To Opt-out or Not Opt-out? That is the Question in Antitrust and Securities Cases
In federal antitrust and securities class actions, large corporate claimants have the option to seek recovery as part of a class or pursue damages individually, via direct action. The decision is not straightforward; an array of variables complicate this risk-reward enigma.
In-house legal departments consider to what degree pursuing direct action will be a costly, time-consuming, and distracting pursuit in view of the company’s financial health and risk appetite, and of course, to what potential benefit. While daunting, declining to opt-out can mean leaving money on the table, particularly because risk transfer solutions are available to opt-out plaintiffs with meritorious claims. Risk transfer solutions like asset monetization can change the equation, offering companies the chance to monetize latent assets while taking no downside financial risk.
Weighing the Opt-Out Decision
For corporate victims with large individual damages, participating as a member of a class is often suboptimal due to procedural complexities and the lack of focus on individual damage claims. The added hurdle of class certification slows litigation and can derail a case (e.g., In re Rail Freight Fuel Surcharge Antitrust Litigation, described below) for years as the litigation meanders through the appellate gauntlet.
Problems can persist well beyond class certification, too. Consider In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation. The $7.2 billion settlement that the parties agreed to in 2012 was rejected by the Second Circuit Court of Appeals after some class members protested that the deal did not sufficiently address the conduct that caused them to file suit in the first place. After the settlement was rejected by the Court of Appeals, the parties submitted a new settlement which was approved in 2019 and is meandering through the appellate courts. For many companies who have opted out, Visa and MasterCard have paid over $1 billion in settlement. For those who are staying in the class, they continue to wait to collect any benefit from the decades-old litigation.
Additionally, a corporate class member, regardless of the size of its claim, does not direct the litigation. Instead, it must abide by the direction and leadership of class counsel, accepting paltry settlements or low verdicts with little recourse. Direct actors are not tied to the same fate. Opt-out Hewlett-Packard’s 2019 $439 million price-fixing jury verdict against optical disk drive manufacturer defendants was a huge win compared to the class settlement of only $75 million, split between 25,000 claimants. Admittedly, Hewlett-Packard took on more risk by going to trial, but the dividends paid big.
According to Opt-Out Cases in Securities Class Action Settlements: 2014-2018 Update from Cornerstone Research, direct action plaintiffs know they can fare better by opting-out, especially where damages are high: between 2014 and 2018, securities class action settlements larger than $20 million were over 10 times more likely to have opt-outs than settlements smaller than $20 million. Also, the study demonstrated that the sky is the limit for opt-out settlements. In In re New England Health Care Employees Pension Fund v. Qwest Communications International Inc, the pension fund secured the largest single opt-out settlement in a securities class action at $411 million, representing 92.4% of the final class settlement.
Other benefits include direct action plaintiffs’ ability to reduce costs and maximize recovery by creating consortiums with similarly situated direct actors. Aggregating claims can economize opt-out lawsuits by pooling resources and increasing settlement leverage, as shown by the opt-outs groups that formed in In re Linerboard Antitrust Litigation.
In the Section 1 Sherman Act case, the class, comprised of about 80,000 companies, settled with defendants for $202 million with class counsel taking nearly one-third of the settlement as their fee, ultimately recovering approximately $1,770 per class member.
Thirteen groups of class members,140 or fewer total entities, opted-out and filed direct actions. While not all the opt-out settlements are public, available documents show that the opt-out plaintiffs fared far better than the class, obtaining a $25 million settlement from one of the twelve defendants alone. For each opt-out group (and group member), the gross recovery was substantially more from one defendant than each class member received from all defendants.
These examples illustrate that for large corporate entities with strong claims, opting-out translates to a larger recovery, sooner. But it does not mean starting from scratch. Often, by the time an opt-out files an individual action, the case’s facts and theories have been well-developed by federal agencies, state attorneys general, and lawyers involved in the class litigation.
As for the concern that the direct action will sidetrack internal resources, experienced outside counsel and consulting experts can handle the majority of the work, enabling critical units to carry on with business. In terms of business relationship sensitivity, direct action plaintiffs have greater ability to insulate partnerships by leveraging joint and several liability to structure settlement terms.
The on-going cost of litigating a direct action can deter prospective corporate opt-outs from filing. But there are strategies to shift the cost and risk of loss to companies specializing in litigation asset monetization like Risk Settlements which provides a suite of services to opt-outs whereby we remove the downside risk while offering the opportunity to realize the upside of latent litigation assets.
Current Antitrust Matters with Opt-Out Potential
Broiler Chickens Price Fixing
In 2016, broiler chicken purchasers filed suit against major U.S. producers of the $30 billion industry. The plaintiffs accuse the producers of involvement in a long-standing conspiracy to fix prices, suppress production, and manipulate the public index price for broiler chickens. The Department of Justice launched a criminal antitrust probe into the matter, securing indictments against several defendant executives as of June 2020. The class actions are currently in discovery. The liability evidence is strong: in addition to the growing number of indictments and the denial of the defendants’ motions to dismiss, several producers have settled with plaintiffs and have agreed to cooperate in the case against the remaining defendants.
Caustic Soda Price-Fixing
A consolidated class action against nine of the major caustic soda (sodium hydroxide) manufacturers alleges that defendants conspired to fix, raise, and maintain prices of caustic soda from 2012 through 2015. The economic evidence is compelling, and points to only one explanation for the lockstep increase in pricing: a scheme to manipulate supply and inflate prices. Procedurally, defendants have not yet filed their answer to the pending direct purchaser suit.
Generic Drugs Price Fixing
A high-profile and high-stakes price-fixing conspiracy case has swept up more than twenty of the nation’s largest generic drug manufacturers. So far, multiple defendant company executives have pled guilty to and have been sentenced for federal antitrust crimes, nearly half of the country’s attorneys general have filed suit, and the alleged conspirators face various class actions from private drug purchasers.
Allegations center on the uncharacteristic and coordinated rise in generic drug prices, ranging from several orders of magnitude to nearly 1000% in some cases. The market, normally marked by aggressive competition, was worth approximately $74.5 billion in 2015. Generic pharmaceuticals constitute 90% of all U.S. prescriptions. A number of major generic drug purchasers, like hospital systems and health insurers, have already opted-out, recognizing the opportunity to monetize the situation while preserving critical business relationships.
Rail Freight Fuel Surcharge Price-Fixing
Private plaintiffs have pursued antitrust claims against four of the biggest U.S. railroads, BNSF Railway Company, CSX Transportation, Inc., Norfolk Southern Railway Company, and Union Pacific Railway Company, for conspiring to raise rail freight transportation service prices from 2003 through 2007. The defendants, who hold more than 90% of the market for domestic rail freight, may have overcharged customers of more than upwards of $6 billion.
The federal class action has stalled out due to the denial of class certification, which was confirmed on appeal. Thus, wronged railroad customers must file direct actions. Oxbow Carbon & Minerals LLC’s direct action is proceeding and may serve as a bellwether on the merits.
While the downside of opting-out can cause corporate claimants to shy away, risk transfer solutions mitigate that possibility. At Risk Settlements, we provide results without risk by identifying affirmative litigation opportunities, managing and funding the litigation, transferring the downside financial risk and providing companies upfront monetization and/or substantial upside at the conclusion of the case.