Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_03-cv-00637/USCOURTS-cand-4_03-cv-00637-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1332 Diversity-Breach of Fiduciary Duty

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

NOT FOR CITATION

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

GREGORY WATTERSON, Derivatively

On Behalf of RIVERSTONE NETWORKS,

INC.,

Plaintiff, No. C 03-0637 PJH

v. ORDER GRANTING MOTION FOR

FINAL APPROVAL OF DERIVATIVE

ROMULUS PEREIRA, et al., SETTLEMENT

Defendants

– and – 

RIVERSTONE NETWORKS, INC.,

Nominal Defendant.

_________________________________/

This matter came on for hearing on June 1, 2005, on the application of the parties for

final approval of the settlement of this shareholder derivative suit, as set forth in the Stipulation

and Agreement of Settlement dated November 12, 2004, and filed herein on December 17,

2004 (“the Stipulation”). Also before the court was the motion of objector Charles L. Grimes to

intervene. Plaintiff Gregory Watterson appeared by his counsel Jeffrey D. Light and Brian J.

Robbins. Defendants Romulus Pereira, Piyush Patel, Christopher Paisley, Eric Jaeger, Jorge

A. Del Calvo, Robert Stanton, and Suresh Gopalakrishnan, and nominal defendant Riverstone

Networks, Inc. (“Riverstone”), appeared by their counsel Paul T. Friedman and Craig D.

Martin. Also appearing for Riverstone was Noah D. Mesel. Objector and proposed intervenor

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Charles L. Grimes appeared by his counsel David A. Jenkins.

Due and adequate notice having been provided to the current Riverstone shareholders,

as required by the court’s order of February 16, 2005, and the court having read the parties’

papers and carefully considered their arguments and the relevant legal authority, and good

cause appearing, the court hereby GRANTS the motion for final approval of the derivative

settlement, and GRANTS the motion to intervene, as follows and for the reasons stated at the

hearing. 

BACKGROUND

After Riverstone announced disappointing financial results in June 2002, twelve

complaints alleging violations of federal securities laws were filed in this court as proposed

class actions. The twelve suits were consolidated on September 24, 2002, as In re

Riverstone Networks, Inc., Securities Litigation. On March 14, 2003, defendants moved to

dismiss the consolidated complaint for failure to state a claim. Briefing was completed on

June 13, 2003, but the parties stipulated to continue the hearing to allow the parties to

participate in mediation. 

Meanwhile, on August 13, 2002, a shareholder derivative action was filed on behalf of

Riverstone in the Superior Court of California, County of Santa Clara. (Bruhn v. Pereira, No.

CV-810290). The allegations in the derivative suit were virtually identical to the allegations in

one of the securities fraud complaints that had been filed in federal court the week before. In

December 2002, the defendants in the derivative action demurred. Rather than oppose the

demurrer, the plaintiff filed an amended complaint in February 2003. 

Also in February 2003, Watterson v. Pereira, the above-entitled shareholder derivative

action, was filed in this court. The allegations in the present suit are substantially identical to

those of the original state court derivative complaint. 

In April 2003, a second shareholder derivative action was filed in Santa Clara Superior

Court (Carrico v. Pereira, No. CV-816188). The superior court consolidated the two actions

as In re Riverstone Networks, Inc., Derivative Litigation, and in May 2003, plaintiffs filed a

single consolidated shareholder derivative complaint. Defendants demurred. On September

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17, 2003, the court sustained the demurrer and dismissed the consolidated complaint for

failure to allege demand futility. Rather than granting leave to amend, however, the court

stayed the action, on the ground that the state court complaint and the complaint in the

derivative action pending in federal court encompassed the same issues.

Meanwhile, on April 25, 2003, Riverstone announced that it had received a request

from the SEC for the voluntary production of documents relating to the company’s accounting

practices, and had been notified that the SEC would open a formal investigation. On July 21,

2003, Riverstone announced that it had identified information calling into question the

appropriateness of its revenue recognition, and that it would restate its financial statements for

fiscal year 2002 and the first three quarters of 2003. 

On September 26, 2003, defendants moved to dismiss the federal derivative

complaint, on the ground (among others) that plaintiff had failed to make a pre-litigation

demand on Riverstone’s board and had failed to allege demand futility with particularity.

Shortly thereafter, plaintiff Watterson indicated his intention to file an amended complaint,

which he did on November 6, 2003, the motion to dismiss having been withdrawn. 

Defendants again moved to dismiss, on March 26, 2004. The parties stipulated to extend the

deadlines for briefing the motion, and then, in May 2004, requested a stay of the action so that

they could discuss settlement. 

