Last month, when I noted in a post that the parties to the FirstEnergy bribery-related derivative litigation had agreed to settle the suits for a payment of $180 million and the company’s agreement to adopt certain governance reforms, I added what I thought at the time was the pro forma observation that the settlement was subject to court approval. The court processes that have followed have been anything but pro forma. As it has turned out, Northern District of Ohio Judge John R. Adams has thrown a huge money-wrench into the works, refusing even to stay the case pending in his court, demanding that plaintiffs’ counsel reveal the names of the individuals that actually paid the supposed bribes, and directing the parties to conduct depositions in the case – a case that the parties have already agreed to settle. The story of the unfolding of these events is well told in two recent posts on Alison Frankel’s On the Case blog, here and here.
First, a little background. FirstEnergy is an electric utility based in Ohio. FirstEnergy operates two aging nuclear plants that have proven to be enormously expensive to maintain. According to allegations raised in subsequent criminal proceedings, FirstEnergy successfully sought to have legislation passed by the Ohio legislature intended to bailout the company for the costs of maintaining its aging power generation facilities. It is alleged in the criminal proceedings that FirstEnergy was able to have this legislation passed by making massive payments, totaling as much as $60 million, to the political campaign of Larry Householder, the Speaker of the Ohio House of Representatives, and to support other House candidates.
In July 2021, the company entered a deferred prosecution agreement (DPA), in which the company admitted that it “conspired with public officials and other individuals and entities to pay millions of dollars to and for the benefit of public officials in exchange for specific official action for First Energy’s benefit.” Pursuant to the DPA, the company paid a fine of $230 million.
After news of the bribery allegations first emerged, a number of lawsuits were filed. Among other things, plaintiff shareholders filed several shareholder derivative lawsuits against certain current and former directors and officers of the company, as well as against the company as nominal defendant. Separate derivative suits were filed in the Northern District of Ohio; the Southern District of Ohio; and the Ohio Court of Common Pleas in Summit County, Ohio. The plaintiffs in these actions allege that the individual defendants (or at least some of them) actively participated in the bribery scheme; allowed the company to make massive illegal payments; and covered up the scheme in violation of Ohio and federal law.
The case filed in the Northern District of Ohio is pending before Judge John R. Adams. Judge Adams has refused to transfer the case to the Southern District of Ohio, where Judge Algenon Marbley has consolidated nine other derivative suits, appointed lead counsel, and denied defendants’ motions to dismiss. In other words, the Southern District of Ohio is where the derivative litigation has been taking place. Accordingly, after the parties reached their agreement to settle the case following mediation, the parties filed a motion in the Southern District of Ohio, with Judge Marbley, seeking preliminary approval of the settlement. The parties also advised Judge Adams that the case had been settled and sought to have the proceedings in the Northern District of Ohio stayed.
Judge Adams entered a February 11, 2022 order denying the requested stay and accusing the parties of “forum shopping,” and – even though there was no motion to approve the settlement pending in his court — set out a lengthy list of questions about the settlement, including, among other things, the names of the FirstEnergy executives that paid the bribes.
The parties’ counsel appeared before Judge Adams in a courtroom hearing on March 9, 2022. Among other things, at the hearing, Judge Adams expressed his irritation that the parties settled the case just before depositions in the case were scheduled to be taken. He demanded that plaintiffs’ counsel provide the court with the names of the bribe payers. Lead plaintiffs’ counsel Jeroen van Kwawegen of the Bernstein Litowitz law firm declined to answer the question directly, saying that the plaintiffs had learned the names of the bribe payers in the course of mediation, and that he could not reveal the names publicly without violating the mediation privilege and violating the protective order in the Southern District of Ohio proceedings.
Judge Adams became increasingly irate, saying to van Kwawegen that “the mediation privilege doesn’t apply here, counsel,” adding “I’m just telling you to answer the question directly. If you’re refusing to do that, tell me now, because if that’s what you’re refusing to do, then maybe we need new counsel to represent the shareholders in this case.” Judge Adams also emphasized, before abruptly closing the hearing and leaving the bench, that “there is public interest here, counsel, because this is a public corruption case.” (As Frankel put it in her blog post about the “astonishing” March 9 hearing, you really do need to read the hearing transcript; it’s “a doozy,” as she says.)
In a post-hearing March 11, 2022 order (here), Judge Adams questioned plaintiffs’ counsel’s assertion of the privileges and confidentiality, and ordered the parties to explain why counsel refused to provide the information. The order added that if he found the explanation is insufficient and counsel continued to refuse to provide the information, it could “result in sanctions, up to and including the removal of Plaintiffs’ counsel as counsel for the shareholders.”
In a post-hearing brief submitted to the court, the plaintiffs’ lawyers offered to produce the names of the bribe payers in camera, but continued to urge that producing the information publicly would violate the confidentiality orders entered in both the Northern District of Ohio and the Southern District of Ohio. Plaintiffs’ counsel also argued that producing the information publicly would violate the “settlement privilege” and cited Sixth Circuit precedent to the effect that “strong public interest in favor of secrecy of matters discussed by parties during settlement negotiations.”
Lawyers for FirstEnergy’s board’s special litigation committee filed a separate brief arguing that the derivative suit pending in Judge Adams’s court was not the right vehicle for the for the vindication of the public’s interest with respect to the bribery allegations. The derivative case, the brief argued, is for the company’s benefit, to recover for harm done to the company. The public’s interests are fully served, the brief argued, in the separate pending criminal proceedings. The court’s “desire for public accountability, while understandable, risks harm to the interests of FirstEnergy and its stockholders, which is exactly the opposite of what a derivative litigation is supposed to do.”
