Risk & Compliance

The Rise (or Fall) of Class Action Costs

Gargantuan settlements in shareholder class action lawsuits have obscured several contradictory trends.
Stephen TaubFebruary 15, 2005

The average settlement in a shareholder class action lawsuit amounted to $27.1 million last year, up 33 percent from $20.3 million for 2003, according to the latest annual study of class action litigation by NERA Economic Consulting.

Of last year’s 119 settlements, 16 of them exceeded $50 million; 9 topped $100 million. In fact, the lawsuits against WorldCom, Raytheon, and Bristol-Myers Squibb produced three of the eight largest shareholder class-action settlements of all time, with a combined value of over $3.3 billion.

These gargantuan settlements, however, obscure several contradictory trends.

In 2004 the median settlement fell for the second straight year, to $5.3 million, from $5.5 million in 2003 and $6 million in 2002. More than 70 percent of settlements last year were valued at $10 million or less; more than 44 percent came in under $5 million.

Meanwhile, the number of shareholder class actions against public companies has barely budged since the passage of the Sarbanes-Oxley Act of 2002. Last year, 238 suits were filed, compared with 234 in 2003.

The data will provide more fodder for the debate over tort reform. As we reported, last week the Senate passed a bill that would make it more difficult to file class-action lawsuits against companies. The measure would require many cases to be brought in federal courts rather than in state courts, which are generally considered more favorable to plaintiffs.

NERA also noted that many of the companies that are settling lawsuits are instituting corporate governance reforms as part of their agreements. “Shareholder class actions are being used in new ways…to obtain specific corporate governance reforms,” stated the consultancy’s report.

Since the passage of Sarbanes-Oxley, at least nine settlements have incorporated such reforms, including cases involving AON Corp., HCA Inc., and Ingersoll-Rand Co. In fact, reported NERA, Ingersoll-Rand agreed to make corporate reforms in lieu of a cash settlement. But generally, added the consultancy, companies are agreeing to improve their governance practices in return for a lower cash outlay.