When companies are materially harmed by egregious conduct, their effort to be made whole through litigation presents significant cost and risk—and when they are members of a potential class action in the US, they face the further choice of choosing to remain in the class or to opt out and bring the action as an individual plaintiff.
That choice is inherently economic: Remaining in the class is cost neutral but results in lower recoveries, while opting out requires spending to pursue an individual claim but has historically resulted in much higher recoveries.
In recent years, we have seen a rise in large corporations choosing to opt out. Given this, Burford commissioned research to delve into how many companies are making the choice to opt out, why they do so, and what they stand to gain. The independent research was conducted in June 2022 with 150 US GCs, heads of litigation and other senior in-house lawyers responsible for their companies’ commercial litigation. Some of the key findings of the resulting report on class action recoveries are highlighted below.
Companies routinely recover pennies on the dollar for their class action claims
Companies have tens of millions of dollars’ worth of class action claims, with large companies (those with more than $1 billion in annual revenue) more than four times more likely to have claims worth more than $25 million as companies with revenue under $1 billion.
Respondents suggest (and historical data overwhelmingly bears out) that significantly more damages are recovered when opting out than by remaining in the class. Yet many companies decide nonetheless to remain a class member: Respondents were twice as likely to say that their companies did not opt out of any claims in the last five years (22%) as to say they never remained in the class (11%). Companies that remain in the class could suffer economic consequences: 82% of respondents recovered less than 50% of potential monetary damages when they remained in the class, less than the recoveries of those that opt out.
Companies’ top reasons to stay in the class are economic—and fixable
Respondents’ top two reasons for remaining in a class are not being able to justify the cost of pursuing an opt out claim (64%) and not having the budget to do so (61%). When companies have significant high-value claims both concerns are solvable with legal finance, as capital is provided on a non-recourse basis, meaning repayment is contingent upon a successful outcome in the individual claim; in the event of an unsuccessful outcome of a financed opt out claim, the company opting out has risked nothing but also owes nothing.
The availability of commercial legal finance positively impacts opt out strategy
When working with companies on opt out matters, a legal finance provider assumes the cost of paying for the fees to pursue an individual high value claim and can also accelerate some of the expected value of the monetary damages. Under this arrangement, companies eliminate the litigation expenses and mitigate the risks of opting out. In addition to removing these deterrents to pursuing an individual claim, legal finance can offer companies certainty around recoveries.
Over half (52%) of in-house lawyers report 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.
When companies opt out, their primary motivator is to secure the best return
About one in five companies have claims worth more than $25 million, and those with claims worth over $50 million—those with higher stakes—are more likely to opt out. Their primary reason for doing so is to secure the best return from a class action claim. Among large company GCs, the top reason for pursuing a claim as an individual plaintiff is that doing so fulfills their fiduciary duty to maximize return on the claim. In addition to recovering more monetary damages, in-house lawyers choose to opt out because it gives them greater control over counsel, strategy and settlement.
The use of legal finance correlates with opting out
Given the economic security legal finance provides for companies choosing to opt out, it’s unsurprising that those companies that have used legal finance are three times more likely than the general population to say they mostly or always opt out. As more companies recognize the correlation between opting out and higher returns, we can expect to see companies’ increasingly using legal finance to support their opt-out strategy, thereby reducing the cost and risk of opting out while increasing recovered damages.
As Christopher Bogart, CEO of Burford Capital, said: “Burford’s independent research on commercial class actions demonstrates the clear benefit that legal finance provides to companies with significant claims. If you’re a GC and you have a claim that’s big enough to merit opting out, you should, because you’ll recover more, and you can do so without budget implications by using legal finance capital. Further, your competitors who are already using legal finance are opting out three times more often. As a former GC, I recognize the importance of maintaining control and maximizing returns in litigation, and Burford works with many GCs to use legal finance to reduce risk, maintain greater control and enhance the likelihood of achieving greater recoveries.”