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Paprakis v. Skullcandy, Inc.

United States District Court, D. Utah

June 14, 2017

ROSE PAPRAKIS, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
v.
SKULLCANDY, INC., S. HOBY DARLING, DOUG COLLIER, HEIDI O'NEILL, JEFF KEARL, SCOTT OLIVET, GREG WARNOCK, RICK ALDEN and JASON HODELL, Defendants.

          MEMORANDUM DECISION AND ORDER

          Dee Benson United States District Judge

         Before the court are two applications for an award of attorneys' fees and expenses, the first filed by Plaintiff Rose Paprakis (“Paprakis”) (Dkt. No. 16), and the second filed by Plaintiff Karen Bernicke (“Bernicke”).[1] (Dkt. No. 26.) The court held a hearing on the motions on April 27, 2017. James Wilson appeared on behalf of Paprakis and Michael Rosner appeared on behalf of Bernicke. David Scofield appeared as local counsel for both Plaintiffs. Monica Call appeared on behalf of all Defendants, and Matthew Balte appeared on behalf of Defendant Skullcandy, Inc. (“Skullcandy”). At the conclusion of the hearing, the court took the matter under advisement. Now, having been fully informed, the court issues the following Memorandum Decision and Order.

         Background

         In February 2016, the Board of Directors of Skullcandy began exploring the possibility of selling the company. (Dkt. No. 31 at viii.) During the next few months, Skullcandy representatives met with potential suitors and shared information on a confidential basis. (Id.) In early May 2016, Skullcandy received nonbinding indications of interest from four identified suitors. (Id.) After continued negotiations, on June 23, 2016, Skullcandy entered into a merger agreement with Incipio, LLC (“Incipio”), the highest bidder, at the price of $5.75 per share. The Incipio merger agreement contained a “go-shop” provision and a “fiduciary out” provision, which allowed Skullcandy to continue to explore other options and accept a better offer should one emerge. (Dkt. No. 31 at ix.)

         On June 24, 2016, one day after the announced merger agreement and prior to the filing of the Complaint in this action, Mill Road Capital (“Mill Road”) submitted an indication of interest to acquire Skullcandy at $6.05 per share. (Id.) Throughout the “go shop” period, Skullcandy also contacted 98 potential bidders and entered into non-disclosure agreements with eight potential bidders to facilitate due diligence efforts regarding other possible mergers. (Id.) At the end of the “go shop” period, on July 28, 2016, the Skullcandy Board of Directors determined that Mill Road's proposal was superior to Incipio's original offer and, as such, terminated the merger agreement with Incipio. (Id.)

         A bidding war ensued. Incipio returned on August 2, 2016, with a revised offer to purchase Skullcandy for $6.10 per share. (Id.) On August 14, 2016, Mill Road submitted a revised indication of interest for $6.25 per share. (Id.) After further negotiations, on August 17, 2016, Mill Road submitted another offer at $6.35 per share. (Id. at xi.) On August 18, 2016, Skullcandy amended its disclosures to inform the stockholders of the Mill Creek offer. (Dkt. No. 16 at 6.) On August 23, 2016, Incipio indicated that it did not intend to submit another offer. (Dkt. No. 31 at xi.) Skullcandy then accepted Mill Road's final tender offer of $6.35 per share. (Id.)

         On September 29, 2016, the Mill Road tender offer closed with 80% of the outstanding shares being tendered, not including the 9.8% held by Mill Road and its affiliates. (Id.) As of October 3, 2016, all of the previously outstanding shares of Skullcandy stock (other than those owned by Mill Road and its affiliates) were cancelled and converted into the right to receive $6.35 per share. (Id.) As such, all of Skullcandy's shareholders, apart from Mill Road and its affiliates, received $6.35 per share cash value for their outstanding Skullcandy stock.

