Mesko v. Cabletron Systems Inc.

Rule of Law:

When determining reasonable attorneys’ fees in common fund class actions, a district court should adopt a 'market mimicking approach' to approximate the fee arrangement that would have been negotiated in an open, competitive process at the outset of the case, rather than applying subjective multi-factor tests or fixed percentages.

Facts:

• In the mid-1990s, Cabletron Systems, Inc. was a leading manufacturer of computer networks, achieving 32 consecutive quarters of record growth, with a 26% increase in net sales for the quarter ending February 28, 1997.
• Following this period of success, Cabletron’s stock price significantly dropped in the next three quarters, including a 67% decline between March 3, 1997, and December 2, 1997.
• Cabletron investors alleged that during the class period (March 3, 1997, to December 2, 1997), Cabletron executives and directors concealed serious problems, fraudulently inflated revenue figures in SEC filings and press releases, and engaged in insider trading by selling their own stock.
• Many of the allegations in the investors' complaint were based on information provided by anonymous former Cabletron employees and other sources claiming personal knowledge of the fraudulent practices.
• After extensive discovery, Defendants obtained written affidavits from the anonymous sources, which proved to be 'far less incriminating' than what the Plaintiffs' counsel had initially suggested.
• The parties subsequently reached a settlement agreement of $10.5 million, plus interest, for the class.
• Plaintiffs' counsel requested attorneys’ fees amounting to 30% of the $10.5 million settlement (approximately $3.15 million) and reimbursement of $915,414.01 in out-of-pocket expenses.

Procedural Posture:

• On October 24, 1997, Cabletron investors filed a class action lawsuit in the United States District Court for the District of New Hampshire against Cabletron and seven of its executives and directors, alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.
• Defendants responded to the lawsuit by filing a Motion to Dismiss.
• The case was reassigned among various district judges, eventually landing with Judge Mary M. Lisi of the District of Rhode Island, sitting by designation.
• Judge Lisi granted Defendants’ Motion to Dismiss, holding that Plaintiffs’ Second Amended Complaint did not meet the Private Securities Litigation Reform Act (PSLRA) pleading requirements.
• Plaintiffs appealed Judge Lisi's dismissal to the First Circuit Court of Appeals.
• The First Circuit Court of Appeals overturned the dismissal, ruling that Plaintiffs had satisfied the PSLRA pleading requirements, and remanded the case to the district court.
• The case was assigned to District Judge Smith on December 2, 2002.
• Throughout discovery, Defendants repeatedly sought the names and contact information of Plaintiffs’ anonymous sources, which Plaintiffs initially opposed.
• The district court allowed Plaintiffs to withhold this information initially, but eventually granted Defendants the right to learn the names of and depose the anonymous sources after Defendants produced extensive discovery.
• In late 2004, after Defendants contacted the anonymous sources and obtained written affidavits, they found the information to be far less incriminating than expected.
• Defendants then filed a Motion to Strike the anonymous source allegations from the Second Amended Complaint.
• Before a ruling on the Motion to Strike, the parties reached a settlement.
• The court granted preliminary approval of the Settlement and the Plan of Allocation on April 8, 2005.
• At the final settlement hearing on August 30, 2005, the Court questioned Plaintiffs’ counsel regarding apparent discrepancies between the anonymous source affidavits and counsel's earlier claims.
• After notice and a hearing on January 18, 2006, the Court appointed Magistrate Judge Lincoln D. Almond as a Special Master to investigate these discrepancies.
• Judge Almond completed his investigation and filed his report on April 26, 2006, determining there was no basis to conclude improper conduct by counsel.
• After receiving the Special Master’s report, counsel declined an additional hearing and requested that the Court enter an order of final approval of the Settlement, Plan of Allocation, and Plaintiffs’ Motion for Attorneys’ Fees and Reimbursement of Expenses.