Attorneys Fees Claim in Shareholder Derivative Case Disallowed Where Lawyers Failed to Attempt Settlement Discussions before Filing Lawsuit

In Pipefitters Local No. 636 Defined Benefit Plan v. Oakley, a pension plan shareholder in Oakley (the company known for its sports sunglasses) sought attorney fees after it filed, then dismissed, a shareholder derivative case against Oakley asking for a higher share price on the 2007 sale of Oakley’s business to Luxottica Group.

In August 2007, Oakley announced the proposed sale of its company. The pension plan shareholder thereafter filed a lawsuit to enjoin the acquisition, but dropped the case when Oakley made some changes to its final proxy statement. The shareholder then asked for attorneys fees, claiming it was the “catalyst” that caused changes to the proxy statement, to the “substantial benefit” of the other shareholders.

Because there was no settlement or court judgment, the shareholder’s fee claim arose under a “catalyst theory,” which allows for attorney fees, even when litigation does not result in a judicial resolution, if the defendant changes its behavior substantially because of, and in the manner sought by, the litigation. See, Trope v. Katz ; Code Civ. Proc., § 1021.

The trial court denied the shareholder’s claim for an award attorney fees, and the California Court of Appeals, Fourth District, affirmed, explaining:

[A] shareholder cannot claim unjust enrichment on a catalyst theory where it failed to provide pre-suit notification to the company. In suing first and asking for changes later, the shareholder failed to comply with an elemental equitable precept: that one who seeks equity must do equity.

Awarding attorney fees for litigation when those rights could have been vindicated by reasonable efforts short of litigation does not advance that objective and encourages lawsuits that are more opportunistic than authentically for the public good. Lengthy pre-litigation negotiations are not required, nor is it necessary that the settlement demand be made by counsel, but a plaintiff must at least notify the defendant of its grievances and proposed remedies and give the defendant the opportunity to meet its demands within a reasonable time.

Here, plaintiff waited until nearly four weeks after filing its amended complaint to send a letter to Oakley’s board regarding its concerns. The Court of Appeals therefore rejected plaintiff’s claim that the Oakley shareholders were unjustly enriched by the “benefits” they supposedly received from plaintiff’s lawsuit because plaintiff never made any effort to forward its suggested revisions to management before filing its complaint.

It is, however, important to note that the California Supreme Court, in Vasquez v. State of California , declined to adopt a categorical pre-suit notification requirement to attorney fee claims arising in non-catalyst cases which resulted in a judgment or settlement. But even for non-catalyst cases, Vasquez noted that a court, in considering whether to exercise its equitable powers to award still properly takes into consideration whether the party seeking fees attempted to resolve the matter without litigation.

In the high-stakes game of class action litigation, the lesson here is to be reasonable in trying to settle a case before litigation.

Prevailing counsel in the case were Eric S. Waxman and Peter B. Morrison.

The California Court of Appeals, Fourth District, panel included: Justice Richard M. Aronson, Justice William W. Bedsworth and Justice Raymond J. Ikola.

The Orange County Superior Court judge in the case below was Judge Gail Andrea Andler, Dept. CX102.