The number of federal court securities class action lawsuit filings during 2019 was consistent with the heightened number of filings in each of the two prior years. The total number of suits during 2019 was significantly increased by the number of federal court merger objection lawsuit filings, but even just with respect to the traditional suit filings, the number of securities suit filings in 2019 was well above historical levels. The 2019 federal court securities litigation rate (that is, the number of lawsuits relative to the number of listed companies) was at an all-time high.
The Number of Federal Court Securities Class Action Lawsuit Filings: There were a total of 404 federal court securities class action lawsuit filings in 2019, which is slightly above the 2018 total of 402 but slightly less than the 2017 total of 412.
The annual totals in each of the last three years far exceed historical annual filing levels. For example, the 404 federal court securities lawsuit filings is nearly double (+99%) the 1997-2017 annual average number of 203 filings. The 404 federal court filings during 2019 is the second highest annual number of filings ever, excepting only 2001, a year in which the total number of filings (498) was inflated by the number of IPO laddering lawsuits.
The Litigation Rate: While the number of lawsuits filed each year is of significant interest to companies, insurers, and other observers, the rate of litigation (that is, number of lawsuits relative to the number of listed companies) arguably is of much greater significance. As the number of lawsuits has increased and the total number of listed companies had decreased over the years, the litigation rate has been going up, especially in comparison to long-term trends.
Using the 2018 year-end number of U.S. publicly traded companies (4,406), and subtracting the 22 non-exchange listed defendant lawsuits (for example, cases filed against cryptocurrency companies and OTC companies) from the 404 total number of securities lawsuits filed in 2019, leaving 382 lawsuits against listed companies, translates to a 2019 litigation rate of 8.66%, meaning that in 2019, just under one out of every eleven U.S. listed companies was hit with a securities suit. A litigation rate of 8.66% represents the highest-ever annual rate of litigation, exceeding even the elevated levels experienced in 2017 and 2018 (when the rate was 8.4%, both years). To put this in the simplest terms, the likelihood of a U.S.-listed company getting hit with a securities suit is the highest it has ever been.
The Litigation Rate for Traditional Securities Suits: Obviously, the high number of merger objection lawsuit filings (which is discussed further below) significantly inflates the litigation rate. If the merger objection lawsuits are taken out of the equation and only traditional lawsuits filed against listed defendants are considered (of which there were 231 in 2019), and the year-end 2018 number of public companies (4,406) is used for calculation purposes, the 2019 federal court securities litigation rate calculates to 5.24%. This litigation rate implies that in 2019, the chance of a publicly traded company getting hit with a traditional federal court securities suit is about one in twenty.
The 2019 traditional securities suit litigation rate is far above historical levels; at the end of 2018, Cornerstone Research calculated the 1997-2017 “core” lawsuit litigation rate as 2.9%. In other words, the likelihood in 2019 of a company getting hit with a securities suit was nearly double the long-term average annual likelihood. The 5.24% core litigation rate in 2019 is also the highest it has ever been, exceeding even the elevated levels experienced in 2017 (4.2%) and in 2018 (4.5%).
The Number of State Court Securities Lawsuit Filings: In addition to the significant number of federal court lawsuit filings in 2019, there were also a significant number of state court securities class action lawsuit filings. As a result of the U.S. Supreme Court’s March 2018 ruling in the Cyan case – in which the court confirmed that state court’s retain concurrent jurisdiction for liability actions filed under the Securities Act of 1933 – a number of securities suit have been filed in state court. While many of these state court suits have parallel federal court lawsuits, a number of the state court filings are standalone actions.
State court filing data is harder to gather than federal court data, and the total number of state court securities suit filings through year-end 2019 is not yet available. However, according to research by Stanford Law Professor Michael Klausner and his Stanford Securities Litigation Analytics colleagues Jason Hegland, Carin LeVine, and Jessica Shin, through October 31, 2019, there were a total of 39 securities class action lawsuits filed in state court, of which at least 20 were standalone actions. Even if just this partial-year number of standalone securities suit is taken into account and added to the number of federal court lawsuits filed during the year, the combined total of 424 exceeds the equivalent year-end 2018 total of 420. Given that there likely were additional standalone state court actions filed in the final two months of 2019, it is likely that the final 2019 total will even further increase the overall total of 2019 securities class action lawsuit filings.
