Approximately a year ago, the Court of Chancery in a complex factual dispute between IAC/InterActive Corp. and Wesley T. O’Brien, its former COO and CEO, held that O’Brien’s claim for indemnification was not time-barred by the doctrine of laches and that he had the right to advancement of attorneys’ fees and expenses in any further proceedings in this matter.  2009 WL 2490845 (Del. Ch. Aug. 14, 2009). Our blog review of that decision is available here. A year later, in a rather unique procedural setting at the request of the parties, the Court decided the remaining issues in the case based upon written submission (which included stipulated documentary record and deposition testimony) in lieu of a trial.  O’Brien v. IAC/Interactive Corp., C.A. No. 3892-VCP (Del. Ch. August 27, 2010), read opinion here. As an aside, in situations such as this where parties seek resolution of their dispute on the basis of a stipulated record, the Court does not apply the summary judgment standard under Court of Chancery Rule 56.  Instead, the Court makes findings of fact and conclusions of law based on the record presented to the Court “in the same manner and with the same binding effect as after a trial.”

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP

While the Court addressed a number of issues related to indemnification, this summary will focus on the following three issues: (i) is it reasonable to include premium fees in the amount to be indemnified; (ii) should costs related to Plaintiff’s affirmative claims be deducted from the amount to be indemnified; and (iii) from what date should prejudgment interest be assessed.  O’Brien v. IAC/Interactive Corp., C.A. No. 3892-VCP (August 27, 2010).

“Premium” or “Success” Fees

At various points in this litigation, the plaintiff retained a number of different law firms with different contingency fee arrangements.  While defendant IAC did not contest O’Brien’s right to indemnification, it did claim that it should not have to pay the premium or success fees charged by certain of plaintiff’s law firms because they were not reasonable.   Under Delaware law, an indemnitee may recover only those fees and legal expenses that are reasonably incurred.  In determining the reasonableness of fees in the indemnification context, Delaware courts look to Delphi Easter Partners Ltd. P’ship v. Spectacular Partners, Inc., 1993 WL 328079 (Del. Ch. Aug. 6, 1993), which held that fees are reasonable if the following inquiries are met: (i) were the expenses actually paid or incurred; (ii) were the services that were rendered thought prudent and appropriate in the good faith professional judgment of competent counsel; and (iii) were charges for those services made at rates, or on a basis charged to others for the same or comparable services under comparable circumstances.

Expenses Paid or Incurred

O’Brien contended that the premium or success fees his counsel charged were actually incurred because he is responsible for paying all of his attorneys’ fees, including all premiums associated with those fees, if his indemnification claim is ultimately successful, regardless of whether he receives the full amount of indemnification he seeks.  IAC claimed that “incurred” means “owed for work performed rather than a result obtained.” IAC claims that the contingency fees were not “incurred in the traditional sense” and merely were tacked on to regular hourly fees. 

The Court noted that contingent fee arrangements are premised upon a result obtained – a “success” for the client and that O’Brien became obliged to pay the premium fees in question after his counsel achieved the goals they promised to pursue under the agreements.  As a result, even if the Court did not award premium fees, O’Brien would still have to pay those premiums to his counsel. The Court found that “although the contested premiums were charged in addition to or in lieu of normal hourly rates, they still represent expenses incurred in the sense that the premiums or enhanced hourly rates simply represent the rate of pay per unit of time.” The real issue then was whether the rate was reasonable in the circumstances. 

There was no dispute as to whether the actual hourly rates charged were reasonable, only whether the premium fees were reasonable. IAC argued that the hiring of multiple firms necessarily results in duplicative work. The key consideration, however, from the Court’s perspective was whether O’Brien’s counsel, in their good-faith professional judgment, believed that retaining multiple firms was prudent and appropriate.  The Court noted:

A party is not prohibited from retaining the most capable and experienced counsel because a case might be considered “uncomplicated.” Similarly, merely because a case is relatively straightforward does not mean additional assistance or extra preparation is not justified for important or determinative matters within the case…. I cannot say that having multiple law firms at different stages of this protracted process was imprudent or inappropriate, and there is no evidence that O’Brien’s counsel provided any services in bad faith or that specific services resulted in excessive or duplicative fees. Therefore, O’Brien has satisfied the second aspect of the Delphi inquiry.

Rates for Comparable Services Under Comparable Circumstances

As to whether the charges were made at rates which were comparable to rates charged for services under comparable circumstances, the Court reviewed what each law firm customarily charged for similar work.  In particular, the Court looked at the reasonableness of the premium charged for two firms which charged a 20% premium while a third firm charged a 100% premium for the same or similar work.    In the end, the Court found the 100% premium to be unacceptable, and while it accepted the services rendered by counsel who charged the 20% premium as reasonable, it did not reject the 100% premium in its entirety.  Instead, it approved a 50% premium finding that:

  [a] premium greater than that obtained by the other two firms is appropriate in this case, because [that firm] apparently took the lead in attempting to secure O’Brien’s vigorously contested indemnification rights, especially in the Florida Trial and Appellate Actions. That issue is critical to O’Brien’s prospects for success in this matter. In addition, [that firm] undertook the risk of recovering no fee at all, and that attendant to deferring the date of payment until years after they performed the underlying services.  

Court Cuts Fees Attributable to Affirmative Claims in the PRC Arbitration

Under Delaware law, corporations are empowered to indemnify any person who was or is a party to an action “by reason of the fact that the person is or was a director, officer, employee or agent of the corporation.” A lawsuit alleging that a director breached his fiduciary duty to his corporation is an example of an action for which a defendant is a party “by reason of the fact” that he was a director of the corporation. In this case, however, the plaintiff brought a claim for breach of his own employment contract which, the court found, did not meet the “by reason of the fact” test.  As a result, the Court reduced the amount that O’Brien was entitled to based on his affirmative claims for breach of contract.

Interest and Setoff

Under Delaware law, prejudgment interest on the amount of indemnification is a matter of right.  However, the issue here was the date when such interest started to accrue – when O’Brien first demanded advancement from PRC pursuant to the Indemnification Agreement, or when O’Brien first made his demand on IAC as opposed to PRC.  The Court found that O’Brien was entitled to prejudgment interest [as defined in 6 Del. C. § 2301(a), compounded quarterly] on expenses incurred before he made demand on PRC, and on expenses incurred after he made demand from the date those expenses were paid and only on the amounts that were paid and not on the premiums, contingent fees and expenses. 

PRC had filed for Chapter 11 bankruptcy protection in the United States District Court for the Southern District of New York on January 23, 2008.  As a result, the Florida proceedings to determine the indemnification amount were stayed so O’Brien filed a proof of claim in the PRC Bankruptcy that included claims for breach of his employment agreement and indemnification.  The Court of Chancery held that IAC was entitled to a set-off of any amounts that O’Brien may receive as a result of his indemnification claim against PRC in the PRC bankruptcy.