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A Closer Look at Warren Buffett’s Annual Letter to Berkshire Shareholders

Like many others, I look forward to Warren Buffett’s annual letter to Berkshire Hathaway shareholders, and like many others, I read his annual letter closely, looking for any investment insights I can glean as well for Buffett’s now-famous homespun brand of wisdom and humor. Although Buffett latest letter to Berkshire shareholders – which was published Saturday morning – does offer readers a little under each of these headings, I think many reading Buffet’s latest letter might have come away a little disappointed, as I discuss further below. Buffett’s 2019 February 22, 2020 letter to Berkshire shareholders can be found here. (Full disclosure: I own BRK.B shares, although not as many as I wish I did.)

  As someone who had carefully read Buffett’s letters for decades now, I have to say I am more than a little bit troubled about how short they have become. I was struck last year how short his letter was, and I had the same reaction again this year. Along with the increasing brevity, the letters seem to have become increasingly formulaic and consist of well-worn tropes – such as, for example, the long-term value of equity investing, the importance of accrued earnings, and the value of insurance float. I know he repeats these themes because they are important to understanding how he runs Berkshire, but he is not saying anything on these topics that he has not said many times before.

  For me, it is impossible to observe the uncharacteristic brevity of Buffett’s most recent letters and not to think about his advancing age. Buffett will be ninety years old this summer. To be sure, this year’s letter, arguably by contrast to prior letters, expressly acknowledges and addresses his age. In a section of the shareholder letter captioned “The Road Ahead,” Buffett in fact recognizes that he and Berkshire’s Vice Chairman Charlie Munger “long ago entered the urgent zone.” However, he says, the company is “100% prepared for our departure.” After laying out the case for the company’s continued prosperity, Buffett details the outlines of his estate plan, by which over the course of 12 to 15 years, his A shares will be converted to B shares and then distributed to various foundations.

  In yet another tacit recognition of the need for the company to be prepared for its life after Buffett, this year’s letter states that at the upcoming Berkshire shareholder meetings, the two designated management successors, Ajit Jain and Greg Abel will be “given more exposure.”

  For me, the acknowledgement of his age, the transparency about Buffett’s long-term estate plan, and the overt management transition are all positive and important developments.

  The letter is of course first and foremost a report to Berkshire’s shareholders, and from that perspective, the news is good. Berkshire had GAAP earnings of $81.4 billion, an astonishing figure that requires some significant explanation. Of that $81.4 billion, fully $53.7 billion represents net unrealized capital gains, which Buffett argues should not be taking into account for earnings purposed but is required because of changes to GAAP. The more important figure, from Buffett’s perspective, is the company’s 2019 operating earnings of $24 billion, which, it should be noted, is roughly equal with the equivalent figure for the year prior.

  Interestingly, while Berkshire had another good year, it arguably did not meet the target of one of Buffett’s standard measurements. For years, Buffett has opened the shareholder letter comparing the annual percentage change in the per-share market value of Berkshire to the annual percentage change in the S&P 500 (with dividends included). Over the long haul, Berkshire has far surpassed the S&P 500 under this measure. However, in 2019, Berkshire fell short, with Berkshire showing a change of 11% and the S&P 500 showing a change of 31.5%. The relative underperformance in 2019 was the largest since 2009.  Indeed, in the 11 years from 2009-2019, the S&P has beaten Berkshire four time, and there were three other years in which the measures were very close to even. Berkshire’s most significant changes in value relative to the S&P 500 are now years in the past – Berkshire has in fact underperformed the S&P 500 over the past decade.

  One of the basic facts about Berkshire these days is that it is big – really BIG. As of December 31, 2019, the company was carrying $128 billion in cash on its balance sheet. It is hard to put that much cash to work and it is hard to produce the changes in value that the company was able to show in the past. Buffett himself has emphasized many times over the years how much harder it has become as the company has grown larger to be able to produce returns on a percentage basis. A question that gets asked frequently about Berkshire these days is whether it has just grown too big to beat the market.

  Another way in which Berkshire is big in almost unfathomable ways is with respect to the company’s equity investment portfolio. The aggregate market value of the company’s equity investments as of the end of 2019 was $248 billion (up from $172 billion as of the end of 2018). In looking at the list of Berkshire’s top 15 equity investments one thing that jumps out is how large the company’s investment in Apple has become. Indeed, with now over $35 billion invested in the company, Berkshire’s investment in Apple represents the company’s largest ever investment in a single company (exceeding even the company’s $32 billion acquisition in 2016 of Precision Castparts).  The Apple investment has done well – as of year-end 2019, the market value of Berkshire’s $35 billion Apple investment was over $73 billion.

