The Globalization of Securities Litigation

Europe (and much of the rest of the world) have long been skeptical of American-style opt-out class actions in which the plaintiff’s attorney defines the scope of the class.  Similarly, they have prohibited the contingent fee, discouraged punitive damages, insisted on “loser pays” fee shifting, and required opt-in classes to be led by a public agency or an approved not-for-profit body.  All this should seemingly preclude the spread of “entrepreneurial litigation” to Europe or elsewhere.[1]  But it hasn’t!

Major securities class actions for record or near record amounts have recently settled in the Netherlands and Japan, and an even larger securities action is now being litigated against Volkswagen in Germany.  All have involved an international parade of institutional investors, but the most striking fact about them is the key organizational role in structuring them played by traditional American plaintiff’s law firms.  Although the courthouse door in the United States has been shut to these plaintiffs by Morrison v. National Australia Bank Ltd.,[2] their U.S. law firms have shown that they can take their show on the road to Europe and Japan.  This had seemed impossible because no major European jurisdiction authorizes an opt-out class applicable to securities litigation; nor does any permit the contingent fee; and all also employ “loser pays” rules.

How has it been done?  Some will answer (too quickly) that U.S. law firms have been exploiting the Netherland’s unique Act on Collective Settlement of Mass Claims (or “WCAM” in Dutch).  Enacted in 2005 to deal with a crisis caused by a drug (DES) that produced birth defects,[3] this statute does permit the Amsterdam Court of Appeals to approve a global settlement class action, but it does not permit any plaintiff to sue under it.  Indeed, the Netherlands does not even authorize an opt-in class action.

If you can only settle but not sue, the U.S. Supreme Court said in Amchem Products that such a plaintiff’s attorney is “disarmed” and cannot provide adequate representation to its clients.[4]  Yet defendants do not settle securities class actions in Europe for over $1 billion if the plaintiff’s counsel is “disarmed.”  In reality, the plaintiff’s attorneys “armed” themselves by achieving three goals at once: (1) broad claim aggregation; (2) financing from third parties; and (3) protection against fee shifting.  High as the European barriers were, creative legal engineering has outflanked them.  What the U.S. firms have created may be a second-best substitute to the American opt-out class action, but it works.  In effect, it is a synthetic class action.  And it shows that legal entrepreneurs can survive and succeed even in an inhospitable environment.

The most noteworthy case that reveals this new synthesis is the settlement reached in March 2016 against Fortis for $1.337 billion.  That amount is a record for European securities litigation, and it was structured by two well-known American plaintiff’s law firms: Grant & Eisenhofer (based in Delaware and New York) and Kessler, Topaz, Meltzer & Check (based in Philadelphia).[5]  In combination with Deminor, a Belgian consulting firm that describes itself on its website as specializing in investor protection, and VEB, the Dutch shareholder’s association, they did the following:

First, they organized two “stichtings” (a Dutch word, loosely translated as “association”), which gave limited liability to their clients and protected them from fee shifting.  The investors could transfer their legal claims to the stichting, but any recovery would revert to each investor.  Effectively, this device amounts to the equivalent of an opt-in class action.  That is, it gives centralized control over the litigation to the board of directors of the stichting, and it eliminates the need (which is present in a consolidated action) to list each plaintiff separately.  The American law firms knew many of the institutional investors that wanted representation against Fortis, because they had been active in earlier litigation in the U.S., in which the foreign investors had been dismissed (even before Morrison) because there was too little “conduct or effect” in the U.S. to satisfy even the pre-Morrison rules.[6]

Next, to finance the litigation, the organizers went to a hedge fund specializing in “third party funding.”  This financing was probably more costly than lawyers financing the case, themselves, on a contingency basis, but it offended no European rules (which bar only lawyers from receiving a contingent fee).  Finally, with financing from the hedge fund, they purchased insurance from a liability insurer against “loser pays” fee shifting.