In October 2003, the parties had commenced mediation in an attempt to negotiate a

settlement of the claims raised in In re Riverstone Networks, Inc. Securities Litigation (the

securities fraud suit.) On March 17, 2004, the parties reached an agreement in principle to

settle that suit. At some point thereafter, they also reached agreement on a settlement of the

state and federal derivative actions, and the Stipulation of Settlement was signed on

November 12, 2004. 

The Stipulation provided for a general release of claims by Riverstone shareholders on

behalf of Riverstone, and also provided that Riverstone would implement certain corporate

governance measures, described in the Stipulation at ¶ IV.2.1. Riverstone also agreed “to

pay the fees and expenses (including, without limitation, the fees and expenses of all experts

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 The court refers throughout to “plaintiffs,” as the Stipulation of Settlement was entered

into by counsel for the derivative plaintiffs in the federal and state actions.

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retained by Derivative Plaintiffs’ Counsel to assist in the Derivative Actions) of Derivative

Plaintiffs’ Counsel in an aggregate amount of $1,750,000 as a unitary part of the Settlement.” 

Stipulation ¶ VI.B. In addition, the plaintiffs in the state court derivative suit agreed to file a

notice of dismissal in that case once the settlement agreement is approved by this court. 

Defendants agreed to “cause the [D&O liability] insurers” to pay approximately $11

million “for the benefit of Riverstone in connection with the defense and settlement of” the

Riverstone Securities Litigation. Derivative plaintiffs (in the state and the federal actions) also

assert that their counsel were “instrumental” in obtaining the $11 million from defendants’

insurers for settlement of the securities fraud suit. Other than “cause[ing] the insurers” to pay

$11 million in towards the settlement of the securities fraud suit, the individual defendants are

not contributing monetarily towards the settlement. 

On December 2, 2004, the parties filed their application for preliminary approval of the

derivative settlement. At the initial hearing on January 20, 2005, the court stated that it was

not prepared to grant preliminary approval, and ordered further briefing, providing the parties

with specific issues that it wished to have addressed. Plaintiffs1 filed a supplemental brief on

January 26, 2005. Defendants did not file a brief. 

On February 16, 2005, the court conducted a further hearing on the application for

preliminary approval. At that hearing, the court directed plaintiffs to provide additional

supplemental briefing – specifically, to address the standard of law that applies to the court’s

evaluation of the request to approve the settlement. The court noted that plaintiffs hadn’t

attempted to make a showing under the standard for approval of attorneys’ fees requests, and

that even under the more generous standard for approval of settlement agreements – that is,

“fairness” – they still hadn’t made any showing. 

The court advised the parties that it had “real reservations,” that it was “not satisfied

with the showing,” and that it was “not exactly sure what to do to resolve it.” The court also

expressed dissatisfaction with the parties’ failure to explain exactly which corporate

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governance measures were implemented as a result of the settlement, and which were

already in place before the settlement agreement. The court then indicated that it was willing

to preliminarily approve, “mostly based on the approval by the board,” but added that “any

objections that I receive from any shareholders on this settlement will be scrutinized and could

very well block final approval of the settlement.” Following the hearing, the court signed the

order preliminarily approving the settlement and providing for notice.

On May 2, 2005, Riverstone stockholder Charles L. Grimes filed a motion to intervene

and also filed objections to the settlement – primarily, to the amount of attorneys’ fees agreed

to by the parties. During the week between May 17, 2005, and May 25, 2005, the parties filed

additional briefs and declarations in support of the application for final approval of the

settlement. On June 1, 2005, the court conducted a hearing on the application for final

approval of the settlement.

At the June 1 hearing, plaintiffs argued that Mr. Grimes’ motion to intervene should be

denied; that the agreed-to fee was an appropriate and reasonable term of the settlement; and

that plaintiffs had made a sufficient showing that they were entitled to the fee of $1.75 million. 

Defendants argued that the settlement should be approved because it had been

approved by the current Riverstone board of directors, two-thirds of whom had joined the

board after the time of the wrongdoing alleged in the complaint. Defendants asserted that the

board had decided to accept the settlement because they believed it would be in the

corporation’s best interest, in that continued litigation would be expensive, and a settlement

would provide finality and allow the company to proceed with its usual business.

The court advised the parties that finding the settlement fair, reasonable, and adequate

was difficult in view of the settlement term providing for payment of $1.75 million in fees to

counsel for plaintiffs in both the state and federal actions. The court indicated, however, that it

would approve the settlement, based primarily on the recommendation of Riverstone’s board

of directors, as articulated at the hearing and in the supporting papers by defendants’ counsel

Mr. Friedman. The court granted Mr. Grimes’ motion to intervene, and invited him to appeal

the final judgment. 