  At year-end 2019 valuations, Berkshire’s Apple investment represented nearly 30% of the Berkshire’s equity investment portfolio value. This skew in the company’s investment portfolio is all the more curious given Buffett’s famous refusal during the dot-com boom to invest in technology companies because he professed not to understand their businesses. The Apple investment clearly reflects the impact of Berkshire investment managers Todd Combs and Ted Wechsler, who both joined the company in the 2010-2011 time frame. When I look at Berkshire’s Apple investment, I cannot help but reflect that though Buffett is still in charge, the company has already changed in significant ways.

  One other thing about Berkshire’s top 15 holdings that I find surprising is how significant the company’s investment in airlines is. Three of the company’s top 15 investments are in airlines: Delta Air Lines (year-end value of $4.1 billion); Southwest Airlines (year-end value of $2.5 billion); and United Continental Holdings (year-end value of $1.9 billion). I find this concentrated investment in airlines curious, as in the past Buffett publicly acknowledged Berkshire’s prior investment in U.S. Air to be one of his mistakes.

  In his 2007 letter, he described the airline industry as a “bottomless pit” that has sucked up investors’ money; he said “to his shame,” he had “participated in this foolishness.” He said of Berkshire’s 1989 investment in U.S. Air preferred shares that “as the ink was drying, the company went into a tailspin and before long our preferred dividend was no longer being paid.” Even though he later was able to sell the preferred shares for a gain, the airline itself ultimately went bankrupt – twice. Once again, it seems to me when I look at Berkshire’s current investment in multiple airlines that Buffett is still around, there are signs that the company is already changing in arguably significant ways.

  By way of contrast perhaps, one industry Buffett has always favored is the insurance business. As Buffett says in this year’s letter in talking about Berkshire’s vast portfolio of controlled businesses, “our insurance business has been the superstar.” During the past 17 years, Berkshire has produced an underwriting profit in its insurance operations, with an aggregate pre-tax profit during that period of $27.5 billion (of which $400 million was recorded in 2019).

  As has always been customary in his commentary on this topic, Buffett is cautious to forewarn that Berkshire will not always produce these kinds of returns. As he puts it, “we will most certainly not have an underwriting profit in 16 of the next 17 years. Danger always lurks.”

  In discussing what future danger might look like, Buffett slides in a comment that may be of particular interest to readers of this blog. Among the list of things that could produce adverse underwriting results, Buffett mentions some familiar items but  adds one further item that is not always on the list. He says that “’The Big One’ might come from a traditional source, such as wind or earthquake, or it may be a total surprise involving, say, a cyber attack having disastrous consequences beyond anything insurers now contemplate.”

  The possibility of a cyber event causing consequences beyond anything insurers now contemplate is a nightmare that the insurance industry as a whole would rather not confront. Buffett’s suggestion of that possibility seems to me to be something of a message to the industry about the dangers out there. It is interesting to me and particularly telling that in identifying the possible source of the ultimate catastrophe, Buffett refers not (as he might have given recent history) to a terrorist event, but rather to a cyber security event. This strikes me as something important for the insurance industry to consider.

  Buffett’s exploration of one other topic may also be of interest to this blog’s readers. In this year’s letter, Buffett has a lot to say about boards of directors, noting that he has himself over the course of the last 62 years served as a director of 21 publicly-owned companies. He notes during the first 30 years of that period, it was rare to find a woman in the room, and that the efforts for more women to be heard in the board room “remains a work in progress.”

  Buffett goes on to note that despite many changes, most boards are still controlled by their company’s CEO. For example, audit committees now work harder than they once did, but “they remain no match for managers who wish to game numbers.” Acquisition proposals “remain a particularly vexing problem for board members,” because the deck is stacked if favor of deals the CEO backs. And while there is increased emphasis on board independence, director compensation in recent years has soared, making the lure of rich board fees a “subconscious factor affecting the behavior of many non-wealthy members.”

  The upshot of it all is that while almost all of the directors Buffett has served with were “decent, likable and intelligent,” many of these “good souls are people whom I would never have chosen to handle money or business matters. It simply was not their game.”

  In the face of this negative picture of captive boards filled with underqualified members, Buffett identifies a few things that might make a difference. For example, at Berkshire, he says, “we will continue to look for business-savvy directors who are owner-oriented and arrive with a strong specific interest in your company.” Buffett also notes that he feels better about directors who have purchased shares in their company’s stock using their own money rather than just receiving them through grants. And as far as board governance goes, there has been at least one “very important improvement” – that is, the increase in the use of regularly scheduled “executive sessions” of directors at which the CEO is barred.

