Opt-Out Cases in Securities Class Action Settlements

Amir Rozen is a vice president in the New York office of Cornerstone Research; and Christopher Harris is a partner in the New York office of Latham & Watkins LLP. This post is based on a Cornerstone/Latham co-publication authored by Mr. Rozen, Mr. Harris, and Brendan Rudolph.

This post updates our 2013 publication Opt-Out Cases in Securities Class Action Settlements, which provided for the first time a comprehensive quantitative analysis of publicly available lawsuits and settlements of so-called “opt-out” securities cases (cases in which at least one putative class member excludes itself from the class in order to pursue a separate lawsuit against the defendant). This publication supplements the prior study with publicly available information about the opt-outs from securities class action settlements reached between 2012 and 2014. Our database of 1,458 class action settlements now contains 48 opt-out cases from 1996 to 2014.

Key Findings

  • Out of 186 securities class action settlements between January 1, 2012, and December 31, 2014, relying on publicly available data, we identified 10 cases in which at least one plaintiff opted out of the class action settlement and pursued a separate case against the defendant.
  • There is no publicly available information regarding dollar value opt-out settlement amounts in any of the 10 cases. However, in two of the 10 cases certain opt-outs recovered nothing—these cases were dismissed because they were time-barred under the reasoning of the 2013 ruling in Police and Fire Retirement System of the City of Detroit v. IndyMac MBS Inc. (“IndyMac”).
  • Plaintiffs remain more likely to bring opt-out cases stemming from larger class action settlements: 75 percent of class actions with settlements of $500 million or greater reached between 2012 and 2014 had at least one related opt-out case, compared with 4 percent of class action settlements below $500 million. Across all the cases in our database, 58 percent of class actions with settlements of $500 million or greater reached between 1996 and 2014 had at least one related opt-out case, compared with 3 percent of class action settlements below $500 million.
  • Almost 17 percent of cases with class action settlements over $20 million in 2012–2014 had associated opt-out cases.
  • Among cases with information available, the average total value of opt-out settlements was $85.4 million, or almost 13 percent of the average class action settlement amount.
  • Institutional investors such as pension funds, sovereign wealth funds, and hedge funds remain the most frequently observed type of opt-out, although small individual investors opted out in many cases.The research for this post was conducted jointly by Cornerstone Research and Latham & Watkins.

Analysis of Opt-Out Cases

As discussed in our 2013 report, the great majority of securities class actions result in either a dismissal or a settlement, with very few reaching a trial verdict. After a settlement is agreed upon, potential class members have the ability to opt out of the settlement. Prior research had found that the most relevant predictor of opt-outs is the dollar amount recovered per class member. Other research had reported that, after the adoption of the Private Securities Litigation Reform Act (PSLRA) in 1995, most plaintiffs who opted out did not do so in order to bring their own lawsuit. Studies in the post-PSLRA period have found that the prevalence of opt-out cases—efforts to achieve a larger recovery through settlement or judgment outside the class—has increased relative to the pre-PSLRA period. Our research builds on this by looking at the prevalence of recent opt-out cases, year by year, and analyzing salient available information about these cases.

We have identified 48 cases from 1996 to 2014 in which at least one party from the class opted out and filed a separate suit against the defendant, representing 3 percent of our sample of 1,458 cases. Ten of these 48 opt-out cases occurred in 2012–2014, subsequent to our previous report.

We found no discernable increase in the preponderance of opt-outs over time. Between 1996 and 2014, both the number of opt-out cases and the percentage of those cases to class action settlements has fluctuated. The largest percentages in our data occurred in 1998 and 2013. The table below shows the number of opt-out cases per year based on our analysis, with the incremental additions to our original report boxed.

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Settlement Amount

In 21 of the 48 class action settlements with opt-out cases, the settlement or judgment amount for some or all of the opt-out cases was publicly available. The largest set of opt-out settlements related to a single case, in terms of total dollar value, was AOL Time Warner Inc., where the $764 million of opt-out settlements was almost 31 percent of the size of the class action settlement. The largest opt-out settlement amount as a percentage of the class action settlement was Qwest Communications International Inc., where the $411 million opt-out settlement was 92 percent of the final class action settlement.

