United States District Court, D. New Jersey
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Audra Elizabeth Petrolle, Donald A. Ecklund, James E. Cecchi, Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C., Roseland, NJ, Lisa J. Rodriguez, Nicole M. Acchione, Trujillo Rodriguez & Richards, LLC, Haddonfield, NJ, James C. Shah, Shepherd, Finkelman, Miller & Shah, LLP, Collingswood, NJ, for Plaintiffs.
Edwin F. Chociey, Jr., Riker, Danzig, Scherer, Hyland & Perretti LLP, Morristown, NJ, Donald A. Robinson, Leda Dunn Wettre, Keith J. Miller, Robinson, Wettre & Miller LLC, Newark, NJ, for Defendants.
WOLFSON, District Judge:
Presently before the Court is a motion to approve the final settlement reached between Plaintiffs-shareholders and nominal Defendant J & J Corporation (" J & J" ) in several consolidated shareholder derivative actions, as well as motions to intervene and dismiss by an objector to the settlement. Through the settlement, J & J agrees to institute corporate governance changes and pay up to $10 million in attorney's fees and $450,000 in costs, subject to this Court's approval. For the following reasons, the Court will approve the settlement and appoint a special master to aid the Court in determining reasonable attorney's fees and costs. The Court denies the objector's motions to intervene and to dismiss.
This consolidated shareholder derivative action is a merger of several suits— eight separately filed demand-futility suits , and two suits by plaintiffs who filed demand letters with J & J requesting, inter alia, that J & J institute litigation against members of its Board of Directors (" the Board" ), but these requests were refused. I refer to these groups, respectively, as " Demand-Futility Plaintiffs" and " Demand Refused Plaintiffs." I refer to all suits collectively as " the Derivative Suits."
For a more complete factual background leading up to the filing of these suits, as well as the substantive allegations of the demand-futility complaint, the Court refers to its prior opinion granting, without prejudice, J & J's motion to dismiss those complaints. Suffice it to say here that the Demand-Futility Plaintiffs alleged that there were " red flags," such as Food and Drug Administration warning letters, that should have alerted the Board about three substantive categories of alleged corporate misconduct: (a) product recalls; (b) off-label marketing of drugs; and (c) illegal kick-backs. Those plaintiffs further alleged that J & J failed to comply with current good manufacturing practices, referred to as " cGMP."  The Demand-Futility Plaintiffs assert violations of Section 14(a) of the Exchange Act, as well as
breach of fiduciary duty claims against the Board. The Demand Refused Plaintiffs assert similar claims.
B. Procedural History
From February through November 2010, several J & J shareholders submitted demand letters to the Board, demanding that the Board investigate, institute litigation, and take other remedial action regarding, inter alia, J & J's product recalls, off-label drug marketing, illegal kickback schemes, and lack of good manufacturing practices. While these letters were in the process of being submitted, the Demand-Futility Plaintiffs filed their complaints, beginning with the first complaint filed on April 21, 2010 and ending with the final one filed on June 24, 2010.
Meanwhile, on April 22, 2010, the Board appointed a Special Committee, along with independent counsel, to consider the allegations of those shareholders who filed demand letters. The Special Committee was comprised of four independent directors who had recently joined the Board around the time the Committee was formed. Although the committee initially considered only the first-filed demand letters, on June 15, 2010, the Board expanded the committee's mandate to include review of the allegations of the demand-futility complaints, along with any subsequently-received demand letters or derivative complaints. See Report of the Special Committee at 2-3.