  While Buffett seems to suggest that it is possible for boards to be filled with sufficiently skilled individuals who have independent financial motivations, and while there are governance processes that can encourage board independence, the overall picture he paints of board capture and lack of competence is really pretty discouraging.

  In the context of his letter to Berkshire shareholders, Buffett’s comments about companies in general and about their boards all come back to Berkshire itself. In his list of reasons why he believe the company is “100% prepared” for his departure, he states that he believes that the company has “skilled and devoted top managers for whom running Berkshire is far more than simply having a high-paying and prestigious job” and that the company’s directors — “your guardians” – are constantly focused on both the welfare of owners and the nurturing of a culture that is rare among giant corporations.”

  In other words, Berkshire’s performance on “The Road Ahead” depends a lot on the caliber and performance of the company’s managers and directors.

  Buffett will still be at center-stage at the upcoming annual shareholders’ meeting. But it seems to me, in a number of ways I noted above, the company may (finally?) be readying for what comes next, after Buffett. And that is a good thing, if we truly are to believe that the company is “100% prepared” for Buffett’s eventual departure.

  The Upcoming PLUS D&O Symposium: This upcoming week I will be in New York for the PLUS D&O Symposium. On Tuesday, February 25, 2020, I will be moderating a panel at the Symposium on the topic “Time for Another Round of Securities Litigation Reform?” I will be joined on the panel by Sara Brody of the Sidley Austin law firm; Sean Griffith of the Fordham Law School; Jeremy Lieberman of the Pomerantz law firm; and Jerrod Schlesinger of Chubb. It should be a great session and I hope to see everybody there.

  I know that many of this blog’s readers will be at the Symposium. If you see me at the Symposium, I hope you will make a point of saying hello, particularly if we have not previously met. See you all in New York!

  And Finally: The February 22, 2020 Wall Street Journal carried a wonderful tribute in recognition of the 50th anniversary of the release of the album “Nilsson Sings Newman,” which features a range of songs written by Randy Newman and sung by Harry Nilsson while Newman plays the piano. Even though I know I am showing my age, I fully endorse to the author’s view that this album is one of the greatest of all times. I recommend the article, and I strongly recommend the album, which, if you have never heard it, is a revelation. The songs on the album, as interpreted by Nilsson’s vocals, are wry, entertaining, and occasionally moving. As the Journal article’s author notes, “Half a century on, ‘Nilsson Sings Newman’ still sounds singular, inspired and fresh. If you haven’t heard it, a sparkling aural discovery awaits you.”

  Here is a recording from the album of Nilsson singing Newman’s “Love Story”:

  A Closer Look at Warren Buffett’s Annual Letter to Berkshire Shareholders published first on

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Monday February 24, 2020 is Spencer Day

The board of the Spencer Educational Foundation has declared Monday, February 24, 2020 as Spencer Day. The Spencer Education Foundation was founded in 1979 to fund the education of tomorrow’s risk management and insurance leaders through scholarships and grants for students risk management, insurance, actuarial science and business. The organization also facilitates internship opportunities, provides on and off campus experiential learning opportunities through grants, and funds development of risk management/insurance curriculum. The purpose of the Spencer Day designation is to showcase Spencer scholarship recipients, the companies who hire them, and the myriad ways that Spencer supports industry education.

  The Foundation’s announcement about Spencer Day and the related activities can be found here.  The organization’s press release about Spencer Day provides, in part, as follows:

  The Board of Directors of the Spencer Educational Foundation has pronounced the last Monday of February as Spencer Day. The purpose of this designation is to showcase Spencer scholarship recipients, the companies who hire them, and the myriad ways that Spencer supports industry education.

  This announcement follows a significant sustaining gift just received from the FM Global, one of the world’s largest commercial property insurers. FM Global’s generous $650,000 gift is the largest single pledge received in Spencer’s 41-year history, and will enable Spencer to eclipse their 2019 high water mark of giving away close to $1.5M to fund industry education.

  Marya Propis, SVP and Director of Distribution & Broker Partnerships at All Risks, Ltd. and Spencer Board Chair, commented, “The mission of Spencer is simple; we are helping to manufacture talent for the entire industry, and as our support grows, our capacity to generate more results increases, too. We are excited to call upon all Spencer Scholars – and the companies who employ them – to stand up today and be acknowledged. We also want to shine a bright spotlight on standout industry partners like FM Global on our Spencer Day.”

  What is the Spencer Day call to action? TODAY, via social media, industry professionals are encouraged to promote #SpencerScholars whom they mentored, advised, and assisted, and employers can make clear that they place a value on hiring and supporting #SpencerScholars.