Judge Adams’s was not having any of these arguments. In a fiery March 22, 2022 order (here), he recited the details of the underlying misconduct, noting, among other things, that “the bribery scheme was designed to directly take money out of the pockets of millions of Ohioans,” adding that as a result of the misconduct “the public’s confidence in the political process was undermined.” He noted again that the parties had settled the case just before depositions were to commence in the case, as a result of which the defendants were not required to answer questions about their actions, and that as a result of the settlement, “none of these alleged wrongdoers will be required to contribute even $1 to the ultimate settlement.” In a section of the order captioned “Hiding the Ball,” he states that he hoped “to gain a better understanding of what led to the settlement in this matter and what drove the settlement amount.”
Judge Adams’s rejected counsel’s argument that privileges or confidentiality barred counsel from publicly revealing the names of the bribe payers. He concluded his order by reciting the “public interest” in the case, stating “the public has a right to know how it is that the political process was so easily corrupted.” He noted that the parties had “attempted to deprive” him of “any role in ensuring that any resolution of the case is fair, reasonable, and adequate,” and that rather than present their settlement to him to analyze, the parties “have engaged in active forum shopping to present their settlement to another district court in a later-filed action.” He concluded by ordering counsel to produce the names of the bribe payers by Noon the next day, adding that “thereafter counsel will answer the Court’s further inquiries regarding what fact discovery has shown to date.”
On March 23, 2022, plaintiffs’ counsel filed with the court an affidavit, signed by van Kwawegen and co-counsel Thomas Curry, which recited that “they believe that discovery received would have shown at trial that two senior executives of FirstEnergy devised and orchestrated FirstEnergy’s payments to public officials.” The affidavit named Charles E. Jones, who was FirstEnergy’s CEO and a director at the time of the scheme; and Michael J. Dowling, who was First Energy’s Senior Vice President for External Affairs at the time of the scheme. The affidavit goes on to recite that Jones and Dowling “have vehemently denied acting improperly,” adding that neither has been charged by the Department of Justice.
Providing the court with the information in the Affidavit clearly was not sufficient to placate Judge Adams. The next day, on March 24, 2022, Judge Adams issues a brief order reiterating that the parties’ motion to stay the proceedings in the Northern District of Ohio was denied, adding that “the parties shall apprise the Court in advance of any days and times that they seek to use the courthouse facilities to conduct depositions.”
According to a March 25, 2022 Law360 article (here) about Judge Adams’s latest Order, counsel for the shareholders noted in a status report filed in the case that the settlement proposal currently pending before Judge Marbley in the Southern District of Ohio “prohibits the parties from prosecuting any of the derivative actions pending final approval of the proposed settlement.” The same article also recites that one of the attorneys for the shareholders told Law360 that “the plaintiffs intend to continue seeking approval of the $180 million deal from Judge Marbley and abide by their agreement not to push the case before Judge Adams forward.”
Let me just say at the outset that as a fellow Ohioan, I share Judge Adams’s outrage about the alleged bribery scheme. Judge Adams was on the mark in his March 22 Order when he said that “this bribery scheme has undoubtedly shaken whatever trust Ohioans may have had in the political process used by their elected officials.”
However, the alleged underlying misconduct was not just outrageous, it was, according to the U.S. Department of Justice, criminal as well. There are, in fact, criminal proceedings pending against several wrongdoers, and a trial has been scheduled in the criminal proceedings. The public’s interest in establishing what happened and in seeing that any wrongdoers who are found guilty of wrongdoing are punished will be served in the criminal proceedings. There is no need for Judge Adams to try to strongarm the process and turn a civil proceeding among private parties into a vehicle to vindicate the public interest.
The criminal proceeding is not before Judge Adams. Indeed, the parties’ settlement agreement itself is not before Judge Adams, as they did not submit the agreement to him for his review. Judge Adams’s has angrily denounced the parties’ submission of the settlement agreement for review and approval to Judge Marbley rather than to him as “forum shopping,” even though Judge Marbley’s courtroom is the one in which the case has gone forward up to this point. Implicit in Judge Adams’s suggestion that the parties are forum shopping is the suggestion that the parties submitted the settlement to Judge Marbley because they think they will get approval from him not forthcoming in Judge Adams’s court. The forum shopping allegation really an insult to Judge Marbley, as if Judge Marbley will not give the settlement sufficient scrutiny or review.
Among the many perplexing things that Judge Adams has said is his outrage that the parties settled just before depositions commenced. The fact is that parties frequently settle to avoid the costs, disruption, and uncertainty that discovery can cause; if a settlement were to be objectionable because the settlement agreement was reached on the eve of discovery, a lot of settlements would have to be tossed. There is no need for discovery if the parties have reached a settlement that achieves the purposes of the litigation. And the purpose of a derivative lawsuit is to redress the company’s harms, not to provide some nebulous public benefit.
Another vexing problem about Judge Adams’s approach is that his intervention is costing the parties – including in particular, First Energy – a great deal of money. Judge Adams’s approach dramatically demonstrates the problem with unconsolidated parallel litigation. The parallel litigation not only multiplies the costs but it runs the risk of inconsistent rulings and the dissipation of judicial resources. It also can cause a truly unseemly spectacle.
More About Judge Adams: Readers curious about Judge Adams will want to read his biographical sketch on Wikipedia (here), particularly the section at the end of the sketch captioned “Controversies.” (In the original draft of this blog post, I had copied out the text of the Controversies section from the sketch, but it occurred to me that I live in the Northern District of Ohio and I don’t need any controversies of my own, and so I deleted the excerpt.)