For decades the United States was the epicenter of securities class-action lawsuits against executives and their companies. But a 2010 court decision determined the federal court system would no longer be host to essentially foreign disputes.
Plaintiffs were left looking for alternative jurisdictions abroad.
After years of slow growth and struggles due to financial and legal obstacles, class action litigation outside the United States has found a foothold in the form of litigation funding firms. This new field has boosted class actions internationally and increased the risk for multinational companies and their executives. As such, global coverage placement is more important today than ever before.
The Burdens of Litigation Abroad
Class actions are popular vehicles for plaintiffs in the United States, allowing individuals with smaller damages to join together to seek recovery as a more powerful group. The costs and other burdens of litigation on any one individual shareholder often far overshadow possible recovery sums, limiting the incentive to pursue a case outside of a class action.
Class actions are a uniquely American invention, and historically they were not allowed in most other countries. Although that has changed in recent years—today more than two dozen countries permit some type of class, collective or group action—many obstacles remain to using these litigation vehicles.
Some countries restrict class-like actions to certain types of proceedings. Others limit the type of matter that can be resolved through class action, such as contractual disputes, antitrust actions or product liability cases.
There are also significant financial burdens imposed on potential plaintiffs. For example, some countries require a plaintiff make a financial deposit into court in an amount representing some portion of the recovery sought. In addition, many countries have a “loser pays” rule, under which the individual who loses a case must pay all of the attorneys fees of the winning side.
Other countries often do not permit what is known in the United States as contingency fees. Contingency fees allow an attorney to self-fund a case, collecting attorneys fees from the settlement or judgment at the conclusion of the case. That is not the situation in many countries abroad. Instead, the individual plaintiff must pay attorneys fees on an ongoing basis during the life of the case.
Litigation abroad has also been thwarted by enormous differences in liability laws and significant distinctions between the forms of legal process from country to country. In the United States, federal securities laws provide a single framework within which to adjudicate federal lawsuits. And though each state has its own set of securities laws (often referred to as blue sky laws), there are fundamental similarities between them. As a result, a single law firm can oversee litigation and hire local firms in many states, marshalling a coordinated effort in a relatively efficient and smooth manner. That has not been the case outside the United States. Country differences in substantive liabilities and legal processes represent a very real challenge to an individual plaintiff who must retain lawyers in each country, understand the different liability laws, work within the differences in the legal process and successfully maintain actions in multiple countries all at once.
All of these obstacles—from restrictions on suit type to financial burdens to different liability laws—have prevented the growth of a securities litigation industry abroad.
Litigation Funding Opens the Gates
The advent of litigation funding firms has provided plaintiffs a solution to many of these challenges because they are designed to take on these obstacles. Funding firms watch the global marketplace for potential cases. They research local liability laws to determine the viability of cases, country by country. They research the legal process in the various countries to determine whether and how actions can be brought and maintained. They identify potential plaintiffs. They fund the requisite court deposits. They pay attorneys fees as the case proceeds. They assess the likelihood of success, and having done so, they agree to assume the financial obligation should the plaintiff lose the case.
In exchange for this work, the firms contract with plaintiffs to be paid a percentage of any recovery, much like contingency fees in the United States. As such, litigation funding firms remove the logistical, legal and financial burdens from the plaintiff and forge ahead with the litigation abroad, leading a coordinated worldwide effort.
The impact of litigation funding has been clear: more cases in more countries. Dozens of cases have been filed in a wide variety of countries in recent years.
In one case involving a manufacturing company, litigation arising out of financial fraud was brought in three countries. In the United States, shareholder class actions led to a multimillion-dollar settlement, while actions by prosecutors led to another multimillion-dollar settlement. In the United Kingdom, criminal actions were commenced, and a whistleblower case was settled for millions. In Japan, executives received prison sentences, and a litigation funding firm pursued an alternative dispute resolution resulting in a multimillion-dollar settlement.
In another manufacturing company case, a firm is facing regulatory litigation and shareholder actions in four countries. In the United States, regulators and shareholders have filed the expected actions. Dozens of cases have also been filed in Germany, including suits under Germany’s version of class action and a suit by hundreds of institutional investors. Collective actions have been filed in the Netherlands, and a state pension fund has filed an action in Norway.
Because these cases take a long time in many countries, they become more expensive. Each country may begin its own local civil, criminal and regulatory proceedings, potentially necessitating multiple local counsel with expertise in each area. There will also be settlements in each country, which will compound and potentially increase overall settlement values. Plus, once a litigation funding firm has done its research, reviewed a case, decided it viable and invested in prosecutions around the globe, the firm may be less likely to settle for sums that do not provide a return on their sizable effort and investment.
The Multinational Insurance Opportunity
Multinational companies and their executives can prepare for this broadening global litigation by putting a truly multinational insurance program in place.
Directors and officers liability insurance can provide protection in the headquarters country and in countries that permit the policy to apply to local subsidiaries and executives. In those countries, premium allocation requirements must be met and premium taxes paid. The insurer can arrange for claims handling in countries that require locally licensed adjusters, and it can ensure losses are adjusted by an insurer that understands the foreign liability regime and rules. In addition, local policies can be purchased in countries that do not permit application of non-local insurance, and reinsurance can be arranged in compliance with local restrictions.
This framework of a truly multinational insurance program must be considered and created in a way that complies with the requirements of all countries involved to provide the best protection against an increasingly global litigation environment.