In the following guest post, Kara Altenbaumer-Price (pictured) takes a look at two recent case decisions in which courts have declined attorneys’ fee awards in connection with non-cash class settlements. Kara is the Management & Professional Liability Counsel for insurance broker USI.
Many thanks to Kara for her willingness to publish her article here. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly.
Two recent cases striking down attorney fees awards raise questions about lawyer-driven class actions and the viability of suits aimed at garnering attorney fees rather than cash for the class plaintiffs. If the holding in either case gains traction, it could have a significant positive impact on D&O insurance, particularly in the area of merger-objection suits and efforts by carriers to stem the losses from these types of cases.
In the first case, the Dallas Court of Appeals dealt a blow to plaintiffs’ lawyers pursuing so-called “bump up” cases in Texas state courts in September when it rejected a settlement that included cash to the lawyers, but none to the class of investors. Rocker v. Centex Corp. appears to have been a typical “bump-up” case in which shareholders of a company about to merge or be acquired file suit seeking to raise—or “bump up”—the purchase price of the company they hold shares in.
The legacy of this case was thrown into uncertainty on November 30, 2012 when the Texas Supreme Court granted the review of the case without consideration of the merits and set aside the judgment pursuant to an agreement by the parties. Nonetheless, the case warrants discussion because the reversal did not call into question the merits of the lower appellate court decision.
The underlying case in Rocker v. Centex was not unusual, as it is not uncommon for the settlement of merger objection cases to include additional disclosures to the shareholders about the proposed deal, but no increase in share price and thus no cash to the shareholder class. Such settlements, however, usually involve hefty attorneys’ fees awards to the plaintiffs’ counsel. What was remarkable about Rocker v. Centex is that the Texas appellate court, however, refused to approve such a settlement, ruling that tort reform legislation passed several years ago in Texas prohibits such awards.
The court looked to a Texas Rules of Civil Procedure called the “coupon rule” that provides that “if any portion of the benefits recovered for the class are in the form of coupons or other noncash common benefits, the attorney fee awarded in the action must be in cash and noncash amounts in the same proportion as the recovery for the class.” In Rocker v. Centex, the entire settlement to the class was a noncash benefit in the form of additional, material disclosures related to the deal. As a result, the court ruled that the plaintiffs’ attorneys could be awarded no cash—even if it meant that they had worked for free. The Centex case eliminates the incentive for plaintiffs’ counsel to bring cases—at least in Texas state courts—where the end goal is attorneys’ fees. If there really is a belief that the share price is too small, and the case causes a rise in the share price, then attorneys fees would still be justified and payable under the Centex ruling.
The second case actually arises in the context of privacy litigation, rather than securities class actions, but it tackled the same issue of class settlements than contain no cash to the class. A California federal district court rejected a settlement in a privacy class action against Facebook because the settlement included changes to Facebook, $10 million to organizations involved in internet privacy, and $10 million in attorneys fees, but no cash to the plaintiffs themselves. The court in Fraley v. Facebook questioned the large size of the fee award. The court also rejected arguments by plaintiffs’ counsel estimating the value of the privacy changes to Facebook to the plaintiffs and questioned whether injunctive awards to plaintiffs can be assigned a value at all for assessing attorneys’ fees. Like the Rocker v. Centexcase, this case potentially has huge implications for class actions pursued for the purpose of creating plaintiffs’ fee awards.
Both of these cases highlight the primary issue that defendants (and insurers) have with merger litigation (even though the Facebook case arose in another context, the principle is the same)—the notion that the cases exist not to ensure that the best deal is achieved for shareholders, but to make a quick and sizeable buck for plaintiffs attorneys. As Advisen wrote in its second quarter 2012 report that “it has been suggested, including by some judges presiding over these cases, that new filings are driven more by plaintiff’s attorneys seeking new sources of fee revenues than by the economics of mergers and acquisitions.” Companies, eager to close the deal, usually offer up a hasty settlement that includes large fee awards, to make the litigation go away.
With 91 percent of merger deals above $100 million resulting in litigation according to Cornerstone, insurance carriers have taken note of this issue, which has turned D&O insurance from a low frequency, high severity product to a high-frequency product in the carrier’s view. Many have blamed the increase in M&A suits for the recent rise in D&O insurance rates. One solution to combat this issue is the introduction of separate M&A deductibles for public company D&O and exclusionary language for M&A cases that is creeping into 2012 and 2013 D&O insurance renewals. Considering that coverage changes tend to lag behind the litigation trends, it will be interesting to watch this trend develop as carriers continue to try to manage losses associated with M&A cases.
Many have blamed the increase in M&A suits for the recent rise in D&O insurance rates. One solution to combat this issue is the introduction of separate M&A deductibles for public company D&O and exclusionary language for M&A cases that is creeping into 2012 and 2013 D&O insurance renewals. Considering that coverage changes tend to lag behind the litigation trends, it will be interesting to watch this trend develop as carriers continue to try to manage losses associated with M&A cases.