Among cases with information available, the average total value of opt-out settlements was $85.4 million, or almost 13 percent of the average class action settlement amount. The average is heavily skewed by the larger opt-out settlements—the median value of opt-out settlements was only $3.9 million, or slightly less than 4 percent of the related class action settlement amount.

Prevalence in Large Cases

While a large class action settlement does not guarantee opt-out cases, as class action settlements get larger the propensity of plaintiffs to bring an opt-out case also increases. Between 1996 and 2011, 11 percent of cases with class action settlements over $20 million had associated opt-outs. Over the 2012–2014 period analyzed in this update, almost 17 percent of cases with class action settlements over $20 million had associated opt-outs. Conversely, for class action settlements below $20 million, the opt-out case rate was only 1 percent in both periods.

Among the largest settlements, 11 of 19 cases with settlements over $500 million in 1996–2014 had associated opt-outs. Of the four cases with settlements over $500 million in 2012–2014, three had associated opt-outs. With the obvious caveat of a small sample size, this 75 percent rate in 2012–2014 represents an increase over the 53 percent opt-out rate for such large settlements in the 1996–2011 period analyzed in our original report.

While only 2 percent of all securities class action settlements between 2012 and 2014 were larger than $500 million, 30 percent of the cases involving opt-outs during the same period were associated with class action settlements larger than $500 million. In other words, large class action settlements represent a disproportionate percentage of the cases that ultimately face an opt-out. Based on our findings, if larger class action settlements are reached in the future, more opt-out cases may be expected to emerge.

Plaintiffs

We obtained information about the identity of plaintiffs in 43 of the 48 opt-out cases in our sample:

  • The most common plaintiffs in opt-out cases are pension funds. Pension funds were present in 21 of these 43 opt-out cases during 1996 to 2014.
  • Other institutional investors, including mutual funds, hedge funds, and other investment companies, were involved in 20 opt-out cases.
  • Eighteen opt-out cases involved individual shareholders, and four involved shareholders who obtained their holdings as a result of the defendant firm acquiring another company or entity.

Considerations for Opting Out Based on Recent Cases and Data

There are several issues opt-out plaintiffs must consider. Because opt-out cases tend to be smaller than the class action but may incur similar litigation expenses, the proportion of attorney’s fees and other expenses (such as expert fees) that plaintiffs have to pay out of pocket may be higher than if the plaintiff had remained in the class. Individual plaintiffs may therefore not wish to bring an opt-out case unless their losses are sufficiently high to justify the subsequent legal costs.

One of the main reasons that class action participants nonetheless elect to opt out and pursue individual cases is the potential for financial improvement of the outcome despite the burden of legal fees. The mere threat of an opt-out can be a powerful negotiating tool for plaintiffs. The higher dollar recovery sought for by plaintiffs, however, may not materialize. Many such reasons were discussed in our initial report. The Second Circuit’s subsequent decision in IndyMac offers yet another cautionary reason (discussed below).

Another possible reason for opting out is the desire to bring a lawsuit in state court, which the opt-out plaintiffs might believe would provide a speedier trial process or a sympathetic local judge and jury pool. As discussed below, however, a recent interpretation of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) flags a potential complication to such calculus.

Implications of IndyMac

In IndyMac, the Second Circuit held that the three-year statute of repose under the Securities Act of 1933 couldnot be tolled during a pending class action. Although the other circuits are not in unanimous agreement with this opinion, the IndyMac decision did have implications for opt-out case resolution in two of the 10 opt-out cases in the 2012–2014 period analyzed for this update.

In the American International Group Inc. Securities Litigation, a settlement of $725 million was granted final approval on February 2, 2012, and 25 shareholders opted out of the class. Seven of these shareholders are investment funds controlled by the same investment group. A lawsuit filed by six of these shareholders was dismissed in part because their claims under both the 1933 Act and the 1934 Act were time-barred under the reasoning of the ruling in IndyMac.

In the Bear Stearns Companies Inc. Securities Litigation, SRM Global Master (SRM)—a hedge fund—opted out of a $275 million settlement to pursue a separate litigation against Bear Stearns. In the complaint, SRM alleged that it suffered $200 million in damages. The Second Circuit ruled that SRM filed its claim too late, dismissing the Securities Exchange Act of 1934 claims under the reasoning of IndyMac.

