Thus we find no merit in any of class counsel's original three objections.
B. Objection Raised by Class Counsel During Settlement Hearing
During the July 8, 1992 settlement hearing class counsel raised an additional objection. This objection, while untimely, will be considered by the Court. At the hearing, class counsel argued that because some class members will not benefit from the settlement, it is unconstitutional.
Specifically, class counsel stated that because many of the class members already settled their tax liability with the IRS or, because they paid an Alternative Minimum Tax and did not have the same extensive tax liability as the other class members, that these class members would receive little or no benefit from the settlement. There is no support in the record for this statement.
At the hearing, Mr. David Dobbins, a partner at Patterson, Belknap, Webb and Tyler, designated class counsel, relied on a letter from one class member that was not placed in the record and was not shown to the Court. In that letter, the class member stated, according to Mr. Dobbins, that he had paid an alternative minimum tax and did not have any tax liability to the IRS. We cannot rely on such unsupported statements to defeat a reasonable settlement offer.
Mr. Dobbins also stated that many class members had already paid their tax liability to the IRS. Only one class member returned a ballot stating no opinion on the settlement because he had already paid the tax liability to the IRS. Class Counsel argues that because some of the class members have already settled with the IRS that they will not derive any benefit from the settlement. This is simply not true.
Certain sections of the Internal Revenue Code require the IRS to refund any taxes that individual limited partners have paid when the partnership reaches a settlement with the Internal Revenue Service. These refunds would be sent automatically, but if they are not sent, the limited partner has two years to file a claim with the IRS for a refund. See, Sections 6230(d)(5), 6230(c)(1)(B), 6230(c)(2)(B) and 6611 of the Internal Revenue Code. Thus, any class members that have paid their tax liability will be entitled to a refund.
Even if we were to assume that some of the class members will not benefit from this settlement, class counsel's argument that such settlement is unconstitutional has no merit. In support of that argument, class counsel cited Real Estate Title and Settlement Services Antitrust Litigation, 869 F.2d 760 (3d Cir.), cert. denied, 493 U.S. 821 (1989). We find, after careful review of that case, that Real Estate Title is totally irrelevant to the constitutionality of this settlement.
In Real Estate Title, certain class members challenged whether they were bound by a settlement reached in a class action in federal district court. These class members had never consented to the jurisdiction of the original court, were not within the personal jurisdiction of the original court and had not been given the opportunity to opt-out of the class action. The sole issue before the appellate court was whether this challenge should be heard by the same trial court that approved the settlement.
This case has nothing to do with whether it is constitutional to approve a settlement that does not treat all class members equally. Here, 68.3% of the class has voted to accept this settlement. Only five percent of the class has rejected the settlement. It is clear to this Court that the class wishes to accept this settlement regardless of the position of class counsel. Because, class counsel's only remaining objection is insupportable by either case law or plain common sense we will resolve this objection in favor of the defendants and approve this settlement.
C. Factors to Consider When Approving A Class Action Settlement
In Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975) the Court of Appeals for the Third Circuit adopted the class action settlement test established by the Court of Appeals for the Second Circuit in Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974). This test states that the Court must consider nine factors when determining the fairness, adequacy and reasonableness of the proposed settlement. After our consideration of these nine factors, set out in detail below, we find that the settlement is reasonable, fair and adequate.
1) The complexity, expense and likely duration of the litigation
Here, the trial, as with all securities fraud trials, will be long and complex. In addition, because of this Court's extensive criminal docket, and the likely length of this trial, we cannot guarantee that this case would go to trial within the next two years. If this case does not settle the litigation will be prolonged indefinitely and the benefits of the settlement with the IRS will be lost. Thus, the complexity, expense and duration of the litigation weigh in favor of settlement.
2) The reaction of the class to the settlement.
As of the date of this Opinion, 155 of the 210 class members who received notice of this settlement offer have voiced an opinion of this settlement offer. Thus, 73.8% of those class members that received notice have responded. 92.9% of the ballots received expressed a desire to accept the settlement. Thus, 68.3% of the class, representing at least 57.9% of the ERP I units voted to accept the settlement. An overwhelming majority of the class voted to accept the settlement. Thus, the favorable reaction of the class to the offer supports approving this settlement.
3) The stage of the proceedings and the amount of discovery completed.
Basic fact discovery is fairly far advanced. Discovery is set to close sometime this month, with expert discovery to begin at that time. Thus, the parties have a solid understanding of the facts and the worth of the case. All additional discovery will be in preparation for trial. This discovery, consisting mostly of expert depositions, will not add to the factual basis of the case and will only increase the cost of the litigation. Thus, this is the appropriate time to discuss and approve settlement. This factor also weighs in favor of settlement.
4) The risks of establishing liability.
After reviewing all the evidence on the record, we find that, it is possible that the plaintiffs could establish liability. However, we also find that a plaintiffs' verdict at trial is questionable. Class counsel's theory of liability is that the defendants had many valuations of ERP I available which they did not provide to the class in the proxy statement. But there is an equal amount of information on the record that these valuations were unreliable. Thus, at best the odds of the plaintiffs receiving a favorable verdict are 50:50, if we consider the evidence in the light most favorable to the plaintiffs. Given the likely possibility that the plaintiffs will not establish liability, this factor suggests approval of the settlement.
5) The risks of establishing damages.
There is a very high risk here that the plaintiffs will not be able to establish damages above the $ 2 million offered in this settlement. The technology on which ERP I was based lost money consistently since the buyout. In our June 26, 1992 Opinion we analyzed the reasonableness of the damages that plaintiffs claim and reached the following conclusions:
Since the date of the buyout one of the only two customers using the [TWACS] system no longer does. In addition, none of the other prospective customers identified by the plaintiffs have purchased the technology. As a matter of fact, Emerson spun off the TWACS business to its shareholders as part of another deal at no additional charge.
