Attorney fees in Delaware's Court of Chancery lack "consistent benchmarks" and, for big awards, may fail to reflect "risk or performance," according to a report Tuesday that potentially ratchets up pressure on state lawmakers wary of jeopardizing Delaware's standing as the national hub for corporate law disputes.
The 94-page work by three law school professors, "Is Delaware Different? Stockholder Lawyering in the Court of Chancery," provided more fodder for defense- and corporate-side arguments that lawmakers should consider curbs on big fees and awards in Court of Chancery derivative actions and could consider curbs on judicial discretion.
"The data contradict the core judicial narrative that Delaware cases are 'uniquely risky,'" co-author Jessica Erickson, George E. Allen Chair in Law at the University of Richmond School of Law, said in an email to Law360. "Delaware judges frequently justify high fee awards on the theory that Chancery litigation involves greater risk."
The report concluded that Delaware stands out compared with federal securities class litigation, and "may over-reward repeat players ... while undercompensating smaller claims."
"Notwithstanding Delaware's confidence in its judiciary's ability to calibrate appropriate fee awards, our data reveal little evidence that those awards systematically account for firm performance or litigation risk," the report said. "The data suggest that Delaware should reconsider the broad discretion it grants judges in fee setting."
New York University's Stephen J. Choi, University of Richmond's Erickson and University of Michigan's A.C. Pritchard released the work several months after a second consecutive year of bruising Delaware legislative battles over stockholder litigation and costs.
John L. Reed of DLA Piper told Law360 on Tuesday the report "is the most comprehensive analysis to date of fee awards in representative stockholder actions. Reaching the right public policy decision should be the sole goal. A proper analysis of fee statistics can expose whether there is a problem, and I believe we have a problem in Delaware."
Legislative changes in Delaware this year already have provided new safe harbors for directors and controlling stockholders in conflict transactions and narrowed shareholder rights to inspect corporate books and records. The developments included a bitter fight in 2024 over changes that, in part, permitted corporate boards to cede some governance rights to chosen stockholders.
Joel Friedlander of Friedlander & Gorris PA, a corporation law litigation boutique, said on Tuesday that the latest study report "does not capture the reality of stockholder litigation as I have practiced it. I asked to see their data about our firm's cases and they declined."
The report, described as based on hand-collected data from every derivative suit and class case involving public companies in Chancery Court between 2017 and 2022, emerged as the corporate and plaintiffs' bar and Delaware lawmakers already were predicting a legislative push in 2026 focused on big case awards and criticisms that plaintiffs' attorneys receive higher fees for Delaware stockholder cases than comparable federal securities actions.
The focus on high fees and risks to Delaware's status as a major corporate charter hub this year led to a proposed resolution by state lawmakers seeking recommendations on attorney fees from the Council of the Corporation Law Section of the Delaware State Bar. The Council already had planned to issue a recommendation in time for the 2026 legislative session, the report noted.
"We are awaiting the completion of the council's work," Sen. Bryan Townsend, a Morris James LLP attorney and state Senate leader for majority Democrats, told Law360 on Tuesday.
The latest report observed that when courts "grant excessive fee awards, they are diverting value from stockholders — a concern that courts and lawmakers should take seriously," the report said. It added that big fees may create unintended incentives in stockholder litigation, and "Delaware fees trend higher than fees in federal securities class actions" for the largest cases.
Attorney fee rates were $1,692 hourly in the Chancery Court versus $935 hourly in federal securities litigation, according to the report.
"If corporate America perceives a problem with the volume or quality of such litigation, then Delaware should be motivated to carefully examine its use of this lever," the researchers said in the report.
Among the recent standouts, the report noted, a $345 million fee award — a $17,692 rate — in a case that saw Delaware Chancellor Kathaleen St. J. McCormick order the cancellation of Elon Musk's $56 billion Tesla compensation plan after years of litigation.
Also highlighted was a $266.7 million fee affirmed in connection with a $1 billion settlement in a Dell Technologies stockholder suit.
Joel Fleming of Equity Litigation Group said in a LinkedIn post, "The math at the heart of this analysis is badly wrong," and excluded the cost of unreimbursed expenses and risk.
"Specifically, they exclude four outcomes where plaintiffs' lawyers see some or all of their work go uncompensated: fruitless books-and-records investigations, lost leadership disputes, partial settlements followed by trial losses, and appeals," Fleming wrote. "Each of these errors causes them to understate the risks of contingent practice," and fees necessary to incentivize contingent practice.
Reed said one purpose of an attorney contingency fee "is to ameliorate risk so lawyers can make up for the contingent cases they lose. But overhead is only incurred once, so each multiple is really an additional 2x award, assuming a generous 50% profit margin."
As a result, Reed said, a 2x multiple is really 3x, and a 10x is 19x.
"Awarding anything even close to 10x creates perverse incentives because it encourages a regime where 90% of the cases can be unmeritorious if the plaintiffs' bar can make up for all the losers in one case," Reed said. "That is bad public policy, because those unmeritorious cases have costs that must then be borne by corporate America, stockholders, and the judicial system itself, with no cost or risk to those bringing the cases."
Anat Alon-Beck, an assistant professor at Case Western Reserve University School of Law, told Law360 that the study provided "valuable empirical insight into fee award practices" but warrants a cautious read.
"Delaware litigation is distinct in its procedural structure, remedies, and judicial approach; federal securities cases involve class certification, statutory frameworks, and discovery processes that differ materially from the equity-based, judge-driven proceedings typical of the Court of Chancery," Alon-Beck said.
Taken into account in the report was data on 2,492 federal class suits involving a securities disclosure claim against a public company from 2005 to 2018, litigation with similarities to Chancery derivative cases.
Delaware cases, the law professors' study found, were more likely to produce a fee and less likely to be dismissed than federal securities actions for the period examined.
"Overall, lawyers in Delaware face a lower risk of walking away empty-handed than lawyers in federal securities class actions," the study concluded. "Delaware lawyers received nothing in approximately 40 percent of their cases, while lawyers in federal securities class actions walked away with nothing in approximately 60 percent of cases."
The authors said Delaware jurists give plaintiff attorneys a higher return on litigation than seen in federal court and said the report provides little evidence that fee awards account for law firm performance or litigation risk.
"It is frustrating that certain members of academia choose to repeatedly opine on contingency fees without understanding basic concepts underlying the contingency firms' business models," Mark D. Richardson of Labaton Keller Sucharow LLP said in an email Tuesday. "Many of their assumptions would quickly deteriorate if they spent five minutes speaking to someone who actually does this for a living."
Nov 18
Deal Summary