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DISCUSSION

A. Legal Standard

Federal Rule of Civil Procedure 23.1 requires the district court to review and approve

the settlement and dismissal of any shareholder derivative suit. Fed. R. Civ. P. 23.1 (“The

action shall not be dismissed or compromised without the approval of the court, and notice of

the proposed dismissal shall be given to shareholders or members in such manner as the

court directs.”). A similar rule applies in state court. See Fletcher v. A. J. Industries, Inc., 266

Cal. App. 2d 313, 324 (1968) (trial court in shareholder derivative action “is in a position to

scrutinize the fairness of a settlement because the court alone can authorize the action’s

dismissal”). Before approving the settlement, the court must determine that it is

“fundamentally fair, adequate, and reasonable.” In re Pac. Enter. Sec. Litig., 47 F.3d 373, 377

(9th Cir. 1994). 

In assessing whether the settlement of a derivative action is fair to the corporation and

its shareholders, the court considers the same factors that are applied to class action

settlements. Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1311 (3d Cir. 1993); see also 7

Newberg on Class Actions (4th ed.) § 22:110. The court should determine whether the

proponents of the settlement have shown that it fairly and adequately serves the interests of

the corporation on whose behalf the action was instituted. Id. 

This determination involves a balancing of several factors, which may include the

strength of the plaintiff’s case; the amount offered in settlement; the risk, expense, complexity,

and likely duration of further litigation; the extent of discovery completed; and the possibility of

collusion among counsel in negotiating the settlement. Churchill Village L.L.C. v. Gen’l Elec.,

361 F.3d 566, 575-76 (9th Cir.), cert. denied, 125 S.Ct. 56 (2004); see also Officers for

Justice v. Civ. Serv. Comm’n of San Francisco, 688 F.2d 615, 625 (9th Cir. 1982). It is the

settlement taken as a whole, rather than the individual component parts, which must be

examined for overall fairness. Hanlon v. Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998). 

“The settlement must stand or fall in its entirety.” Id. 

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 Some cases discuss the value of the benefit conferred on the corporation under this

category. See, e.g., Rosenbaum v. MacAllister, 64 F.3d 1439, 1446 (10th Cir. 1995). 

3

 The court made at least two requests for this information, but it was never forthcoming

in any detail.

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B. Analysis

1. Fairness Factors

a. strength of plaintiff Watterson’s case 

The state court sustained the demurrer to the consolidated derivative suit because

plaintiffs had failed to make a pre-filing demand on Riverstone’s board of directors, and had

failed to sufficiently allege demand futility. The parties seeking preliminary approval of the

settlement of the derivative actions agreed in the application that the Watterson case might

similarly be subject to dismissal because Watterson had not made a pre-filing demand. 

Defendants argued in addition that Watterson failed to allege his claims with specificity, a

requirement under the Federal Rules. Both sides also asserted that Watterson’s odds of

prevailing would be remote, because derivative suits are “rarely successful.” This factor

appears to favor settlement, because if plaintiff has no case, there is no point in continuing

with the litigation. 

b. the amount offered in settlement 

This factor is not relevant, as no money is being offered in settlement of the derivative

claims.2 Rather, the Stipulation provides for implementation of new corporate governance

procedures. It is difficult to assess the value of this benefit, even its non-pecuniary value, as

the parties have never clarified which procedures were in place prior to the filing of the

derivative suit, which procedures would have been implemented independent of the filing of

the derivative suit, or which procedures were implemented after the Stipulation was executed

or as a result of the settlement.3 

The Stipulation states that “[d]uring the pendency of the Derivative Actions, Riverstone

implemented, or began to make best efforts to implement by the end of 2004,” the corporate

governance procedures listed in the Stipulation. Stipulation ¶ IV.2.1. The Stipulation simply

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 Plaintiffs provided a declaration from California attorney Harry R. McCue, a retired

United States Magistrate Judge, and from Scott D.Hakala,a Chartered Financial Analyst, both

of whom state thatin theiropinion the changes in corporate governance procedures and internal

controls provide significant value to the corporation. 

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provides a list of corporate governance measures, and the parties offer no comparison

between new procedures and old. Nor do plaintiffs provide expert testimony that clarifies the

difference between the new and old procedures.4 Moreover, based on the statements in the

Stipulation, it appears that Riverstone may have implemented many if not all of the measures

before the Stipulation was executed. 

At the hearing on the application for preliminary approval of the settlement, the court

also asked the parties to elaborate on the changes in corporate governance and the extent to

which they were actually “changes.” The court noted the lack of discussion (in the parties’

papers) of the value of the changes, or of discussion of whether they were implemented after

the settlement or were in progress before, or whether they were the result of the SEC action

as opposed to the settlement. 

In response, plaintiffs’ counsel stated that the corporate governance provisions were

negotiated during the mediation, and that some were the result of the derivative actions having

been filed, while others were the result of settlement. Defendants’ counsel stated that none of

the changes resulted from the SEC investigation, that some resulted from the settlement, and

that some were ongoing. 

c. the extent of discovery completed, and the risk, complexity, and likely

duration of further litigation

There has been no discovery and no motions heard in the federal derivative action. 

