And The Winner Is…

The Delaware Court of Chancery has selected lead counsel in derivative suits against Fox arising out of defamation claims relating to its 2020 election coverage

In the wake of the 2020 presidential election, the Fox News network broadcast statements accusing two voting machine companies of facilitating election fraud. The voting machine companies sued for defamation. Fox Corporation (the “Company”) paid $787.5 million to settle one lawsuit. Another remains pending.

Various stockholders filed derivative complaints that seek to shift the losses the Company suffered from the entity to the directors and officers who the stockholders say caused the harm. Those actions have been consolidated.

Two competing teams seek leadership roles. Each lead counsel team is well-qualified and could litigate the case. Each lead plaintiff team has strengths and weaknesses.

This is the first decision interpreting recently amended Rule 23.1, which now identifies factors for a court to consider when resolving a leadership dispute. After balancing those factors, this decision selects the Friedlander Team as lead counsel and the NYC/Oregon Funds as lead plaintiffs.

The court recounts the shareholder litigation and competing players for leadership

Only one team of lawyers remained consistent throughout the process: the Friedlander firm, Cohen Milstein, and Lieff Cabraser (collectively, the “Friedlander Team”). They appeared initially on behalf of the Oregon Funds. They applied for leadership on behalf of the New York Funds and Oregon Funds (jointly, the “NYC/Oregon Funds”).

The NYC/Oregon Funds had selected the Friedlander Team through a deliberative process. The public officials who oversee the NYC/Oregon Funds—the New York City Comptroller, the Oregon Attorney General, and the Oregon State Treasurer—decided to work together to investigate issues regarding the Company. The NYC/Oregon Funds requested proposals from multiple law firms with which they have relationships, and they selected the Friedlander Team. The NYC/Oregon Funds subsequently entered into a written engagement letter with the Friedlander Team that, among other things, places a negotiated cap on the fee award that the Friedlander Team can seek. The process of team formation was intentional, clientinitiated, and client-driven.

The other team of lawyers (the “BLBG Team”) appears to have evolved on the fly. Their leadership application calls for Bernstein Litowitz to serve as co-lead counsel with Kessler Topaz Meltzer & Check LLP and Robbins Geller Rudman & Dowd LLP. The latter two firms had not previously appeared in the case. Bernstein Litowitz initially appeared with Labaton and Friedman Oster, but the application relegates them to the role of additional counsel. It is not clear when or how Kessler Topaz or Robbins Geller joined the group, nor how the decision was made to have certain firms serve as co-lead counsel and others as additional counsel.

The BLBG Team applied for leadership on behalf of the Cayman Islands Fund and Sjunde AP-Fonden, one of the two Swedish funds that originally appeared (the “Cayman/Swedish Funds”). It is not clear how the Cayman/Swedish Funds became connected with the BLBG Team. It is not clear whether the funds or the lawyers started the discussions or whether the funds and any of the law firms had an existing relationship. The Cayman Fund and the two Swedish funds submitted a joint declaration stating that they “each individually began discussions with counsel” after the Dominion settlement and “each subsequently elected to be named plaintiffs.” After submitting the declaration, one of the Swedish funds dropped out. The declaration generally describes the funds’ willingness to work together and with counsel, but the language is formulaic. There does not appear to be any engagement letter between the BLBG Team and the Cayman/Swedish Funds, although the BLBG Team informed the Cayman/Swedish Funds about their ability to make a fee application and the legal standards that this court would apply.

Competence

At this stage of the case, the Friedlander Team appears to have prepared a stronger complaint. That complaint incorporates factual developments and incidents at Fox News that are not included in the BLBG Team’s complaint. It also includes a Massey claim that appears promising and is not found in the BLBG Team’s complaint. As noted, both complaints were well-crafted. The Friedlander Team’s complaint, however, is relatively stronger.

Performance

The Friedlander Team was more circumspect. They waited until after the Company actually suffered a corporate trauma in December 2022. By not starting earlier, the Friedlander Team avoided imposing costs on the Company unnecessarily. The Friedlander Team served a books and records demand on behalf of the NYC Funds on March 30, 2023 and a demand on behalf of the Oregon Funds on May 31, 2023. They synthesized the documents they received with the extensive information that was publicly available, much of which was generated by the Dominion litigation and posted on a Dominion website.

Both teams thus proceeded responsibly. This factor slightly favors the Friedlander Team, but not to a meaningful degree.

Structure

On this issue, the Friedlander Team’s proposal is superior. The Friedlander Team consists of three firms. That is not too cumbersome a number. Having three firms also enables the team to combine the Friedlander firm’s deep expertise in Delaware law with the more diverse competencies of Cohen Millstein and Lieff Cabraser.

The differences among the three firms and their practices suggest that the Friedlander Team can harness the benefits of diversity, which “is the most powerful method of becoming more innovative.” Michael Muthukrishna, A Theory of Everyone 153 (2023). Research shows that cognitively diverse groups find solutions faster, and higher cognitive diversity correlates with better performance overall.

Contentions of the losing group

if it should turn out that the NYC/Oregon Funds (or the Friedlander Team) fall short of their obligations, then that can be remedied. The selection of a leadership team at the outset of the case is not a one-time event that gives the team a property right to pursue the litigation. “If a derivative plaintiff or derivative counsel fails to adequately represent the interests of the entity in pursuing the derivative action, then the Court may dismiss the derivative action without prejudice, replace the derivative plaintiff or derivative counsel, or make further orders as warranted.” Ct. Ch. R. 23.1(c (4).

Ultimately, this is a decision that involves tradeoffs. The NYC/Oregon Funds have unique attributes. On the positive side of the ledger, they bring resources and expertise, an institutional commitment to the litigation, and the legitimacy of public officials doing their jobs. On the negative side, there are potential complexities of the type that the BLBG Team has cited. In my judgment, the former outweighs the latter.

(Mike Frisch)