The Significance of Federal Court Merger Objection Lawsuit Filings: As was the case in 2017 and 2018, the number of federal court securities class action lawsuit filings in 2019 was inflated by the significant number of merger objection lawsuit filings. Since early 2016, and due to a series of rulings by the Delaware Chancery court in which the court evinced its distaste for the disclosure-only settlements by which these kinds of merger suits traditionally were resolved, the plaintiffs lawyers have been filing these merger objection suits in federal court rather than in state court.
In 2019, 158 of the 404 federal court securities class action lawsuit filings were merger objection lawsuits, representing about 39% of all federal court securities suit filings during the year. Of the 158 merger objection lawsuits, 137 (about 86% of all merger objection lawsuit filings during the year) involved alleged proxy statement misrepresentation claims filed under Section 14(a) of the ’34 Act, and 21 (about 13% of all merger suit filings) involved alleged tender offer misrepresentation claims filed under Section 14(e) of the ’34 Act.
The Number of Traditional Securities Lawsuit Filings: While the number of merger objection lawsuit filings was obviously a significant factor in the heightened number of federal court securities suit filings during 2019 (as was also the case in 2017 and 2018), the number of federal court filings during 2019 was still well above historical levels even if the merger suits are disregarded.
There were 246 traditional federal court securities suit filings in 2019, which is about 21% above the 1996-2017 average annual number of securities suit filings (203) during the period 1997-2017. Indeed, an annual total of 246 lawsuits represents a higher annual number of filings than were filed in any year between 2001 and 2016 (the year in which the annual number of federal lawsuit filings began to grow quickly as plaintiffs’ lawyers began filing merger suits in federal court rather than state court). Thus, while the annual number of federal court securities suit filings has been inflated in recent years by the flood of merger objection lawsuits, the number of federal court securities class action lawsuit filings would still be well above historical levels even if there were no merger objection lawsuit filings.
The Federal Court Jurisdictions in Which the Lawsuits Were Filed: The 2019 federal court securities suit filings were filed in 39 different district courts. The district court with the highest number of filings was the United States District Court for the District of Delaware, which had 122 lawsuit filings (representing about 30% of all federal court filings). All of the Delaware federal court filings were merger objection lawsuits.
After Delaware, the district court with the highest number of filings was the Southern District of New York, with 76 suit filings. The next highest after the S.D.N.Y. was the Northern District of California, with 30.
The federal courts in New York and California each collectively had significant numbers of filings. The federal courts in New York, including the Eastern District of New York (25) and the Northern District of New York (1), had a total 102 federal court lawsuit filings. The federal courts in California also had a significant number of lawsuit filings in 2019; in addition to the N.D. Cal., the Central District of California had 16, and the Southern District of California had 4, bringing the total 2019 securities suit filings in California federal courts to 50.
Together there were 152 filings in the federal courts of California and New York combined, representing 37% of all of 2019 federal court securities suit filings.
The Industries of the Companies Hit with 2019 Federal Court Securities Suits: The 2019 federal court securities lawsuit filings hit companies in a wide variety of industries. The companies named as defendants in 2019 federal court securities suits represented 106 different Standard Industrial Classification codes.
The SIC code category with the highest number of securities suit filings in SIC Code 2834 (Pharmaceutical Preparations), which had 30 federal court securities suit filings in 2019. A total of 38 companies in SIC Code Group 283 (Drugs) were hit with federal court securities suits in 2019.
Another life sciences group, SIC Code Group 384 (Surgical, Medical, and Dental Instruments and Supplies) had 13 federal court securities suits in 2019, including 8 in SIC Code Category 3841 (Surgical and Medical Instruments and Aparatus).
Together, a total of 51 companies in these two life sciences groups were hit with federal court securities suits in 2019, representing about 12.5% of all federal court securities suits in 2019.
Another SIC Code category with a significant number of securities suit filings in 2019 was SIC Code Group 737 (Computer Programming and Data Processing), which had a total of 25 federal court securities suits, including 13 in SIC Code Category 7372 (Prepackaged Software). The 25 suits against companies in this group represented about 6% of all securities suits in 2019.
The 76 suits filed against life sciences and high tech companies taken together represents about 19% of all 2019 federal court securities class action lawsuits.
Federal Court Securities Lawsuit Filings Against Non-U.S. Companies: Of the 404 federal court securities class action lawsuits filed in 2019, 62 were filed against non-U.S. companies, representing about 15% of all 2019 federal court securities class action filings.