On July 19, 2010, while the Special Committee was considering the aforesaid allegations, three of the shareholders who filed demand letters (Leslie Katz, Jeffrey Tarson and Joan Tarson) moved to intervene in the demand-futility actions in which counsel had moved for leave to consolidate. The demand-futility complaints were ultimately consolidated, by Order of this Court, on August 17, 2010. In that same order, the Court appointed as co-counsel the following firms: Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C., Morris and Morris Counselors at Law LLC, Robbins Geller Rudman & Dowd LLP, and Bernstein Litowitz Berger & Grossmann LLP. Counsel stipulated to this arrangement, arguing that appointing them to a co-counsel organizational structure would ensure that their efforts were not duplicated and would streamline representation of all Demand-Futility Plaintiffs. After the Court consolidated the demand-futility actions, the motion to intervene was administratively terminated pending the Special Committee's decision. The Demand-Futility Plaintiffs then filed a consolidated amended complaint on December 17, 2010. A few months later, on February 21, 2011, J & J filed a motion to dismiss that complaint.
While the J & J motion to dismiss the demand-futility consolidated amended complaint was still pending, the Special Committee issued its report, on June 27, 2011. The Committee recommended that the Board not pursue litigation on behalf of J & J against any J & J Board member or executive. The Board subsequently adopted the Special Committee's recommendation on July 11, 2011.
In addition, the Board adopted a series of internal controls designed to ensure that quality control and other issues that underlay the allegations of wrongful conduct in the Derivative Suits were reported upstream to the directors. Specifically, the Board accepted the Special Committee's recommendation that the Regulatory and Compliance Committee be expanded in the following manner:
[The Committee should be] authorized to retain outside expert consultants, to assist the Committee in its work as the need arises. Among other things, the Regulatory and Compliance Committee,
in consultation with management and an expert consultant, should develop metrics and a report card that would provide insight into and perspective on J & J's Compliance systems and organizations. The new Committee should have an initial term of five years, commensurate with the McNeil Consent Decree. Members of the Special Committee will make themselves available to consult and confer with the members of the Regulatory and Compliance Committee, to provide the latter with the former's insights gained as a consequence of its investigation.
Report of the Special Committee at 121.
Once the Special Committee's report was filed, the Court granted the parties the opportunity to submit supplemental briefing on J & J's motion to dismiss. Thereafter, on July 28, 2011, the Court heard oral argument on the motion and reserved its ruling for a formal opinion. Also at the hearing, the Court addressed the previously-administrative terminated motion to intervene by the Demand Refused Plaintiffs , and denied that motion. Rather than consolidating those plaintiffs into the demand-futility action, the Court consolidated the suit brought by Leslie Katz, Jeffrey Tarson and Joan Tarson with one brought by another shareholder whose demand was refused— M.J. Copeland. These actions, together, comprise the Demand-Refused Plaintiffs. The Court appointed Abraham, Fruchter & Twersky, LLP as lead counsel, and Kantrowitz, Goldhamer & Graifman, P.C., as liaison counsel, for this group of plaintiffs.
After thoroughly considering the parties' arguments and extensive briefing, on September 29, 2011, 865 F.Supp.2d 545 (D.N.J.2011), the Court issued a formal opinion granting J & J's motion to dismiss without prejudice. The central question posed by the motion was whether the plaintiffs satisfied the Federal Rule of Civil Procedure 23.1 heightened pleading standard applicable solely to demand-futility actions. In granting J & J's motion, the Court ruled that, while the complaint alleged the numerous " red flags" that the demand-futility plaintiffs believed should have alerted Board members to J & J's alleged malfeasance, the plaintiffs did not sufficiently allege that the specific Board members actually had knowledge of those red flags.
The plaintiffs engaged in settlement negotiations with J & J following oral argument on the motion to dismiss but before the opinion was issued. Throughout the negotiations, the parties reviewed documents from their respective, multiple, experts and J & J provided informal discovery. In the parties' initial negotiations, around August 31, 2011, Demand Futility Plaintiffs provided a settlement proposal to the Board that included both corporate governance reforms and a monetary payment to J & J. Joint Decl., ¶ 53. Demand Refused Plaintiffs also participated in the settlement negotiations. Id. at ¶ 56. However, once the Court granted J & J's motion to dismiss on September 29, 2011, the Board was not willing to entertain a monetary component to the settlement and the negotiations from that point forward focused primarily on injunctive relief. See id. at ¶ 53-54, 60-61.
