Federal Judges Take on Securities Lawyers' Mootness Fees Racket

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November 08, 2019

The Trial Lawyers Chafe at the Challenge to Their “Cozy Game”

In the legal world, the proliferation of securities lawsuits over the past few years is no secret. Neither is one of the drivers of this trend: merger objection lawsuits. This extra spotlight, though, seems to have uncovered a key part of what Kevin LaCroix of the D&O Diary called a “cozy game.”

Plaintiffs’ lawyers have been banking “mootness fees,” which they receive in exchange for voluntarily dismissing their lawsuit after companies disclose more (often meaningless) information about the deal. A recent academic study found that nearly two-thirds of dismissed merger objection suits in 2018 involved a mootness fee.

This dismissal-for-cash scheme went on unabated for several years, until recently. In August, a federal judge in Delaware rejected a plaintiffs’ lawyer attempt to collect a fee, since the lawsuit didn’t provide a substantial benefit to the class. Former U.S. Securities and Exchange Commissioner Paul Atkins called on policymakers to “to end this big-game hunt approach by plaintiffs’ lawyers who care little for outcomes that benefit the interests of shareholders, and more about the trophies that end up on their wall and in their bank accounts.”

In June, Northern District of Illinois Judge Thomas Durkin took a similar stance. He called it a “racket” and ordered the plaintiffs’ lawyers to give back their mootness fee. Now the plaintiffs’ lawyers are appealing that order to the Seventh Circuit U.S. Court of Appeals, saying judges have no jurisdiction over these settlements.

The authors of the study mentioned above likened these fees to “blackmail.” It’s hard to dispute that characterization. That study found the low end of the typical average mootness fee range to be more than $23 million. The class members they represent get extra disclosures about the deal, which, in the case at issue, Judge Durkin called “worthless to shareholders.”

LaCroix said the appeal “may require the Seventh Circuit to address some fundamental questions about the reach of the court’s authority.” The lawyers are questioning the district court’s ability to review these types of arrangements. Affirming that ability will go a long way towards reining in a system driven by fees and money.

11/08/2019