Class Action Defense Costs Rising; Wave of Cyber Actions Predicted

April 22, 2019

The overall cost to large businesses of defending against class action lawsuits continues to rise even as the number of companies sued falls. This is happening because more companies being sued are facing multiple suits and the cases have become more complex and high risk.

Last year saw the fourth consecutive annual rise in spending after steadily decreasing expenditures from 2010 to 2014, according to the annual Carlton Fields Class Action Survey. In total, companies spent $2.46 billion defending class actions in 2018. The number of companies that reported facing class actions in 2018 dropped slightly to 54% of the companies surveyed, but the average number of matters per company increased from 6.3 in 2017 to 7.8 in 2018.

The survey is based on interviews with general counsel or senior legal officers at 395 Fortune 1000 and other large companies across a variety of industries. Participating companies in the 2019 survey had an average annual revenue of $14.8 billion and median annual revenue of $6.7 billion.

Labor and employment cases remain the most common type of class action, accounting for 28.7% of matters and 26.1% of spending. In the past five years, nearly two-thirds of companies have faced at least one labor and employment class action and, overwhelmingly, companies report that wage and hour matters are their top concern in this category.

“As predicted, class action defense spending rose again in 2018 and this is likely to continue through 2019,” said Julianna McCabe, director of Carlton Fields’ Class Action Survey and chair of the firm’s National Class Actions practice group. “As the resources and financing available to pursue these costly matters have become increasingly available, the volume and complexity of the class actions filed continues to rise. In-house legal departments are dedicating significant resources to these cases and relying on outside counsel for help in making early assessments of their win-loss probabilities, among other factors,” said Julianna McCabe, director of the Carlton Fields survey and chair of the California-based defense firm’s national class actions practice group.

Those surveyed believe the number of class actions will increase again in 2019, with data privacy class actions seen as the next big wave. The percentage of companies making such a prediction nearly doubled from last year’s survey, increasing from 28.9% to 54.3%. Eighty-six percent of companies said they have an action plan in place to limit the impact of a data breach, including class action exposure.

Nearly 9% of companies identified collective actions under the European Union’s new privacy regulation (the GDPR) as a next wave, a significant enough number that it was reported separately in the survey. Approximately two-thirds of companies reported concern stateside, about the impending California Consumer Privacy Act.

Among the survey’s additional findings:

  • Companies increased their use of contractual arbitration clauses in 2018, and the percentage of companies that included class action waivers in their arbitration agreements increased to near 50%. More companies now use arbitration clauses that bar class actions than in any previous survey.
  • Exposure, win probability, the relevant case law and facts, and reputational impact were the class action risk variables companies ranked as most important, and more than 95% of companies report relying on outside counsel for an early assessment of win-loss probability.
  • Increasingly, companies facing class actions employ a case-by-case approach to class action management, 53.2% reporting that they defend at the right cost, assessing each case separately. Only 10.6% say they prefer to settle such matters early, while 21.3% take an aggressive stance and 14.9% employ a “defend at all costs” strategy.
  • Still, cases filed as class actions are most often resolved by settlement, with 53.1% of companies reporting that settlements typically occur pre-certification. Thirty-nine percent of matters filed as class actions are settled on an individual basis.
  • Companies are taking notice of the impact of the political climate in Washington on their management of class actions, with 23.5% of companies reporting that it affects regulatory oversight and involvement relevant to class actions.
  • The use of alternative fee arrangements (AFAs) in class actions declined slightly in 2018. More companies identified fixed fees as a successful type of AFA for class actions than any other type of arrangement.

Source: Carlton Fields Class Action Survey

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