In my May post, Making Better Judgments about Summary Judgment in Securities Class Actions, I discussed how we can pick more cases to defend through summary judgment. But, of course, the vast majority of cases will still settle, so we need to discuss how to improve mediation outcomes.
Far too often, defense counsel sets up mediation to settle for whatever amount the plaintiffs’ lawyers will take, without considering the impact of the settlement on the defendants’ reputation, the impact of an over-sized settlement on the defendants’ future insurance programs and pricing, and the target a bloated settlement will put on the defendants’ backs. We have an obligation to mediate zealously and balance all these considerations. We all should want to win mediations.
How do we do that?
We need to be prepared to defend the case on the merits if and when the motion to dismiss is denied. A significant reason cases reflexively settle once the motion to dismiss is denied, with little or no productive work on damages and the merits, is that the defendants aren’t prepared to defend the case. At the beginning of the litigation, defense lawyers competing for the case typically tout the chances of winning the motion to dismiss. But most motions to dismiss fail, which means far too many defendants are surprised when they lose the motion. And since the motion to dismiss process takes a year or more, the denial seems to come out of nowhere and feels like a blindside. This situation is worse when the defendants haven’t conducted an interview process in which they selected a lead lawyer they trust, as opposed to working with a litigator “assigned” to the case by the firm’s corporate lawyer for the client. The defendants often don’t know if they have the right lawyer to take them through the meat of the litigation. So panic sets in and settlement seems like the only safe strategic course.
This problem is exacerbated by the unfortunate decline in early merits assessment. In days gone by, a thorough but targeted initial background review and merits assessment was de rigueur. It is not an internal investigation but instead a focused, tailored, and balanced effort that can be done in the low six figures in all but the largest cases. We would ask the company for a set of key internal documents, assemble and review relevant public documents, identify a handful of people to interview, and assess the strengths and weaknesses of the claim. We would discuss the outcome with management and the board, as well as the D&O broker and insurers. This allowed for thoughtful strategic planning through the motion to dismiss and beyond: the company could understand the risk it faced, the insurers could calibrate their involvement and set reserves, and defense counsel could defend the case with the right amount of effort and cost.
But today, far too often, this type of review does not occur. There are multiple causes, including a low cap or budget offered to secure the engagement; the (incorrect) view that a motion to dismiss is mostly a matter of identifying what the complaint does not allege, as opposed to an affirmative narrative that sticks up for the defendants’ honesty and good faith; and understandable backlash over some firms’ use of the background review to do a full-blown internal investigation. We need to get back to early case assessments.
We need to develop our economic defenses. In a typical mediation that occurs before class certification, the parties have not done damages discovery or rigorous analysis – much less the work required to analyze price-impact issues under Halliburton II and Goldman Sachs.
Instead, the parties typically come to the mediation only with a plaintiff-style damages estimate that neither side has thoroughly analyzed, much less tested through intensive work with the experts and expert discovery. Rigorous expert work often significantly reduces realistic damages exposure. For example, stock drops that lead to a securities class action are often the result of multiple negative news items. A rigorous damages analysis parses each item from the total stock drop to isolate the portion caused by the revelation of the allegedly hidden truth that made the challenged statements false or misleading.
Reductions in damages through work with defendants’ economist can make an enormous difference in the settlement value of a case, since settlement value is a percentage of damages. In my cases, the best estimate of damages is often 50% or less of plaintiff’s style damages.
Yet far too many defense lawyers don’t just use but often embrace plaintiff-style damages in order to put pressure on the insurers to settle for an amount within policy limits, even if well above the case’s settlement value. In my experience, the best way to obtain the insurers’ consent to and payment of a settlement is to work collegially with them: conduct a rigorous damages analysis and assessment of the merits, speak candidly with them about the settlement value, and fight hard together for a settlement at or near the settlement value.
Advocating bloated damages isn’t actually in the defendants’ interest. Insurers know when defense counsel hasn’t done rigorous damages work or, worse, has done it but doesn’t share it. Again, the defendants are prejudiced through higher premiums and retentions, and are a magnet for future securities class actions when their defense counsel doesn’t approach mediation zealously. Moreover, insurers are increasingly engaging their own resources to understand a verifiably independent view of damages. And once licenses for Securities Analytics Research’s data and econometric analyses become ubiquitous among insurers (which I believe is inevitable), they will have an independent, clear view of objective damages estimates.
In the meantime, defendants are entitled to a zealous defense, including at mediation. I hope that the approach I’ve outlined becomes the norm.