The challenges of defending class action lawsuits have intensified, affecting companies across industries and touching on nearly all practice areas. But in-house legal departments have responded by taking an increasingly strategic approach to these matters.
These were among the trends identified by the fourth annual Carlton Fields Jorden Burt Class Action Survey released March 16. The law firm’s survey, which is based on 360 in-depth interviews with general counsel and chief legal officers at 349 companies that operate in more than 25 industries, strives to help in-house counsel identify and manage the risks and costs inherent in class action litigation. Surveyed companies had average annual revenue of $18.2 billion.
This year’s survey revealed that companies are managing more class actions overall. More than one in three in-house counsel reported managing multiple class actions on an ongoing basis, up from one in four last year. At the same time, there has been a precipitous increase in both “bet-the-company” and “high-risk” class actions. Three years ago, only 4.5 percent of class actions fell into either category. Now companies place 16.4 percent of their class actions into one of these categories, a more-than threefold rise.
This trend appears to be the result of recent developments in class action law that have been largely favorable to defendants. For example, U.S. Supreme Court cases, including Wal-Mart v. Dukes, have taken a more stringent approach to class certification. As a result, when deciding which cases to bring, plaintiff’s lawyers, who must invest more time and effort in each case, tend to seek out those with the greatest possible upside.
Companies have responded to the growing risk with increased class action spending on outside counsel. With each jump in risk level (from routine to complex to high-risk to bet-the-company) potential exposure climbs and defense costs rise accordingly. Even class actions that fall outside the highest risk categories can result in substantial exposure.
Survey respondents reported that tens of millions of dollars may be at stake even in matters deemed “routine,” and exposure can rise into the billions of dollars for matters deemed “high risk” or “bet the company.”
However, law departments are increasingly ensuring that costs are consistent with risks, strategically targeting the dollars spent on class action defense. Reflecting this trend, last year 31 percent of in-house counsel surveyed said they took a “defend-at-all-costs” approach to class actions. This year, that percentage dropped to 13. Correspondingly, the percentage of those willing to defend at the right cost climbed from 20 to 29 percent, while others opted for an aggressive stance (24 percent) or tailored the approach on a case-specific basis (18 percent).
When weighing the risks class actions pose, companies have many concerns. Ranking them on 1 to 10 scale, in-house counsel assigned the three highest scores to exposure (9.1, up from 9 last year), win probability (8, up from 7.9) and reputational impact (7.6, up from 6.8). Defense costs ranked last (5.6, up from 5.1).
Once the defense of a class action has concluded, companies are also measuring success with different metrics than they previously used. In 2013, win rates topped the list as the most important measure of success. It was followed by outside counsel performance, and, at the bottom of the list, reputational impact. However, in 2014, reputational impact shot up to become the second-most important measure of success, preceded only by cost of damages.
In addition to evolving risk levels, strategies and philosophies, this year’s survey reveals growing concerns with data privacy matters. While consumer fraud and labor and employment remain the most common types of class actions, accounting for more than 50 percent of all matters, corporate counsel are bracing for more data privacy cases. In fact, 29 percent identified these matters as a growing class action threat. By contrast, when the survey launched in 2012, just 10 percent listed data privacy matters as a future concern.
Overall, the survey shows that legal departments are responding to the class action threat by thinking strategically and building on key best practices. The latter include making a single individual responsible and accountable for the outcomes of the company’s class action lawsuits; early case assessment that involves outside counsel in a significant way; increased use of alternative fee arrangements, particularly for matters on the lower end of the risk spectrum; and more proactive use of arbitration provisions that address class actions.
For corporate legal departments seeking to maximize class action defense resources, the survey provides a practical benchmarking tool—and encouraging data on the merits of approaching these matters strategically.