After seven months of negotiations, the parties entered into a proposed settlement agreement on July 11, 2012. Generally, Plaintiffs characterize these reforms as providing for adoption of management level
systems and procedures designed to ensure early detection and remediation of all product-related issues. Pl. Open. Br. at 2. The key features of the agreement are: (1) the adoption of a Quality and Compliance (" Q & C" ) Core Objective; (2) the creation and adoption of a Regulatory, Compliance & Government Affairs Committee (" RCGC" ); and (3) the implementation of a Product Risk Management (" PRM" ) Standard, directed at all J & J products. Each of these components will be addressed in more detail below.
Plaintiffs then moved for preliminary approval of the settlement, which this Court granted by way of an Order dated July 16, 2012. In that Order, the Court also directed that all shareholders be notified of the proposed settlement and given the opportunity to object. The Court, further, set a final settlement hearing date of September 28, 2012. Following the Court's order, Objector Mark Petri filed a motion to intervene in the Derivative Suits as well as a motion to dismiss, on August 31, 2012.
As the September 28, 2012 hearing date approached, the Court became aware that some individual investors had not received timely notice of the proposed settlement. To ensure that objections by late-notified individual investors could be heard, the Court ordered a second round of notices and adjourned the approval hearing to October 18, 2012.
Altogether, the Court received 15 objections, mostly focusing on the amount of fees sought by Plaintiffs' counsel and agreed to by J & J, and one request to opt out of the settlement. The consensus amongst the objectors was that, though they question the merits of the Derivative Suit and what precise benefit the corporate governance reforms confer, the settlement should be approved in order to prevent J & J from incurring further litigation costs. Objector Petri raised more substantive challenges that will be discussed in connection with his motions to intervene and to dismiss. A few additional objectors adopted Petri's substantive arguments as well.
The settlement approval hearing was held on October 18, 2012. At the hearing, the Court heard argument from Plaintiffs and objections by Petri, who was represented by counsel. No other objectors appeared. After considering the parties' arguments, the Court indicated that it would approve the settlement and issue a formal opinion setting forth its reasons. With respect to attorney's fees, the Court indicated that it would appoint a special master for reasons explained in the opinion.
C. Settlement Terms
As noted, the settlement includes: J & J's adoption of the Quality and Compliance Core Objective, the creation of the Regulatory, Compliance & Government Affairs Committee; and (3) the implementation of a Product Risk Management Standard. I provide a brief synopsis of each reform.
Q & C Core Objective
The Q & C Core Objective is a Board commitment to create quality control and assurance systems that will prevent, timely detect, and correct noncompliance with drug marketing laws, cGMP regulations, and the PRM Standard. This objective is designed to remedy one of the core allegations in the Demand-Futility Plaintiffs' suit— that the J & J Board insulated itself from the reckless and lackluster quality control systems present in J & J subsidiaries. One of the ways the objective does this is by creating company-wide control and assurance systems that are designed to effectively supplement J & J's decentralized management approach.
According to Plaintiffs' governance and compliance expert, former SEC Chairman Harvey L. Pitt, the Q & C Core Objective achieves several goals that are significant. First, the objective facilitates " the Board's full understanding of the importance of imposing rigorous health care compliance and quality systems...." Pitt Decl., ¶ 68. Second, he opines that the objective confirms " the Board's commitment that J & J's operating companies must conduct their business activities in conformity with applicable laws, regulations, and internal policies...." Id. Third, he notes, the objective is " a Board-level direction" to the Company that it expects the Company to prevent and detect instances of noncompliance. Id. Similarly, Plaintiffs' pharmaceutical quality control and product risk management expert, Dr. Mitchell Glass, agrees that adoption of the objective provides substantial benefit to J & J by sending " an important message to the enterprise regarding tone at the top," and, further, acknowledges the importance of quality control systems at J & J. Glass Report, ¶ 21. Moreover, he finds it significant that the compensation and evaluations of J & J employees are tied to the objective.
