S. District Judge Thomas Durkin of Chicago had no business throwing out a $325,000 mootness fee that they and other plaintiffs' firms received from the pharma company Akorn. Akorn paid the fee after agreeing to make additional proxy disclosures about its then-pending merger with Fresenius. Plaintiffs' lawyers, in turn, agreed to dismiss prospective class actions challenging the deal.

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These “mootness fees,” as you probably know, have become a key business model for plaintiffs' lawyers in the years since Delaware Chancery Court cracked down on fee awards in so-called disclosure-only M&A class action settlements. (A reminder: In disclosure-only settlements, shareholders get no money at all - just additional proxy disclosures.) After Delaware’s 2016 ruling in In re Trulia, shareholders' lawyers shifted to federal court for class actions challenging M&A transactions. They also stopped, for the most part, settling cases on a classwide basis.

Instead, most federal-court M&A class actions in the last few years have been voluntarily dismissed by individual shareholders before substantive litigation even takes place. In many cases, when those dismissals have been accompanied by beefed-up proxy disclosures, defendants have agreed to pay mootness fees to shareholders’ lawyers. In a study earlier this year of the mootness fee phenomenon, law professors Matthew Cain and Steven Solomon of Berkeley, Jill Fisch of Penn and Randall Thomas of Vanderbilt estimated that in 2017 alone, shareholders’ lawyers received $23 million in such fees.

Unlike class action settlements, which must be approved by trial judges, mootness fee deals are generally outside of the court’s reach. Under the Federal Rules of Civil Procedure, plaintiffs do not have to obtain judges’ approval to dismiss cases before a defendant has answered the complaint or moved for summary judgment. And even though these shareholder M&A challenges are filed as class actions, the class action rules allow plaintiffs to dismiss cases without court approval as long as the class has not been certified.

Critics such as the U.S. Chamber of Commerce, as I’ve reported, have accused shareholders' lawyers of abusing the leverage of class action litigation by filing complaints on behalf of all shareholders yet evading judicial scrutiny of their fees by settling on behalf of individual plaintiffs.

In Judge Durkin’s June 2019 ruling in the Akorn case, the judge concluded that he had the inherent power to review Akorn’s mootness fee payment to shareholder lawyers because plaintiffs’ original class action complaints should have been dismissed out of hand. The judge concluded that the additional disclosures shareholders sought in those original filings were immaterial. Plaintiffs' lawyers deserved no fee for obtaining immaterial disclosures, he said, citing the 7th Circuit’s 2016 decision in In re Walgreen Co. Stockholder Litigation. In that case, the appeals court decried the “racket” of shareholder M&A class actions and struck down a fee award to plaintiffs' lawyers who obtained only additional disclosures in a class action settlement.

But in their new brief, the shareholder firms appealing Judge Durkin’s Akorn decision argued that Walgreen precedent gave the trial judge no authority to review a mootness fee. In Walgreen, the brief argued, the 7th Circuit was reviewing fees awarded to plaintiffs’ lawyers who settled on behalf of a class of shareholders. By contrast, according to the brief, Judge Durkin inserted himself into a private agreement between Akorn and lawyers representing individual shareholders who did not need the court’s approval to dismiss their claims. He had no jurisdiction over the mootness fee agreement, the brief said, and no authority to void it.

“This court has repeatedly held that inherent authority must be exercised sparingly,” the brief said. “Courts may not rely upon their inherent authority to side-step applicable rules, statutory regimes and established principles of law. Yet that is precisely what the district court did here.”

It’s worth pointing out that Geyser previously rescued shareholders' lawyers at the U.S. Supreme Court in last term’s Emulex v. Varjabedian. The case ostensibly presented the question of the proper pleading standard for shareholder allegations of inadequate tender offer disclosures, but Emulex and its amici also asked the Supreme Court to consider whether shareholders even have a private right to sue under federal securities laws governing tender offers. Geyser argued that Emulex had waived the right to assert that broad argument. Last April, the justices dismissed the case as improvidently granted, leaving intact, as least for now, shareholders’ ability to file class actions challenging tender offer disclosures.

Class action watchdog Ted Frank of the Hamilton Lincoln Law Institute has moved to be appointed as an amicus in the 7th Circuit appeal to defend Judge Durkin’s ruling. Frank, an Akorn shareholder, sought unsuccessfully to intervene in the litigation before Judge Durkin, but his protest of the mootness fee agreement ultimately prompted Judge Durkin to invalidate the deal.

Frank’s brief to the 7th Circuit said that Akorn does not intend to argue in favor of Judge Durkin’s ruling at the appeals court. I emailed Akorn counsel Sohil Shah of Polsinelli to confirm that assertion but didn’t hear back.