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Advantages and Challenges of Opt-Out Lawsuits

August 18, 2016

What is an Opt-Out Lawsuit?

An aspect of class action litigation that is not often discussed is that of the opt-out lawsuit. These are lawsuits in which an individual plaintiff “opts out” of the larger class action suit that is being brought against the defendant to pursue a suit individually. In a securities class action lawsuit context, opt-out suits are typically filed by institutional investors such as banks, pension funds, insurers and other similar organizations. Because the individual plaintiff files directly against the defendant, opt-out lawsuits are also known as “direct action” lawsuits.

There are many reasons why an individual investor may choose to opt out of a larger class action. In most cases, the main motivating factor is that the plaintiff may be able to receive a larger and more rapid settlement than if they were simply a named party in the larger class action suit.

Advantages of Opt-Outs

Opt-out or direct actions can provide a number of significant advantages and benefits for the client which may not normally be found in a broad class action lawsuit. These include:

  • The ability to choose from a wider array of legal claims and theories
  • The capability to name additional defendants or parties as needed
  • Potentially greater recovery amounts than provided in a large class action lawsuit
  • Potentially faster recovery than in a class action suit
  • Greater control over specific decisions related to the case

Lastly, there is the notion of “first dibs.” An opt-out plaintiff sometimes gets “first dibs” at the defendant’s D&O (directors and officers) liability insurance policy proceeds before they get exhausted. In some cases, proceeds get exhausted before actual claims settlements are issued.

Challenges Associated with Opt-Out Lawsuits

One of the main considerations with opt-out lawsuits is the decision of whether to opt out or not in the first place. The decision to pursue direct action rather than remain in a class action suit is highly complex. It requires a thorough understanding of state, federal and sometimes inter-jurisdictional laws, as well as firm grasp on the type of misconduct involved in the case.

There are many subtle nuances in an opt-out filing that require the experience and assistance of a legal professional. For instance, some opt-out lawsuits may be subject to dismissal based on certain grounds (such as the suffering of actual injuries, or whether the plaintiff is actually suing on behalf of another party). In order to avoid early dismissal, it’s important to be able to identify whether the claim is solid enough to proceed with.

Secondly, the issue of timing is a crucial one when it comes to filing an opt-out lawsuit. There may be specific windows of time when it becomes more advantageous to opt-out than at other times. For instance, if a party opts out of a class action suit at a relatively later time, they may have more access to information about the case than they would at an earlier time.

On the other hand, by waiting too long, the plaintiff runs the risks of missing opt-out deadlines. The plaintiff also runs the risk that early settlements with the defendant could result in bankruptcy or a depletion of settlement funds. Thus, it’s important approach a potential opt-out situation by considering all possible outcomes given the client’s current circumstances.

Significant Opt-Out Cases and Relevant Legal Issues

Opt-out cases continue to provide plaintiffs with additional options by which they can obtain quicker legal relief. Some important opt-out cases and relevant developments in the news include:

  • Jumio, Inc.’s former shareholders and the company have reached a settlement in the wake of the company’s bankruptcy. The settlement pays legal fees and protects Eduardo Saverin, Facebook co-founder, from future lawsuits stemming from the Chapter 11 filing. However, individual shareholders may still choose to opt out and claim the right to sue Saverin and other investors. This demonstrates how powerful opt-out options can be by providing plaintiffs with additional routes for legal remedies.
  • U.K.: To make matters slightly more confusing, the British term for “class action” is “opt-out collective action”. The U.K.’s Consumer Rights Act of 2015 now allows for opt-out collective actions (class actions) for competition claims. The first opt-out collective action under this act was filed in June 2016. The action is in relation to the advertising agreements for the sale of Pride mobility scooters.  
  • Brazil: Kessler Topaz has filed opt-out securities fraud actions on behalf of several U.S. and European institutional investors against the Brazilian oil conglomerate Petrobras. This arises out of a decade-long bribery and kickback scheme. Many are calling this the largest corruption scandal in Brazilian history, with allegations involving concealed bribes to government officials in attempts to inflate refinery values.

When approached properly, opt-out actions can be a powerful tool for individual shareholders to pursue legal actions that provide them with more options and direct control of the case. As you can see, opt-out lawsuits are extremely complex, and the decision to pursue one generally requires the assistance of a legal professional. If you have any inquiries, concerns or questions regarding an opt-out option, contact us today at Kessler Topaz. Our team of attorneys is committed to protecting shareholder rights and working for lasting policy changes to prevent fraud.