Securities Opt-Out Litigation

Opt-out plaintiffs enjoy many advantages including the ability to control the strategy of the case and pursue legal theories not asserted in the class action. For example, they can elect to file their case in state court rather than federal court. They can also assert claims that require individualized proof and thus cannot be brought on a class basis or claims under state law that disallow defenses available under the federal securities laws.

But the most significant advantage is that opt-outs generally receive far larger settlements. Although comprehensive data about opt-out settlements are unavailable because parties generally agree to keep their terms confidential, opt-out recoveries generally substantially exceed those of class members on a per share basis. Premiums of several to many hundreds of percent compared to class recoveries are common. Multiples in the thousands of percent have been achieved.

The primary reason for such outperformance is what the literature describes as “insolvency constraints” which curtail the size of class settlements but generally not those of opt outs given the smaller sums in dispute. As Professor Coffee of Columbia Law School has explained, where a class demands large sums in damages, “the defendants’ strongest argument may be that the corporation simply cannot pay such an amount and would file for bankruptcy before doing so. Similarly, the federal judge and/or a mediator may push for a settlement within a ‘realistic’ range.” By contrast, opt-out plaintiffs are not required to be “reasonable” but can be the “squeaky wheel” that the defendants are required to pay off if they want peace.

In other words, companies cannot afford to pay large percentages of multibillion-dollar damages claims. As a result, class claims involving such substantial sums (so-called “mega” cases) settle for relatively small percentages of class-wide losses regardless of their merit. In fact, since 2008, the median class settlement for cases involving over a billion in damages has been a mere 2.5% of the class-wide loss. In comparison, opt-out settlements involving losses of tens of millions of dollars – or even upwards of a hundred million dollars – are not similarly constrained, and thus tend to settle for much larger loss percentages.

The upshot of this dynamic is a settlement advantage for opt outs that is more significant the larger the class-wide damages. Furthermore, once a class action settles, defendants have a strong incentive to resolve opt out claims to stop the “meter running” on legal fees and to prevent the continued diversion of management attention.