  Currently, Spencer relies on annual, recurring support from hundreds of donor companies and industry professionals, and is so grateful for these ongoing partnerships. Of course, if you’re a Spencer Scholar – past or present – we want to salute you, too, and encourage you to identify yourself via social media or on our website.

  Over 1,000 P&C insurance professionals have benefited from Spencer’s philanthropic efforts since the first three scholarships were granted in 1980. By gathering at annual events such as the Gallagher Spencer Golf event on Sat May 2 and the Spencer & Sedgwick FunRun on Tues May 5 at the RIMS Annual Conference in Denver, as well as the Spencer Gala Dinner on Thurs Sept 17 at the Sheraton Times Square in New York, insurance professionals can support Spencer’s ability to propel careers by removing financial obstacles.

  Monday February 24, 2020 is Spencer Day published first on

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Save the date: Venable’s Seventh Annual Advertising Law Symposium will be held in Washington, DC on March 19, 2020

Combining the experience and thought leadership of Venable’s advertising law practice – one of the nation’s largest and highest ranked – with key insights from government and industry insiders, our renowned Advertising Law Symposium offers sessions designed to educate and enlighten. Attendees span both the legal and business worlds, and include clients and professionals working across the industry. Session topics will cover broad trends and anticipated developments, as well as industry-specific hurdles, highlights, and more.

Interested in attending? Sign up to learn more about this exciting annual event.

Save the date: Venable’s Seventh Annual Advertising Law Symposium will be held in Washington, DC on March 19, 2020 published first on

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Directors’ and Officers’ Antitrust Liability Risks and D&O Insurance Concerns

In prior posts on this site (for example, here), I have noted the phenomenon of directors’ and officers’ liability claims arising in the wake of antitrust enforcement actions. These follow-on civil actions arguably represent one part of an increasing trend toward trying to hold individual directors and officers accountable for their companies’ antitrust violations. According to a recent paper, as a result of trends in relevant doctrines and enforcement policies, the risk to directors and officers from these developments is “likely to continue rising in the foreseeable future.” In his February 12, 2020 paper entitled “D&O Liability for Antitrust Violations” (here), University of Arizona Law Professor Barak Orbach details the developments contributing to these trends and reviews the implications for director and officer liability. Professor Orbach’s paper raises a number of interesting considerations, particularly from an insurance perspective, as discussed below.

  Increased Focus on Individual Liability

Professor Orbach’s observations about antitrust liability arise within the larger context in which regulatory and enforcement authorities increasingly are focused on holding corporate directors and officers accountable for their involvement in corporate wrongdoing – as reflected, for example, in the U.S. Department of Justice’s Yates Memo. These accountability efforts focus not only on the individuals’ direct involvement in the wrongdoing but also on their alleged failures to detect, prevent, corporate wrongdoing. Oversight responsibilities are, Professor Orbach notes, an increasing important part of the DOJ’s antitrust enforcement guidelines.

  Sources of Individual Liability for Corporate Antitrust Violations

Potential director and officer liability for corporate antitrust violations can be found in three sources: the antitrust laws themselves; general corporate law; and the federal securities laws. Under the antitrust laws, the individuals who formulated, negotiated, authorized, directed or executed policies or agreements that constituted steps in an antitrust violation may be criminally and civilly liable for the violation. Under the general corporate laws, individuals who were aware of the violations or who failed to make good faith efforts to oversee material risks and compliance with applicable laws may be held liable for losses caused by the unlawful acts. Under the securities laws, individuals may be held liable for material misrepresentations or omissions concerning antitrust risk.

  In his paper, Professor Orbach details the specific provisions of the federal antitrust laws that are the basis of individual antitrust liability. He also reviews the important areas of corporate law contributing to individual liability for a corporation’s antitrust violations, including under the Caremark duty of oversight, as recently embellished by the Delaware Supreme Court’s 2019 decision in Marchand v. Barnhill (about which refer here and here).

  Professor Orbach also reviews in detail the bases on which underlying antitrust enforcement actions have led to follow-on securities class action litigation. As he notes, “where an antitrust action claims that a company engaged in wrongful anticompetitive conduct, the question is whether past representations about competition and legal risk were adequate.” In recent years, he notes, “the initiation of antitrust actions has triggered securities class action lawsuits against companies and their senior executives.”

