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A lawyer who is also a corporate shareholder is not entitled to any fee award in a derivative securities case if he decides to represent himself in lodging an objection — even if his pro se efforts win back more than $580,000 for the company — the 3rd U.S. Circuit Court of Appeals has ruled. “Denial of a fee award to attorneys who represent themselves will serve as a prophylactic to deter those attorneys, hopefully few, who may be guided by financial incentives to pursue unnecessary litigation or to provide representation that is not sufficiently guided by objective, rational decisionmaking,” U.S. Circuit Judge Dolores K. Sloviter wrote in Zucker v. Westinghouse Electric Corp. The ruling marks the second time the 3rd Circuit has used the Zucker case as a vehicle to announce an important ruling on when lawyers are not entitled to receive any fees in a derivative securities case. In 2001, the court overturned an award of more than $580,000 in fees, holding that lawyers who represent shareholders in derivative actions are not entitled to any pay unless the suit ultimately provided a benefit to the corporation. In Zucker I, the court 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. Now, in Zucker II, the court has refused to award any fees to the winning lawyer in Zucker I, who, as a Westinghouse shareholder, acted on his own behalf to lodge the objections that led to the 2001 decision. The unanimous three-judge panel concluded that since attorney William Coudert Rand of New York was acting pro se, he cannot seek any fees under the “common fund” doctrine. Sloviter found that the lower court was correct in rejecting Rand’s fee petition because he had not acted as “independent, objective counsel.” Rand had originally asked for $250,000 in fees — a figure he calculated as one-third of the benefit he created for Westinghouse by successfully lodging an objection to the derivative plaintiffs lawyers’ request for $750,000 in attorney fees. At a minimum, Rand argued that he should be paid at his usual hourly rate of $250 per hour for the time he logged in waging the objection — about $67,000. Lawyers for Westinghouse agreed that Rand’s work had benefited the company economically and, in a stipulation, agreed to pay him $95,000 for attorney fees and expenses. But the trial judge concluded that while Rand was entitled to reimbursement of costs, he was not entitled to a penny in fees for his pro se representation. Then-Chief Judge D. Brooks Smith of the Western District of Pennsylvania said Rand had “conferred a definite benefit” on the corporation, but that he had not truly incurred any “attorney fees” in doing so since he had represented himself. “Thus, an award of attorney’s fees would not compensate him for expenses incurred in initially objecting and subsequently prosecuting the appeal,” Smith wrote. Smith (who now sits on the 3rd Circuit) concluded that a rule barring attorney-objectors from recovering attorney fees was a wise one since it would blunt any temptation of attorneys to “advance garden variety objections” in order to recover a salary of fees. When Rand appealed Smith’s decision, Westinghouse opted not to participate in the appeal, except to acknowledge it had entered into the stipulation that said Rand was entitled to $95,000. Faced with no lawyer arguing in favor of affirming the lower court, the 3rd Circuit decided to hire a lawyer. Attorney Howard Bashman, an appellate law specialist, was appointed by the court to file an amicus brief in support of affirmance. In his brief, Bashman said Rand’s appeal presented a question of first impression: “whether a pro se lawyer should be entitled to receive attorneys’ fees under the common fund doctrine in a shareholder derivative suit.” Looking to the U.S. Supreme Court for guidance, Bashman found two cases — decided 110 years apart — that, he said, strongly counseled against any fee award to a pro se lawyer. In the 1881 decision in Trustees v. Greenough, Bashman said, the justices held that a lawyer is not entitled to payment for the personal services he provided while litigating in his own interest. And in the 1991 decision in Kay v. Ehrler, the justices denied fees to a lawyer who successfully represented himself in a civil rights claim. Since Kay, Bashman said, lower courts have applied its rationale to a variety of other fee-shifting statutes — including the Freedom of Information Act, the Equal Access to Justice Act and Title VII — to deny requests for attorney fees from pro se lawyer-litigants. Bashman urged the 3rd Circuit to affirm Smith’s decision, saying such a ruling “will appropriately discourage pro se lawyers from litigating a common fund action in the hope of achieving a big payday if the matter succeeds.” Rand, who was represented on appeal by his father, William Rand Sr., argued that the Kay rule should not be extended to attorneys who represent themselves in securities cases. Civil rights cases are “emotionally charged,” Rand argued, and lawyers who represent themselves in such cases often do so without legal expertise. By contrast, Rand argued that, as a shareholder-attorney litigating an objection in a common fund case, he remained “dispassionate.” But Sloviter found that Rand’s effort to distinguish his case from Kay and its progeny was less than persuasive. “We have no reason to assume that shareholders who risk losing or have already lost considerable sums of money in their stockholdings will be substantially less emotionally involved in their suit than civil rights plaintiffs,” Sloviter wrote in an opinion joined by Circuit Judges Theodore A. McKee and Michael Chertoff. Sloviter noted that in the 1881 Trustees decision, the Supreme Court was focused on the “seemingly dispassionate issue of real estate funds” and nonetheless spoke of the “need for detached, objective counsel in order to counterbalance whatever pecuniary motives a party might have for bringing litigation.” Rand, she said, “has offered no support for his hypothesis that neutral third-party counsel is less desirable in the context of shareholder derivative suits than in civil rights suits.” Sloviter concluded that Rand “is a doubly interested party” because he had both a shareholder’s interest in the corporation as well as an attorney’s interest in obtaining attorney fees. “Because the conflict of interest as a lawyer and an objector-shareholder might lead him to take actions contrary to the best interest of the corporation, he is not entitled to a ‘salary’ of attorney’s fees under Trustees,” Sloviter wrote. Sloviter also concluded that a ruling against Rand would have no downside. “Failure to award Rand fees should not discourage other shareholders from raising meritorious objections in the future; it will only ensure that they pursue objections with the assistance of third-party counsel,” Sloviter wrote.

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