Drake v. Cotton

Filed 6/29/06 Drake v. Cotton CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

Appeal from an order of the Superior Court of Orange County, Jonathan H. Cannon, Judge. Affirmed.

Dempsey & Johnson, Michael D. Dempsey and Arlene M. Turinchak for Defendant and Appellant.

Robbins Umeda & Fink, Brian J. Robbins, Jeffrey P. Fink; Soltan & Associates, and Venus Soltan for Plaintiffs and Respondents.

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I. INTRODUCTION

This is an appeal from a judgment approving $1.2 million in negotiated attorney fees for the settlement of a shareholder derivative suit. Steven Cotton, former CFO and Chief Operating Officer of Lantronix, contends the fees should not have been approved because (1) plaintiff's counsel failed to provide documentation of the nearly 1,400 hours spent on the case; (2) the 2.6 fee enhancement multiplier incorporated into the $1.2 million is unjustified; and (3) payment of the fee will harm the corporation and its shareholders. We disagree on all points.

California case law supports the use of a declaration (provided in this case) to justify requested fees, dispensing with the need to document every minute spent on litigation. Furthermore, a trial court may approve a fee enhancement multiplier when counsel takes a case on contingency and the litigation results in a substantial benefit to the corporation. Here, as explained below, the risks and benefits of this complex securities litigation made the 2.6 multiplier reasonable -- the allegations in the complaint suggested abuses in kind, if not in quantity, that were similar to the well-known Enron scandal. Finally, there is no evidence the fee award is harmful to the corporation; rather we conclude it was the result of a reasoned business decision designed to avoid the costs and risks associated with prolonged litigation.

II. BACKGROUND

A shareholder derivative suit was filed on July 26, 2002 on behalf of Lantronix, a company that designs, develops and markets network device servers, against certain of its current and former officers and directors. The defendants were accused of inflating the price of Lantronix stock by overstating revenue, falsifying financial statements, omitting material adverse information, and issuing a series of misleading press releases regarding fiscal year 2001 and first and second quarter fiscal year 2002 revenues.

Specifically, an internal review of the company's accounting procedures revealed certain sales made to distributors did not qualify for revenue recognition upon shipment. Rather, due to special distributor agreements, the revenue should have been recognized as gross profit only when the distributor resold the products from its inventory. However, those agreements were ignored, and the company recognized revenue upon shipment.

To compound the overstatement, the company issued press releases touting a 67 percent year-over-year revenue increase in the company's device business, and â€