  Individual Directors’ and Officers’ Defenses and Protections

As Professor Orbach discusses, while individual directors and officers can be subject to claims based on their companies’ alleged antitrust violations, the individuals do have a variety of defenses and protections. These defenses and protections include the business judgment rule; exculpatory clauses; indemnification; advancement; and insurance. The business judgment rule and exculpatory clauses provide defenses to liability. Indemnification, advancement, and insurance provide the individuals with protection against the costs of defense and liabilities in the form of settlements and judgments.

  D&O insurance can be an important part of the protections available to corporate officials who are targeted for their company’s antitrust violations. However, as Professor Orbach notes, these policies frequently contain exclusions for criminal misconduct.

  Increased Emphasis on Oversight Duties

In his conclusion, Professor Orbach notes that changing attitudes toward corporate wrongdoing and an increasing emphasis on holding individuals accountable have “affected the expectations for D&O oversight of antitrust risks.” Until recently, the focus has been on individuals who participated in the alleged violations.

  However, more recently, enforcement authorities are focused on the corporate officials’ general oversight responsibilities and the extent to which their companies have adopted, maintained and overseen corporate compliance programs. Parallel developments in corporate and securities laws “have further reinforced the growing expectations for oversight of antitrust compliance and require D&O to meet heighted oversight responsibilities.”

  Discussion

The value of Professor Orbach’s overview of potential director and officer antitrust liability is his insight that the liability can arise not just under the antitrust laws themselves, but under the general corporate laws and the securities laws as well. His discussion about the potential liabilities arising under the duty of oversight principles, as recently elaborated under the Delaware Supreme Court’s Marchand decision, is particularly helpful in showing the ways that individuals can be held liable under for their company’s antitrust violations. As he notes, “D&O already face an increased risk of such liability and that this risk is likely to continue growing.”

  One particular aspect of Professor Orbach’s analysis that is worth emphasis is his discussion of the ways in which underlying allegations of antitrust wrongdoing can lead to securities class action litigation. In numerous prior posts, I have discussed specific situations in which companies caught up in antitrust enforcement actions can become the target of follow-on securities litigation.

  For example, as discussed here, numerous companies in the poultry production industry were hit with follow-on securities lawsuits, after a number of companies in the industry were targeted with private antitrust litigation alleging that companies in the industry had engaged in price-fixing.

  Similarly, as discussed here, a number of generic drug companies were hit with securities suits after news that the federal antitrust authorities were pursuing criminal antitrust charges against certain companies in the industry on price-fixing charges.

  Similarly, plaintiffs’ lawyers initiated a number of securities suits against auto parts companies (refer, for example, here) following news that the DOJ and the EU were investigating companies in the auto parts industry for possible collusion and price-fixing.

  Other examples of cases where securities class action lawsuit followed in the wake of antitrust enforcement activity include the  securities suit filed against Reddy Ice Holding and certain of its directors and officers (about which refer here), as well as the securities suit filed against Horizon Lines and certain of its directors and officers (refer here).

  The translation of antitrust enforcement actions into potential liabilities under the securities laws has significant implications from a D&O insurance perspective. Under most public company D&O insurance policies, the policies’ entity coverage extends only to securities claims. Many antitrust enforcement actions target the entity; but antitrust enforcement actions against the corporate entity would not trigger the D&O insurance policies’ entity coverage. A securities claim against a publicly traded company typically would trigger the company’s D&O insurance policy’s entity coverage.

  To be sure, Professor Orbach’s paper was focused on individual liability for antitrust violations, as opposed to entity liability. All else equal, an antitrust enforcement action against an individual presumptively would trigger the D&O insurance policy.

  There are of course a number of policy provisions that potentially could be applicable. For example, as Professor Orbach notes, the policy’s criminal conduct exclusion at least potentially could be in play. However, in the current era, most criminal misconduct exclusions are not triggered by mere allegations; the exclusion only operates to preclude coverage upon a final adjudication that the precluded conduct actually happened. Thus, in most instances, the D&O insurance would be available to defend individuals from the underlying allegations, as well as any follow-on civil claims.

  There is an additional D&O insurance coverage issue that needs to be discussed when it comes to potential antitrust liabilities, and that has to do with the antitrust exclusion that can be found in the base forms of many private company D&O insurance policies. In that regard, it is worth noting that there is nothing about the antitrust laws that limits their reach just to publicly traded companies. A private company very much could be the subject of antitrust allegations from enforcement authorities as well as in private enforcement actions.

  Were a private company and its director and officers to be hit with either a regulatory or private antitrust action, the presence of an antitrust exclusion could very much affect the availability of coverage. The important thing to note about these kinds of exclusions when it comes to policy placement is that even though many insurers have an antitrust exclusion in their base forms, many of the insurers will upon request remove these exclusions by endorsement, or at least offer some amount of sublimited antitrust coverage. Other insurers will at least limit the exclusion to the entity only or specify that the exclusion does not apply to defense expense. The important thing is to be aware if the policy has an antitrust exclusion, in order to address the exclusion at the time of policy placement.