Defendants argue that this factor favors settlement, as Riverside would have incurred

substantial costs in connection with any formal discovery, and would have had to make

numerous employees and former employees and board members available for deposition. 

They assert that the settlement allows Riverstone to avoid the expenses that can accompany

protracted litigation. Defendants also contend that continued litigation would have distracted

Riverstone’s management from the business of running the company. Plaintiffs concur, noting

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 The court notes in addition that the derivative plaintiffs originally took the position (in their

motionfor preliminaryapprovalof the settlement) thatthe litigation was risky because Watterson

had failed to make a pre-litigation demand onRiverstone’s board of directors, and because the

case was likely to be dismissed for failure to allege demand futility with particularity, while they

took the positionin their supplemental briefing in support of the applicationfor finalapprovalthat

Watterson’s case was meritorious and thathe was likely to prevail in any motion to dismiss, and

that approval of the settlement would therefore eliminate this potential for protracted litigation. 

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that the settlement comes at an early stage of the litigation (of the present action), foreclosing

the extraordinary expense of protracted discovery and trial preparation, and the incalculable

cost of time and attention diverted away from the day-to-day business operations of the

company.

Neither party comments directly on the likely duration of further litigation. This factor is

difficult to assess, as there appears to be a conflict between the parties’ assertion that

Watterson’s case was weak (therefore presumably vulnerable to dismissal under Rule

12(b)(6)) and their claim that settlement will enable the parties to avoid protracted litigation.5

d. possibility of collusion among counsel in negotiating the settlement

Both sides emphasize that the settlement negotiations were conducted at “arm’s

length,” with the essential participation of the mediator, former United States District Judge

Judge Charles A. Legge. The court is aware of no specific evidence of collusion. 

e. “fairness factors” taken as a whole

Based solely on defendants’ representations, the court finds that the agreement to

implement changes in corporate governance confers a benefit on the corporation. In addition,

the settlement undoubtedly relieves defendants from the expense of additional litigation,

whatever the merit (or lack thereof) of Watterson’s case. Taken together, the “fairness factors”

favor approval of the settlement. 

2. Request for Attorneys’ Fees

Although the provision for payment of attorneys’ fees and costs is included as a term of

the settlement agreement, the court addresses this factor separately in order to underscore its

concerns regarding this method of structuring a settlement that is required by statute to be

approved by the court.

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 Five law firms are listed on the plaintiff’s application for preliminary approval of

settlement. Of these, three – the Murray firm, the Dreher firm, and the Emerson firm – are the

counselofrecordforplaintiffWattersoninWattersonv. Pereira. Two other firms – the Lerach firm

(successor to Milberg Weiss) and the Robins Umedafirm– are counselofrecord for the plaintiffs

in the state court derivative suit; in addition, counselfor Watterson filed a “Notice of Association

of Counsel” in May 2004, stating thatplaintiff was associating in the Lerach and Robins Umeda

firms. 

7

 Riverstone is incorporated inDelaware,notCalifornia,and the general rule in diversity

suits is thatthe lawof the place of incorporationapplies. See Batchelder v. Kawamoto, 147 F.3d

915,920 (9th Cir. 1998). However, Watterson alleges claims under California law, and there are

nosignificantdifferencesbetweenfederal lawand the lawinDelawareand Californiaonthe issue

of attorneys’ fees. See Lewis v. Anderson, 692 F.2d 1267, 1270 (9th Cir. 1982); In re Oracle

Sec. Litig., 852 F.Supp. 1437, 1445 (N.D. Cal. 1994). 

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As stated above, the Stipulation provides that Riverstone shall pay attorneys’ fees in

the amount of $1.75 million to plaintiff’s counsel.6 Under the general rule in California and in

most jurisdictions, the party prevailing in an action may not recover attorneys’ fees unless a

statute expressly permits such recovery. See, e.g. Cal. Civ. P. Code § 1021 (California

expression of general rule); see also Hall v. Cole, 412 U.S. 1, 5 (1973) (general American

Rule is that prevailing litigants must pay their own attorneys’ fees). 

An exception to this rule is found in the “common-fund doctrine,” an equitable doctrine

under which the beneficiaries of the fund pay their share of the expense necessary to make it

available to them. Fletcher, 266 Cal. App. 2d at 320; see also Boeing Co. v. Van Gemert,

444 U.S. 472, 478 (1980); Hall, 412 U.S. at 5 & n.7. Courts in California apply the common

fund doctrine in favor of any plaintiff who has successfully maintained a stockholder’s

derivative action on behalf of a corporation in the state. Fletcher, 266 Cal. App. 2d at 320-21

(citing cases).7 

In a “common fund” settlement, the parties settle for the total amount of the common

fund and shift the fund to the court’s supervision. The plaintiffs’ lawyers then apply to the court

for a fee award from the fund. Staton v. Boeing Co., 327 F.3d 938, 969-70 (9th Cir. 2003). 

