'Own Counsel' Defense Rejected in Awarding Class Counsel Fees

Can a party that retains its own counsel be liable to pay a fee to another party’s counsel or to class counsel? The answer, according to the recent Court of Chancery opinion in Smith, Katzenstein & Jenkins v. Fidelity Management & Research, C.A. No. 8066-VCL (Del. Ch. April 16, 2014), is a resounding yes. The court rejected the defendants’ “own counsel” defense in an action to recover attorney fees and costs for benefits conferred as a result of the plaintiffs’ prosecution and settlement of a class action as contrary to longstanding Delaware precedent dealing with shared causation in the award of fees and expenses when an attorney creates a common fund for, or confers a common benefit upon, a readily ascertainable group.

The plaintiffs were law firms that successfully prosecuted a class action lawsuit on behalf of the stockholders of Revlon against its controlling stockholder and board of directors. The defendants were investment funds and entities affiliated with the Fidelity financial services group that held or controlled shares constituting approximately 75 percent of the class. After the law firms began pursuing their case, but before the firms settled on behalf of the class, the Fidelity defendants settled their claims for a fixed amount per share plus a contingent payment based on any additional amount that the law firms obtained for the rest of the class. The law firms ultimately settled the claims for the rest of the class for an amount per share in excess of the Fidelity defendants’ fixed payment, resulting in an additional payment to the Fidelity defendants of approximately $4 million. After settling with Revlon, the law firms approached the Fidelity defendants seeking compensation for the benefits that they had conferred on the Fidelity defendants, but the defendants refused to pay anything. The firms then instituted suit against the Fidelity defendants. Subsequently, the court approved the class action settlement on behalf of the remainder of the class and awarded the firms fees and expenses based solely on the benefits that they had conferred on the class members other than the Fidelity defendants.