One of the procedural innovations the PSLRA introduced was the requirement that plaintiffs’ counsel who file a securities class action lawsuit complaint must issue a press release announcing the complaint’s filing and notifying prospective class members of the opportunity to seek to become lead plaintiff. Plaintiffs’ lawyers quickly realized the potential publicity value for them from this exercise. Over time, related practices have developed, including the now commonplace practice in which plaintiffs’ lawyers issue a press release before they have filed a suit, announcing that they are “investigating potential claims.” While this practice is now familiar, it is still worth considering what the pre-suit communication tells us about the prospective lawsuit.

In a recent paper, four academics have examined this question; their article concludes that what the authors call “plaintiff’s attorney marketing” not only signals the likelihood of future litigation, but also may indicate severity of the litigation. The four authors are Steven E. Kaplan of Arizona State University, and Adi Masli, Matt Peterson, and Eric H. Weisbrod of the University of Kansas. Their article entitled “Corporate Ambulance Chasing? Plaintiff’s Attorney Marketing as a Signal of Corporate Litigation Risk,” can be found here. The authors’ May 23, 2024, post on The CLS Blue Sky Blog summarizing their article can be found here.

The authors evaluated a sample involving 4,500 public companies over the period from 2013-2020. The authors collected data on announcements (in the form of press releases and tweets) from the companies during the eight-year study period, in order to identify plaintiffs’ attorney investigation announcements. The authors examined a total of 167,357 investigation articles and 30,831 investigation tweets during the sample period.

Based on their analysis, the authors determined that overall, investigation announcements were “relatively rare,” occurring in only about 3 percent of company-months. But, the authors determined, when these announcements do occur, “subsequent litigation is much more likely.”

The authors determined that the “baseline probability” of a company in the sample getting sued in the next twelve months is about 18.7 percent. They further determined that in months in which an investigation tweet or press release appeared, the probability of future litigation jumps to 45 percent for investigation articles and 46 percent for investigation tweets. Moreover, the probability of future litigation continues to rise with greater numbers of press releases or tweets during the month. That is, not only does the presence of an investigation press release or tweet indicate an increased likelihood of future litigation, but the greater the number of press releases or tweets, the greater the likelihood of litigation.

The obvious objection to these observations is that of course companies that are the subject of the investigation press release or tweet are likelier to be sued, because obviously something happened to the company of sufficient importance to attract the plaintiffs’ lawyers’ attention. The authors themselves acknowledge that the marketing releases are often triggered by adverse corporate events, such as financial restatements, merger announcements, or signs of internal control weaknesses.

Based on their further analysis, the authors conclude that “even controlling for these potential triggers,” the plaintiffs’ lawyers’ marketing releases “remain incrementally informative about future litigation risk,” concluding further that “adding indicators for investigation articles and tweets to a litigation risk model increases the litigation risk model’s predictive power by 33 percent. The authors interpret these results as suggesting that “plaintiffs’ attorneys’ marketing efforts signal their judgment about a case’s potential viability.”

As a further test of these conclusions, the authors completed additional analysis with respect to financial restatement announcements, which the authors characterized as “a known trigger of shareholder lawsuits.” Even controlling for “restatement characteristics that speak to the potential merits of a case,” such as, for example, an indicated of fraud, the existence of plaintiffs’ attorney investigation articles or tweets in a three-day announcement window “remains strongly predictive of future litigation.”

The authors also considered the possibility that plaintiffs’ attorney marketing “may causally facilitate corporate litigation by connecting attorneys with potential plaintiffs.” The authors specifically found that due to an alteration in the algorithm that determines which tweets are displayed in a user’s Twitter feed, in which tweets most relevant to the user based on the user’s prior activity were displayed first, investigative tweets became incrementally more predictive of future litigation. The authors conjecture that this use of social media may have played a causal role in facilitating litigation by reducing the coordination costs between plaintiffs and law firms.

The authors acknowledge that courts and others have bemoaned that plaintiff marketing can “undermine regulations aimed at reducing frivolous lawsuits” and that some commentators go so far as to publicly label the attorneys putting out the press releases as “corporate ambulance chasers.”

However, whatever one may think of these marketing practices, the incorporation of plaintiff attorney marketing into litigation risk models “meaningfully increase(s) the predictive ability” of the model. Moreover, the authors conclude, the attorney marketing efforts are “not merely associated with the incidence of lawsuits but reflect value-relevant information about attorneys’ assessment of corporate liability.” The plaintiff’s attorneys’ marketing releases are “an informative, timely, and publicly available signal of the likelihood of corporate litigation, and, to a lesser extent, its potential severity.”

Discussion

On one level, it may be observed that the authors have merely concluded that when plaintiffs’ lawyers make a public statement that they have zeroed in on a specific company, it is likelier that the company is going to be sued. However, there is, in my view more to the authors’ analysis that this. For starters, the authors have quantified the probabilities, and demonstrated the general likelihood that companies that are the subject of one of these press releases are likelier to get sued.

Here is what I see as the value of these observations. Many times over the years I have found myself in conversation with management or counsel for a company that has been the subject of one of these attorney marketing press releases. My universal practice in these circumstances is to recommend that the company provide to its D&O insurer a notice of circumstances that may give rise to a claim. A surprisingly larger percentage of time, the company’s management or counsel will push back on the recommendation, usually on the ground that the prospective litigation would be frivolous or that the notice itself is just the product of ambulance chasers just trying to drum up business.

These kinds of observations may, at some level, be valid, but they don’t change the wisdom of providing a notice of circumstances to the company’s D&O insurers; as the authors’ analysis shows, a company that is the subject of an investigation press release is much likelier to get hit with a securities suit. Better for the company to conduct itself accordingly.

Another valuable observation in the authors’ paper is their conclusion these attorney marketing practices may serve a “causal role in facilitating litigation.” The authors’ analysis of this phenomenon was focused in particular with respect to the attorneys’ social media practices, but it is my observation that attorney marketing practices serve this role, whether the medium used is Twitter (or its current successor, X) or a more traditional press release.

The point is, the plaintiffs’ lawyers putting out the communication are trying to find plaintiffs to represent, preferably ones with a greater financial interest in the lawsuit who are therefore likelier to win the lead plaintiff derby. Indeed, the attorneys’ interest in using these communications to find clients to represent is so well understood that these kinds of attorney marketing efforts are universally referred to as “trolling press releases,” meaning that they attorney using the press release to troll for clients. While the reality of these practices are well-understood on a common sense basis, the authors’ research is helpful to identify, describe, and quantify these practices.