There is no doubt that, as I have previously noted on this site, the conversation about ESG has changed over time, particularly as ESG has faced a political backlash. These changes not only concern ESG itself but each of its three constituent pillars – and while ESG discussions frequently focus on the “E” pillar, and in particular on climate change, the changes in the ESG conversation also concern the “S” pillar as well. Of the recent changes surrounding the Social component of ESG, arguably none is more important that the U.S. Supreme Court’s 2023 decision in Students for Fair Admissions v. Harvard College, in which the Court ruled that race-based policies should not be used in university admissions. In a May 23, 2024, Law360 article entitled “The State of Play in DEI and ESG One Year After Harvard Ruling” (here), attorneys from the Crowell & Moring law firm review the ways that the Supreme Court’s decision in the Harvard case have changed the dialog surrounding Diversity, Equity and Inclusion (DEI) and ESG.

Continue Reading ESG, DEI, and the Supreme Court’s College Admissions Decision

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.

Long-time readers may recall that just a short time ago there was growing concern that New York’s courts might be becoming a preferred forum for aggrieved investors to pursue liability claims against non-U.S. companies’ executives, based on the companies’ home country laws. However, in early 2022, just as the alarm bells began to sound, New York courts issued a series of rulings dismissing various cases of this kind, suggesting that the furor might have been overblown. But even following these events, concern remained that New York’s courts might still prove to be available in at least certain circumstances for claims under home country law against non-U.S. companies and their executives.

A recent decision from a New York trial court, in which the court denied the defendants’ motion to dismiss a breach of fiduciary duty claim brought under Cayman law against former officers and directors of a Cayman company, confirms that, under some circumstances at least, New York courts may be an available forum for litigants to pursue these kinds of claims involving non-U.S. companies. The fact that the Court accepted the case, and the considerations that proved to be relevant to the court, are both instructive.

Continue Reading NY Court Keeps Cayman Law D&O Suit Involving a Cayman Company
Assen Koev

The resolution of many securities class action lawsuits would benefit from an economic assessment early in the case process. In the following guest post, Assen Koev argues in favor of a standardization of the initial economic assessment analysis as a way to provide the parties and concerned insurers with a clearer picture of the securities lawsuit at an earlier point in the case. Assen is an economic consultant and founder of SCA iPortal. A version of this article previously was published on Law360. I would like to thank Assen for allowing to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Assen’s article.

Continue Reading Guest Post: Standardizing Early Case Appraisal in Securities Class Actions

There is no doubt that ESG both as a concept and as a social, political, and litigation phenomenon has changed over time. Due to political backlash and changing investor priorities, ESG and ESG-related issues recently have featured less prominently in general economic and business dialog than even just a short time ago. An interesting and thought-provoking May 2, 2024, article (here) from the Rock Center for Corporate Governance asks the question whether the circumstances surrounding ESG are changing because ESG “is a luxury good”? (Hat Tip to Cydney Posner’s May 13, 2024, post on the Cooley law firm PubCo blog, here). The article raises some interesting questions and reflects interesting data and observations.

Continue Reading Is ESG a “Luxury Good”?
Brent Stevens

In the following guest post, Brent Stevens analyzes and summarizes the findings from the 2024 Claims Litigation Management Defense Counsel Study. Brent is a Senior Director at Consilio and leads Consilio’s Insurance Vertical, serving Consilio’s Insurance Industry clients, including carriers, brokers, and their law firms. I would like to thank Brent for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to the site’s readers. Please contact me directly if you would like to submit a guest post. Here is Brent’s article.

Continue Reading Guest Post: Navigating Key Insights from the 2024 CLM Study
Peter C. Fischer
Burkhard Fassbach

In the following guest post, Peter C. Fischer and Burkhard Fassbach explore the reasons why board members of German companies would be well-advised to negotiate a clause in their service agreements requiring their companies to procure D&O insurance, as well as the preferred terms and provisions that the D&O insurance should incorporate. Peter is a Professor of Law at the University of Applied Sciences Dusseldorf and Burkhard is a D&O lawyer in private practice in Germany. A version of this article in German previously was published in the law journal GWR. I would like to thank Burkhard and Peter for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.

Continue Reading Guest Post: The German D&O Procurement Clause Revisited

Here at The D&O Diary, we read everything so you don’t have to. One item that crossed my desk this week particularly resonated with me. The specific item was the court’s dismissal motion grant in the securities class action lawsuit pending against the footwear and apparel company Allbirds.

The plaintiffs had tried to argue that by their use in their complaint of bold and italicized font they had indicated which of the defendants’ statements they (the plaintiffs) alleged to be false and misleading. The court said it could not discern from the plaintiffs’ typography what statements or portions or statements were supposed to be misleading and granted the defendants’ dismissal motion with leave for the plaintiffs to attempt to replead. While the ruling could be only a setback for the plaintiffs, there arguably are some lessons here for all of us that should not be overlooked.

Continue Reading Boldface and Italics Not Enough to Identify Misleading Statements

In a recent decision in an insurance coverage dispute, the Delaware Superior Court granted the insurers’ motions to dismiss, holding that coverage under two towers of insurance was precluded, respectively, by the No Action clause and the Past Acts Exclusion. Insurance coverage practitioners and observers will find this decision interesting in and of itself, for what it says about the relevant policy provisions, and as a general matter, as an example of a Delaware court coverage decision. As discussed below, the decision arguably is an expectations-defying example of an insurer-friendly Delaware court coverage decision. A copy of the court’s May 9, 2024 decision opinion can be found here.

Continue Reading Del. Court Dismisses Coverage Suit Based on No Action, Prior Acts Clauses

As I have noted on this site in discussing artificial intelligence, among the risks and opportunities that the recent rapid emergence of AI represents for organizations of all kinds are the risks associated with AI-related regulatory oversight and supervision. Until now, references to AI-related regulatory concerns have mostly pertained to the EU’s Artificial Intelligence Act, which the European Parliament approved in March of this year. It is now clear that AI-related regulatory concerns likely will also extend to supervisory efforts of U.S. states as well, as reflected in the Colorado legislature’s May 8, 2024 passage of the Colorado Artificial Intelligence Act. This legislation, if signed into law by Colorado governor Jared Polis, would make Colorado the first U.S. state to enact comprehensive AI-related regulation.

As discussed below, the Act may or may not become law, but whether or not it does become law, it contains key signposts concerning the likely course of future AI-related regulation, as well as key AI risk management measures that well-advised companies will take to try to address their AI-related regulatory risk.

Continue Reading Colorado Legislature Passes U.S.’s First State AI Regulatory Bill