The court evaluates the request for approval of settlement (under the

factors identified in Hanlon and other cases) separately from the request for attorneys’ fees.

A variant of the “common-fund doctrine” is the “substantial-benefit rule,” where the

successful plaintiff in a derivative action may be awarded attorneys’ fees against the

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 The Ninth Circuitdoes notrequire thatdistrict courts address everyfactor listed in Kerr.

Jordan v. Multnomah County, 815 F.2d 1258, 1264 n.11 (9th Cir. 1987).

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corporation if the corporation received “substantial benefits” from the litigation, although the

benefits were not pecuniary and the action did not produce a fund from which they might be

paid. Fletcher, 266 Cal. App. 2d at 320, 324, cited with approval in Westside Cmty for Indep.

Living, Inc. v. Obledo, 33 Cal. 3d 348, 352 (1983). Under California law, an agreement to

implement improvements in corporate governance may provide a nonpecuniary “substantial

benefit” to the corporation that is sufficient to entitle plaintiffs to an award of attorneys’ fees. 

Fletcher, 266 Cal. App. 2d at 323-24. 

It is irrelevant that the “benefits” achieved may have come from a settlement of the

plaintiff’s action rather than by a final judgment following trial. Id. at 325; Lewis, 692 F.2d at

1270 (both federal and California law permit a fee recovery when a substantial benefit arises

from a settlement rather than a judgment). Federal law also permits a fee award if the benefit

arises from corporate remedial action that moots a plaintiff’s claim. Lewis, 692 F.2d at 1270. 

In either a “common fund” or a “substantial benefit” case, the court can follow the

“lodestar” approach, where the fee is determined based on the time and materials spent by

derivative counsel. In re Oracle, 852 F.Supp. at 1449. In evaluating the lodestar, the court

should consider any of the factors listed in Kerr v. Screen Extras Guild, Inc., 526 F.2d 67 (9th

Cir. 1975) that are relevant.8 The following factors are pertinent to a derivative counsel fee

determination: the results achieved by counsel, plus the time and effort applied to a case by

counsel for plaintiff; the relative complexities of the litigation; the skills applied to their

resolution by counsel; and the standing and ability of petitioning counsel. In re Oracle, 852

F.Supp. at 1449. 

At the hearing on the motion for preliminary approval of the settlement, the court asked

the parties whether the agreement as to attorneys’ fees was an element of the settlement

agreement, or whether it was a separate agreement; and if it was part of the settlement

agreement, whether the agreement would fail if the fees were not approved. Plaintiff’s

counsel indicated that the settlement was a unitary settlement, which would fail if the

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agreement to pay $1.75 million in fees was not approved as well. The court discussed with

the parties its concerns that, if the fee agreement was included as a term of the settlement

agreement, there could be no separate basis for determining whether fees should be

awarded, and the same “fairness” factors would govern approval of the fees provision. 

The court advised the parties that it was particularly troubled by the fact that they had

offered no explanation whatsoever of the basis for $1.75 million requested. The court stated

further that it was impossible to perform a “reasonable fee” analysis based on a lodestar

calculation, as the application provided no information regarding hours, tasks performed, or

billing rates. In the supplemental briefing that followed the second hearing on the motion for

preliminary approval of the settlement, plaintiffs’ counsel finally provided the court with lodestar

documentation, though they still failed to address the Kerr factors. 

Where fees are paid to attorneys in a shareholder derivative suit, the idea is that the

corporation has benefitted from the suit, and the cost of that benefit should be spread among

all the shareholders. See James D. Cox & Thomas Lee Hazen, Cox & Hazen on

Corporations (2003) §15.20. Throughout the settlement approval process, defendants have

urged the court to approve the settlement on the ground that Riverstone continued to lose

money as a consequence of the litigation, and that settlement would thus benefit the

corporation. Defendants also asserted that if the litigation proceeded, Riverstone would likely

not have the assets to satisfy any judgment that plaintiffs might win. According to defendants,

Riverstone’s D&O insurers aggressively disputed their respective coverage obligations and

threatened rescission during the mediation. Defendants asserted that Riverstone had

negotiated the settlement based on the assumption that it would have to fund it 100%,

although two of the three insurers eventually agreed to tender their policy limits. In addition,

defendants noted that Riverstone’s bondholders had sued the company seeking immediate

repayment of $131 million, casting further doubts on Riverstone’s cash reserves. 

