CHRISTOPHER J. BURKE, Magistrate Judge.
In these related shareholder derivative suits (referred to herein as the "KBC Action" and the "North Action," respectively), presently pending before the Court are Plaintiff KBC Asset Management NV's ("KBC") "Motion to Consolidate and Appoint Lead Plaintiff, Lead Counsel and Liaison Counsel" ("Motion"). (D.I. 30; North Action D.I. 38)
KBC filed its Complaint on November 6, 2013. (D.I. 1) In that KBC Action, in lieu of an Answer, Defendants filed a motion seeking dismissal of the Complaint pursuant to Federal Rules of Civil Procedure 12(b) and 23.1. (D.I. 12) That motion was fully briefed in May 2014. (D.I. 18).
North, in the meantime, had filed her Complaint on November 14, 2013, in the United States District Court for the Southern District of Ohio ("Southern District of Ohio"). (North Action, D.I. 1) North thereafter moved the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel") to centralize the litigation in the Southern District of Ohio; the MDL Panel later denied that motion. (North Action, D.I. 21) Upon Defendants' request, the Southern District of Ohio thereafter transferred the North Action to this Court. (North Action, D.I. 28).
In light of the transfer of the North Action, on September 29, 2014, Chief Judge Leonard P. Stark ordered that the pending motion to dismiss in the KBC Action should be denied without prejudice. (D.I. 29; North Action, D.I. 31) Chief Judge Stark then ordered the KBC Action and the North Action be referred to the Court for all purposes, up to and including resolution of casedispositive motions. (Id.)
On October 15, 2014, KBC filed the instant Motion, (D.I. 30; North Action D.I. 38), which was fully briefed as of November 13, 2014, (D.I. 37; North Action D.I. 46). At KBC's request, (D.I. 39; North Action D.I. 48), the Court held oral argument on the Motion on January 22, 2015.
As its title indicates, the Motion raises three separate issues: (1) whether the cases should be consolidated; (2) whether KBC should be designated as Lead Plaintiff; and (3) whether KBC's counsel, Motley Rice LLC ("Motley Rice") and Rosenthal, Monhait & Goddess, P.A. ("Rosenthal Monhait") should be designated Lead Counsel and Liaison Counsel, respectively. The Court will address these issues in turn.
"If actions before the court involve a common question of law or fact, the court may... consolidate the actions[.]" Fed. R. Civ. P. 42(a). The Court has broad authority to consolidate actions for trial involving common questions of law or fact if, in its discretion, it finds that such consolidation would "facilitate the administration of justice." Ellerman Lines, Ltd. v. Atlantic & Gulf Stevedores, Inc., 339 F.2d 673, 675 (3d Cir. 1964); see also Resnik v. Woertz, 774 F.Supp.2d 614, 624-25 (D. Del. Mar. 28, 2011). Although the existence of common questions of law or fact is a prerequisite to consolidation, their presence does not require consolidation pursuant to Federal Rule of Civil Procedure 42(a). Rohm & Haas Co. v. Mobil Oil Corp., 525 F.Supp. 1298, 1309 (D. Del. 1981). Instead, in considering such a motion, the Court must balance any savings of time and effort gained through consolidation against any "inconvenience, delay, or expense" that may result. Id.
Here, all parties agree that the two cases should be consolidated, and there is no dispute that both cases involve common questions of law and fact. (D.I. 31 at 8-9; D.I. 33 at 3-4 & n.1; D.I. 34 at 3, 9; D.I. 36) Both actions were filed by shareholders of Chemed derivatively on behalf of the company, and the respective Defendants in both actions are nearly identical. (D.I. 1; North Action, D.I. 1) Both Complaints allege common (though not identical) facts. (Id.) And both assert that certain officers and members of Chemed's Board of Directors ("Board") breached their fiduciary duties to the company by implementing, sanctioning and/or consciously ignoring systematic violations of the False Claims Act, via the submission of improper and ineligible claims to Medicare and Medicaid over a number of years.
Federal Rule of Civil Procedure 23.1(a) provides that a "derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of shareholders ... who are similarly situated in enforcing the rights of the corporation[.]" Fed. R. Civ. P. 23.1(a). Here, there is no question that the competing Plaintiffs will "fairly and adequately" represent the shareholders' interests. The question instead is whether to appoint a lead plaintiff, and if so, which Plaintiff will best represent shareholder interests.
