Class action spending is up for the second consecutive year, marking the reversal of a downward trend that occurred between 2011 and 2014.
Across industries, companies spent $2.17 billion on class action lawsuits in 2016. While the percentage of companies managing at least one active class action declined, from a high of 60.6 percent in 2015 to 53.8 percent in 2016, companies perceive that the magnitude of their potential exposure and risk has increased. For companies managing class actions, volume has remained virtually unchanged from 2015, with most respondents reporting approximately six active cases.
Labor and employment matters displaced consumer fraud as the most common type of class action companies faced in 2016. Labor and employment cases now account for 37.7 percent of class actions and 38.9 percent of class action spending. This occurred as wage and hour claims surged and labor industry regulators implemented an aggressive enforcement strategy. Class actions involving intellectual property issues also rose to 7.5 percent. Data privacy class actions, highly anticipated for several years, remained a small percentage of matters overall. Although companies continue to report that these types of matters are a concern, less than 22 percent of companies have actually faced a data privacy class action.
Both the routine and highest-risk categories of class actions reflected increases this year, indicating that companies face class actions that are more polarized in terms of complexity and exposure level. The percentage of class actions in the bet-the-company and high-risk categories increased from 9.5 percent in 2015 to 25.3 percent, while the percentage of class actions in the routine category increased from 28 percent in 2015 to 38.7 percent. This impacted defense philosophies, with companies increasingly reporting that they either “go low” or, in complex cases, “defend at all costs.” In contrast, only 20.8 percent of companies reported using a “defend at the right cost” philosophy, down sharply from a high of 33.9 percent in 2015.
Though they increasingly face higher-risk and higher-exposure class actions, corporate legal departments continue to reduce the number of in-house attorneys used to manage those cases. Not surprisingly, these in-house attorneys are spending more time on class actions, and their companies are relying more heavily on outside counsel.
When evaluating the risks presented by class actions, exposure is still deemed the most important variable and “coming in under estimated exposure” remains a key determinant of success. Companies report that they resolve 62.5 percent of their class action lawsuits by settlement, and that most settlements occur before a class certification decision.
The use of alternative fee arrangements to manage class actions continued to decline. The percentage of companies that relied on AFAs in their defense of class actions dropped from 49.2 to 35.8 percent. This decline reflects the challenges inherent in using alternative fee structures to manage increasingly complex and unpredictable matters. Companies that do use AFAs continue to favor fixed fee structures.