Dell Decision Out

Yesterday, the Delaware Supreme Court released its decision in the Dell fee award appeal.  It's available here.  The Dell case presents a question for blockbuster shareholder litigation--when the damages numbers in dispute grow particularly large, should courts apply a declining percentage when setting the attorneys' fees?  (Disclosure, I joined an amicus brief on this issue at the trial level.)  The Dell plaintiffs secured a billion dollars in settlement.  Delaware's Chancery Court opted to give the lawyers $267 million in fees.  

Ultimately, funds holding about 24% of the class objected to the fee award.  This is how the Delaware Supreme court stated their argument:

Pentwater argued that awarding a percentage of the settlement sought without considering the size of the settlement was unfair to the class. They contended that, in this case, the proposed fee was disproportionate to the value of the settlement. The objectors urged the court to apply a declining percentage to the fee award, which is similar to the approach used by federal courts in large federal securities law settlements. The declining percentage method reduces the percentage of the fee awarded to counsel as the size of the recovery increases. According to Pentwater, fee awards “are meant to reasonably incentivize the attorneys taking these cases,” and, in its view, “the amount of work, time, and effort spent on a case does not grow proportionately with the transaction size.”10 In other words, “it is not a hundred times more difficult (or riskier) to litigate and try a $10 billion case than it is to litigate and try a $100 million case.” They argued that the Delaware Supreme Court and Court of Chancery have applied the declining percentage method in other cases. (footnotes omitted)

In these cases, the trial court's fee awards are reviewed under a deferential abuse-of-discretion standard.  After Dell, the basic framework remains unchanged.  Delaware courts consider five factors to decide fee awards:  "(1) the results achieved; (2) the time and effort of counsel; (3) the relative complexities of the litigation; (4) any contingency factor; and (5) the standing and ability of counsel involved."  

But the devil is always in the details.  How should courts, after Dell, apply the five factors?  The decision has some language indicating to me that courts need to consider declining percentages in mega-settlements.  Consider these statements and a quotation:

• Given the equitable principles underpinning fee awards in common fund cases, and this Court’s concern for excessive compensation or windfalls, it is entirely appropriate, and indeed essential, for the court to consider the size of the award in a megafund case when deciding the fee percentage. An award can be so large that typical yardsticks, like stage of the case percentages, must yield to the greater policy concern of preventing windfalls to counsel.
• At some point, the percentage of fees awarded in a megafund case exceed their value as an incentive to take representative cases and turn into a windfall.
• But a point exists at which these incentives are produced, and anything above that point is a windfall. In other words, if a fee of $500,000 produces these incentives in a particular case, awarding $1 million is a windfall, serving no other purpose than to siphon money away from stockholders and into the hands of their agents. Thus, it is important that we attempt, in a self-conscious and transparent manner, to estimate the point at which proper incentives are produced in a particular case. (favorably quoted from Seinfeld v. Coker)

What will this mean for future fee awards?  My thought here is that it seems likely that Chancellor McCormick will read the decision closely as she considers fee awards in the two outstanding Tesla cases. 

The Delaware Supreme Court approved the Dell award as within the bounds of discretion.   Yet how wide will the discretion be in the future?  As the numbers go up to the billions as in the Tornetta case, the math changes.  There, attorneys blocked a $56 billion dollar compensation plan.  They've requested about $6-7 billion in compensation.  (The numbers change depending on the stock price.). Although it's not even 15% of the benefit they obtained for the class, $6-7 billion is still a staggering amount.  It works out to about $300k+/hour for the attorneys involved.  

Ultimately, the question remains:  where is the line between adequate compensation to ensure skilled litigation in challenging cases and a windfall to the attorneys involved?  Now, we wait to see where Chancellor McCormick draws that line in awarding fees.  The Dell lawyers collected about $5,000 per hour worked.  It's a big jump from $5,000/hour to $300,000/hour.  I don't envy her job to settle on the right number.

Allison Frankel also has covered this case here.