There were a record number of securities class action lawsuits filed against tech companies in 2019, according to a new report from Cornerstone Research. The report, entitled “Tech Company Securities Class Action Filings and Settlements: 2015-Q1 2020 Review and Analysis” (here) also shows that the number of securities suit filings against tech companies increased each year compared to the prior year during the four-year period from 2016-2019. Cornerstone Research’s July 15, 2020 press release about the new report can be found here.
The report examines the securities suit filings and settlements involving “tech companies,” which in the report consists of five categories of companies Bloomberg Industry Classification System: (1) Computers; (2) Internet; (3) Semiconductors; (4) Software; and (5) Telecommunications. In analyzing “filings” the report only looks at “core filings” – that is federal and state securities class action lawsuits alleging violations of the federal securities laws. The report does not consider M&A-related filings or merger objection lawsuits.
The Number of Tech Company Securities Suit Filings
According to the report, there were a total of 85 state and federal securities class action lawsuits filed against tech companies in 2019, of which 65 were filed in federal court and 20 were filed in state court. The total of 85 tech company filings in 2019 is a record. The 85 tech company filings in 2019 represents a 44 percent increase over the 55 tech company filings in 2018 (45 of which were filed in federal court and 10 of which were filed in state court). The Internet and Software subsectors accounted for 66 percent of tech company filings in 2019.
Consistent with the overall increase in the annual number of securities suit filings during the period, the number of securities suit filings against tech companies increased every year during the four-year period from 2016 (when there were 28 tech company filings) to 2019 (when there were 85 tech company filings). Filings against tech companies accounted for 20 percent of the overall total number of securities suit filings during the period 2016-2019/.
Filings in State Court vs. Filings in Federal Court
State court filings as a proportion of all tech company securities suit filings has increased from 9 percent in 2017 to 18 percent in 2018 to 24 percent in 2019 to 33 percent in Q1 2020. The report attributes the shift toward state court filings to the U.S. Supreme Court’s March 2018 decision in the Cyan case, which confirmed that state courts retain concurrent jurisdiction for ’33 Act liability actions. Securities suits against tech companies have been filed in a wide variety of states including California, New York, Nevada, Massachusetts, Pennsylvania, Florida, Georgia, and Colorado.
The Impact of COVID-19
The report notes that the number of tech company securities suit filings declined in the 1Q 2020, “Likely due to the slowdowns associated with the COVID-19 pandemic.” The report notes that while the full impact “remains to be seen,” there is “potential” for an increase in tech company securities class action lawsuits, “based on the economic slowdown an operational issues associated with the pandemic.”
Market Capitalization Losses
Because of the rising number of filings over the last four years, the aggregate market capitalization losses that the tech company securities suit filings during that period represent “historically large amounts.”
The aggregate Disclosure Dollar Loss (DDL) of tech company securities suit filings rose to $161 billion in 2019, an increase of 27% from the $127 billion in 2018. DDL is the dollar value change in the defendant company’s market capitalization from the trading day immediately before the end of the class period and the trading day immediately following the end of the class period.
The aggregate Maximum Dollar Loss (MDL) of tech company securities suit filings in 2019 was $614 billion, more than double the $282 billion in 2018. MDL is the dollar value change in the defendant company’s market capitalization from the trading day during the class period with the highest market cap to the trading day immediately following the end of the class period.
Tech company securities suits filed in state courts generally represented smaller market capitalization losses compare to the tech company securities suits filed in federal court. In 2019, state court cases represented only four percent of the DDL Index of company filings, while making up 24 percent of the filings.
The number of tech company securities suit settlements varies from year to year. There were only seven tech company securities suit settlements in 2019, compared to 21 in 2018. The seven settlements in 2019 is the lowest annual number of tech company securities suits settlements during the five year period from 2015-2019.
For both tech and non-tech company defendants, cases with larger settlement amounts tend to take longer to settle; however, on average, during the period 2015-2019, tech company securities suits settled more quickly. Only four percent of tech companies’ securities cases during that period took more than five months to settle, compared to 16 percent for non-tech company securities suits.
In general, during the period 2015-2019, the annual median amount of tech company settlements was lower than the median amount of settlements involving non-tech companies. However in 2019, the median tech company securities suit settlement was $17 million compared to $11 million for non-tech companies.