By KERRI PANCHUK
Dallas Business Journal

Southwest Airlines Co. has agreed to pay $3.5 million in attorneys' fees and expenses to settle a lawsuit filed against the company by shareholders who alleged that the airline had failed to comply with Federal Aviation Administration inspection requirements.

Southwest shareholders filed a derivative complaint against Southwest and its senior officers, including CEO Gary Kelly, according to court filings. The plaintiffs - the Carbon County Employees Retirement System and Mark Criestello - contended in the complaint that Southwest's officers and directors breached fiduciary duties, as well as their fiduciary duty of good faith, when dealing with a 2007 incident in which the FAA mandated inspection of certain planes.

The plaintiffs allege in the court documents that the corporate officers failed to provide the appropriate oversight to ensure that FAA inspection requirements were met. The complaint alleges that the inspections of "a number of airplanes" had been only partially completed by that date. Southwest also was accused by the shareholders of mismanagement and corporate waste.

The shareholders allege in the suit that "defendants allowed Southwest (through the actions of its management) to violate the law by continuing to fly certain of those airplanes (subject to FAA inspection mandates) between March 15, 2007 and March 23, 2007."

William Maxwell, finance professor at the Southern Methodist University Cox School of Business, said the shareholders in this type of suit are not really gaining any financial value from their action. The only party benefiting from this type of complaint, he said, is the lawyers. Maxwell added that from Southwest's point of view, the settlement could very well be a financial decision as opposed to a legal one. "Three and a half million may be cheaper than tying up lawyers and the executives' time," he said.

Both parties confirm in the court filing that they've agreed to settle the derivative suit due to the time and effort associated with continuing to pursue the disagreement. Southwest said in the filing it will implement reforms, including the new position of associate general counsel for operations, to handle operational compliance issues. Southwest does not admit any wrongdoing in the court filing regarding its agreement to settle.

With no clear financial gain on any side, this case in the end may be more about embarrassing corporate leadership to compel action, experts say.

"I do think it is a shot across the bow in the sense that no management wants to have this happen on their watch," said Maxwell. "This is kind of a wake-up call to management."