By contrast, plaintiffs’ counsel’s only effort at briefing was to cite cases that stand

generally for the proposition that courts should approve settlement agreements, and that a

court presented with an application for approval of a settlement should not turn the application

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into a “full-fledged hearing on the merits.” Counsel also argued that because the economic

value of non-pecuniary corporate therapeutic benefits can be difficult to precisely quantify, “an

agreement on the parameters of a fee and expense award is particularly appropriate,” and

urged the court to approve the $1.75 million because it was “negotiated under market

conditions.” 

In their supplemental brief in support of the application for preliminary approval of the

settlement, plaintiffs’ counsel again provided no explanation as to the asserted

“reasonableness” of the $1.75 million fee request. Essentially, they asserted, just as in the

initial brief filed in support of the application, that the court should approve the request simply

because it was part of the parties’ settlement agreement. Nor did they provide the information

the court had requested concerning the changes in corporate governance. The only additions

were three declarations – one from an economist, one from a retired magistrate judge, and

one from plaintiffs’ counsel Keith Park – purporting to explain why the settlement should be

approved.

In the brief in support of the application for final approval of the settlement, plaintiffs

argued, primarily, that the court should approve the fee provision because the amount was

negotiated under “market conditions.” In support of that proposition, they cited a wholly

inapposite case – In re Continental Illinois Sec. Litig., 962 F.2d 566 (7th Cir. 1992). In that

case, a securities fraud action which had settled for $45 million, the Seventh Circuit reversed

the district court, which had cut the requested fees in half. Plaintiffs’ counsel had sought the

lodestar, supported by the usual documentation. The lodestar also amounted to 20% of the

recovery. The district judge found the requested billing rates to be excessively high, and also

reduced the amount in several other respects. The Seventh Circuit criticized the district court

for placing a ceiling of $175/hour on the lawyers’ hourly rates, and also (among other things)

for refusing to allow paralegal expenses to be compensated at market rates, stating that the

district court had made a mistake “by trying to determine the value of a service that the market

has set its own value on” and noting that the Supreme Court has disapproved the approach of

reimbursement for paralegal costs based on “cost” of the paralegal as distinct from the market

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9

 Even if the Continentaldecisionwere somehow relevant to this case – which it is not –

the Ninth Circuithas criticized the Seventh Circuit’s positionthatinawarding feesincommonfund

cases, courts should determine a reasonable fee byattempting to replicate the marketrate. See

Vizcaino v. Microsoft Corp., 290 F.3d 1043, 1049 (9th Cir. 2002). Of course, plaintiffs’ counsel

is notasking this court in this case to attemptthe replicate the marketrate – but simply to approve

the agreement to pay $1.75 million because it was negotiated under “market conditions.”

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value of the services. Plaintiffs’ counsel misleadingly cited this case for the proposition that

“[i]t is inappropriate “to determine the value of a service that the market has set its own value

on” by reference to hours or hourly rates, and it is error not to award a premium “in order to

reflect the risky character” of representative litigation (citing In re Continental, 962 F.2d at

569).9

Plaintiffs’ counsel argued further that the Supreme Court has stated that consensual

resolution of attorneys’ fees is the ideal toward which litigants should strive and that a request

for attorneys’ fees should not result in a second major litigation, citing Hensley v. Eckerhart,

461 U.S. 424 (1983). Hensley is not relevant here, as it involved a contested motion for

attorneys’ fees under 42 U.S.C. § 1988. The request in the present case is not contested. 

Moreover, settlement of civil rights cases does not require court approval or oversight, while

settlement of shareholder suits does. 

Plaintiffs’ counsel provided three additional reasons that the court should approve the

$1.75 million request: that the agreement regarding fees was the result of an arms’-length

negotiation between sophisticated counsel, defendants, their insurers, and Judge Legge; that

the settlement – including the $1.75 million fee – had been approved by Riverstone’s board of

directors as being in the best interests of the company; and that the agreed-to fee and

expense provision is a “common settlement term” and is “consistent in amount with other

derivative settlements.” 

In support of the third argument, plaintiffs provided copies of eleven orders they

claimed were recent examples of court-approved derivative settlements that included an

agreement as to fees and expenses as part of the settlement. Of those eleven cases, one

was from a state court in Missouri, eight were from the Superior Court of California, and two

were from the United States District Court (one from the Southern District of Texas, and one

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from the Northern District of Georgia). None of the eleven opinions was a reported decision,

and plaintiffs provided the court with no information about the underlying facts or the details of

the settlements. 

In short, apart from the persuasive arguments made by counsel for Riverstone, the

court was presented with little reason to approve the award of $1.75 million in fees and

expenses to plaintiffs’ counsel. 

