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How The In-House Legal Department Can Make It Rain

Risk Settlements > Blogs & Articles  > How The In-House Legal Department Can Make It Rain

How The In-House Legal Department Can Make It Rain

How The In-House Legal Department Can Make It Rain

Legal Department Turned Profit Center

In-house counsel’s focus and resources are often dedicated primarily to defensive or reactive measures, like defending the company’s interests in litigation, advising on compliance issues, and resolving business disputes, all of which can be both time-consuming and expensive.  As a result, legal departments routinely forego potentially valuable litigation claims because the financial, legal, or timing risks required to monetize affirmative claims are viewed as too great or too uncertain.  In fact, all too frequently, companies may not even be aware they possess these valuable claims at all.

But, by identifying and monetizing their company’s affirmative legal claims, in-house legal departments are poised to take a more proactive role in the company’s success, transforming themselves from being a cost burden into a profit center.  One might expect that such a transition requires a massive overhaul of the legal department’s resources, personnel, and policies. In reality, most of the financial risk can be mitigated by third parties through litigation funding or up-front monetization.  It takes little more than a strategic partnership and the desire to take action to effectively monetize the company’s corporate legal assets.

DuPont first pioneered the concept of “turning the legal department into a profit center” in the mid-2000s. Within three years, DuPont’s “Legal Recoveries Program” had generated over $500 million in revenue. Companies like Ford and Michelin soon joined the trend, and, in 2007, Ford famously boasted that its “Affirmative Recovery” program had generated enough money to cover all its legal costs and then some.[1] Recently, other large companies like Home Depot and Coca-Cola have stepped up their efforts to identify and enforce claims, mainly in the field of class action opt-outs—a simple and effective vehicle for corporate legal teams to put money back into the company’s coffers.

There are various types of affirmative corporate claims, including antitrust, contract, trade secret, and general business torts, but a company must be able to first identify the claims before they can be monetized.

A particularly ripe area for affirmative claim recovery arises out of antitrust litigation.  Corporations, just like consumers, can be victimized by price fixing and other anticompetitive conduct, and the amounts at stake for large corporations are often significant.  These claims can be valuable corporate assets that companies should be looking to monetize on behalf of their stakeholders.

Most civil antitrust claims for monetary recovery are brought as class actions.  But the class action vehicle is designed to address small claims that are not economically viable on their own.  A class action is generally not the best fit for corporate claimants with larger value claims.  As such, direct, opt-out actions, in which corporate claimants with more significant economic damages pursue their claims directly against the defendants, provide the means through which victimized companies can recover their losses.

Class actions are also procedurally complicated.  It generally takes much longer to resolve a class action than it does to resolve a direct action and there is much more judicial oversight.  Moreover, class members, regardless of the value of their individual claims, do not have a role in directing the litigation.  And, most importantly, if a resolution is obtained on behalf of the class, class members tend to recover only a small fraction of the actual value of their claims.  Larger corporate claimants typically opt out of class actions to pursue their own direct actions.  The greater leverage provided by their larger purchase volumes often leads to much larger, and earlier, recoveries than those remaining part of the class.

An opt-out corporate claimant can recover two to four times more than it would if it remained in the class, while recoveries of ten times more have also occurred.[2]  Here, rather than generating new litigation, a corporation and its legal department are simply pursuing existing or “parallel” litigation, following already-developed case theories, and enforcing rights that are largely already established. For this reason, a corporate opt-out provides an attractive and low-investment method for a legal department to start generating revenue.

There are several advantages to opting out. The most obvious one, of course, is the likelihood of a much larger award in an individual business action. On top of that, an opt-out plaintiff does not have to share in the uncontrollable expense of notice, administration, and attorney’s fees that accompany a large class action battle. Further, opting out provides more control over the timing of the litigation and more flexibility in selecting a favorable venue.

According to the 2018 Antitrust Report, antitrust victims recovered an average of $3 billion per year from 2013 to 2018.[3] According to Lex Machina, approximately 85% of antitrust damages were attributable to settlements in antitrust class actions.[4] From 2013 to 2018, the average (mean) of these settlements varied annually from $24 million to $42 million.[5] As these numbers show, antitrust class actions represent potentially enormous awards, and, by opting out and filing a direct action, a company can increase these numbers. Frequently, however, these claims lie dormant while the injured company remains idly in the class, unaware of the strength of its individual opt-out claim, or, even worse, that it possesses a claim at all.

Examples

While the concept itself may be novel and in its infancy, there are several corporate opt-out success stories. Three recent antitrust cases demonstrate the advantages of individual direct actions over their class counterparts.

