Over the last several days, Doug Greene of the Lane Powell law firm has been running a series of articles on his D&O Discourse blog asking the question “Who is Winning the Class Action War?” In the aggregate, the multi-part series provides an interesting commentary on the current state of securities class action litigation in the United States. The articles in the series are thought-provoking and provocative — apparently deliberately so — and I commend them to readers for the perspective they provide on the current state of play in securities litigation, from the outlook of an experienced defense-side securities class action litigator.
Based on my own varied experiences, I have my own perspective on some of the topics Greene discusses in his articles, which I have set out below. I want to emphasize at the outset that I am neither entirely disagreeing with nor entirely agreeing with Greene’s analysis and conclusions. I offer my thoughts here for whatever they may be worth, as part of the dialogue that Greene’s articles undoubtedly will provoke.
Greene wrote his series in three parts. The first of the three articles (here) reflects his premise that the securities class action plaintiffs’ bar is relatively small, specialized and has “the capacity to coordinate.” The plaintiffs’ bar’s relatively small is size and capacity for cohesiveness put the plaintiffs at a relative advantage to the defense bar.
In the second of the three articles (here), Greene postulates that the defense bar, by contrast to the plaintiffs’ bar, is “splintered, relatively inexperienced, and highly inefficient.” The result is that the defense interests are not represented in a systematic, coordinated way; this lack of coordination and coherence affords the plaintiffs’ lawyers certain advantages.
In the May 15, 2017 final installment of the three-part series (here), Greene discusses the ways he proposes to try to address these shortcomings. Specifically, he proposes that D&O insurers should take a more active role in coordinating defense activities and the defense of individual securities claims.
Greene is a skilled advocate, and he has written a well-structured brief in which he has lined up a series of propositions to support his conclusions. I have no interest in even attempting to try to provide a brief in opposition, and in fact, I ultimately don’t disagree with Greene’s final premise that there is a potential role for the D&O insurance industry to help improve securities suit processes and outcomes. Whether or to what extent the specific remedies Greene has proposed are feasible or even desirable is another question; to the extent those within the securities litigation bar or the D&O insurance industry take up the questions Greene has posed, I offer my thoughts on Greene’s brief, for whatever they may be worth.
There is one particular point on which I want to start, a point on which I agree with Greene; because this point comes relatively deep into the progression of Greene’s thoughts, I want to highlight it at the outset here, if only to ensure that it is not overlooked. That has to do with the potential value of greater collaboration and coordination between defense counsel and the D&O insurers.
In the third article in the series, Greene correctly observes that in many instances the D&O insurers’ representatives have “been involved in exponentially more securities class actions than even the most experienced defense lawyers.” He then goes on to make an observation that I hope is read and internalized by every defense lawyer in the country: “I have achieved superior results for many clients by working collegially with insurers – from helping to shape motion-to-dismiss arguments, to learning insights about particular plaintiffs’ lawyers and their latest tricks, to selecting the right mediator for a particular case, to achieving favorable settlements.” He concludes by saying that “given this expertise and alignment of interests, defense counsel should involve insurers in the defense of the case as part of their responsibility to their clients.”
This observation on Greene’s part is critically important. Many of the top securities litigation defense lawyers also know and understand this point, but others do not. These other defense lawyers treat the insurers and their representatives with hostility; their instinctive hostility poisons the claims process and undermines the efficient resolution of their clients’ claims.
A different but related problem is the (fortunately small) number of defense lawyers who regard the insurers’ representatives not just with hostility but with contempt. True story – once when I was on the carrier side handling a claim, a particular defense counsel, in order to justify a position I had questioned, told me in no uncertain terms that I could not question his views because he is “the best securities lawyer in the country.” He was serious.
These kinds of attitudes not only undermine the entire claims process, but they introduce barriers impeding their clients’ best interests. Greene is correct that the best approach is to recognize that, as repeat players in the process with aligned economic interest, the insurers and their representatives not only have an important role to play but can in fact provide valuable collaboration. However, as I emphasize below, there is work the insurers need to do to help encourage greater collaboration, as well.
Having emphasized this important point about the potential benefit from greater collaboration in the claims process, I now want to turn to several of the premises on which Greene builds his analysis.
First, while the plaintiffs’ bar is relatively small compared to the defense bar, I question whether it is as coherent or cohesive as Greene postulates. Indeed from my perspective, there is at least one huge split within the plaintiffs’ bar, as well as a number of smaller divisions.