Regulatory, Compliance & Government Affairs Committee
The RCGC, which is created by the settlement agreement, further assists the Board in overseeing J & J's compliance with drug marketing laws and cGMP on a more centralized basis. By way of example, the RCGC Charter and Operating Procedure (" C/OP" ) directs the Committee to assess the information it is receiving to support its oversight functions on an annual basis. See Stipulation of Settlement, Ex. A, Section III., A. Charter, Oversight of Committee Matters, ¶ 3. Under the C/OP, the Board must also annually review and approve J & J's " internal audit plans related to compliance and quality." Id. at Duties and Responsibilities of the Committee, ¶ 11.
Plaintiffs' expert, Chairman Pitt, opines that the creation of this committee is historic in that it is the first time a standing committee was created to provide oversight over J & J's compliance with regulations and internal policies. Pitt Decl., ¶ 72. He, further, highlights that this committee is comprised of at least three independent directors who should be unaffected by commercial pressures when carrying out their duties. Id. at 93. In his view, the committee will also unify the oversight of legal and regulatory compliance, and quality control, over J & J's numerous operating companies. Id. Dr. Glass adds that the creation of the committee constitutes a best practice, and helps " provide a crucial foundation to support the robust implementation of [J & J's internal controls, like the PRM Standard discussed below] and to empower key executives ... within the organization." Glass Report, ¶ 32.
Product Risk Management Standard
Per the Stipulation, J & J agrees to design and implement a new PRM Standard, mandatory for all J & J subsidiaries. The PRM Standard is comprised of a Quality Policy and Quality Framework. Among other things, the standard will " set forth the independence and role of Quality personnel in the PRM process, and provide that all quality issues subject to the PRM Standard will be managed in accordance with the escalation reporting line defined in the Quality Policy." Stipulation of Settlement, Ex. A, Section IV., A. New PRM Standard, ¶ 1. The design and implementation of the PRM Standard will rest with J & J's Chief Quality Officer (" CQO" ). He or she will, further, ensure that specific standards applicable to certain business sectors are designed and adopted. Id. The independent Enterprise Regulatory Compliance
Group will serve as an additional oversight over the CQO. Id.
Having set forth the relevant background, I now turn to the parties' motions. Currently, there are three motions before the Court: (A) a motion for final approval of settlement by the shareholder Plaintiffs, including the award of $10 million in attorney's fees and $452.016.76 in costs; (B) a motion to intervene by Objector Mark Petri; and (C) a motion to dismiss by that same objector. I address Mr. Petri's motions first and, thereafter, turn my attention to the fairness of the proposed settlement and the requested attorney's fees.
II. MOTIONS TO INTERVENE AND DISMISS
Federal Rule of Civil Procedure 24 governs motions to intervene. Objector Mark Petri argues that he is entitled to intervene as of right for the purpose of asserting that the named plaintiffs do not adequately represent the class and, therefore, that the class action should not be certified and the suit dismissed. Alternatively, he moves for permissive intervention for the limited purpose of preserving his appellate rights.
A. Intervention as of Right
Subsection (a) of Federal Rule of Civil Procedure 24, which addresses intervention as of right, provides:
On timely motion, the court must permit anyone to intervene who: (1) is given an unconditional right to intervene by a federal statute; or (2) claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties adequately represent that interest.
The Third Circuit has interpreted Rule 24(a)(2) to require proof of the following four elements from the applicant seeking to intervene: first, a timely application for leave to intervene; second, a sufficient interest in the litigation; third, a threat that the interest will be impaired or affected, as a practical matter, by the disposition of the action; and fourth, inadequate representation of the prospective intervenor's interest by existing parties to the litigation. Kleissler v. U.S. Forest Service, 157 F.3d 964, 969 (3d Cir.1998). " Failure to satisfy any one of these requirements is a sufficient ground to deny the application." In re Bank of New York Derivative Litig., 320 F.3d 291 (2d Cir.2003) (quoting Catanzano by Catanzano v. Wing, 103 F.3d 223, 232 (2d Cir.1996) (internal quotation marks omitted)).