3. Arguments by the Objector, Charles Grimes

The court received papers from one objector – Charles Grimes – a Riverstone

stockholder with 3,500,000 shares. He objected primarily to the amount of the fee request,

making several arguments in opposition to the motion for approval of the settlement. 

First, he contended that it was improper for the settling parties to include an attorneys’

fees provision as part of the settlement agreement, relying on the Ninth Circuit’s recent

decision in Staton v. Boeing Co. 

Second, he asserted the suit was not meritorious, noting that the motion to dismiss

would in all likelihood have been granted, because of the lack of pre-litigation demand.

Third, he claimed that there had been no showing by the parties that the settlement

would result in a benefit to the corporation (primarily because the settlement required the

changes in corporate governance to be in effect for only 4 years, and because plaintiffs had

not shown any nexus between the derivative suit and the changes in corporate governance). 

Finally, he argued that the amount requested is not reasonable – that the lodestar

information submitted by plaintiffs’ counsel provided no basis for measuring whether the fee

was reasonable, that there was no evidence that derivative counsel had done much work other

than copying the state court complaints. He asserted that the real reason the case had settled

was probably a combination of the SEC investigation and the work done by plaintiffs’ class

counsel in the securities fraud suit. 

Grimes also filed a motion to intervene in the action, for the purpose of preserving his

right to appeal any adverse decision regarding his objection to the settlement (i.e., to the

attorneys’ fees provision in the settlement agreement). In support of his request, he cited an

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10 The Ninth Circuit in Powers noted that the Supreme Court had granted certiorari in

Felzen, and then simply affirmed by an equally divided court, without answering that particular

question. Powers, 229 F.3d at 1255 (citing Cal. Pub.Employees’RetirementSys.v. Felzen, 525

U.S. 315 (1999)).

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unpublished decision, Karpp v. F.D.I.C., 921 F.2d 280, 1990 WL 212693 (9th Cir., Dec. 27,

1990), in which the Ninth Circuit found that the appellants lacked standing to appeal a class

action settlement because they had opted out of the settlement class, and had made no effort

to formally participate in the district court case, as, for example, moving to intervene. 

The Ninth Circuit answered the question of the right of an objector to appeal the

settlement of a class action Powers v. Eichen, 229 F.3d 1249 (9th Cir. 2000), a case brought

under the Private Litigation Securities Reform Act. The court held that an unnamed class

member who failed to intervene in the proceedings below had constitutional standing to

appeal an award of attorneys’ fees from the class settlement, because the size of his portion

of the settlement award was inversely related to the size of the attorneys’ fees award. Powers,

229 F.3d at 1254-56. 

In 2002, in Devlin v. Scardelletti, 536 U.S. 1 (2002), the Supreme Court held that a

“nonnamed class member” who objects in a timely fashion to a settlement may appeal without

first intervening. Devlin, 536 U.S. at 14. The Court characterized the dispositive question as

whether the class member should be considered a "party'' for purposes of appealing the

settlement, finding it most important that the settlement would bind nonnamed class members. 

Id. at 9-10. 

However, this is not a class action, but a shareholder derivative action, in which there is

no question of a shareholder being able to “opt out.” It does not appear that the Ninth Circuit

has ruled on this issue with regard to shareholder derivative suits. The court did note in the

Powers decision that the Seventh Circuit was (at the time) the only circuit to rule that nonparty

shareholders do not have standing to appeal a decision in a shareholder derivative suit. 

Powers, 229 F.3d at 1255 (citing Felzen v. Andreas, 134 F.3d 873 (7th Cir. 1998)10 and also

noting that both the Second and Third Circuits had allowed non-intervening unnamed parties

to challenge the fairness and accuracy of a settlement in the context of Rule 23.1). In Bell

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Atlantic Corp. v. Bolger, the Third Circuit held that an objector who had not formally intervened

had standing to appeal the order approving settlement of a derivative suit. Bell Atlantic, 2

F.3d at 1310. In Rosenbaum v. MacAllister, the Tenth Circuit ruled the same way. 

Rosenbaum, 64 F.3d at 1443. 

Plaintiffs opposed the motion to intervene, arguing that because the corporation is the

plaintiff in a derivative suit, any individual claims of the company’s stockholders are not at

stake and the shareholders are not parties. In support, they cited Jones v. H.F. Ahmanson &

Co., 1 Cal. 3d 93 (1969). While it is true that the individual claims of the company’s

stockholders are not at issue in a derivative action, Jones does not provide support for

plaintiffs’ claim that the individual shareholders cannot challenge a settlement on behalf of the

corporation, which is what Mr. Grimes is attempting to do here. Jones simply held that where

the complaint of a minority stockholder in a savings and loan association against majority

stockholders and a holding company did not seek recovery on behalf of the association for

injuries to the association or for injury incidental to any injury to the association but for injury to

herself and other minority stockholders, her suit was not derivative and could be maintained

without meeting the statutory requisites of derivative actions and without showing that the injury

was unique to her. Jones, 1 Cal. 3d at 106-07.