The biggest division in the plaintiffs’ bar is the split between the larger, higher-profile, and more well-established securities plaintiffs’ law firms, and the recently more active breed of smaller and more prolific plaintiffs’ law firms. As well documented in a blog post on this site by Professor Michael Klausner and Jason Hegland of Stanford Law School, these recently more active smaller law firms, whom Klausner and Hegland call “emerging law firms,” are responsible in significant part not only for the recent increase in securities suit filings, but are also responsible for an overall decline in average case quality. In moments of candor, the attorneys at the larger and better established plaintiffs’ law firms are disdainful of these firms’ actions, and are even express alarm that these smaller firms’ propensity to file a high volume of less meritorious lawsuits presents a threat to overall business model.
Another related but different split within the plaintiffs’ bar is between those whose business model is to try to file a lawsuit every time a merger is announced and those in the plaintiffs’ bar who see this proliferation of litigation as much as a problem as the defense bar does. The larger and more experienced firms want to keep all procedural alternatives available to represent their clients’ interests when circumstances arise where litigation is the appropriate step in response to a proposed merger transaction. These larger more experienced firms are concerned that judicial and legislative responses to the rash of merger objection lawsuits will undermine their ability to pursue more meritorious cases when circumstances require.
One final comment about plaintiffs’ bar’s supposed coherence. Some of the nastiest disputes out there are the fights that frequently emerge between various plaintiffs’ firms about the division of their fees. While it is true that the plaintiffs’ bar is smaller than the defense bar, it is in its own way riven by division and contentiousness.
While I also have many thoughts about Greene’s comments about the defense bar, in the interests of brevity, I want to turn to Greene’s suggestions for bringing about greater D&O insurer in the claims process. In this respect, I want to address some of the basic premises behind Greene’s specific suggestions.
First and foremost, while I agree that greater cooperation between defense counsel and the D&O insurers would serve claims-handling and claims-resolution efficiency, I am not as sanguine about the D&O insurers taken as a whole as Greene is. Greene is much more positive about D&O insurers’ claims handling practices than I am afraid I can be, and I say that as someone who spent the first half of my career on the carrier side. Among other things, Greene says, in support of his proposal for greater D&O claims involvement, “there is very little D&O insurance coverage litigation.” On its face, this is true, especially relative to the volume of coverage litigation we used to see in the 80s and 90s. As the policy has opened up and has coverage has expanded, there are simply fewer issues for the carriers to litigate.
The reduction in litigation does not mean that the carriers are not disputing claims and resisting claims payments. Indeed, I spend that better part of every single day battling with D&O insurers on claims issues, all too often fighting with them on claims positions they have taken that are at best a stretch and at worst unwarranted and unjustified. Greene says, and I agree, that “a D&O insurer’s business is not to avoid paying claims.” Unfortunately, there are a number of front line D&O claims representatives who never saw that particular memo.
To be sure, many of the claims that are taking up my time are not the kind of public company D&O claims in which Greene is involved and all too often the very experienced claims representatives of the type that Greene lauds are not involved in these claims. But I have to say I am sometimes discouraged by the quality of the claims response of some D&O insurers. I hasten to add that there are many skilled claims representatives to whom these criticisms do not apply, but unfortunately there are others to whom these criticisms are applicable.
The problem for everyone arising from the combative mode some D&O insurers sometimes adopt is that other process participants become conditioned to be wary of the insurers. This wariness has a corrosive effect on the claim process. The wariness also undermines the kind of salutary collaboration that Greene advocates and that I discussed above. Greene emphasizes the need for defense counsel to adopt a more collaborative approach, which sentiment I applaud. At the same time, there is a fundamental need for D&O insurers on their part to examine their own claims practices. If insurers want to be viewed as collaborative partners, they have to eliminate claim practices that sow distrust.
One of the most important propositions Greene makes in his series of articles is that in order for the defense side to start doing a better job “winning the war,” the D&O insurers should play “a unifying role” across all categories of defendants. This is an intriguing proposition and one that is worthy of examination and discussion. I have several points to make about this observation.
First, I want to make a point about the D&O industry. In support of his proposal for greater D&O control, Greene suggests that “though the number of insurers may seem large to many, from my perspective it is a relatively small and close-knit group.” At one level, I think I know what Greene means. But at another level, the evidence sometimes is to the contrary. Experience even across just a few individual claims suggests that the insurers do not always function as a cohesive group and their separate views of their own interests often do not align. Even just on the individual claim level, it is a frequent occurrence that the upper level excess insurers are antagonistic with the primary and lower level excess insurers. All too frequently, there is disagreement (sometimes vehement) over whether coverage positions are merited or should be asserted. ( I have recently seen some particularly unpleasant disputes in that regard.) That propensity for fractiousness that can complicate individual claims is equally present when it comes to more collective or general action.