The only hard evidence the plaintiff's have uncovered supporting their allegation that the price offered for the limited partners' interest in ERP I was too low is that Emerson's board authorized it to pay $ 12 million to the ERP I limited partners. While we cannot determine whether this authorization required Emerson to pay the full $ 12 million to the class, we can consider the $ 12 million figure as an estimate of the worth of the company.
Emerson purchased the interest of the ERP I limited partners for $ 10 million. The board had authorized them to pay up to $ 12 million. Thus, the plaintiffs could use this difference between the price and the board authorization as proof that the allegedly misleading proxy statement resulted in $ 2 million in damages. But, given the decline In the business after the buyout, we do not believe that the plaintiffs will be able to prove any additional damages. The value of the settlement proposed by the defendants is $ 2 million. Thus, the amount of the settlement, in this Court's opinion, reasonably reflects the dollar value of this case. The company went downhill so the class may be better off with this IRS settlement than if they had held onto the ERP I shares.
Opinion dated June 26, 1992, at 4 - 5. Thus, if the plaintiffs can establish damages at all, we believe that the maximum amount will be $ 2 million. This is the value of the settlement to the class members. Thus, given the evidence and the risk of establishing damages above $ 2 million, we find that this is a reasonable settlement.
6) The risks of maintaining a class action through trial.
The defendants maintain that the plaintiffs will have to show that each class member relied on the representations of the proxy statement in order to maintain a class action. This does not seem to be a terribly difficult task. Thus, we find that this class action most likely could be maintained through trial. Because this class is relatively stable, this factor neither mandates accepting or rejecting the settlement offer.
7) The ability of the defendants to withstand a greater judgment
Emerson Electric Company is a "Fortune 50" corporation. There is no question that the defendants are financially solvent and could withstand a greater judgment. Thus, this factor neither mandates accepting or rejecting the settlement of this action.
8) The range of the reasonableness of the settlement in light of the best possible recovery
This Court has no doubt that this is a reasonable settlement for the class. The total value of the settlement combined with the administrative convenience of the IRS settlement to the class makes this a good offer in light of the limited potential liability of the defendants to the class. Thus, this factor weighs heavily in favor of accepting the settlement.
9) The range of the reasonableness of the settlement fund to a possible recovery in light of all the attendant risks in litigation.
This is a very good settlement considering the risk of losing this case at trial. We stated above that the plaintiffs' odds of success are, perhaps, 50:50. However, this trial is likely to be long and complex and very confusing to a jury. With such complex trials, the risks involved in the litigation increase. The cost of the trial will be tremendous. In addition, the experts who will testify have not yet been deposed. With only 50:50 odds and such an expensive trial, we believe that accepting this settlement will be in the best interests of the class.
D. Conclusion as to Settlement
After careful review of the record in this case, a hearing on the merits of this settlement and consideration of the above nine factors, we find that this settlement is fair, reasonable and adequate. Thus, we will approve this settlement over the objections of class counsel. We will also direct the defendants to notify the class of the settlement pursuant to the defendants' Application to Send Notice of Implementation of Court-Approved Settlement which we will grant.
OTHER OUTSTANDING MOTIONS
A. Motion for Sanctions
The defendants filed a motion seeking sanctions against class counsel. This motion for sanctions arises out of a communication sent by class counsel to the class. In this motion, the defendants state that class counsel's notice contained many misstatements regarding this case. Thus, the defendants not only seek sanctions, but also, Court approval to send an additional notice to the class curing the alleged misstatements of class counsel.
While we find that class counsel's behavior in the matter has been somewhat bizarre, we decline to impose sanctions. If this Court is to believe class counsel's fee estimates, they will not recover their investment in this case as a result of this settlement. Any further monetary sanctions will be rubbing salt into the wound.
In addition, we will not allow defense counsel to send a curative communication to the class. This class has received several communications from class counsel and defense counsel regarding this settlement. The class also received a notice drafted by this court detailing the term of the settlement. Thus, we feel that the class is so well versed in the terms of this settlement that class counsel's notice could not have confused the class sufficiently to warrant a curative communication.
B. Reed Smith Petition for Attorneys' Fees, Costs and Expenses
We feel that it is premature to rule on this motion because we anticipate that class counsel will file a similar petition. Thus, we will order any party seeking fees to file their petition, accompanied by a brief, by August 31, 1992. Any party wishing to respond to these petitions should file the response, accompanied by a brief, no later than September 15, 1992.
An appropriate order will issue.
Maurice B. Cohill, Jr.
AND NOW, to-wit, this 11th day of August, 1992 it is, hereby ORDERED ADJUDGED AND DECREED that:
1) The offer proposed by the defendants to settle this class action is APPROVED as fair, adequate and reasonable;
2) The defendants' Application to Send Notice of Implementation of Court-Approved Settlement to members of the Class is GRANTED and the defendants are directed to send their proposed notice to the class no later than August 12, 1992;
3) The defendants' Motion seeking Sanctions Respecting Class Counsel's Unauthorized Communications with the Members of the Class Including Solicitation of New Ballots from the Class is DENIED;
4) All petitions for attorneys' fees must be accompanied by a brief and filed with this Court no later than August 31, 1992. Any responses to these petitions must be accompanied by a brief and filed with this Court no later than September 15, 1992.
Maurice B. Cohill, Jr