  One last thing to keep in mind about the antitrust exclusion is that though we refer to it as “the antitrust exclusion” for shorthand purposes, the exclusion itself often is about much more than just claims arising under the antitrust laws as such. Frequently, these exclusions are broadly written and potentially sweep all sorts of other claims, including, for example, claims deceptive trade practices, unfair trade practices, or restraint of trade.

  Not only do these exclusion sweep more broadly than just antitrust issues, but the exclusions are often written on a broad “based upon, arising out of” basis, extending the exclusion’s coverage preclusive reach even further. These considerations even further underscore the importance for private company insurance buyers to try to address the antitrust exclusion at the time of policy placement.

  The bottom line is that, as Professor Orbach emphasizes in his paper, antitrust liability represents a growing area of personal risk for corporate directors and officer, and this risk is likely to continue rising for the forseeable future. Accordingly, it is increasingly important that these considerations are taken into account when D&O insurance coverage is put in place.

Directors’ and Officers’ Antitrust Liability Risks and D&O Insurance Concerns published first on

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ISS Releases 2019 Top 100 Securities Class Action Lawsuit Settlements List

As was the case for the last two reporting years, there were relatively few larger securities class action lawsuit settlements during 2019 compared to prior years. As reported in latest large securities class action lawsuit settlement report from ISS Securities Class Action Services (ISS), there were only two settlements finalized in 2019 large enough to make the list of all time large settlements. However, there are a number of pending tentative securities class action lawsuit settlements that are likely to be finalized in 2020, and thus are likely to lead to an increase in the number of Top 100 settlements during the year. The February 20, 2020 report, entitled “The Top 100 U.S. Class Action Settlements of All Time (as of December 31, 2019)” can be found here.

  The two cases that made the Top 100 list during 2019 are Cobalt International Energy, at $389.6 million, the 43rd largest of all time; and Alibaba Group Holding, at $250 million, tied for 69th largest. While there were only two securities suit settlements making the top 100 list in 2019, four in 2018, and two in 2017, there were as many 12 making the list in 2016.

  The total value of the 101 securities class action lawsuit settlements finally approved in in 2019 was $3.17 billion, a decrease from the total valued of the 126 approved settlements in 20918 of $5.84 billion. Much of the difference between the two totals is attributable to the massive $3 billion Petrobras settlement, which was approved in 2018.

  While there were relatively few of the largest securities suit settlements in 2019, there likely will be more of the larger settlements finalized in 2020. According to Jeff Lubitz, Executive Director of ISS Securities Class Action Services, among pending settlements that are likely to be finalized in 2020 include Valeant Pharmaceuticals ($1.2 billion); American Realty Capital Partners ($1 billion); First Solar ($350 million); SCANA Corporation ($192.5 million); and Snap, Inc. ($187.5 million).

  Just for the sake of level-setting, in order to make the Top 100 list as it currently stands, a future settlement would have to exceed $168 million.

  Of the Top 100 settlements, 92 percent have involved an institutional lead plaintiff, whereas only 8 percent have involved a non-institutional lead plaintiff.

  Of the top 100 settlements, 36 have been led in whole or in part by the Bernstein Litowitz law firm, and 16 have been lead in whole or in part by the Robbins Geller law firm (and its predecessor firm), including the largest of all time, the Enron settlement ($7.2 billion). 14 have been led by Milberg (and its predecessor firm).

  In terms of aggregate recoveries from the Top 100 settlements, the Bernstein Litowitz law firm is top, with $25.9 billion in total settlements in the Top 100; the Robbins Geller law firm, with $15.1 billion in total settlements from among the Top 100; and the Barrack, Rodos and Bacine law firm, with $13.1 billion to total recoveries from among the top 100. (Please note that these law firm aggregate figures reflect cases that the law firm led in whole or in part.)

  Of the top 100 settlements, 41 have involved restatements, while 59 have not involved restatements. However, the restatement cases are among the very largest. Of the top 15 settlements on the list, 12 involved restatements, as well as 15 of the 20 largest.

  My thanks to Jeff Lubitz of ISS Securities Class Action Services for sending me a link to the latest report.

ISS Releases 2019 Top 100 Securities Class Action Lawsuit Settlements List published first on

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20 Days of Immigration March Madness

While some of you may be looking forward to brackets, watch parties, and cheering on your favorite college basketball team, employers should also be thinking about a different type of March Madness – preparing for the H-1B Visa New Registration Process!

