The role of gatekeeper, determining which cases merit the attention of the court, is among the most important responsibilities of our judges. This past week, the Seventh Circuit Court of Appeals exercised its role as gatekeeper, putting the brakes on a proposed settlement of a lawsuit over Walgreens’ planned merger with the Swiss company Alliance Boots GmbH.


The Seventh Circuit Cuts the Deal Tax


After the Walgreens-Alliance Boots GmbH merger was announced, a group of shareholders filed a lawsuit seeking additional disclosures in Walgreens’ proxy statement. Walgreens quickly settled the case by giving the shareholders’ attorneys $370,000 in fees, and agreeing to make what the author of the Seventh Circuit’s opinion, Judge Richard Posner, called “trivial” additional disclosures.


Posner blasted the current proliferation of so-called “strike suits” filed in the wake of business mergers as “no better than a racket.” And he’s completely right. When the only value of a settlement is that it makes a class action go away, perhaps it should not have been brought in the first place.


What is missing is greater clarity and consistency in exercising the gatekeeping role. If courts consistently followed Judge Posner’s lead and rejected proposed zero-value settlements, such suits would not, in fact, be brought in the first place.


Instead, these suits have become so common they are also called “deal tax” suits. The Wall Street Journal, quoting the Delaware Chancery Court, reports “that since 2005 the percentage of transactions of $100 million or more that have triggered stockholder litigation in this country has more than doubled, from 39.3% in 2005 to a peak of 94.9% in 2014.”


Most deal tax suits are settled, and the vast majority of those settlements are approved by the courts without a second thought. In fact, the settlement in this case would likely have been approved too, absent the efforts of “legal hero” Ted Frank of the Competitive Enterprise Institute’s Center for Class Action Fairness, who challenged it on behalf of another shareholder who disagreed with its terms.


Frank, who has spoken at past NJCJI events about his work, persuaded the court to take a closer look at settlements like this, where the attorneys are getting far more out of the litigation than the clients they are supposedly representing. This court agreed to do so, and hopefully other courts will follow suit.


Closer to Home


Here in New Jersey, we are seeing a similar sort legal shakedown flood our courts with cases. Attorneys bringing class action lawsuits under New Jersey’s unique Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA) claim businesses have violated the rights of consumers, but the suits are settled with only trivial benefits for consumers while the attorneys are handsomely awarded. This is just as much of a racket as the deal tax, and it should be stopped.


Unfortunately, these aren’t the sort of suits that someone like Frank can challenge, but NJCJI is doing our best to highlight how unfair the application of this law has become, and advocating for reform. If you would like an update on our current reform efforts, you can register for our fall conference, where we will be discussion TCCWNA and other laws that have unintended consequences that negatively impact businesses in our state.