Opting Out of Class Actions to Maximize Recovery
Legal claims are valuable assets. But businesses often either fail to pursue a recovery strategy at all or employ a strategy that falls short of maximizing the asset’s value. In the context of large securities class actions in particular, this can a very costly mistake. An article by Prof. John Coffee had some eye-popping data on just how costly the mistake can be. Here are three examples:
WorldCom lItigation—Class settlement of $6.2 billion, but three California pension funds opted out and settled their opt-out claims for $257.4 million. Five New York City pension funds also opted out and settled their $130 million in claims for $78.9 million. Their counsel announced that this settlement amounted to "three times more than they would have recovered if they had joined the class.”
AOL Time Warner litigation—Class settlement of $2.4 billion, but opt out did much better: “the University of California settling for $246 million, the Ohio State Pension Funds for $144 million, CalPERS for $117.7 million, and CalSTRS for $105 million.” And “the State of Alaska settled its $60 million claim for $50 million and said that it had done 50 times what we would have recovered from the class.”
Qwest litigation—Class settlement of $400 million, but this was the first class settlement “in which the total payments to opt outs actually exceeded those to the class,” totaling $411 million.
These datapoints buttress a simple proposition: For class members with large standalone claims, it may pay more to opt out. The full article discussing these and other datapoints can be found here. It’s worth a read, particularly if you or a loved one think you may have a large securities fraud claim.
See John Coffee, Accountability and Competition in Securities Class Actions: Why "Exit" Works Better than "Voice", 30 Cardozo L. Rev. 407 (2008).