The USCIS recently announced the implementation of a new electronic registration process for H-1B visas. The registration period will run from March 1-March 20. Therefore, employers seeking to file H-1B cap-subject petitions for the fiscal year 2021 cap should start planning and gathering documentation on eligible employees.

In an effort to make sure employers don’t “drop the ball,” I recently recorded a presentation answering questions and sharing important information to keep in mind regarding this process. You can listen to the recording here.

20 Days of Immigration March Madness published first on

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Equifax Data Breach-Related Securities Suit Settled for $149 Million

Over the last several years, plaintiffs’ lawyers have filed a number of D&O lawsuits against companies that had been hit with a cybersecurity incident. These suits have largely been unsuccessful, with the exception of the lawsuits filed against Yahoo in the wake of that company’s data breach. While the plaintiffs’ track record in data breach-related D&O lawsuits so far has not been good, a recent development could suggest that that has changed. On February 13, 2020, the parties to the Equifax data breach-related lawsuit filed a stipulation of settlement stating that the case has been settled based on the defendants’ agreement to pay $149 million. The settlement is subject to court approval. This settlement has a number of interesting implications, as discussed below. A copy of the parties’ stipulation of settlement can be found here.

  Background

On September 7, 2017, Equifax announced a “cybersecurity incident” potentially impacting 143 million U.S. customers. The company’s press release stated that during the period from at least mid-May through July 2017 criminals had exploited a U.S. website vulnerability to gain access to customer information. The company discovered the breach on July 29, 2017.

  The information accessed included names, Social Security numbers, birth dates, addresses, and in some instances driver’s license numbers. The credit card numbers of about 209,000 U.S. consumers were also breached. Upon discovering the breach, the company launched a forensic review to determine the scope of the breach. The company also notified law enforcement officials. (On February 10, 2020, four Chinese nationals working for the People’s Liberation Army were indicted in connection with the 2017 breach.)

  On September 8, 2017, the first trading day after the release of the data breach news, Equifax’s stock price had dropped nearly fifteen percent. Over the next few days, further news and information about the breach became public. By September 15, 2017, Equifax’s share price had dropped a total of nearly 36 percent since the initial data breach disclosure.

  The Plaintiffs’ Complaint

As discussed here, on September 8, 2017, plaintiffs’ lawyers filed a securities class action lawsuit against the company and certain of its directors and officers. The data breach-related securities lawsuits against Equifax ultimately were consolidated and in April 2018 the plaintiffs’ counsel filed a consolidated amended complaint (here).

  In the amended complaint, the plaintiff alleged that the defendants made multiple misleading statements and omissions about the sensitive information in Equifax’s custody; about the vulnerability of the company’s systems to cyberattack; and about the company’s compliance with data protection laws. The complaint alleges that despite these assurances, the company “failed to take the most basic precautions” to protect its systems from hackers. The complaint alleges that these statements artificially inflated the company’s share price and caused a loss in the value of the company’s shares when “the truth was revealed.”

  Among other allegations in the amended complaint, the plaintiff alleged that the company’s cybersecurity was “dangerously deficient” as a result of the company failure to implement appropriate protocols; failure to remediate known deficiencies; failure to encrypt sensitive data; failure to implement appropriate authentication measures; and failure to adequately monitor its networks and systems.

  The Motion to Dismiss and Subsequent Proceedings

The defendants filed a motion to dismiss the plaintiffs’ amended complaint. As discussed here, on January 28, 2019, Northern District of Georgia Judge Thomas W. Thrash, Jr. entered an order granting in part and denying in part the defendants’ motion to dismiss.

  Following Judge Thrash’s ruling on the motion to dismiss, the parts of the case that had not been dismissed went forward. In addition, the parties also commenced mediation efforts. In late 2019, as a result of the parties’ mediation efforts, the parties entered an agreement in principle to settle the lawsuit, subject to several conditions, including in particular the completion of a full stipulation of settlement. On February 13, 2020, the parties’ jointly filed a motion with the court seeking preliminary approval of the settlement. The parties’ stipulation of settlement accompanied the motion.

  Discussion

As I noted at the outset, while there have been a number of D&O lawsuits filed against companies that have experienced cyber-security incidents in recent years, these lawsuits largely have been unsuccessful. The one notable exception was the Yahoo data breach securities lawsuit, which as discussed here, settled for $80 million. The related  Yahoo shareholder derivative lawsuits settled for $29 million, as discussed here. Yahoo’s successor-in-interest, Altaba, also settled a related SEC enforcement action for $35 million. But, with the notable exception of the Yahoo litigation, D&O lawsuits based on cybersecurity incidents had not been particularly successful for plaintiffs. That is, until now.