In Hewlett-Packard Co. v. Quanta Storage, Inc., the court found that Hewlett Packard suffered damages from the defendant’s participation in a price-fixing scheme in the optical disk drive market. HP, which had opted out of a related-class action, won a $439 million judgment. By contrast, the class action against Quanta and other defendants settled after six years of litigation for $75 million, with 25,000 claims filed. Compared to HP’s nine-figure award, that is a much smaller pie cut into a lot more pieces. Ultimately, opting out allowed HP to secure a much larger award while simultaneously benefiting from the “shared merits” of the class action litigation.[6]

In In re Methionine Antitrust Litigation, consumer goods staple Quaker Oats also made the right call in opting out. The case involved a price-fixing scheme for two animal feed products. Class members watched from the sidelines as the controversy spawned criminal charges, guilty pleas, and even a movie starring Matt Damon (The Informant!). Meanwhile, Quaker opted out and ultimately recovered three times the average amount awarded to class members. Quaker’s decision illustrates an important advantage of opting out: the notoriety of the case (i.e., the case “going viral”) posed no risk of limiting Quaker’s recovery with each additional claim filed. Instead, Quaker won its own, much larger, award on its own terms and without the delays inherent in any high publicity class action.

Finally, in In re Linerboard Antitrust Litigation, several groups of plaintiffs opted out and pursued actions against twelve defendants individually. These plaintiffs and their class counterparts alleged that the defendants conspired to restrict production and raise prices of linerboard, a material used in cardboard boxes. The class, an estimated 80,000 plaintiffs, settled with the defendants for $200 million, which, after deducting for fees and expenses, came out to an estimated $1,772 per class member. By contrast, the opt-out plaintiffs settled with one of the twelve defendants for $25 million, an average gross recovery of $1.9 million per plaintiff. In other words, the plaintiffs who opted out recovered more from one defendant than the class members recovered from all of the defendants. Clearly, it can pay to opt out.

Affirmative Asset Recovery: Profits and Predictability Without Risk

Like any legal strategy, the decision to opt out is not without risk, and in-house counsel should carefully consider all options before advising the company on the best approach to take.  At Risk Settlements, we help companies identify their affirmative legal claims and design solutions that minimize the economic and administrative challenges of pursuing those claims directly against the offending defendants.

  • If litigation is required, we can provide litigation funding for the company to prosecute the claim directly. If the company is interested, we work with top-tier antitrust law firms to maximize the likelihood of success while also providing the funding. By participating in a consortium with other companies (not a class action) seeking redress from a defendant for the same conduct, we can help leverage large corporate losses to create risk to a defendant and maximize the recovery to each company.
  • If a negotiated resolution out of public view is appropriate, we can draw on years of experience successfully settling many cases in this Indeed, these types of cases almost always settle, sometimes without requiring the filing of a lawsuit.
  • For those concerned that opting out would entail unmanageable uncertainty and expense, Risk Settlements can eliminate this risk by monetizing all or part of the claim immediately and transferring the outcome risk of the claim to Risk Settlements. This arrangement allows companies to obtain upfront, bottom-line revenue without any risk regarding the actual success of the claim. Resources that might have been used to cover legal costs can be redeployed to the company’s core operations. Further, unlike a conventional, contingent legal asset, the upfront monetization provides an immediate boon to the company’s balance sheet. These solutions make affirmative asset recovery a much more feasible and less risky prospect for in-house legal teams.

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Risk Settlements is different from traditional litigation funding companies. Instead of simply loaning money for legal expenses, we partner with companies to identify and monetize latent litigation assets by bringing the attorneys, experts, strategies, and execution while at the same time removing the downside risk of the ultimate outcome. Whether it’s an antitrust opt-out or another affirmative legal claim, Risk Settlements can assist your company in identifying its latent corporate assets and maximizing recoveries while eliminating the financial and outcome risk to the company.

[1] Vanessa O’Connell, Company Lawyers Sniff Out Revenue, Wall Street Journal, May 13, 2011.

[2] Rebekah Mintzer, How Coke and Home Depot’s Lawyers Are Making the Companies Money, Law.com, Jun. 30, 2016.

[3] 2018 Antitrust Report: Class Action Filings in Federal Court (May 2019) [hereinafter 2018 Report], 7 Huntington National Bank & Univ. of San Francisco School of Law, available at http://ssrn.com/abstract=3386424.

[4] Antitrust Litigation Report 27 (April 2019), Lex Machina, available at https://lexmachina.com/antitrust-litigationreport/.

[5] 2018 Report at 13.

[6] Daniel Strauss, Antitrust opt-outs entice litigation funders to opt-in, Debtwire, Feb. 18, 2020

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