These suits against non-U.S. defendants involved companies from 22 different countries. The country with the highest number of federal court lawsuits in 2019 was China, which had 17, of which six involved IPO companies. The country with the next highest number of securities lawsuits was Canada, which had 11, of which seven involved companies in the cannabis industry. Other countries with significant number of federal court lawsuits include the U.K., which had nine, and Ireland, which had 5.
It is worth noting that only three of the securities lawsuits filed in 2019 against non-U.S. companies were merger objection suits; the remaining 59 securities lawsuits against non-U.S. companies were traditional lawsuits. These 59 lawsuits against non-U.S. companies represent a significant percentage of the traditional securities lawsuits filed in 2019 — the lawsuits against foreign companies represent about 24% of the traditional lawsuits. The foreign companies listed on U.S. exchanges are hit with U.S. securities suits in far greater numbers than than there presence on the U.S. exchanges would suggest, as non-U.S. companies represent only about 17% of U.S-listed companies.
Federal Court Securities Lawsuit Filings Against IPO Companies: A total of 29 of the 2019 federal court securities class action lawsuits involved IPO companies, representing about seven percent of all 2019 filings. Of these suits involving IPO companies, 5 involved companies that had completed IPOs in 2017, 12 involved companies that had completed IPOs in 2018, and 12 involved companies that completed IPOs in 2019. (Please note that these figures refer only to IPO companies sued in federal court securities suits; many of the state court securities class action lawsuit filings also involve IPO companies.)
Commentary: 2019 was the third year in a row in which there were more than 400 federal court securities class action lawsuits filed. At this point, it is clear that the recent elevated levels of securities class action lawsuit filings represent the new normal. Companies and their D&O insurers must now assume that the chance of any given U.S.-listed company getting hit with a securities lawsuit is far greater than was the case in the past – indeed, the chance of a company getting hit with a securities lawsuit arguably is the highest it has ever been.
The fact that D&O insurers must now assume a significantly higher lawsuit frequency level than in the past is one of several factors driving the current D&O insurance pricing increases.
The fact that over 400 federal court securities lawsuits have been filed in each of the last three years means that there is a massive backlog of cases pending in the courts and swelling the D&O insurers claims portfolio. To be sure, a higher percentage of the total of 1,218 federal court securities suit filings during the past three years have been dismissed than was the case historically. However, even with a significant number of dismissals, a still significant number of cases remain pending.
This backlog of cases is another significant problem for the D&O insurers, as these claims must be managed and adjusted. Reserves must be set for these cases, further undermining current year underwriting results. The sheer number of cases pending has a multiplicative effect on aggregate defense expenses as well, further eroding the D&O insurers’ current year underwriting results.
All of these effects are further magnified by the rise since early 2018 in state court securities class action litigation. As noted above, some of these state court suits are standalone suits; when these standalone state court suits are taken into account, all of the negative impacts from the high levels of federal court litigation are even further exacerbated. While some of these state court suits are duplicative of federal court lawsuits, the number of parallel state and federal lawsuits presents its own set of problems, as defense expenses are increased and as the claim management become complicated by duplicative and potentially conflicting case processing and claims resolution.
The cumulative impact of all these factors and a host of other considerations are among the important reasons that D&O insurance buyers currently face a disrupted insurance market. As the insurers come to grip with the now well-established trends discussed above, they are struggling to find the right approach. All insurers, including both primary and excess insurers, are seeking increased rates; many primary insurers are also requiring increased retentions for many companies, and in some cases, offering only significantly altered terms and conditions.
All signs are that these litigation trends will continue as we head into the New Year. The likelihood is that the current disrupted market for D&O insurance for U.S.-listed companies will continue in 2020, as well. We can only hope that these forces will also lead to further discussion in 2020 of possible renewed securities litigation reform.
A Preview of Coming Attractions: I will be publishing my annual Top Ten D&O Stories report on the January 6, 2020.
Some Final Notes about Data and Methodology: I count each company that has been sued in a securities class action lawsuit for essentially the same allegations only once, regardless of the number of complaints actually filed. This methodology may differ from the methodology used by other public sources that track securities lawsuit filings, which it turn may cause my tallies to differ from other published tallies.
In tracking the securities lawsuits, I rely on a number of different sources including the Stanford Law School Securities Class Action Clearinghouse; Law 360; Justia; ISS Securities Class Action Services; and Stanford Securities Litigation Analytics. I also audit my tally against other resources periodically throughout the year.