I have been complaining about the fees approved by the NC Business Court for those lawyers obtaining disclosure only settlements since there was a Wachovia Bank. Some of you may not be old enough to remember that venerable bank.
Now, at last, Judge Gale has found a disclosure only settlement to have yielded (almost) immaterial disclosures, and slashed the attorneys’ request for fees (by more than 50%) and expenses (to zero). The Opinion, delivered last month, is In re Krispy Kreme Doughnuts, Inc. Shareholders Litig., 2018 NCBC 58.
Fee Request Slashed: From $350,000 Requested To $150,000 Awarded
Plaintiffs’ lawyers requested a fee award of $350,000. They said that thirty lawyers from twelve different law firms had spent more than 800 hours in connection with the lawsuit. Op. ¶26. The lawyers said that the time spent would have yielded a lodestar fee of $533,038 based on their “normal hourly rates.” Id.
Judge Gale, who scrutinized the bills carefully, said that he concluded:
that the total reasonable time spent on the litigation is significantly less than the total time sought to be compensated in the Motion.
Judge Gale pointed out a few time entries which he found excessive (in Op. ¶37), and remarked particularly on class counsel spending more than fifteen hours of
research on North Carolina’s basic, easily-identified pleading requirements for shareholder derivative actions.
Did The Class Need To Be Represented By Out-of-State Lawyers?
Were the issues in the class actions challenging the Krispy Kreme merger so complicated that heavy artillery from big (and non-North Carolina) class action sophisticates were needed?
The nature of this litigation required skilled counsel experienced in shareholder class actions. See N.C. Rev. R. Prof. Conduct 1.5(a)(1) and 1.5(a)(7). While Plaintiffs’ Counsel are certainly well-regarded, highly experienced counsel who have been involved in class actions that have generated significant results for shareholders in other litigation, the Court concludes that the litigation could have been competently handled by North Carolina counsel whose billing rates are significantly below the rates that Plaintiffs’ Counsel contend prevail in their home jurisdictions.
North Carolina Rates, And The Quality Of The Result Achieved, Dictated A Reduction In Fees
After finding the services of non-North Carolina lawyers to be unnecessary, Judge Gale declared that a “typical and customary hourly rate” in North Carolina for complex commercial litigation” ranged from $250 to $550 per hour. Op. ¶41.
Then he evaluated the quality of the supplemental disclosures that the class lawyers pried out of Krispy Kreme. Those disclosures “included:
(1) the unlevered cash flows used in the financial advisor’s discounted cash flow (“DCF”) analysis; (2) Krispy Kreme’s management’s considerations regarding their potential post-merger employment; (3) the financial advisor’s potential conflict of interest; and (4) metrics used to evaluate comparable companies.”
Judge Gale, in previously approving this settlement (in 2018 NCBC 1), had not ruled that these supplemental disclosures were material. I wrote about that ruling in January 2018. In the current case, he specifically observed that he had not found “that the materiality of the supplemental disclosures was plain or obvious.” Op. ¶44.
This time, assessing the value of the obtained disclosures against the attorneys’ fees sought, Judge Gale rejected Plaintiffs’ counsel’s “argument that the value of the disclosures was so obvious as to justify a fee award based on a premium rate.” Op. ¶46. In other words, the disclosures achieved were not worth much.
I think that this is the first time that the NC Business Court has evaluated the materiality of disclosures in connection with a fee request and found them to be less than “material.”
If you think that was a pretty bad result for the lawyers applying for fees, it got worse. They had run up nearly $20,00 in expenses in their vigorous pursuit of Krispy Kreme, and Judge Gale refused to allow them to collect a penny of those expenses.
Why did Judge Gale refuse to award any expenses, even though the Defendants had agreed to pay them as part of the settlement? Because of an ethical defect in the lawyers’ fee agreements with their clients.
Their agreements with their clients said that their clients were “not liable to pay any of the expenses of the lawsuit” and that the law firm would “pay all costs and expenses in the litigation.” Op. ¶60.
Lawyers frequently advance expenses for their clients, so why was there a problem with this fee agreement language? Historically, lawyers could advance expenses for their clients “provided the client remain[ed] ultimately liable for such expenses.” Op. ¶57 . The lawyer then had the option to forego recovering expenses from their client.
Rule 1.8 of the North Carolina Revised Rules of Professional Conduct, via Comment 10, “make clear that'[c]osts advanced for a client are the client’s financial responsibility.'” Op. ¶58.
Although lawyers are free to waive their right to recover expenses, the applicable ethical Rule:
does not contemplate that clients can be absolved from any and all financial responsibility at the inception of the litigation and without regard to the litigation’s outcome. To the contrary, RPC 1.8(e) ‘enable[s] a client to share the risk of losing with a lawyer,” thereby supporting one of the main functions of contingent fee arrangements. Restatement (Third) of Law Governing Lawyers §35, cmt.b (Am. L. Inst. 2000).
So what is the punishment for a violation of RPC 1.8? As seen by Judge Gale, it is forfeiture of the right to recover the advanced expenses. That’s based on the Restatement (Third) of Law Governing Lawyers. It says that: “[a] lawyer engaging in a clear and serious violation of a duty to a client may be required to forfeit some or all of the lawyer’s compensation for the matter.” Id. at §37.
What kind of message does this decision send to out-of-state lawyers thinking of filing a merger class action in North Carolina, hoping to settle on the basis of supplemental disclosures, and thinking that they will collect a big fat fee? Well, they should be warned that the Business Court will closely scrutinize their bills. will likely apply what those lawyers think are penurious North Carolina rates, scrutinize the value of the disclosures obtained, and may refuse to award any expenses, depending on the language of their engagement letters. They may decide to look for greener pastures.