Although no statutory authority exists for the appointment of a lead plaintiff in shareholder derivative actions like these, courts have the inherent "authority to appoint a lead plaintiff ... in a derivative action in order to create an efficient case-management structure." N. Miami Beach Gen. Employees Retirement Fund, No. 10 C 6514, 2011 WL 12465137 at *1-2 (N.D. Ill. July 5, 2011) (appointing a lead plaintiff and lead counsel to avoid "the potential for disagreements and inefficiences"); see also Horn v. Raines, 227 F.R.D. 1, 3 (D.D.C. 2005) (appointing, inter alia, a lead plaintiff in derivative actions, as it was "necessary to provide for an orderly litigation"). Here, the Court finds that although there are only two derivative actions at issue and two competing Plaintiffs, appointing a lead plaintiff (and, relatedly, lead plaintiff's counsel) would be beneficial. See Berg v. Guthart, Case Nos. 5:14-CV-00515-EJD, 5:14-C01307-EJD, 2014 WL 3749780, at *1-2, *7 (N.D. Cal. July 30, 2014) (appointing a lead plaintiff and consolidating two similar shareholder derivative actions); Clark v. Thiry, Civil Action No. 12-cv-2074-WJM-CBS, Civil Action No. 13-cv-1308-WJM-MJW, 2014 WL 4050057, at *1, *4 (D. Colo. Jan. 7, 2014) (same); Sexton v. Van Stolk, No. C07-1782RSL, 2008 WL 1733242, at *1 (W.D. Wash. Apr. 10, 2008) (same). To date, these two litigations have taken divergent paths in multiple courts, and the absence of an efficient, streamlined structure for directing this litigation on behalf of the corporation has only led to delay and inefficiency. Appointing a lead plaintiff should help to change this course.
In determining which plaintiff should be chosen as lead plaintiff, a number of courts have considered the following factors: (1) which plaintiff has the largest financial interest; (2) the preference for institutional investors to lead a lawsuit for shareholders; (3) the quality of the pleadings; (4) the vigor with which the plaintiff has pursued the suit; and (5) the plaintiffs arrangement on the payment of attorney's fees. See Berg, 2014 WL 3749780, at *4; N. Miami Beach, 2011 WL 12465137 at *1; Dollens v. Zionts, Nos. 01 C 5931, 01 C 2826, 2001 WL 1543524, at *5-6 (N.D. Ill. Dec. 4, 2001). Here, both KBC and North address the applicability of these factors in their briefing, (D.I. 31 at 10-15; D.I. 34 at 9-17), and the Court will utilize them as well.
As to the first factor—which plaintiff has the largest financial interest—courts have recognized that "financial stake has some relevance to the plaintiffs interest in a derivative action and the likelihood that the plaintiff will pursue the derivative claims vigorously." In re Foundry Networks, Inc. Derivative Litig., No. C-06-05598, 2007 WL 485974, at *1 (N.D. Cal. Feb. 12, 2007) (finding this factor to favor a group of plaintiffs that held at least 2,700 shares in the corporation at issue, over a plaintiff who owned 666 shares). KBC's customers own a substantial amount of Chemed stock, and have assigned their right to sue to KBC; those holdings total 19,664 shares, with a current value (as of the time when briefing on the Motion commenced) of $1.96 million. (D.I. 31 at 11; D.I. 34 at 11; D.I. 37 at 5; D.I. 38, ex. B at 2) Unfortunately (and somewhat disconcertingly), North did not indicate, either in her Complaint or in her briefing, exactly how many shares of Chemed stock she owns, nor for how long she has owned that stock. The most North would commit to say in her answering brief was that KBC's stock ownership was "larger than Plaintiff North's in absolute dollar terms." (D.I. 34 at 15) Even at the time of oral argument, North's counsel was not in a position to answer this question with any specificity; there, her counsel could say only that North owned less than 100 shares of the stock (i.e., somewhere between 1 share and 99 shares)—shares worth less than a thousand dollars at most. (Transcript of January 22, 2015 Oral Argument ("Tr.") at 49 (North's counsel representing that the value of North's holdings is "[i]n the hundreds [of dollars,]" although noting that he was uncertain of the current share price)) With KBC's customers owning well over 150 times more shares than North and with those shares having a far larger total value than North's shares, this factor clearly falls in KBC's favor. Cf. N. Miami Beach, 2011 WL 12465137 at *1 ("[T]his factor does tip in [one plaintiff's] favor, particularly where [that plaintiff] owns more than double the number of shares that [the competing plaintiffs] own individually."); see also Chester Cnty. Emps.' Ret. Fund v. White, No. 11 C 8114, 2012 WL 1245724, at *3 (N.D. Ill. Apr. 13, 2012) (same).