Plaintiffs do not dispute the first prong, i.e., the timeliness of Petri's motion to intervene. Nor do they dispute the third prong— whether there is a threat that the proposed intervenor's interest will be impaired or affected, as a practical matter, by the disposition of the suit.
While these two prongs are met, Petri does not satisfy the second or fourth prongs. The second prong asks whether the proposed intervenor has a sufficient interest in the litigation. Courts in the Third Circuit have held that shareholders with only an economic interest in the outcome of the litigation do not have " sufficient interest," reasoning that
allowing a current shareholder to intervene in a securities class action settlement merely because the value of the common stock may be diluted would set a very dangerous precedent because it would sanction the intervention of any
stockholder in any suit in which the trust or corporation whose stock the stockholder owns is a party.... The logical result of this would be that a corporation could not prosecute or settle any suit by or against it without obtaining the approval of every shareholder (and perhaps every holder of a debt instrument as well). Clearly the corporate entity was never intended to be so limited in its ability to make decisions and to act on them.
In re Cendant Corp. Sec. Litig., 109 F.Supp.2d 273, 277 (D.N.J.2000) (quoting Kusner v. First Pennsylvania Corp., 74 F.R.D. 606 (E.D.Pa.1977), aff'd, 577 F.2d 726 (3d Cir.1978) (Table); Landy v. Federal Deposit Ins. Corp., 486 F.2d 139 (3d Cir.1973); Swanson v. Traer, 249 F.2d 854 (7th Cir.1957); and Levin v. Mississippi River Corp., 59 F.R.D. 353 (S.D.N.Y.), aff'd, 486 F.2d 1398 (2d Cir.1973)) (internal quotation marks omitted). Cf. Liberty Mut. Ins. Co. v. Treesdale, Inc., 419 F.3d 216, 222 (3d Cir.2005) (concluding that party seeking proceeds from insurance company could not intervene as of right in insurance coverage dispute between company and third party because they had only a " mere economic interest in the outcome of litigation" ). See also In re Community Bank of Northern Virginia, 418 F.3d 277, 315 (3d Cir.2005) (" [W]e are in no way suggesting that absent class members who merely express dissatisfaction with specific aspects of the proposed settlement or that attorneys (who, after finding one or more class members as clients, and wish to share in the forthcoming fee), have the right to intervene." )
Petri relies on the Seventh Circuit's recent decision in Robert F. Booth Trust v. Crowley, 687 F.3d 314 (7th Cir.2012), which held that an objecting shareholder was entitled to intervene as of right. Review of Crowley makes clear, however, that the basis of the court's ruling was that, under Seventh Circuit law, " the only way [an objecting shareholder] can get appellate review is to become a party." Id. at 318. The Third Circuit has no such rule, see In re Rite Aid Corp. Securities Litig., 396 F.3d 294, 298 (3d Cir.2005), thus, Crowley's analysis does not attend here. Moreover, Petri acknowledged at oral argument that, under Third Circuit law, he does not need to intervene in order to preserve his appellate rights. Hrg. Tr. 28:24-29:5.
In addition, to the extent that Petri argues he should be granted intervention in order to pursue dismissal of the suit, courts have denied motions to intervene where the movant's sole interest is in dismissing an action. See, e.g., Glover v. Ferrero USA, Inc., Civil Action No. 11-1086, 2011 WL 5007805, at *6 (D.N.J. Oct. 20, 2011); Worthington v. Bayer Healthcare LLC, Civil Action Nos. 11-2793, et al., 2011 WL 6303999, at *6 (D.N.J. Dec. 15, 2011).
