This Delaware Supreme Court decision is the second time Delaware’s High Court has reviewed a decision by the Delaware Court of Chancery in this case regarding a request for attorneys’ fees in a class action settlement. The prior case summaries at the above link provide a more detailed factual background. A simplified statement of the case is that attorneys who pursued related litigation in California argued that they caused a higher price to be obtained in a merger, and then sought to intervene in the related case in Delaware to share in the attorneys’ fees awarded.
Issues on Appeal
The key issues on appeal before the Supreme Court related to whether there was a causation between the increase in the tender offer as a result of the efforts of the attorneys for the intervenor, Alaska Electrical Pension Fund. Specifically, Alaska argued that the defendants failed to rebut the presumption to which it was entitled, and that the Court of Chancery abused its discretion when it held that the defendants established that Alaska did not in any way contribute to the higher price.
Standard of Review
The Supreme Court applied the abuse of discretion standard when reviewing a denial of an application for attorneys’ fees. In addition, the Supreme Court reviewed de novo legal principles applied in reaching that decision. See footnote 10.
The Corporate Benefit Doctrine as an Exception to the American Rule
An exception to the American Rule under which litigants pay their own attorneys’ fees regardless of the outcome of the lawsuit, is the "corporate benefit doctrine” which has been long recognized in Delaware to provide for the reimbursement of attorneys’ fees and expenses in corporate litigation. In order to be entitled to an award of fees under the corporate benefit doctrine, an applicant must show three things: (1) that the suit was meritorious when filed; (2) the action producing benefit to the corporation was taken by the defendants before judicial resolution was achieved; and (3) the resulting corporate benefit was causally related to the lawsuit. See footnote 13.
The policy reason behind the common corporate benefit doctrine is that the rule insures that, “even without a favorable adjudication, counsel will be compensated for the beneficial results they produce.”
Presumption Applicable for Causal Connection
Delaware law imposes on the defendant the burden to show that there was no causal connection that existed between the initiation of a lawsuit and any later benefit to the shareholders, when, as here, a defendant takes action subsequent to the complaint that renders the claims asserted moot. This presumption exists because it is the “defendant, and not the plaintiff, who is in a position to know the reasons, events and decisions leading up to the defendant’s action.” See footnote 16.
Under Delaware law, there are two types of presumptions. First, “conclusive presumptions” mandate that the trier of fact: “find the presumed fact from the proven fact.” See footnote 17.
Second, a “rebuttable presumption” is applied to impose on the party against whom it is directed the “burden of proving that the non-existence of the presumed fact is more probable than its existence.” See D.R.E. 301(a). The presumption of causation is rebuttable, but to overcome the presumption, the defendants “must demonstrate that the lawsuit did not in any way cause their action.”
See footnote 19, which notes that Delaware law differs from the Federal Rules of Evidence which require only that the opposing party produce some evidence to rebut the presumption.
Standard of Review of Factual Findings
The Supreme Court emphasized that the findings of fact of the trial court are entitled to deference and that “so long as the Court of Chancery has committed no legal error, its factual findings will not be set aside on appeal unless they are clearly wrong and the doing of justice requires their overturn." See footnote 26. The Supreme Court reasoned that because the presumption of causation was rebutted by factual findings supported by the record, the Court of Chancery did not abuse its discretion in denying the application of Alaska for attorneys’ fees and costs.
Standard of Review for Discovery Rulings
The Supreme Court applied the standard of review of “abuse of discretion” for its review of a discovery issue in connection with a motion to compel e-mails that Alaska argued should be subject to the “at issue” exception to the attorney/client privilege.
The Supreme Court explained that the "at issue" exception to the attorney/client privilege may apply in two situations: “(1) A party injects the privileged communications themselves into the litigation, or (2) A party injects an issue into the litigation, the truthful resolution of which requires an examination of confidential communications.” See footnotes 28 through 30. However, in the end, based on Supreme Court Rule 8, the Court declined to rule on this last issue after determining that it was not fairly presented to the trial court for review prior to the appeal.