The second factor relates to institutional investor status. Dollens, 2001 WL 1543524, at *5 (suggesting that as to this factor, a court should examine not just the fact of a party's institutional investor status, but whether the particulars of that status gave it "any greater incentive to litigate this case than [would] any other plaintiff who seeks to lead"). This is not a case that implicates the Private Securities Litigation Reform Act ("PSLRA"),
The third factor relates to the quality of the pleadings. See In re Comverse Tech., Inc. Derivative Litig., No. 06-CV-1849 (NGG)(RER), 2006 WL 3511375, at *5 (E.D.N.Y. Dec. 5, 2006) (noting that the "pleadings serve as an accurate and appropriate barometer through which the court can assess which firm would best represent the interests of the shareholders and the rights of the corporation"). Without making any statement as to the legal merit of the claims in the respective Complaints, both Complaints appear to be of a high quality, in that they contain many detailed factual allegations relating to the alleged wrongs at issue. N. Miami Beach, 2011 WL 12465137 at *2. The Court does, however, credit KBC's point that its Complaint gives evidence of independent investigation conducted by its counsel—such as through the use of interview statements generated by Motley Rice investigators, or the use of statistical data that Motley Rice obtained from the National Hospice and Palliative Care Organization. (D.I. 31 at 5, 13-14; D.I. 37 at 6; see also D.I. 1 at ¶¶ 6, 79, 81, 107, 118, 121-30); see also N. Miami Beach, 2011 WL 12465137 at *2 (citing one plaintiff's use of non-public information in their complaint as a positive factor demonstrating a high-quality pleading). On the other hand, KBC notes (and North does not really dispute) that a "substantial portion of the substantive allegations in the North Complaint were copied — either verbatim or nearly verbatim" from a proposed complaint filed by another party in a securities-fraud class action in the Southern District of Ohio. (D.I. 31 at 7-8, 14 (noting that 133 out of 283 paragraphs were copied in this way) (emphasis omitted); D.I. 34 at 7 n.5); see Dollens, 2001 WL 1543524, at *5 (citing the fact that a party "merely reworked" another complaint as a factor reflecting negatively on its request to be lead plaintiff). These aspects of the respective Complaints suggest that this factor should slightly favor KBC.
The fourth factor relates to the vigor with which the respective Plaintiffs have pursued their suits. Both have done so vigorously, albeit on very different paths—a fact that has led to quite a lot of procedural wrangling at an early stage. "Vigorousness of effort is not going to be a problem in this lawsuit[,]" N. Miami Beach, 2011 WL 12465137 at *2, and the Court is hard-pressed to conclude that one side or the other here has a better record of making "a consistent effort to move the case forward in an inclusive manner[,]" Berg, 2014 WL 3749780, at *7. This factor is neutral.
The fifth factor is the plaintiff's arrangement on the payment of attorney's fees. KBC's counsel has indicated that it would be "willing to accept the court's decision concerning a reasonable fee" and would strive to avoid "duplication of effort" by counsel. Dollens, 2001 WL 1543524, at *6; see also (DI 31 at 15 (internal quotation marks and citations omitted)). The Court has no indication that North's counsel would not do the same. Thus, this factor is neutral.
Ultimately, with three of these factors weighing in KBC's favor, and none in North's favor, the totality of the circumstances favors appointing KBC as Lead Plaintiff. KBC has a more significant financial stake in the litigation, a better developed history of serving in this role, and, on the margins, has better demonstrated the ability to bring unique contributions to this litigation. The Court will thus appoint KBC as Lead Plaintiff.
Although the decision on a lead plaintiff should guide the Court's related decision as to Lead Counsel and Liaison Counsel, the Court will nevertheless analyze the parties' arguments in that regard as well. "`The Court, if it sees fit, may appoint one or more attorneys as liaison counsel, lead counsel, or trial counsel for the consolidated cases' and "`can assign the designated lawyers specific responsibilities.'" Resnik, 774 F. Supp. 2d at 625 (quoting 9A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2385 (3d ed. 2008)). The selection of lead counsel in a shareholder derivative action filed in federal court is left to the sound discretion of the Court. Id.; Horn, 227 F.R.D. at 3. The Court must determine "`which counsel will best serve the interest of the plaintiffs' with respect to "`experience and prior success record, the number, size, and extent of involvement of represented litigations, the advanced stage of the proceedings in a particular suit, and the nature of the causes of action alleged.'" Resnik, 774 F. Supp. 2d at 625 (quoting 3 Herbert B. Newberg & Alba Conte, Newberg on Class Actions § 9.35 at 388 (4th ed. 2002)); see also Horn, 227 F.R.D. at 3.
