In the latest development in the long-running FirstEnergy bribery-related derivative lawsuit settlement saga, a federal judge has granted final approval to the proposed settlement in the consolidated action pending in the Southern District of Ohio, albeit while reducing the amount of the plaintiffs’ fee award. The parties will now, with the benefit of the final settlement approval, turn to the Northern District of Ohio, where an unconsolidated parallel action remains pending, and where the presiding judge has recently appointed new counsel to prosecute the separate action. In a rational and orderly world, the separate proceeding in the Northern District of Ohio would be dismissed. However, under the actual conditions, anything could happen.
The FirstEnergy derivative suit arises out of a political scandal in the Ohio, in which members of the Ohio General Assembly allegedly were paid bribes in order to support the passage of legislation (known as HB6) that was financial beneficial to FirstEnergy. Several legislators and others were indicted in connection with the scandal and criminal proceedings remain pending. Following the revelation of the scandal, a number of civil actions were filed relating to the allegations. Several shareholder derivative suits were filed and all but one of the federal court derivative actions were consolidated in the Southern District of Ohio, before Judge Algenon Marbley. A separate unconsolidated parallel derivate action remains pending in the Northern District of Ohio before Judge John Adams.
As discussed here, in February 2022, the parties to the consolidated action announced that following mediation they had entered a settlement, consisting of an agreement to pay $180 million (to be funded entirely by D&O Insurance) and the company’s adoption of certain corporate therapeutics. Upon entry into the settlement, the parties sought to stay the parallel proceedings in the Northern District of Ohio, pending final approval of the settlement.
As I discussed in a blog post at the time (here), Northern District of Ohio Judge John Adams was having none of that. Outraged by the egregiousness of the underlying scandal, Judge Adams refused to grant the stay and demanded that the parties provide additional information, such as the names of the company executives that had paid the alleged bribes. While the parties were working through the settlement approval process in the Southern District of Ohio, they fenced with Judge Adams in the Northern District, as he threatened to bring in substitute counsel to continue to pursue the claims in his court, notwithstanding the tentative pending settlement in the action.
As discussed here, in July 2022, Judge Adams followed through on his threat to appoint substitute counsel in the Northern District Action. Even though Judge Marbley had by that point granted preliminary approval of the settlement in the consolidated action, Judge Adams entered an order soliciting applicants to succeed as plaintiffs’ counsel in the case in his courtroom. On August 15, 2022, Judge Adams entered an order appointing Markovits, Stock & Demarco and Abraham, Fruchter & Twersky as new counsel in the Northern District action. (As Alison Frankel discussed in a August 18, 2022 post on her On the Case blog, there was a related kerfuffle about the reasons why Judge Adams had not appointed the Boies Schiller law firm as counsel, including among other reasons that the Boies Schiller firm had a conflict of interest.)
Final Settlement Approval
On August 23, 2022, Judge Marbley entered an order granting the parties’ request for final approval of the consolidated action pending in the Southern District of Ohio. Judge Marbley’s order extensively reviews the settlement, carefully scrutinizing the fairness of the proposed settlement amount and the purpose and likely effect of the proposed corporate therapeutics. He noted that while the proposed settlement amount does not “make the company whole” it does “capture the vast majority of the main recoverable asset for the Company’s immediate use” – that is, the $180 million settlement amount captures about 82% of the company’s $220 million D&O insurance program, leaving the remaining $40 million to fund continuing defense expenses in ongoing proceedings. Judge Marbley did grant the motion of the company’s board’s special litigation committee to reduce the plaintiffs’ counsel’s fee award from the requested fee of $48.6 million to $36 million.
In his order, Judge Marbley expressly and very carefully considered the impact of the final settlement approval on the separate parallel proceeding pending in the Northern District of Ohio. He noted that one of the purposes of the settlement agreement was to effect a complete release of all claims; he noted further that the settlement stipulation provides that upon entry of final approval the parties will jointly seek dismissal of the Northern District action (and separate state court action), and will seek appellate relief if dismissal of the Northern District action is denied. Judge Marbley considered Judge Adams’s expressed concerns that the parties had sought to “forum shop” in order to proceed in a court other than his, even though the action in his court had been the first filed. Judge Marbley carefully dismissed these concerns but did note that it was up to the Northern District of Ohio to decide how the entry of an order of final approval of the settlement affects the proceedings in that court.
With the benefit of Judge Marbley’s order granting final approval of the settlement, the parties will now return to Judge Adams’s courtroom. As a result of the various motions and communications with Judge Adams pertaining to the choice of counsel in the Northern District proceedings (discussed above), Judge Adams is likely to take an even less receptive approach than he has in the past. (In a separate August 22, 2022 post on her On the Case blog, Frankel further elaborates on the skirmishing that has been going on and on Judge Adams’s reaction to all of it. As Frankel’s post details, counsel for the company’s special litigation committee and for certain of the individual defendants have already sought to try to seek to have Adams forbear from any further action in the case.)
In an orderly and rational universe, the parties’ forthcoming motion in the Northern District of Ohio to have the parallel action pending in that court dismissed would be granted as a matter of course. However, in their settlement agreement, in which the parties already agreed that they would cooperate in any subsequent appeals if the Northern District of Ohio were to deny the motion to dismiss, the parties effectively acknowledged that they may not be able to count on the smooth process otherwise available in an orderly and rational universe. I suspect they are already preparing themselves for the likelihood of having to pursue a petition to the Sixth Circuit for a writ of mandamus directing the dismissal of the Northern District Action. The shame here is that Judge Adams’s actions are unjustifiably imposing costs on the parties, and in the process further eroding the remaining D&O insurance. In the context of a shareholder derivative lawsuit, which by definition exists to serve the interests of the company, Judge Adams’s actions are directly contrary to the company’s interests.