There was in fact an attempt to bring about coordinated action among the D&O insurers in the early 2000s. One of the most highly respected senior company level officers of one of the largest insurers convened a meeting of senior executives from many of the leading D&O insurers. It was an interesting meeting, with a number of interesting ideas expressed. Unfortunately, the ambitious and laudatory initiative quickly fell apart. When it became clear that there were going to be cost implications involved with trying to coordinate, there was no agreement on how costs would be shared. The initiative died stillborn, despite its initiation by one of the most respected individuals in our industry, and despite the obvious incentive for all of the participants to try to collaborate.
The fact is that the D&O insurance industry consists of a host of different players who see their roles and who see their interests very differently. It is not just that the primary players and the excess players often have dramatically diverging view, but there is also the fact that the participants in the D&O insurance industry are fighting each other tooth and nail every single day on in the D&O insurance marketplace. The participants all have deeply engrained opinions about who they think the problem is in the industry (unsurprisingly, the uniform view is that the problem is “the other guy”).
The D&O industry is not a unified body. For that reason, it is an uncertain proposition at best that D&O carriers can be expected to cohesively play the coordinating role Greene has proposed. I question his suggestion that “the D&O insurance community is well-suited to be the glue that fixes the fractured defense bar.”
Second, one of the specific ways Greene suggests D&O insurers could be give more control, at least on the individual claims level, is that the industry should move to offer public company D&O insurance on a “duty to defend” basis. From my perspective there would be little interest in this offering and I think it would not be welcome either from the brokers or from the ultimate buyers. When serious claims emerge, companies want their own counsel, they don’t want counsel chosen by the carrier.
Regardless of whether or not a duty to defend option is commercially feasible, it is not practically workable and it would not produce the result that is the basis on which Greene has made the proposal. The fact is that the insurers routinely reserve their rights to deny coverage at the outside of serious D&O claims. For example, most securities class action lawsuits involve allegations of fraud; the carriers reserve their rights to deny coverage in the event the fraud claims are substantiated by an “adjudication.” Greene recognizes this concern but suggests that this problem can be resolved with the appointment of Cumis counsel (that is, by the appointment of independent counsel). I don’t see how this sequence solves anything. The very point of Cumis counsel is that they are not beholden to the insurers or subject to their control; if Cumis counsel are going to have to be a regular part of the process, hoped-for cost efficiencies could be lost. I am not sure that will lead to a better process or better outcomes.
I have to pause here to apologize for my skepticism. Underlying Greene’s thesis is a wellspring of optimism, particularly with respect to the positive role that the D&O insurers might play to help improve the process and outcomes. In the face of such a positive outlook, I hate to sound so negative and cynical. In particular, I am sorry to sound as if I disagree with Greene’s ultimate thesis that the defense approach to securities class action lawsuits would be bolstered by allowing the D&O insurers to play a greater role. The fact is that when it comes to this fundamental proposition, I agree with Greene. So while I may disagree with many of the points that Greene makes along the way, I am not disputing his argument in favor of greater collaboration between defense counsel and the D&O insurers.
In fact, I hope that Greene’s essays will encourage serious discussion of this idea, and that as a result of this discussion ways can be found that from a practical perspective help facilitate greater D&O insurer involvement.
Careful readers of Greene’s articles will note that I have I have not addressed the starting point for Greene’s analysis, which is the assertion that the plaintiffs’ lawyers are winning the securities litigation war. I have not discussed this because even after reading Green’s analysis, I am not sure what to make of it. If you had asked me out of the blue before I saw Greene’s articles, I probably would have said that overall the dynamic has been in the defendants’ favor. There is no doubt that the dismissal rate has gone up, and the defense bar has done a good job marshalling favorable U.S. Supreme Court precedents to defend their clients. For that reason, I am interested to know what others’ think of Greene’s suggestion that the plaintiffs’ are winning the securities litigation wars.
The one thing I know for sure about the securities litigation wars is that the battles have become a lot more costly. For that reason, I think it is in everyone’s interest – or at least everyone on the defense side of the table – to explore ways to try to ensure that claims are handled and resolved in the most cost effective way possible. Greene’s suggestion that greater carrier involvement may have bring about more efficient claims processing and resolution has merit and is worth exploring, and I hope his series of blog posts may encourage discussion of these issues. I also hope my grumpy and skeptical comments do nothing to discourage the dialogue.