Court Cracks Down On Attorneys Lining Their Pockets Under the Guise of Protecting the Little Guy

New Jersey Civil Justice Institute discusses with Ted Frank the recent Center for Class Action Fairness's victory in their objection to a proposed settlement.

The role of gatekeeper, determining which cases merit the attention of the court, is among the most important responsibilities of our judges. This past week, the Seventh Circuit Court of Appeals exercised its role as gatekeeper, putting the brakes on a proposed settlement of a lawsuit over Walgreens’ planned merger with the Swiss company Alliance Boots GmbH.

After the Walgreens-Alliance Boots GmbH merger was announced, a group of shareholders filed a lawsuit seeking additional disclosures in Walgreens’ proxy statement. Walgreens quickly settled the case by giving the shareholders’ attorneys $370,000 in fees, and agreeing to make what the author of the Seventh Circuit’s opinion, Judge Richard Posner, called “trivial” additional disclosures.

Posner blasted the current proliferation of so-called “strike suits” filed in the wake of business mergers as “no better than a racket.” And he’s completely right. When the only value of a settlement is that it makes a class action go away, perhaps it should not have been brought in the first place.

What is missing is greater clarity and consistency in exercising the gatekeeping role. If courts consistently followed Judge Posner’s lead and rejected proposed zero-value settlements, such suits would not, in fact, be brought in the first place.

Instead, these suits have become so common they are also called “deal tax” suits. The Wall Street Journal, quoting the Delaware Chancery Court, reports “that since 2005 the percentage of transactions of $100 million or more that have triggered stockholder litigation in this country has more than doubled, from 39.3% in 2005 to a peak of 94.9% in 2014.”

Most deal tax suits are settled, and the vast majority of those settlements are approved by the courts without a second thought. In fact, the settlement in this case would likely have been approved too, absent the efforts of “legal hero” Ted Frank of the Competitive Enterprise Institute’s Center for Class Action Fairness, who challenged it on behalf of another shareholder who disagreed with its terms.

Frank, who has spoken at past NJCJI events about his work, persuaded the court to take a closer look at settlements like this, where the attorneys are getting far more out of the litigation than the clients they are supposedly representing. This court agreed to do so, and hopefully other courts will follow suit.

Read the full article at New Jersey Civil Justice Institute