What can we do about bad litigation?

A couple of events come together today to spur some thoughts on what we can do to solve the litigation problem.  The answer isn't going to be something simple, like putting Milberg out of business.  But there is a way. . .

This NYT article discusses some of the abuses Milberg has been charged with. The article notes that the PSLRA was supposed to focus on plaintiffs with big losses, who then participated in selecting the attorney, rather than letting the lawyer drive the suit as before. It says, “[t]he law was meant to rein in lawyers who simply eyeballed companies that were in trouble and ran to the courthouse with a plaintiff in tow at the first hiccup in the share price.”

And yet, as the article points out, the lawyers are still to a significant extent calling the shots by organizing individual plaintiffs. Of course Milberg seems to have gone too far in gaming the system.  However, a successful prosecution of the firm obviously isn’t going to stop the practice.

Also today Tom Kirkendall reminds us that Bill Lerach – untouched by the Milberg prosecution – is poised to collect a billion dollar fee in the Enron class action and has just run to the courthouse to sue on the announcement of Kinder Morgan’s leveraged buyout. As Tom points out, the allegation that $100 a share is “pure speculation at this point” because the price is still subject to a counteroffer.

The facts in the firm’s press release indicate that Kinder Morgan has some good things going for it, but are hardly convincing that the buyout price is too low.

I discussed the problems of these insta-suits on leveraged buyouts last year in connection with VC Strine’s opinion in the Cox Communications case. As I noted there:

The problem is that the lawsuit comes right after an initial proposal that the controlling shareholder inevitably will increase as a normal part of the bargaining process. Because the proposal is subject to further negotiation, the lawsuit almost certainly lacks real merit at the time it is filed. Yet the defendant cannot get a dismissal because it is always possible at the pleading stage that there is some fairness issue with the merger price, and in controlling shareholder transactions the business judgment rule is never applied under Kahn v. Lynch Communications Systems, Inc.. Moreover, the plaintiff in these cases always settles at the price agreed on by the controlling shareholders and special litigation committee, suggesting that the lawsuit itself didn't contribute to the negotiations.

So what did Strine do? He saw through the efforts of the plaintiff’s effort to show that litigation settlements caused merger premia by noting that the data didn’t support that the premia were produced by the lawyers’ efforts. The court disparaged “hastily-filed, first-day complaints that serve no purpose other than for a particular law firm and its client to get into the medal round of the filing speed (also formerly known as the lead counsel selection) Olympics.” And he ended by significantly reducing the fee request.

Moreover, Strine didn’t stop there. He meticulously analyzed the legal standards in these cases that produced this perverse litigation, and suggested a fix – giving credence to a majority of minority shareholder vote and preserving room for the business judgment rule.

In sharp contrast to the Strine opinion, I discussed soon after that how an Atlanta court had granted 100% of the $1.25 million fee request of Fulton county lawyers in the same case despite adding essentially no value – they merely unsuccessfully tried to stay the action, and asked a few questions at some of the depositions set up by the Delaware attorneys. I described "the Atlanta fee case [as] an egregious example of the corporate litigation system gone awry." I noted that one way to address the specific problem would be to permit the parties to enter into a binding contract choosing the forum that will hear corporate litigation. (See, e.g., my From Efficiency to Politics in Contractual Choice of Law, 37 Ga. L. Rev. 363 (2003)).

More generally, the solution to the litigation problem is obviously not in restricting the efforts of plaintiffs firms (which is not to say that Milberg should be able to bribe plaintiffs, if that’s what it did). Nor is it in putting entire firms out of business. It lies in having legal rules that are conducive to disposing readily of bad suits, and ensuring that good judges (like VC Strine) hear these claims.

Comments

Insta-suits have been around since before I started practicing in the late '80s. They are driven by the traditional practice that the first to file gets to be the lead lawyer for the plaintiffs and gets to assign work and get the lion's share of the fees.

The idea that shareholder firms had shareholders "on retainer" who allowed their names to appear on lawsuits for some kickback has been (to my mind) something of an open secret for years.

Note the following comment from Lewis v. Anderson, 435 A.2d 474, 475 n.1 (Del. Ch. 1982):

In more than nine years as a member of the Court of Chancery I have noticed that each year seems to bring forth several new shareholder-related suits brought in the name of Harry Lewis. Over the same period, however, because of settlements, voluntary dismissals, mooted actions and the like, I have never had the good fortune to actually lay eyes on anyone claiming to be Harry Lewis. From time to time I would check with other members of the Court. As best I can tell, none of them has ever seen this apparent champion of the minority shareholders either. I must facetiously admit that more than once the suspicion crossed my mind that perhaps no such person as Harry Lewis actually existed, that perhaps he was merely a fiction-a “street name” if you will-utilized at random by various counsel for the purpose of bringing class and derivative actions for the needed protection of shareholder interests.