J.C. Penney Company, Inc. (“J.C. Penney”) has asked the Dallas Court of Appeals to reverse a ruling awarding $3.1 million in attorneys’ fees in a derivative lawsuit challenging executive compensation practices that J.C. Penney settled in exchange for the non-monetary benefit of certain corporate governance changes. In its appellate briefing, J.C. Penney argues that the derivative plaintiffs provided evidence at the trial court to support a lodestar calculation of only $558,123 in attorneys’ fees. J.C. Penney argues that the $3.1 million fee award is unreasonable because it constitutes 550% of the fees actually incurred by the derivative plaintiffs. The derivative plaintiffs, on the other hand, justify the $3.1 million award on the basis of their valuation of the non-monetary relief as representing at least $15.5 million in settlement value to J.C. Penney and its shareholders. Based on that valuation, the $3.1 million attorneys’ fee award represents only 20% of the value of the settlement.

In ruling on this appeal, the Dallas Court of Appeals will have the opportunity to provide guidance as to the appropriate means of calculating and awarding attorneys’ fees in shareholder derivative actions. From lodestar calculations to the application of multipliers to valuation of non-monetary settlements, there are an array of issues that give reason to keep an eye out for the Dallas Court of Appeals’ ruling.

Moreover, while J.C. Penney’s main argument is that the fee award was excessive in light of the work performed and the results achieved, it also points to TRCP 42(i)(2), which provides that attorneys’ fee awards are unavailable in class action settlements where the relief obtained for the class is non-monetary and only therapeutic in nature. At least two Texas appellate court decisions have held that TRCP 42(i)(2) precludes an award of attorneys’ fees when the settlement of a class action challenging a merger is based on non-monetary relief, such as additional disclosures regarding the transaction. While J.C. Penney did not argue that TRCP 42(i)(2) precludes attorneys’ fees altogether in this case—likely because the case was a derivative action, not a class action—it cited TRCP 42(i)(2) in arguing that the fees awarded were excessive in light of the lack of monetary relief obtained. Thus, any commentary by the Dallas Court of Appeals on J.C. Penney’s TRCP 42(i)(2) argument might provide interesting guidance as to whether the court will apply TRCP 42(i)(2) to preclude attorneys’ fees in future settlements of class action merger litigation that are based only on non-monetary relief.

This case is on appeal from the 193rd Judicial District Court of Dallas County, Texas, is pending before the Dallas Court of Appeals, and is captioned J.C. Penney Company, Inc. and Myron E. Ullman III, et al. v. Everett M. Ozenne, derivatively on behalf of J.C. Penney Company, Inc., No. 05-13-01601-CV.

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