Opt-outs “remain a small yet significant part of the overall securities class action landscape,” according to a recently updated Cornerstone Research report written in conjunction with the Latham & Watkins law firm. The report, entitled “Opt-Out Cases in Securities Class Action Settlements” (here) notes that the opt-out rate has more than doubled in the most-recent four year period and that opt-outs remain more likely in larger dollar settlements. Cornerstone Research’s September 25, 2019 press release about the report can be found here.
Opt-Out Numbers and Rate
The research is based on a review of a database of 1,775 class action settlements from January 1, 1996 to December 31, 2018. Of the 1,775 settlements in the database, 82 (4.6%) involved opt-out cases. These overall figures are significantly affected by the increased opt-out rate in the most recent four year period. Of the 382 securities class action lawsuit settlements during the period 2014-2018, 34 (8.9%) involved opt-out cases. The 8.9% opt-out rate during the most recent four-year period contrasts with a 3.4% opt-out rate prior to 2014.
The two years with the highest number and percentage of opt-out settlements during the 22-year period reflected in the database were 2016 (when 12 out of 85 settlements, representing 14.1% of settlements, involved opt-outs) and 2018 (when 10 out of 76 settlements, representing 13.2% of settlements, involved opt-outs).
Case Law Developments Affecting Opt-Out Rate
Recent case law developments may be a factor in the rise in the opt-out rate. As discussed here, in June 2017, the U.S. Supreme Court held in the California Public Employees Retirement System v. ANZ Securities that the Securities Act of 1933’s three year time limit is a “statute of repose” that cannot be tolled by the filing of a class action complaint. One of the practical consequence of this holding is that class members may not be able to wait until a class action has settled in order to determine whether or not to opt-out, as a result of which some investors may choose to pre-emptively file an opt-out action.
As the report notes, the case law developments “may have factored into the relatively large percentages of opt-outs in the period 2016-2018, as putative plaintiffs may have decided to opt out preemptively in order to preserve their right to sue.”
Opt-Outs Most Common in Larger Dollar Value Suits
While opt-out cases represent a small but growing securities litigation phenomenon, it remains most relevant with respect to the larger dollar value settlements. Essentially, the larger the settlement is the likelier it is that there will be opt-out cases associated with the settlement.
Thus, between 2014 and 2018, 28 percent of cases with class action settlements over $20 million involved opt-outs, while for settlements below $20 million the opt-out rate was only 2.1 percent. And while settlements over $20 million represented only 26 percent of all securities class action settlements during the period 2014-2018, they represented over 80 percent of the opt-out cases during the four year period.
These trends are even more pronounced with respect to the so-called “mega” settlements (that is, settlements over $500 million). During the period 1996-2018, 15 of 23 settlements over $500 million (65%) had associated opt-outs. All four of the settlements over $500 million during the period 2014-2018 involved opt-out cases, compared with only 7.4% of all settlements below $500 million.
The motivations of the opting-out plaintiffs are easy to discern. As the report notes, “plaintiffs elect to opt out because of the potential for better outcomes.” There is some evidence to suggest that, indeed, opting-out plaintiffs do fare better than members of the class. Between 1996 and 2014 in reported settlements opt-out plaintiffs received an additional 13 percent over other class plaintiffs, while in six cases the opt-out premium was over 20 percent.
The VEREIT Case
Developments in connection with one recent securities class action lawsuit seem to reflect many of the settlement and opt-out trends noted in the report. As discussed here, in October 2018, and in connection with the securities class action lawsuit pending against VEREIT (successor in interest to American Realty Capital Partners) entered three separate opt-out case settlements with four large institutional investors totaling $217.5 million, while the class action itself remained pending. (A later separate opt-out case settlement brought the total of opt-out settlements to $245.4 million, and then later still, the company entered a further opt-out settlement, increasing the total value of the opt out settlements to $272.4 million.) Several institutional investors seemed to have opted-out preemptively, and also negotiated settlements separate from the class. In September 2019, the company reached a settlement of the class action of $738.5 million.
Implications for Class Action Parties
The increasing prevalence of opt-out litigation has significant implications for all of the parties. For defendants, if more institutional investors feel compelled to opt-out preemptively, this could “have the effect of driving up the cost of litigation … as they may need to defend multiple suits, sometimes in different jurisdictions.” Plaintiffs also could face increased attorneys’ fees and costs, as well as increased uncertainty.
The report does not discuss it, but the increased opt-out rate has significant implications for D&O insurers as well, particularly for excess D&O insurers. The increased costs associated with opt-out litigation could not only significantly increase insurers’ overall loss costs, but could have the effect of driving loss costs into the higher-attaching excess layers. Increased prevalence of securities class action opt-out litigation represents a heightened severity risk for the excess insurers and significantly increases the risk to higher level excess players that their limits will be exposed either as a result of increased defense expense or as a result of the aggregate amounts paid to settle both the class and opt-out litigation.
Class action litigation is often viewed negatively in the corporate and insurance world but it does have the undeniable advantage of efficiency. The increased splintering of previously collective litigation is in efficient, and it carries the risk of significantly increased costs.
At a time when companies and their D&O insurers are already facing escalating securities class action frequency and increasing severity from securities class action litigation, merger objection litigation, and shareholder derivative litigation, this latest related-litigation dynamic is a very unwelcome development.
I discussed these concerns about opt-out litigation in much greater detail in my blog post (here) written in connection with the VEREIT opt-out litigation settlements.