Of course, this action, filed in 2011, did not cover absent parties.  But that was the next step.  Once the defendants decided that they wanted to settle the “synthetic” class action, both sides could now convert it into an opt-out class action under the WCAM statute.  This protected defendants from the danger that absent parties might be recruited by other lawyers to sue in other jurisdictions (possibly because the first settlement would publicize the dispute again), and it implied a larger recovery and fee for the American law firms.  They hired local counsel and paid them on a standard hourly basis, so that no practicing lawyer received a contingent fee.  What did the U.S. law firms do if they did not litigate?  In short, they assumed the role of risk-taking entrepreneur and struck the deal with the third party funder.

Interestingly, the Fortis WCAM settlement proposes to pay “active” shareholders more than the late arriving class members (basically, the absent class members) who never opted-in by joining a stichting.  This makes the decision to convert to a global settlement even easier for the defendant as the new class members thereby brought into the class come at a cheaper price.  This could not be done in a U.S. class action, but this is a Brave New World.

Although long abhorred by many in Europe, entrepreneurial litigation seems to have been exported to Europe anyway.  Indeed, no sooner had Fortis settled in March, 2016, than the same two law firms brought suit in Germany on behalf of 278 institutional investors from around the globe against Volkswagen.  Now, they used the German “KapMuG” law, which authorizes not a class action, but rather a “bellwether” trial on common issues.[7]  This procedure, familiar to American mass tort lawyers, allows an appellate court in German to pick a representative case in order to resolve the common issues.  The one drawback with this procedure is that it leaves unresolved individual issues, such as damages or special defenses.  Potentially, those could take years of litigation to resolve.  But informed observers doubt that the action will ever be resolved in Germany.  They suspect that when and if the parties decide to settle, they will do so in the Netherlands under the WCAM statute so that the settlement could cover absent parties—in effect, converting their consolidated proceeding in Germany into a de facto opt- out settlement class action in the Netherlands.

Still, the tactic of shifting the settlement to the Netherlands so that it can be made global and binding on everyone may encounter new difficulties in the near future.  According to press reports, several American plaintiff’s firms, including Bernstein, Litowitz, Berger & Grossmann, that are not involved in the German litigation are now active in the Netherlands, forming stichtings and signing up clients.  This suggests that there could be competition in the Netherlands to cut a deal with Volkswagen, and that necessarily increases the defendant’s leverage.  At its worst, the outcome could resemble a “reverse auction” as the defendant induces different teams of plaintiff’s attorney to bid against each other.  No prediction is here made that this will happen, but with American law firms bumping into each other across Europe, competition is likely to occur.  When it does, the one feature of American class action litigation that maintains decorum and keeps practices above board is conspicuously missing from the Dutch legal landscape: namely, the Judicial Panel on Multi-District Litigation.  That panel assigns the case to one judge, who in turn appoints a lead class counsel.  This precludes the defendant in most cases from running an auction for settlement bids.  But in the Netherlands, the court plays a more passive role and simply waits for a settlement to be brought to it.

To be sure, there is a right to opt out under the WCAM statute.  But that right is valuable and will be exercised only if there is another forum where one can sue.  In a case resembling the facts of Volkswagen, if a group of institutional investors believed that they were faced with a collusive settlement in the Netherlands, they could opt out and continue the litigation in Germany.  Strangely, however, they cannot appeal the settlement to a higher Dutch court because the only appeal permitted under the WCAM statute is an appeal by all the parties if the Amsterdam Court of Appeals declines to approve the settlement.

Under E.U. law, a judgment entered in The Netherlands must be respected and enforced by all other member states in the EU.  But doubt remains about the extent to which a U.S. court must respect it.  The Full Faith and Credit clause in the U.S. Constitution only covers judgments in other states and does not apply to foreign judgments.  Although prevailing principles of international comity are respected by U.S. courts, they are trumped by the Due Process Clause.  Thus, it is possible that a U.S. person could object in some future case that a WCAM settlement did not bind him, because such person did not receive either constitutionally adequate notice or an adequate opportunity to opt out.  Although such a case will sooner or later arise, it seems less likely to arise in the context of securities litigation.  If the securities were purchased outside the United States, the objector cannot hope to sue in a U.S. court because of Morrison.  If they were purchased inside the U.S., there is already a well-developed history of U.S. and Dutch courts sharing jurisdiction, with the U.S. investors (and those who purchased in the U.S.) settling in the U.S. and the others settling in the Netherlands.  Indeed, the very first settlement approved under the WCAM statute was a 2009 settlement of a securities class action against Royal Dutch Shell; the U.S. purchasers settled in the U.S. and the rest settled in a $382 million settlement under WCAM.[8]