Implications of SLUSA

The U.S. District Court for the Southern District of New York’s September 10, 2015, decision in Kuwait Investment Office v. American International Group Inc. et al. (KIO) suggests that opt-outs hoping for a more sympathetic or efficient venue may face an uphill battle. Citing SLUSA, the KIO court noted that opt-out plaintiffs’ state law claims were precluded because they fell under the definition of a “covered class action,” and per SLUSA, federal courts should be “the exclusive venue of, and federal law the exclusive remedy for, certain class actions.” Although the opt-outs were not formally consolidated with the class, the KIO court reasoned that the two actions were “highly coordinated” and subject to similar case management orders.

Potential Cross-Border Issues

One of the 10 opt-out cases in 2012–2014 analyzed in this post suggests that cross-border considerations, especially for dual-listed shares (such as those listed in both the United States and Canada), might influence opt-out behavior. There were concurrent lawsuits filed against IMAX Corp. in both Canada and the United States, and the judge in Canada ruled that those who did not opt out of the U.S. proceeding would be excluded from the Ontario proceeding.

Whereas SLUSA may limit opt-outs from “venue shopping” in state court, for dual-listed companies “venue shopping” across borders might influence opt-out behavior.

Blow Provisions

An increase in opt-out cases could impact class action settlements, causing them to fail by triggering so-called “blow-out” or “blow” provisions in the class action settlements. These provisions allow the termination or renegotiation of the class action settlement by the defendant if a large enough portion of the class opts out. Such provisions are designed to give defendants the option to consider opt-out claims that are ultimately made in order to protect against situations where opt-outs are so prevalent that settling the class action does not significantly reduce potential exposure or future legal costs. In other words, despite a class settlement agreement, a defendant may wish to terminate the class action settlement if remaining opt-out claims are significant enough that the litigation is not meaningfully discharged.

As noted in our 2013 study, if larger shareholders are expected to opt out of a settlement, then defendants may have less incentive to settle the class action or may offer less money to settle with the class, which could increase the likelihood of trials. Blow provisions are one way to partially mitigate such incentives while managing the potential for future exposure.

There is no standard, boilerplate blow provision. Rather, the parameters of the provision are crafted by the settling parties, and there are numerous ways in which the terms of a blow provision can be structured. Because the purpose of a blow provision is to be able to terminate the settlement agreement if exposure to opt-out claims reaches a certain level, ideally the provision would directly relate to the dollar amount of potential exposure to opt-out claims. This potential exposure cannot be known with certainty, however, because opt-out plaintiffs may make different allegations than the class. Nonetheless, the more related a blow provision threshold is to the anticipated dollar amount of potential exposure to opt-outs, the more likely that a defendant will be able to terminate the class settlement agreement before the dollar exposure to opt-outs has exceeded the desired level. This is discussed in further detail in the forthcoming Economic Considerations for Blow Provisions in Securities Class Action Settlements, published by Cornerstone Research.

Conclusion

This post updates our 2013 paper, which provided for the first time a comprehensive quantitative analysis of publicly available lawsuits and settlements of opt-out securities cases. This post supplements the prior paper with publicly available information about 10 opt-outs from securities class action settlements reached between 2012 and 2014. Out of 1,458 securities class action settlements in our database beginning on January 1, 1996, we identified 48 cases in which at least one plaintiff opted out.

Based on our analysis of these cases, it appears that defendants will need to continue to consider the potential for opt-out cases, and how to craft blow provisions to manage implications of opt-outs, as crucial issues for large securities class actions. Our research shows that over 50 percent of class actions with settlements above $500 million (and 75 percent of such cases in 2012 to 2014) had opt-outs.

Litigants in securities class actions should consider the impact of opt-out cases, as these settlements can add additional costs to the class action settlement. In the average case with an opt-out, an additional amount of almost 13 percent was paid to plaintiffs who opted out, and in six cases, more than 20 percent was paid to these plaintiffs. One additional factor to consider for the likelihood of opt-out cases is the portion of shares held by pension funds and other institutional investors, which continue to file a majority of opt-out cases.

The complete publication, including footnotes, is available here.

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