Understanding Class Action Risk: Exposure and Win/Loss Probability Remain Primary Concerns for Corporate Counsel
For the fourth consecutive year, potential exposure is considered the most important risk factor by corporate counsel, followed by win probability and business implications.
Business Implications Rise in Importance When Companies Evaluate Class Action Risk
Over the past three years, companies have pointed to the business implications of class actions as an increasingly important variable when assessing risk. Business implications include the interruption of key revenue streams, and damage to profitability, capital, stock price, and brand perception. Reputational impact is closely related and implicates similar factors.
In Their Own Words: Corporate Counsel Offer Advice on Managing Class Action Litigation
As Risk and Exposure Rise, Defense Strategies Change
Reversing last year’s upward trend toward companies defending class actions “at the right cost,” a growing number of companies now describe their class action defense philosophy as “go low” or “defend at all costs.” The “defend at the right cost” philosophy was reported by just 20.8 percent of companies, down from 33.9 percent in 2015. This movement closely correlates with the increased percentage of companies that report using the “go low” and “defend at all costs” strategies, and may be attributable to the substantial rise in both routine and higher-risk class actions.
Companies Settle More Than Half of Their Class Action Lawsuits
On average, companies settle 62.5 percent of their class actions. This is down from 68.7 percent in 2015. Nearly 62 percent of companies report settling cases brought as class actions before any class is certified.
Individual Settlements in Class Actions Are Less Common Than Classwide Settlements
Forty-one percent of companies reported that they settle class actions only on a classwide basis, while most organizations reported a mix of individual and classwide settlement types. In 2016, 11.4 percent of companies reported that they settled class actions only on an individual basis, but among all companies surveyed, 27.5 percent of class actions, on average, are reportedly settled on an individual basis.
Elements of Class Action Settlements
Class action settlements are structured in a variety of ways, and combinations are not uncommon. Companies require an affirmative claim for payment in nearly three-quarters of all class action settlements. Companies also report a notable increase in requiring class members to demonstrate an actual injury to participate, compartmentalizing or categorizing relief provided among class members, and agreeing to changes in one or more business processes. Although some courts criticize the practice harshly, 50 percent of companies report using charitable contributions, known as cy pres, in class action settlements.
Claims-Made Settlements Often Utilize a Common Fund
Where companies require an affirmative claim for payment in class action settlements, on average, a common fund is used 76 percent of the time. Nonetheless, companies report that in 56 percent of claims-made settlements, exposure is limited to the take rate of claims made, either because money reverts from the common fund to the defendant in such settlements, or because no common fund is used.
Mandatory Arbitration Clause Use Decreased in 2016
In 2016, the percentage of companies using arbitration clauses in their contracts decreased. Arbitration clause usage may have been impacted by the Consumer Financial Protection Bureau’s proposed rule that would ban the use of class action waivers in arbitration clauses in certain consumer financial contracts. The future of the proposed rule is uncertain, however, and there may be a resurgence in the use of mandatory arbitration clauses in such contracts if the rule is not implemented.
Companies Potentially Impacted by CFPB’S Proposed Rule Have Already Made Changes
Many companies that would be impacted by the Consumer Financial Protection Bureau’s proposed rule banning class action waivers in arbitration clauses in certain consumer financial contracts have already made changes in anticipation of the ruling. Because the proposed rule impacts only those companies governed by the CFPB’s rulings, however, more than 60 percent of companies report that their use of arbitration clauses will not change based on the proposed rule.
Arbitration Provisions Are Commonly Found in Signed Contracts and Online Agreements
More than 78 percent of companies that use arbitration clauses incorporate these provisions into signed contracts. Posting the clauses online continues to grow as a popular secondary means of distribution. Other types of client communications (e.g., mailings and packaging) are infrequently used to relay arbitration information, and continue to decline in popularity.
In Their Own Words: Corporate Counsel Weigh in on the CFPB’S Proposed Rule on Arbitration Clauses
Few Companies Report an Impact, So Far, From “Proportionality” Change in the Federal Discovery Rules
Fewer than 20 percent of companies report an impact, to date, from the recent changes to Federal Rule of Civil Procedure 26 that were designed to improve the federal civil discovery process by implementing an overarching concept of proportionality. More than 80 percent of companies say the new rule has not changed their defense of class actions. The long-term impact of the rule change remains to be seen.
In Their Own Words: Corporate Counsel’s Diverging Views on the Changes to Federal Rule 26
Companies Rely on Outside Counsel to Follow the Progress of Proposed Amendments to the Federal Class Action Rule
Most companies are generally aware of the proposed amendments to Federal Rule of Civil Procedure 23, but are not closely following the rule amendment process, relying instead on outside counsel to stay informed. Among other things, the proposed rule changes will require courts overseeing class actions to engage in a “front-loaded” analysis of all class action settlement proposals, and will require district court approval of any payments to settlement objectors made in exchange for the withdrawal of an objection or appeal. Of those companies that are following the proposal internally, 15.4 percent report uncertainty about the impact of the proposed rule changes.
In Their Own Words: Corporate Counsel Weigh in on Proposed Changes to FRCP 23
Minimal Change in How Companies Measure Success in Class Action Defense
Companies continue to identify damages (whether in a settlement or a trial) and coming in under exposure as the most important factors for evaluating success in their defense of class actions. Reputational impact and defeating class certification remain important.