KBC moves to appoint its counsel, Motley Rice, as Lead Counsel, and Rosenthal Monhait as Liaison Counsel.
The Court concludes, pursuant to Rule 42(a)(3), that Motley Rice shall serve as Lead Counsel with Rosenthal Monhait serving as Liaison Counsel.
However, the Court concludes that Motley Rice is better qualified to serve as Lead Counsel here, for a few reasons. First, the Court takes note of Motley Rice's recent work as sole lead counsel in Manville Personal Injury Settlement Trust v. Gemunder, No. 10-CI-01212 (Ky Cir. Ct.), a case concerning the alleged submission of false claims to Medicare and Medicaid and related illegal kickbacks, brought on behalf of Omnicare, Inc. ("Omnicare"). (D.I. 37 at 9) In that case, involving complex and difficult claims, Motley Rice successfully obtained a $16.7 million payment and enhanced corporate governance measures that benefitted Omnicare, (id. at 9-10; D.I. 38, ex. H at 5-8), a company spun off from Chemed in 1981 and for which Defendants O'Toole, Gemunder, Hutton and Lindell served as members of the Board of Directors, (D.I. 1 at ¶¶ 16, 18, 20, 22). As KBC notes, the fact that Motley Rice has a "successful track record of litigating on behalf of Omnicare concerning similar allegations of misconduct makes [the firm] uniquely suited to lead the instant litigation." (D.I. 37 at 9 n.14); cf. Chester Cnty. Emps.' Ret. Fund, 2012 WL 1245724, at *4 (citing a plaintiffs counsel's involvement with a similar prior derivative suit on behalf of the same corporation as a factor adding to the weight afforded to that plaintiffs bid to be lead plaintiff). Second, the Court takes into account its earlier conclusion that although both Complaints appear to be of a high quality, the KBC Complaint, drafted by Motley Rice, evidences a slightly greater level of investigatory effort and unique work product. Third, as noted above, see supra notes 6 & 10, in North's answering brief, Bottini & Bottini has made a few strained arguments. These factors, along with the weight afforded Lead Plaintiff KBC's choice of counsel, see, e.g., Berg, 2014 WL 3749780, at *7; Sexton, 2008 WL 1733242, at *2; Dollens, 2001 WL 1543524, at *6, all weigh in favor of appointment of Motley Rice as Lead Counsel.
With regard to KBC's request to have its Complaint designated as the sole operative complaint, it is true that the KBC Complaint does not include, inter alia, four claims found in the North Complaint (claims for abuse of control, gross mismanagement, unjust enrichment and insider trading) and certain arguments regarding demand futility made in the North Complaint. (See, e.g., D.I. 34 at 8) It is difficult to tell with certainty at this stage if those claims and arguments are strong (as North claims) or weak (as KBC claims). But it will be Lead Counsel's role, as part of its obligation to represent the interests of the shareholders in an action brought on behalf of Chemed, to make decisions as to what type of complaint provides the best chance at a positive outcome. The Court can find no support for North's assertion, (Tr. at 59-64), that empowering lead counsel to make such decisions, even if those decisions result in the exclusion of certain claims or arguments from the remaining complaint, is legally problematic.
For the reasons set forth above, KBC's Motion is GRANTED. The Court will separately enter an Order of Consolidation and Appointment of Lead Plaintiff, Lead Counsel and Liaison Counsel, which will largely mirror the proposed Order put forward by KBC, (D.I. 30), as that proposed Order appears to generally track the guidance from the Manual for Complex Litigation (4th ed. 2011) and the content of other similar orders entered in cases of this kind.
Outten v. Wilmington Trust Corp., 281 F.R.D. 193, 197 n.9 (D. Del. 2012) (quoting Manual for Complex Litigation (Fourth) § 10.221 (2005)) (certain emphasis omitted). Liaison counsel's role is different:
Id. (quoting Manual for Complex Litigation (Fourth) § 10.221 (2005)) (certain emphasis omitted).