The court has carefully considered Mr. Grimes’ persuasive objections, but has

reluctantly determined, on balance, that the benefit to the corporation warrants approval of the

settlement. The court does not agree that Staton prohibits inclusion of an attorneys’ fees

provision as a term in a unitary settlement agreement in a shareholder derivative action. In

that case, the Ninth Circuit held that it was improper in the settlement of an employment

discrimination class action for the class counsel to have negotiated, as a term of the

settlement, the amount of fees to be paid from the common fund, instead of following the

typical procedure of presenting a fee application to the court after approval of the class action

settlement. 

The Ninth Circuit acknowledged that the Supreme Court had held that parties to a class

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11 Plaintiff’s counsel provide documentation showing that five law firms expended

1,850.90 hours, for a resulting lodestar of $716,180.50. The lodestar divided by the total hours

equals anaverage of $386.94 per hour for everyattorney, paralegal, and investigator. The $1.75

million fee, less claimed expenses, divided by the total hours equals an average of $924.77 for

every attorney, paralegal, and investigator.

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shifting statute, and might even condition the settlement on a waiver of fees. Staton, 327 F.3d

at 971-72 (citing Evans v. Jeff D., 475 U.S. 717, 720 (1986)). However, the court added that

the effect of conditioning the settlement “on a set amount of attorneys’ fees based on an actual

or putative common fund can be to inhibit district courts from engaging in independent

determinations of reasonable fees, as required by law.” Id. Moreover, the basis of the Ninth

Circuit’s objection to the settlement in Staton was that neither the parties nor the district court

had applied correct statutory fee principles, and that it was improper to apply common fund

fee principles where the parties had not treated the case as a common fund case. Id. at 969-

72. 

With regard to Mr. Grimes’ claim that the suit was not meritorious, the court is unable to

make a determination regarding the merit of the case without having had the benefit of

briefing by the parties in a motion to dismiss. With regard to the argument that there is no

showing that the settlement results in a benefit to the corporation, the court agrees that the

showing is thin, but has accepted the representations of Riverstone’s counsel that the current

board of directors has concluded that the settlement is beneficial. 

Finally, with regard to the claim that the $1.75 million fee request is not reasonable, the

court agrees, but is unwilling to refuse to approve the fees provision because the result will be

to invalidate the entire settlement agreement. The court notes, however, that the information

provided by plaintiffs with their application for final approval of the settlement does not support

their claim that a fee of $1.75 million is reasonable in this case. Plaintiffs have considered

none of the Kerr factors, and the court has no basis upon which to determine whether the work

performed was necessary or the time spent was reasonable. 

Moreover, the $1.75 million less the claimed expenses of $38,347.20, equals

$1,711,652.80, which represents a multiplier of 2.39 of the lodestar.11 Plaintiffs have provided

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absolutely no valid justification for the application of a multiplier in this run-of-the-mill

shareholder derivative action. Plaintiffs refer to the lodestar as “cross-check” – though it is not

clear of what – and then breezily assert that the 2.39 multiplier is “reasonable” because the

amount of the multiplier is “in line with” multipliers in other cases, without discussing the factors

that courts normally consider when deciding whether to apply a multiplier. 

Nevertheless, as stated at the hearing, the court finds that the motion to intervene

should be GRANTED, primarily to ensure that Mr. Grimes is not prevented from appealing the

approval of the settlement to the Ninth Circuit. The court would welcome guidance from the

Ninth Circuit on the question of the propriety of unitary settlements in shareholder derivative

actions, where the provision regarding payment of fees is a term of the settlement agreement;

as well as on the question of the standard to be applied by the court in evaluating the fairness

of such a settlement agreement that includes an attorneys’ fees provision. 

CONCLUSION

This is a settlement that was carefully constructed by plaintiffs’ counsel to evade judicial

review. Moreover, even after the court requested additional information from the plaintiffs, the

plaintiffs repeatedly failed to comply with those requests. The court determined to approve the

settlement only because defendant’s counsel, Mr. Friedman, was so persuasive in describing,

at the hearings, the ways in which the corporation had made the best of a difficult choice, and

the reasons that Riverstone’s board of directors had determined that approval of the

settlement would be the best thing in the long run for the corporation. 

In accordance with the foregoing, and as stated at the June 1, 2005, hearing, the court

hereby GRANTS the application for final approval of the settlement, and GRANTS the motion

of objector Charles Grimes to intervene in this action.

 

IT IS SO ORDERED.

Dated: July 22, 2005

______________________________

PHYLLIS J. HAMILTON

United States District Judge

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