Ninth Circuit Sanctions Plaintiffs’ Attorney for Vexatious M&A Litigation

In recent years, it has become routine for plaintiffs’ law firms to announce investigations of mergers or acquisitions within hours of such an announcement.  Lawsuits challenging major deals are filed, on average, within two weeks. According to a Cornerstone Research, 93% of acquisitions valued at over $100 million announced last year were almost immediately challenged, on average, by 5 lawsuits.   Defendants typically settle these cases quickly as a cost of doing business in order to eliminate potential obstacles to the merger or acquisition.  As a result, lawyers filing such suits, who may use cookie-cutter complaints and lack evidence that the deal hurts shareholders or the public, recover lucrative fees.  Two recent developments may damper the plaintiffs’ bar’s enthusiasm for such lawsuits.

On Thursday, a Texas appellate court threw out $612,500 in attorney fees to two law firms, Edison, McDowell & Hetherington and Robbins Geller Rudman & Dowd, which entered a “disclosure-only” settlement after challenging a $450 million merger of Frontier Oil Corp and Holly Corp in 2011.  “Disclosure-only” settlements are those that result only in providing additional information to shareholders about a deal, rather than any monetary recovery.  Some courts have come to view such claims with skepticism, since there is always more information that can be provided to shareholders.  In the Frontier case, for example, the class member who challenged the fees noted that the additional disclosures, consisted of just over 1,300 words that were, at best, of “marginal” value.  A Houston appellate court found that the fee award was improper, applying a 2003 Texas law aimed at discouraging “coupon settlements” of class actions where plaintiffs’ lawyers reap the benefits while their purported clients get little of value.  It is the second such ruling by a Texas appellate court in the last year and may reduce M&A claims in a state that has become popular for such filings.

Last week, the U.S. Court of Appeals for the Ninth Circuit gave plaintiffs’ firms that repeatedly challenge mergers another reason to think before suing.  The federal appellate court sanctioned a prominent California M&A lawyer, Joseph M. Alioto, and his firm for filing vexatious litigation related to his challenge of a merger between Southwest and AirTran.  Mr. Alioto sued the airlines to stop their merger, but did not get his claim filed until a day after the merger concluded.  After the district court dismissed his case for that basic reason, he not only appealed, but sought an emergency order from the Ninth Circuit to stop the airlines from merging their assets, broader relief than he had requested in the lawsuit.  Attorneys for the airline characterized Alioto’s conduct as a modus operandi of targeting high-profile mergers at their most time-sensitive stage in an effort to win a cash settlement.  The Ninth Circuit ordered Mr. Alioto and his firm to pay $67,495 of the airlines’ costs, the amount related to responding to the request for an emergency order.  Mr. Alioto called the sanction, which he will pay himself, a “badge of honor” that will not deter him from challenging future mergers.