Europe is not the only continent where class action activity has recently picked up.  South Korea is unique in having authorized an American-style opt-out class action.  Although Japan only has an opt-in class action, it has recognized the fraud-on-the-market doctrine, permits contingent fees, and has authorized insurance against fee-shifting.  Not surprisingly, it has seen some increase in actual class actions.  The major recent milestone in Japan has been the Olympus cases, which settled in 2015 in Japan, after out-of-court mediation, for $92 million.  What most makes Olympus unique is the degree to which it was organized by an American law firm.  Many of the members of the plaintiff class were non-Japanese institutional investors, which were solicited to join the action by a Miami-based law firm, DRRT. [9]  Although that law firm was active in an earlier and much smaller U.S. class action involving Olympus’s ADRs, DRRT appears to function more as an intermediary between its non-Japanese clients and Japanese counsel.  Much like Deminor in Belgium, DRRT seems to be playing the role of matchmaker, introducing global institutional investors to local counsel in various foreign jurisdictions.   Japanese companies have long been noted for their reluctance to sue, but this same reluctance does not apply to global investors, who, denied a U.S. forum by Morrison, are following firms like DRRT to foreign jurisdictions.

The common denominator across Europe and Asia has been the entrepreneurial role played by U.S. law firms in exploiting WCAM and KapMuG in the Netherlands and Germany, respectively, and exploring the possibilities of class actions in Japan.  How long American firms can continue to play this role can be debated.  Possibly, there will be a counter-reaction, and the Empire will strike back.  Stay tuned. But, for the present, the American entrepreneurial spirit has overcome all obstacles.

ENDNOTES

[1] For the only serious book covering this topic, see John C. Coffee, Jr., ENTREPRENEURIAL LITIGATION: Its Rise, Fall, and Future (2015). For an indication of the depth of the European resistance to American-style entrepreneurial litigation, see “Commission Recommendation of 11 June 2013 on principles for injunctive and compensatory collective redress mechanism in the Member States concerning rights granted under Union Law,” Official Journal of the European Journal (2013/386 EU) (rejecting all the elements of American-style class litigation).

[2] 561 U.S. 247 (2010).

[3] For detailed overviews of WCAM, see Helene van Lith, “The Dutch Collective Settlements Act and Private International Law” (Dutch Ministry of Justice 2010); Bart Krans, The Dutch Act on Collective Settlement of Mass Damages, 27 Pac. McGeorge Global Bus. & Develop. L.J. 281 (2014).

[4] See Amchem Products, Inc. v. Windsor, 521 U.S. 591, 621 (1977) (citing this author).

[5] The author has interviewed attorneys on both sides of this case and also class members in connection with an ongoing research article.

[6] See Copeland v. Fortis, 685 F. Supp. 2d 498 (S.D.N.Y. 2010).

[7] For an overview, see Astrid Stadler, Developments in Collective Redress: What’s New in the ‘New German KapMuG’”?, 24 European Business L. Rev. 731. (2013); see also William Boston, “German Court Allows Lawsuits Against Volkswagen to Move Forward,” The Wall Street Journal, August 8, 2016.

[8] See In re Royal Dutch/Shell Transport Sec. Litig., 552 F. Supp. 2d 712 (D. N.J. 2007).

[9] DRRT’s website states that it has been in the global investor protection business since 2000, has recovered over $5 billion for its clients, and has over 400 institutional clients. See http://www.drrt.com.

This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.