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Archive for April 2nd, 2008

Many settlement agreements in consumer class actions contain an escape clause that allows a defendant to void the settlement if more than a specified threshold percentage of the class opts out of the settlement class.  Often these clauses are included in the agreement as a matter of habit, with little expectation that they will actually be triggered.  Although it is uncommon for opt outs in a typical class action to significant enough in terms of either quantity or nature to justify voiding the settlement altogether, it is important for defense counsel to consider the risks posed by opt outs.

In making this assessment, it is important to understand that the different categories of class members who tend to opt out of consumer class action settlements.  Some class members opt out because they are distrustful of any legal proceeding and do not want to be involved even if it means giving up potential benefits.  Others opt out because they are concerned about rights that they might be giving up by participating.  Still others may have personal philosophical reasons for not wanting to participate in a class action.  None of these categories are of particular concern to the defendant because although the opt outs mean that some potential claims will not be released, there is little likelihood of the defendant having to face litigation over those claims.

The category of opt outs that is of concern to a defendant is the category that consists of groups of individuals who not only do not want to participate in the class settlement, but also plan to actively pursue litigation over the same claims against the defendant after the class settlement is finalized.  This is a risk posed in cases in which a consumer class settlement has been publicized and if the class includes individuals who live in certain parts of the country, particularly in areas of the deep South.  In these areas, cottage industries of opt out litigation have arisen in which firms round up hundreds or even thousands of class members to opt out in order to pursue individual, group, or “opt out class” litigation after the underlying class action is resolved.  In most parts of the country, there is little incentive to pursue opt out litigation, since in many consumer class actions even grouping together hundreds of individual claims would not make pursuing a lawsuit worthwhile economically.  However, in certain areas, the threat of hometown justice and runaway juries can make it worthwhile for firms to pursue opt out litigation because they can turn each individual claim for even minimal alleged damages into a claim for thousands or even tens of thousands of dollars.  Where this occurs, the defendant can face the prospect of multi-million dollar opt out litigation after spending millions of dollars in settlement of the underlying class action.

What can a defense lawyer do?  The first thing is to make sure to advise a client of the potential cost of opt out litigation in considering the cost of the underlying class action settlement.  This is more an art than a science, but experience and an analysis of the geographic composition of the class can help to generally quantify the extra exposure.  Second, if reviews opt outs carefully as they come in as part of the class settlement administration process, it is not very difficult to recognize when an organized opt out effort is occuring.  Performing this review allows counsel to at least analyze whether the opt outs that are filed in a class action settlement are of the type not likely to result in additional cost to the defendant or whether they are of the type very likely to ensure that the settlement will not end the litigation.

Tort reform in recent years in states where opt out litigation has been prevalent has lessened somewhat the residual exposure presented by potential opt out litigation.  But there is no reason to believe that the time of organized opt out suits is over.  Although there is no way to completely eliminate the risk, understanding the potential exposure associated with opt out litigation and keeping a keen eye out for warning signs that an organized opt out effort is occurring can put a defense lawyer in the best position to advise a client at each step of the settlement process.

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