The terms of an excessive fee settlement announced last fall – 14 minutes before the case was scheduled to go to trial – have now come to light.
While the initial complaint in this case was filed on Sept. 9, 2016, the settlement notes that the plaintiffs’ counsel’s involvement dates back to “long before the filing of this action.” There was, after all, another suit involving Northrop Grumman, and “During years of representing the Grabek[i] Class, Class Counsel developed a thorough understanding of the allegedly unlawful reimbursement practices that formed the basis of the common claim that was asserted in this action to recover payments made to Northrop after May 11, 2009.”[ii]
Indeed, if you’re wondering why there were two suits involving Northrop Grumman, this settlement (Marshall v. Northrop Grumman Corp., C.D. Cal., No. 2:16-cv-06794, motion for preliminary settlement approval 1/13/20) explains that “Plaintiffs filed their complaint after the damages period in Grabek[iii] was limited to May 11, 2009.”
The settlement terms:
- $12,375,000– which is to cover the notice costs and all costs of administration, as well as the incentive payments to the six named plaintiffs of $25,000 each, pending court approval (the settlement notes that “the potential benefit to any individual does not outweigh the cost of prosecuting the claim and there are significant risks, including the risk of no recovery, the risk of alienation from their employers and peers, and the risk of uncompensated time and energy devoted to a lawsuit with uncertain prospects for success”).
- $4,125,000– which is to cover attorney fees and costs, as is common in such cases the “ask” is approximately one-third of the settlement amount, and, as the settlement filing notes, it also happens to be the same structure approved by this court in the Grabek suit.
- $450,000– which is noted as a “ceiling” for the recovery of “reimbursement for costs incurred.”
By way of supporting the case for settlement, the filing notes that the settlement:
- Is the product of extensive arm’s length negotiations (“three years of litigation, and over thirteen years since the filing of Grabek, including the partial grant of multiple motions to dismiss and summary judgment, exhaustive pre-trial preparation, and just prior to the start of trial”).
- Has no obvious deficiencies(“correctly defines the scope of the Class in this case, specifically identifies the parties to be released, fully explains how funds are to be distributed to Class Members, and correctly notes that any award of attorneys’ fees or Class Representative incentive awards must be approved by the Court”).
- Does not give preferential treatment to the Class Representatives or any portion of the Class (“The $25,000 incentive awards Class Counsel will request for the Class Representatives do not “rise to the level of unduly preferential treatment”).
- Is within the range of possible approval (represents significant “monetary relief to the class they might not otherwise obtain,” also “appropriately values Plaintiffs’ claims as “[e]stimates of what constitutes a fair settlement figure are tempered by factors such as the risk of losing at trial, the expense of litigating the case, and the expected delay in recovery (often measured in years),” particularly since “prevailing at trial was far from certain” and “trials of class actions are inherently risky and unpredictable propositions.” Moreover, it acknowledges that “even if Plaintiffs did prove Defendants’ liability, it was unclear whether they would actually be able to obtain the full amount of damages they sought”).
And, were those arguments insufficiently persuasive, the parties explain that “Finally, independent of Class Counsel’s opinion as to the reasonableness of the Settlement, the parties also will submit the settlement terms to an Independent Fiduciary, which will provide an opinion on the Settlement’s fairness before the final approval hearing.”
[i]That case was also at the heart of some controversy in this case, including an (ultimately unsuccessful) motion in May 2019 by the Schlichter law firm to disqualify Marcia Wagner as an expert witness because Tom Clark, now a partner in Wagner’s firm, had been part of Schichter’s firm when they wrested a $16.75 million settlement from a similar case involving Northrup Grumman in 2017.
[ii]For those who have forgotten the case particulars, the plaintiffs in this case (Marshall v. Northrop Grumman Corp., C.D. Cal., No. 2:16-cv-06794, complaint filed 9/9/16), are seven former employees of Northrop Grumman Corp. represented by Schlichter Bogard & Denton. They alleged that the $19 billion, 110,000-participant Northrup Grumman plan paid nearly $10 million (between $1.7 million and $2.1 million/year) in administrative fees associated with the company’s retirement plan – even though the plan was already paying millions of dollars in fees to a third-party recordkeeper, Hewitt Associates. (Effective April 1, 2016, Fidelity Investments replaced Hewitt as the plan’s recordkeeper.) The suit claims that Northrop executives had “unfettered control” over the amounts taken from the retirement plan, allowing the company to receive plan assets “in the guise of compensation” that wasn’t reasonable or necessary for the plan’s administration. The suit also challenged the decision by the plan to retain as an active equity investment option the Emerging Markets Equity Fund, while during 2010 the plan fiduciaries “determined that an active investment strategy for the Plan’s equity and fixed income investment options was no longer prudent or in the Plan participants’ best interest” – a fund that was alleged to have “consistently and dramatically underperformed its benchmark index,” while also being the most expensive fund on the plan menu.
[iii]The settlement (Waldbuesser v. Northrop Grumman Corp., C.D. Cal., No. 2:06-cv-06213-AB-JC, motion for settlement approval filed 6/12/17) agreed to by the parties called for Northrop Grumman to pay a sum of $16,750,000 into a Gross Settlement Fund. The case, filed in the U.S. District Court for the Central District of California, is one of two filed by the law firm of Schlichter Bogard & Denton against Northrop Grumman (the second case is not affected by this settlement). The suit, filed in September 2006, had alleged that during the five-year period preceding spring 2006, the Northrop Grumman Stock Fund paid an average of $454,588.88 per year in investment management expenses, “even though that Fund’s singular investment directive is to invest in Northrop Grumman Corporation common stock. The only stock held by the Stock Fund is Northrop Grumman Corporation common stock. Little or no investment management decisions were necessary or occurring.” The suit also alleged the investment management fees paid by the plan were “…excessive and unreasonable when compared to the market rate for institutional investment management and in light of the actual asset management services required and provided when compared to known and readily available alternatives.”
