Are Plaintiff Attorneys' Fee Awards in the Delaware Chancery Court Excessive? Part V

Prestipino and Klausner’s take

In recent years, the Delaware Court of Chancery has come under fire for awarding what critics call “excessive” attorneys’ fees in class actions and derivative suits. In a series of posts, I’ve traced the major empirical studies of that issue.

I started with a paper by Joseph Grundfest and Gal Dor, whose results showed that Delaware courts often award plaintiffs’ lawyers multipliers far above the “lodestar”—that is, fees calculated by multiplying hours worked by a reasonable hourly rate. Their papers, which have attracted both media attention and political scrutiny, have been used by Delaware’s critics to paint a picture of a legal system out of control, enriching attorneys at shareholders’ expense.

In this post, I’m taking up Attorneys’ Fee Awards in Delaware: A Normative and Empirical Analysis, by Gilda Sophie Prestipino and Michael Klausner. It pushes back, both empirically and conceptually, on Grundfest & Dor’s work, as well as work by Stephen Choi, Jessica M. Erickson, and Adam C. Pritchard.¹ Drawing on a decade of hand-collected data on fee awards in Delaware and federal securities class actions, Prestipino and Klausner argue that Grundfest and Dor’s claims are based on a skewed and incomplete dataset, a misinterpretation of the goals of fee jurisprudence, and a misunderstanding of the Delaware courts’ longstanding approach to aligning incentives between attorneys and shareholders.

Some Cautionary Notes

Prestipino and Klausner pull no punches in describing Grundfest and Dor’s papers. They describe the study as being based “on minimal data,” focusing on “outliers,” having “deficiencies,” and suffering from “methodological flaws.” They assert that Grundfest and Dor “fail to recognize” something as basic as “the objective of a fee award regime.” Certainly not the harshest criticism I’ve seen levelled at work (including my own work in one infamous case), but it nevertheless must make life in the Stanford law school faculty lounge at least a little uncomfortable.

To be clear, I am not taking sides between Grundfest & Dor and Prestipino & Klausner. My intent throughout this series has been to flag an interesting debate that will be frequently referenced in my ongoing work on DExit, without trying to decide on a winner. The series is primarily descriptive, while noting questions that occurred to me as I read each paper.

Prestipino is a judicial clerk with the Delaware Chancery Court. Klausner is a Stanford law professor who discloses that he “is currently co-counsel in cases before the Delaware Court of Chancery on behalf of plaintiffs in cases involving special purpose acquisition companies.” Both of those are potential conflicts of interest. In my experience, however, Klausner is a highly reputable scholar who would let the chips fall where they may rather than favoring his clients, so I take his results at face value.

Of course, speaking of conflicts of interest, I must acknowledge that I found Grundfest and Dor’s and Choi, Pritchard, and Erickson’s results much more congenial given my priors. In particular, my director primacy model emphasizes deference to board authority rather than accountability. Accountability should be limited mainly to self-dealing cases. Nevada and Texas have tilted too far towards deference, but my (admittedly unscientific view) is that Delaware has tilted too far towards accountability.