The business case for opting out of high value class actions

Antitrust & competition

November 21, 2022

Mark Klein

In the United States, anyone that has been harmed by conduct that is the subject of a class action has two options: Choose to remain a member of the class or opt out and bring an action as an individual plaintiff.

Having spent well over two decades in-house, I’m all too familiar with the challenges a GC faces in making the decision to pursue a claim, opt-out or otherwise. Although many factors are at play, too often one consideration—budget—trumps all. Even in the face of egregious behavior by a defendant, it is hard to justify putting limited legal budget at risk to pursue a claim that might lose. This is even more difficult in a commercial class action, where the option to remain in the class seems like the safest (and most budget friendly) option. But when a company has a valuable class action claim, it is incumbent upon a GC to carefully weigh her company’s risk and cost tolerance against the obligation to maximize recoveries—and to thoroughly examine what tools might make an opt-out strategy viable.

Research conducted in June 2022 based on surveys conducted with 150 GCs and heads of litigation reveals that for high value claims, companies that opt out recover significantlymore damages than they would by remaining in the class. “A report on class action recoveries” Burford Capital, September 2022. Despite the likelihood of achieving a larger recovery, companies are still far more likely toremain in the class than to opt out. The lost value is stark, particularly for large companies,which have bigger claims and potentially more upside to be gained by opting out.

The fact that remaining in the class is still the default is not surprising. However, this is arguably changing and will continue to do so as GCs and CFOs face growing economic pressure to maximize the value they extract from their companies’ litigation assets. In the past few years, as GC of the world’s largest provider of legal finance, I have seen more and more large corporations recognize the economic benefit of opting out.

Companies remain in the class most often due to economic constraints

According to the research, companies’ top two reasons for remaining in the class are economic. Survey respondents most often say that the cost of pursuing an opt-out claim isn’t justified by the damages. But they are almost as likely to say that they remain in the class because the company doesn’t have the budget to pursue an opt-out.

Under certain circumstances, particularly when the claim size is small, remaining in the class may be the best business decision. But when a company has a high value claim, that decision makes less sense. One of five companies report claims worth more than $25 million. Note that remaining in the class could mean recovering pennies on the dollar. In fact, 56% of companies routinely recover less than 25% of their entitlement when they remain in the class.

Use of Legal Finance Impacts Companies Opt-Out Strategy

Given that companies’ top reasons for remaining in the class are economic, it follows thatthe availability of legal finance—which removes economic barriers to pursuing individual claims—should correlate to higher levels of opting out.
Indeed, companies that have used legal finance are three times more likely to have opted out of class actions. Over half (52%) of in-house lawyers say that while their organizations have not used legal finance, its availability would positively impact the company’s decision to opt out of a class action. Among in-house lawyers who admit having less understanding of legal finance, this number is even higher (56%).

Interestingly, even companies that have used legal finance or are familiar with it are lesslikely to be aware of a key product—monetization—that can be very compelling to an opt-out strategy. Under a monetization arrangement, a legal finance provider can advance capitaltied to a pending opt-out matter, thereby helping a company monetize, or realize, the valueof the claim almost immediately. This solution accelerates payment, preserves working capital and locks in a recovery amount for an opt-out claim, thus reducing risk of loss. Additionally, monetizing an opt-out can immediately benefit stakeholders by putting aportion of the anticipated proceeds to work in the business, often years ahead of the matter’s resolution.

Opting out aligns with companies’ affirmative recovery efforts

Having an established affirmative recovery program in place—a growing trend among corporates—can support thoughtful and strategic pursuit of individual claims. Affirmative recovery programs are most commonly formal efforts by a legal department to reduce costs and enhance liquidity for a business through meritorious plaintiff-side litigation. In short, they help companies recover lost value and avoid leaving money on the table, which aligns with the decision to pursue a claim directly.

In a 2022 study, two-thirds of GCs, heads of litigation and other senior in-house lawyers interviewed said that their companies have an affirmative recovery program. Investment in these programs is fueled by GCs’ increased motivation to showcase the value add their department can provide, transcending its traditional place as a cost center. One head of litigation commented on the impact of the affirmative recoveries initiative attheir company: “We have increased the communication with the finance teams …. Were view the cases we are defending, but their eyes seem to glaze over until we talk about affirmative matters. That is an area in which corporate finance wants focus and growth. It is a lever that corporate finance likes to pull when they need money. They have come torealize that the legal department is now a potential resource for generating revenue.”

According to the research, maximizing recoveries is the number one reason large companies opt out, suggesting they believe this course is best for business. They are also more likely to have a team in place to pursue opt-out claims, reinforcing the connection between affirmative recovery efforts and opt-out strategy.

As legal and finance increasingly work together to realize the inherent value of legal assets, they are looking to their law firms for support. Legal teams expect their law firms to be ready to advise and educate them on opportunities to add value including risk- and cost-sharing tools.

Financing litigation assets recovers lost value and eliminates risk

As legal departments continue to focus on adding value, more companies will recognize the economic benefit of opting out and will act on it. To create certainty around affirmative recoveries and remove the economic burden of opting out and of pursuing high value individual claims, finance solutions will be a valuable tool for legal departments and need-to-know tool for their law firms.