When I first looked at Judge Murphy's (unpublished) Order in Ehrenhaus v. Baker earlier this month awarding attorneys' fees to the class action attorneys who sued Wachovia and Wells Fargo over their merger in 2008, I was disappointed, though the Judge was following a mandate from the Court of Appeals.
He awarded $1 million in fees and expenses ($1,056,067.57 to be exact) to the NY lawyers representing the class. That ruling came following a decision from the NC Court of Appeals reversing a previous award of fees in that case (by Judge Diaz) and remanding the fee determination to the Business Court.
Judge Murphy had assessed that his "sole directive" on remand was "to determine whether Plaintiff's attorney's fee award request of $1.5 million is reasonable in light of Rule 1.5 of the RPPC." (the Revised Rules of Professional Conduct). Order ¶14.
The Lawyers Got Much Less Than They Had Requested
My disappointment stems from my perspective that the Ehrenhaus lawsuit achieved absolutely nothing of value for Wachovia's shareholders, except for obtaining a more detailed proxy statement containing additional (and to me, pointless) disclosures about the merger transaction. So why did the lawyers deserve anything at all, let alone a million dollars?
But after shedding a few tears for the widows and orphans who were holding Wachovia stock and their undoubtable anger at a million dollars for lawyers who obtained nothing of value for them, I came to the conclusion that this was a pretty good shellacking of the lawyers for the class. After all, they had asked for almost twice that amount ($1,975,000) to start with and had to wait for years to get paid (though there's no telling whether they will have to wait longer as there might be another appeal of this fee award).
And in this most recent round, they had asked for $1.5 million, requesting that a "contingency multiplier" be applied to the fee generated by the hours (over 3,000 hours) they spent on the case at their hourly rate. Judge Murphy rejected that request because there was no contingent fee agreement signed by the class representative. RRPC 1.5(c) says that "[a] contingent fee agreement shall be in a writing signed by the client." Given the mandatory nature of the Rule, Judge Murphy saw this as "a prerequisite in order to create an effective contingent fee agreement." Order ¶29. He ruled that "in the absence of a valid contingent fee agreement between Plaintiff and his attorneys, as required by Rule 1.5(c), any award using a contingency multiplier is unreasonable." Order ¶30.
If you are wondering about the hourly rates proposed to the Business Court by class counsel, they had previously asked Judge Diaz for a $750/hour rate, which he had said in 2010 was "far in excess of those normally charged by attorneys in North Carolina." In their new application for fees, class counsel backed down to a maximum hourly rate of $450, which Judge Murphy ruled "was not excessive when compared with the hourly rates of attorneys engaged in complex business litigation in Charlotte, Mecklenburg County, North Carolina." Order ¶22.
Oh, and there was very bad news in this Order for Mr. Ehrenhaus' local counsel. The Court awarded not a dollar to him even though there was a valid fee sharing agreement between him and Ehrenhaus' out of state counsel. The agreement specified that local counsel would receive five percent of the total fee, but local counsel offered no evidence of the time expended or his hourly rate so the Court could not determine whether the five percent (which would have been more than $50,000) was reasonable.
If you are despondent over the lack of recovery by the North Carolina counsel, Judge Murphy seemed willing to consider the submission of further evidence on the services rendered by him. Order ¶38.
"Disclosure Only" Settlements Should Be Closely Examined For Their Value
Turning back to the reasonableness of the Ehrenhaus fee, there has been quite a bit of judicial discussion recently about the fees appropriate in "disclosure only" settlements. In the case of Kazman v. Frontier Airlines, 398 S.W.2d 377 (Texas App. 2013), the Texas Court of Appeals refused to award any attorneys' fees where the only relief for the plaintiff was additional disclosures in SEC filings.
Delaware courts have ruled that they should scrutinize these types of settlements. The Judges there have taken to asking the attorneys requesting fees in disclosure only settlements to identify which of the disclosures obtained are the most material and thereby evaluating their value. (See In re PAETEC Holding Corp. Shareholders Litigation (letter opinion).
What would Ehrenhaus' lawyers say about the value of the additional disclosures that they obtained? What could they have said? If you want to make that evaluation yourself, you can find the "enhanced" disclosures here.
Maybe I'm being too harsh on the minimal value of this lawsuit for Wachovia's shareholders. The class did obtain the invalidation of the 18 month "tail" in the merger agreement between Wachovia and Wells Fargo. That gave Wells Fargo the right to keep its 40% voting interest in Wachovia's stock for 18 months if the shareholders voted against the merger.
But really, what other entity was likely to be deterred from making a better bid for Wachovia as a result of the tail? Remember that Wachovia was literally hours away from a receivership when Wells Fargo made its offer. And Judge Diaz ruled in his 2008 opinion that "the sobering reality is that there are few (if any) entities in a position to make a credible bid for Wachovia that would be superior to the Merger Agreement." 2008 NCBC 20 at ¶151.
So was a $1 million fee warranted? I don't know, but In the old days of the Business Court, Judge Tennille might have condemned these fees as "stinky fees."
Don't get me wrong on my feelings about fees paid to class action counsel. Sometimes they are well-earned. For example, just the other day, Amazon.com notified me that I was getting $13.00 or so in the settlement of the price-fixing class action against it over the pricing of e-books. (though my Dad pointed out that he only got $3.00) But what was the award for fees and expenses for the lawyers for the class in that case? More than $11 million. I have no problem with that. They can buy a lot of books. And they deserve them.
As for the prospects of an appeal of this fee award, that is unlikely to be warmly welcomed by the Court of Appeals. The Fourth Circuit said yesterday, in a completely unrelated case, that:
[A]ppeals from awards of attorneys fees, after the merits of a case have been concluded,. . .must be one of the least socially productive types of litigation imaginable.
Best Medical Int'l, Inc. v. Eckert & Ziegler Nuclitec GMBH at 10 (quoting Daly v. Hill, 790 F.2d 1071, 1079 n.10 (4th Cir. 1986).