Attorneys' Fee Awards in Delaware: A Normative and Empirical Analysis

Abstract

Fee awards that the Delaware Court of Chancery has granted to plaintiffs’ counsel in class actions and derivative suits are a recent focus of controversy. Critics claim that fees are too high relative to plaintiffs’ attorneys’ “lodestars”—hours lawyers work multiplied by their hourly rate. That criticism, however, is based solely on a handful of cases. We have collected and analyzed data on all fee awards granted over the past ten years. We find that mean and median fee awards are well within a reasonable range, and that the fee awards on which the Court’s critics rely are extreme outliers. We further find that fee awards reflect the percentage-of-the-benefit approach laid out by the Delaware Supreme Court, which aligns plaintiffs’ lawyers’ incentives with shareholders’ interests in obtaining the largest recovery possible. Outliers that the Court’s critics have identified are occasional byproducts of that approach when recoveries are very high. Others have argued that Delaware fees are high relative to the risk plaintiffs’ attorneys bear and suggest that the Court take risk more into account in awarding fees. We explain that if fees were set to compensate plaintiffs’ lawyers for risk, plaintiffs’ attorneys’ incentives to obtain the highest recoveries for shareholders would be impaired. Some low-risk cases entail high shareholder losses. To provide incentives to obtain compensation for those losses, attorneys need to be paid commensurately high fees. Finally, we explain that lodestar-based caps on fees would both reduce incentives to obtain the best recovery for shareholders and motivate plaintiffs’ attorneys to drag out litigation in order to raise the cap.