         Paprakis filed this action on July 19, 2016, just before the end of the “go shop” period. Bernicke filed her action on July 26, 2016, immediately following the termination of the “go shop” period. (See 2:16-cv-831-DN.) Both actions included essentially the same claims and requests for relief. Plaintiffs alleged that Incipio's original offer was unreasonably low and that Skullcandy's disclosures were insufficient. (Dkt. No. 2.) With respect to disclosures, Plaintiffs specifically asserted that Defendants failed to disclose sufficient information regarding interested parties' bids, potential conflicts of interest, and Skullcandy's financial projections. (Id. at ¶37.)

         Following the filing of their Complaints, Plaintiffs engaged with Defendants to attempt to encourage a higher sales price and additional disclosures. On August 5, 2016, Plaintiffs wrote to Defendants to reiterate their pre-lawsuit demand of $7.50 per share and to demand additional disclosures, including information regarding the time frame of negotiations, financial interests of Skullcandy's financial advisor, the status of nondisclosure agreements, and Skullcandy's financial agreements. (Dkt. No. 16 at 3-4.) That same day, Defendants amended the Schedule 14D-9 filed with the Securities and Exchange Commission, which addressed the majority of Plaintiffs' concerns. (Id. at 4-5.) However, the additional disclosures did not include Skullcandy's projected free cash flows. As such, on August 8, 2016, Plaintiffs filed a motion for a temporary restraining order and preliminary injunction to demand disclosure of the projected free cash flows. (Dkt. No. 6.) On August 9, 2016, Defendants again amended their disclosures to include the projected free cash flows. Plaintiffs then voluntarily withdrew their motion as moot. (Dkt. No. 8.) Plaintiffs do not allege that any conflicts of interest or inappropriate behavior by Skullcandy representatives or its Board of Directors were discovered as a result of the additional disclosures, or at any other time during the pendency of this action.

         On November 7, 2016, Plaintiffs submitted to the court a Joint Stipulated Motion to Dismiss Action as Moot and Retain Jurisdiction to Determine Plaintiffs' Counsel's Motion for an Award of Attorneys' Fees and Reimbursement of Expenses, stating that Paprakis was “to submit a motion for an award of attorneys' fees and reimbursement of expenses with the cooperation of, and also on behalf of, Ms. Bernicke and her counsel.” (Dkt. No. 11 at 3.) Following entry of the associated stipulated proposed order, Plaintiffs were unable to agree on the motion for award of fees and costs. Paprakis submitted her Mootness Application for an Award of Attorneys' Fees and Expenses on December 29, 2016. (Dkt. No. 16.) The court then granted Bernicke's Motion to File Separate Motion for Award of Fees, (Dkt. Nos. 23, 25, ) and Bernicke filed her Application for an Award of Attorneys' Fees on January 23, 2017. (Dkt. No. 26.)

         Discussion

         In the Tenth Circuit, “[a] claim for attorneys' fees may remain viable even after the underlying cause of action becomes moot.” Schell v. OXY USA Inc., 814 F.3d 1107, 1123 (10th Cir. 2016). But “[u]nder the American Rule, absent a statute or enforceable contract, a prevailing litigant is ordinary not entitled to collect reasonable attorney fees from the loser.” Id. (citations omitted). Even so, “federal courts, in the exercise of their equitable powers, may award attorneys' fees when the interests of justice so require.” Aguinaga v. United Food & Commercial Workers Int'l Union, 993 F.2d 1480, 1481 (10th Cir. 1993). As in other jurisdictions, the Tenth Circuit has “recognized a limited number of equitable exceptions to the American Rule, ” including the “common fund exception” and the “common benefit exception.” Schell, 814 F.3d at 1123. The party requesting an exception to the American Rule carries the burden to establish an exception by a preponderance of the evidence. See Id. at 1126. “In the absence of a statute or enforceable contract, attorney fees should be awarded sparingly.” Aguinaga, 993 F.2d at 1485.

         The Common Fund Exception

         The common fund exception to the American Rule is applicable where the plaintiff's successful litigation creates “a common fund, the economic benefit of which is shared by all members of the class.” Id. at 1482. Fee shifting may be justified under those circumstances because “to allow the others to obtain full benefit from the plaintiff's efforts without contributing equally to ...


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