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.
research on North Carolina’s basic, easily-identified pleading requirements for shareholder derivative actions.
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.
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.”
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.