Students of D&O litigation know that the plaintiffs’ bar works on a contingency basis. While some may bemoan this fact, the structure does create a set of clear incentives for rational economic actors.
Plaintiff attorneys, being rational economic actors, should therefore decline to work on cases where the expected value of their reward is too small compared to their efforts.
This is exactly the reason that, as faithful readers of the D&O Notebook will recall, Delaware Chancellor Kathaleen McCormick recently announced that plaintiff attorneys should no longer expect to get a hefty payment unless they made a material contribution to shareholders when it comes to M&A litigation.
The Chancellor clearly wants to discourage plaintiffs from bringing frivolous cases in order to be rewarded a sizable mootness fee.
But what is the “right” award when plaintiffs’ attorneys have conferred a large benefit on the shareholders they represent, as was the case in the $1 billion settlement in the recent case, In re Dell Technologies Inc. Class V Stockholders Litigation?
According to Vice Chancellor J. Travis Laster, that amount is 26.67% of the settlement. This is a motivating amount indeed given that the lodestar fees (a common way to assess attorney fee awards by multiplying the number of hours by a reasonable hourly rate) came to about $39.5 million dollars. That amount is less than one-seventh of the plaintiff’s fee the Vice Chancellor actually awarded.
Why should anyone not directly involved in the Dell case care? The expected value of a case to plaintiff’s attorneys is, simplistically, calculated as the likelihood of plaintiffs prevailing in a case multiplied by the potential plaintiff attorney fee award.
Thus, it’s easy to see how a massive attorney fee award like the one in Dell might lead to more frivolous litigation. After Dell, the potential payoff to the attorneys bringing the case on a contingent fee basis just went up—substantially.
Sure, most cases are unlikely to yield such a high plaintiff fee award, but—and apologies for the analogy—consider the psychology behind purchasing lottery tickets. Most tickets will not pay off, and nevertheless, a ton of people purchase lottery tickets. It is unfortunate to imagine that a court of law might be treated the same way due to an incentive to bring litigation just in case the suit might be a blockbuster.
This is not to suggest that the Dell litigation I am about to explain was frivolous. However, the outcome could potentially incentivize frivolous lawsuits in Delaware court.
The Dell Litigation
In 2022, Dell reached a $1 billion all-cash settlement on the eve of trial over a breach of fiduciary duty suit. It was the largest-ever cash settlement awarded to shareholders in a Delaware Chancery Court.
The suing plaintiffs alleged that they were undercompensated in connection with a transaction involving shares that tracked VMware’s publicly traded stock.
However, while that settlement may have caused a few heads to turn, what the plaintiff’s attorneys got was the real shocker.
After the defendants largely lost their motions to dismiss the complaint, plaintiff’s attorneys were awarded 26.67% of the total settlement, amounting to $266.7 million. This was the second-highest fee award to attorneys in a Delaware court.
Declining Percentage Model
Given that attorneys’ fees come out of the settlement, it’s no surprise that some plaintiff shareholders were upset by the Vice Chancellor’s decision. These shareholders likely thought the court would apply a more typical declining-percentage model given how large the settlement was.
Indeed, the declining-percentage model has an important incentive built into it. As the settlement dollars go up, the percentage of that settlement to attorneys goes down. The idea is that we do not want plaintiff attorneys to pursue ever larger settlements just to get bigger attorney fee awards.
It’s also fair because the effort/lawyer hours required to obtain a larger settlement compared to a smaller one is generally not more (for example, a $300 million settlement is unlikely to have required 10 times the number of hours as a $30 million settlement).
The objecting plaintiff shareholders in Dell are not just whistling in the wind. For example, law professors who weighed in on the case cited the median award to attorneys for settlements over $1 billion was 9.5%.
One prominent Dell shareholder pointed to other research that said the average award to plaintiff’s attorneys on a $1 billion settlement was 10.5%.
Vice Chancellor’s Plaintiffs Fee Award
In July 2023, Vice Chancellor Laster of the Delaware Court of Chancery concluded that a much higher percentage was warranted for the plaintiff attorneys in Dell. He issued a lengthy opinion on the fees to support his position.
In it, he stated that the award was congruent with the “guideline range of percentages for a late-stage settlement under the framework that the Delaware Supreme Court endorsed in Americas Mining Corp. v. Theriault.”
Vice Chancellor Laster went on to say that, to determine the percentage, the court “considers the stage of the case when the result was obtained” and that a court “awards a higher percentage when plaintiff’s counsel has pushed deeper into the case, which rewards plaintiff’s counsel for taking more risk in pursuit of the best outcome.”
This incentive, said Vice Chancellor Laster, was important, especially since there has been so much frivolous litigation in the past (like disclosure-only settlements and mootness fee cases).
He went on to say that the declining-percentage model, however, “runs counter to Americas Mining and the incentive structure that the Delaware Supreme Court created,” saying that “Delaware law deals with the problem of overcompensation differently.”
He then cited a case, Sugarland Industries, Inc. v. Thomas, which stated that the court should take the following measures when awarding a percentage to attorneys:
- The percentage of the benefit conferred with the percentage selected from ranges that correspond to the stage of the case
- The extent to which counsel litigated on contingency
- The time and effort counsel invested
- The relative complexity of the litigation
- The standing and ability of counsel
Vice Chancellor Laster followed up by saying that the Delaware Supreme Court made clear in Americas Mining that a court can, of course, “reduce an excessive fee, but that analysis happens using the Sugarland factors. It does not happen because of a declining-percentage methodology.”
The court concluded that it took both America’s Mining and Sugarland into account when determining the award in Dell:
After considering precedents involving late-stage, pre-trial settlements, this decision starts with an indicative fee equal to 26.67% of the common fund, or $266.7 million. None of the other Sugarland factors warrant an upward or downward adjustment.
Incentivizing versus Over Incentivizing
No one’s Magic 8 Ball can reveal what the exact percentage of recovery is and whether it’s just enough to motivate plaintiff attorneys to take difficult but important cases on a contingent basis. Any amount more than “just enough” means that the shareholders themselves—the folks actually harmed by the conduct in question—will get a lesser recovery than they otherwise should.
Nevertheless, we can observe that the ideal percentage is well south of 26.67%. We know this because when the plaintiff attorneys took the case, there had never been an attorney fee award this big, and only one other award, ever, had been at such a high percentage.
In other words, the plaintiff attorneys were clearly willing to do the difficult work while rationally expecting, based on precedent, a much smaller award. (This is true even though the plaintiffs actually requested 28.5% of the award for their fee after the litigation settled.)
The result of the 26.67% plaintiff attorney fee award, of course, is to siphon off recovery that should have gone to the class members.
Moreover, based on the reasoning set forth by Vice Chancellor Laster in his opinion, we should expect to see plaintiff attorneys holding out for ever larger settlements in Delaware to justify higher attorney fee awards for themselves.
That is, unless the attorney fee award is overturned. At least one shareholder expressed an intention to appeal Laster’s decision to the Delaware Supreme Court.
This is a case we will be watching closely, as the outcome could impact future litigation, settlements, and attorney fee awards for years to come.
Everyone agrees there should be redress when it comes to inappropriate corporate conduct. Unfortunately, over incentivizing plaintiff attorneys in a contingent fee system can only lead to an upward trend in frivolous litigation, and an unwillingness of plaintiffs to settle for what might be considered a reasonable amount.
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