As for the fourth prong of the intervention analysis, that prong addresses whether the prospective intervenor's interest is adequately represented by existing parties to the litigation. Representation will be considered inadequate where, " although
the applicant's interests are similar to those of a party, they diverge sufficiently that the existing party cannot devote proper attention to the applicant's interests." Brody v. Spang, 957 F.2d 1108, 1123 (3d Cir.1992). In other words, " the proposed intervenor must ordinarily demonstrate adversity of interest, collusion, or nonfeasance on the part of a party to the suit." In re Community Bank, 418 F.3d at 315.
Petri argues that his interests are not adequately represented by the named shareholders and is, indeed, contrary to their interest as he seeks outright dismissal of the Derivative Suits in order to save J & J from incurring further litigation costs. Although Petri contends that his ultimate objective is to dismiss the suit, in more general terms, his objective (as is the objective of all shareholders) is for the corporation to succeed, comply with governing laws, and be profitable. Keeping this larger objective in mind, Petri's interests are not unaligned with the named plaintiffs. Rather, his dispute with the named plaintiffs boils down to litigation and management strategy— he would have preferred that the suit not have been brought. However, " [t]hat [intervenors] would have been less prone to agree to the facts and would have taken a different view of the applicable law does not mean that the [current parties] did not adequately represent their interests in the litigation." Pennsylvania v. Rizzo, 530 F.2d 501, 505 (3d Cir.1976) (internal quotations omitted).
In addition, most adequacy of representation contentions involve derivative plaintiffs who fail to vigorously prosecute the claim against the Board, or who are so antagonistic to a nonnamed plaintiff shareholders that they " disregard their interests." Greco v. Local.com Corp., 806 F.Supp.2d 653, 658-59 (S.D.N.Y.2011). Here, in contrast, Petri appears to argue that the named plaintiffs have disregarded his interest in having the suit dismissed, yet he acknowledges that settling the suit will have the same effect of freeing J & J from incurring any additional litigation costs. Thus, whether through dismissal or settlement, his goal of decreasing losses will be realized. This demonstrates that his interests are not " disregarded" by the named plaintiffs. Moreover, in acknowledging that settlement also benefits the corporation, Petri reveals his true point of contention— the amount of attorney's fees sought by Plaintiffs' counsel. As noted, Petri does not need to intervene in order to voice his objection to fees, and I will consider these objections in detail below.
To the extent Petri hinges his motion on alleged collusion between class counsel, the named plaintiff-shareholders, and J & J, he must do more than simply point to an agreement to a sizeable fee award; he points to no facts in the record to support his contention. See In re Community Bank, 418 F.3d at 315 (declining to find, based solely on proposed intervenor's assertion, that collusion existed where class counsel " failed to assert, inter alia, what appear to be facially viable TILA and HOEPA claims, conducted no formal discovery, and negotiated an extremely generous fee" but remanded to district court to develop a " full record" on the issue of adequate representation); Salovaara v. Jackson Nat. Life Ins. Co., 246 F.3d 289, 297 (3d Cir.2001) ( " Salovaara has not shown the existence of any improper collusion or bad faith in reaching this [derivative settlement] Agreement." ) (emphasis added). Moreover, case law explains that there are other remedies available to Petri " if he believes [the Board] breached a duty towards the shareholders by entering into the Settlement." Salovaara, 246 F.3d at 297.
In short, through his role as an objector, Petri can protect his own interests in challenging
the fairness of the proposed settlement. As a J & J shareholder, he, like any other " class member may object to a propos[ed settlement]....," Fed.R.Civ.P. 23(e)(5), and, if unsuccessful in challenging the settlement, he may appeal. Indeed, he has filed a separate objection that the Court will consider in addressing the merits of the settlement. And, Petri acknowledged at oral argument that his objections mirror the substantive arguments he would advance as an intervenor. Hrg. Tr. 29:6-10. Accordingly, Petri's motion to intervene as of right is denied.
B. Permissive Intervention
Pursuant to Fed.R.Civ.P. 24(b), a person or an entity, who is not a named party in an action, may seek to intervene in the interested litigation. See PA Prison Soc. v. Cortes, 622 ...