When is the right time to settle a class action?
Perhaps more than any other type of litigation, class actions often feature dynamic shifts that quickly alter the settlement landscape. For example, the court’s ruling on a motion to compel discovery may bring a new perspective on liability exposure. And a decision on class certification often upends both parties’ expectations. The risks and benefits of continuing to defend class actions are constantly changing.
Accordingly, defense counsel would be wise to analyze settlement options at every phase of the case. Finding the most efficient litigation off-ramps is one of the greatest skills a lawyer can develop. And perhaps nowhere is that skill more critical than in class actions.
In this article, first we present a case study of a good settlement opportunity that was lost only to be exploited by class counsel later in the case. Next, we explore some of the nuances that should inform the settlement analyses throughout litigation.
In one recent consumer class action, the company was defending five separate lawsuits pending in District Courts in two Eastern states. With the assistance of Risk Settlements, the parties participated in a three-day mediation resulting in a deal in principal. Over the next few weeks, settlement papers were heavily negotiated. Despite having a very efficient and fixed cost exit of litigation with the use of Class Action Settlement Insurance, the company decided to pull out of the tentative settlement and resume litigation.
For the next eighteen months, the parties engaged in expensive and time consuming battles. Extensive discovery was propounded, fought over, and thousands of additional documents produced. Depositions were taken; multiple hearings and conferences were held in both states. While the company was convinced in the righteousness of its legal position, the plaintiffs prevailed in both courts.
Now, the company found itself back at the table, only this time, it was holding a pair of 2s and did not have many chips left. Facing trial in two different courts, the company decided to settle (again). Having incurred more than $1 million in time and expense, the company ended up having to accept far worse terms, making the total cost of the final settlement twice what it would have cost if they would have just taken yes for the answer.
Unfortunately, this outcome is not unusual in class actions.
Consider the business risks of continuing litigation
One common mistake that defense counsel make in class actions is taking a myopic view of settlements that focuses almost exclusively on litigation risks and potential liability exposure while failing to examine the business impact of continued litigation.
Will critical company executives and employees have to spend exorbitant amounts of time on the litigation, including preparing for and taking depositions, rather than working on the business? Could pending litigation impede a planned merger or acquisition? Is the company’s liquidity dwindling as litigation reserves weaken the P&L? Is the class action wreaking havoc on cash flow, thereby impeding financial and operational planning? If the answer to any of these questions is “yes,” then early settlement may yield the client significant benefits.
Is there a way to transfer the risk away from the defendant?
Even if counsel determines that settlement is not appropriate at a given stage of the case, one other arrow in defense counsel’s quiver should be assessing whether there is a way to transfer the litigation risk away from the client. For instance, there is a relatively new insurance product known as Litigation Buyout (LBO) Insurance (“LBO Insurance”), which lifts the cloud of financial uncertainty that accompanies any class action.
With LBO Insurance, the defendant pays a one-time fixed cost. In exchange, the insurer:
• absorbs the litigation risk;
• assumes responsibility for the financial outcome of the case (up to policy limits);
• takes over settlement negotiations; and
• fully administers class notice and payout duties.
The benefit of LBO Insurance is that it effectively caps the defendant’s financial exposure. Consequently, the company can resume pending transactions, operations, and investment/funding activities.
Every lawyer wants the best outcome for the client. Sometimes, that involves settling a case that might ultimately be won. Unfortunately, even the strongest cases carry risks that can simply be too great to justify continuing the battle. Consequently, an ongoing, consistent analysis of efficient litigation off-ramps should always be front of mind for defense counsel.