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Overturning an award of more than $580,000 in attorneys’ fees, the 3rd U.S. Circuit Court of Appeals has ruled that lawyers who represent shareholders in derivative actions are not entitled to any fees unless the suit benefited the corporation. In Zucker v. Westinghouse Electric Corp., Senior U.S. Circuit Judge Morton I. Greenberg found that it was not enough to show that Westinghouse’s successor, CBS Corp., had benefited from the $250,000 settlement of the derivative action simply because it cleared the way for a $67 million settlement of a class action suit. Instead, Greenberg said, the derivative suit lawyers would be entitled to fees only if they could show that CBS “is better off because of the institution and settlement of the derivative litigation than it would have been if the litigation had not been brought in the first place.” Greenberg succinctly stated the holding of the case before offering a lengthier discussion of the lesson it teaches. “A plaintiff should not receive a fee in derivative litigation unless the corporation, by judgment or settlement, receives some of the benefit sought in the litigation or obtains relief on a significant claim in the litigation,” he wrote. “The district courts must review settlements in derivative litigation in which attorney’s fees will be sought with great care to ensure that a fee is not assessed against a corporation following the settlement of derivative litigation unless the corporation has received a substantial benefit from the litigation itself and not simply from its settlement,” Greenberg wrote in an opinion joined by U.S. Circuit Judges Theodore A. McKee and Thomas L. Ambro. “After all, when derivative litigation is terminated a corporation always can be said to have obtained a benefit as it will save further legal fees. Of course, if the litigation results in a substantial monetary recovery by the corporation it should be readily apparent that it received a substantial benefit from the litigation. “But where, as here, the settlement is for what in the context of the case is a nominal amount not even exceeding the corporation’s legal expenses in the litigation, the fees cannot be justified on the basis of the monetary recovery,” Greenberg wrote. The ruling is a victory for attorney William C. Rand of New York, a CBS shareholder who lodged an objection after U.S. District Judge D. Brooks Smith of the Western District of Pennsylvania awarded fees to attorneys Richard D. Greenfield of Greenfield & Goodman and Mark C. Rifkin of Rifkin & Associates. Greenfield and Rifkin submitted bills that showed they had racked up fees of more than $1.4 million in the case over nearly a decade of litigation. Under the derivative settlement, CBS was paid $250,000 and the lawyers were entitled to seek up to $750,000 in fees and costs. In their fee petition, Greenfield and Rifkin argued that the derivative suit had benefited CBS because insurers would have refused to settle the class action suit unless the derivative suit also settled. Smith ruled that while the derivative plaintiffs’ lawyers were entitled to fees, they should be paid just 60 percent of their $1,456,108 “lodestar.” He awarded $582,443. At that point, Rand objected, saying the derivative lawyers weren’t entitled to any fee at all. Alternatively, Rand said, the fees should be reduced. On appeal, Greenfield and Rifkin argued that Rand waived his right to object to the fees because he never objected to the settlement. Greenberg disagreed, saying the settlement merely provided that the lawyers could apply for fees up to $750,000. “Rand, by not objecting to the settlement, did not waive the right to object to the fee application,” Greenberg wrote. Greenberg found that the critical question in the case was “whether CBS obtained any benefit from the institution and settlement of the derivative litigation.” Although derivative suits are not brought under a “fee-shifting” statute, Greenberg found that decisions in that area were nonetheless helpful and showed that courts insist that lawyers are entitled to fees only when they can show that they “prevailed” or obtained at least “some relief” on their original claims. “It seems to us that the principle recognized in those cases, though based on statutes, should be applied in the nonstatutory context here,” Greenberg wrote. Applying that standard, Greenberg found that “it is, of course, obvious that the derivative litigation did not confer any benefit on CBS and the district court never held that it did.” While Greenfield and Rifkin argued that CBS benefited from the settlement of the derivative suit, Greenberg found that they never even claimed CBS benefited from the institution of the case. “In fact, the derivative litigation plainly proved to be a detriment to CBS because it was an impediment to the settlement of the class action,” Greenberg wrote. Greenberg said he read Rifkin and Greenfield’s brief “with the greatest care from cover to cover” and found “nothing in it explaining how CBS benefited from the institution and settlement of the derivative litigation as contrasted with the mere settlement of the litigation.” And when Rifkin was repeatedly asked at oral argument how the derivative litigation had benefited CBS, Greenberg said, “he never could answer the question.” Although CBS did receive $250,000 in the derivative settlement, Greenberg found that such a sum couldn’t possibly have provided the corporation with any net gain. Since the plaintiffs’ lawyers had logged $1.4 million, he said, “It is not conceivable that CBS’s attorney’s fees did not exceed $250,000.” Greenberg said he recognized that the court’s ruling “may complicate the settlement of complex corporate litigation,” but that “sound principles require that we reach it.” When the derivative suit was filed, the shareholders were alleging that the officers and directors had caused CBS enormous losses. But in the end, Greenberg said, they were willing to settle the case for $250,000 being paid to CBS and the opportunity to apply for an attorney fee of three times that amount. “In this case the tail surely wagged the dog. In fact, the derivative litigation when ended was being used for nothing more than, as Rand accurately states in his brief, a ‘hold up’ as it stood in the way of the class action settlement.” Westinghouse and CBS were represented in the appeal by Leonard Fornella of Heintzman Warren Wise & Fornella in Pittsburgh. The individual corporate officers were represented by Dennis J. Block of Caldwalader Wickersham & Taft in New York; Stephen A. Radin of Weil Gotshall & Manges in New York; and Joseph A. Katarincic of Thorp Reed & Armstrong in Pittsburgh.

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