  The $149 million settlement in the Equifax data breach obviously is a significant settlement that arguably represents a milestone of sorts for D&O litigation in the cybersecurity context. If nothing else, the Equifax settlement, along with the prior Yahoo data breach litigation settlements, make a statement that cybersecurity-related D&O lawsuits potentially represent a significant exposure. The clear implication is that follow-on D&O litigation is among the significant consequences that can follow for companies experiencing cybersecurity incidents.

  The $149 million settlement is massive. However, it is interesting to note that the settlement, as big as it is, does not crack the list of the Top 100 U.S. Securities Class Action Lawsuit settlements. (To break into the list, a settlement would have to exceed at least $164 million.)  However, it is, of course, the largest ever cybersecurity-related securities class action settlement. It clearly represents a bellwether in these kinds of cases, and potentially has significant implications  for other serious pending cybersecurity-related securities lawsuits, including, for example, the data breach-relates securities suits pending against Marriott (here) and Capital One (here).

  There are a number of details about the settlement that are not yet clear. One detail that undoubtedly would be of interest to readers of this blog is the amount of the total settlement that is being funded by D&O insurance. The settlement documents themselves are silent on this point. At least as now, the company itself has said little about the settlement. (I encourage any readers out there who may know the details about the D&O insurance contribution to the settlement to please let me know; I will of course protect the anonymity of anyone who can provide me with the information.)

  The company’s total settlements so far arising out of the 2017 data breach are really kind of astonishing. Along with the recent $149 million securities suit settlement, the company also previously agreed to pay $380.5 million to settle the class action lawsuits filed on behalf of the consumers whose information was exposed as result of the breach. Separately, the company reached an agreement with the FTC to pay up to $425 million to help people affected by the breach. As detailed here, the company also agreed to pay $175 million to 48 states in the U.S and and $100 million in civil penalties to the Consumer Financial Protection Bureau (CFPB). These amounts do not include the cost the company paid to upgrade its systems or defend itself against all of these various proceedings. (Indeed, last week the company said that so far the various  expenses associated with the 2017 data breach had, to date and net of insurance recoveries, cost the company $1.7 billion.) Clearly, the potential costs associated with a serious data breach can be massive.

  One final question about the recent Equifax data breach-related securities suit settlements is what impact it might have on prospective future claimants. At a minimum, the Equifax settlement and the earlier Yahoo settlements show that the plaintiffs’ lawyers might actually be able to make money on these kinds of lawsuits. Clearly, a settlement of the magnitude of the Equifax settlement is enough to attract the attention of prospective future claimants and arguably encourage them to file similar claims. As I have noted frequently in the past, the likelihood is that we will see more of these cybersecurity incident-related securities suits and other D&O claims in the future.

  Just the same, none of this should be interpreted to suggest that we are about to see a flood of these kinds of cases. There were only a very small number of data breach-related securities lawsuits filed in 2019. In many instances, companies experiencing data breaches may not necessarily be attractive securities suit targets because company share prices often do not drop significantly on news of a data breach. In the absence of a significant stock drop, the data breach company will not be an attractive securities suit target.

  In addition, there are a number of factors that make the Equifax situation distinctive and arguably unique. The Equifax data breach was massive, and it involved the disclosure of particularly sensitive information. The impact on the company and its share price was also massive. There have been relatively few other data breaches that were quite as serious in scope, seriousness, and magnitude. Because of these distinctive features of the Equifax situation, there clearly is a limit to any conclusions that might be drawn from the settlement of the case.

Equifax Data Breach-Related Securities Suit Settled for $149 Million published first on

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Book Review: “Court Number One: The Old Bailey Trials That Defined Modern Britain”

Several years ago when my wife (also a lawyer) and I were in London on holiday, we took the opportunity to visit Old Bailey, London’s famous criminal courthouse. We were fortunate on the day we visited to see a portion of rather sensational murder trial. The facts surrounding the underlying crime, while lurid, were also fascinating, but the most striking thing for us about the trial day we observed was the quality of the advocacy, which was absolutely brilliant. Witnessing the spectacle was a completely enthralling experience.

  On a more recent visit to London, I was browsing the new books counter at Hatchard’s book store on Piccadilly when I happened to spot Thomas Grant’s book “Court Number One: The Old Bailey Trials That Defined Modern Britain.” I took a photo of the book and sent the picture to my kids with a strong hint that I wouldn’t mind finding the book under the Christmas tree. Fortunately, the kids got the hint, and the book was among the presents I unwrapped this past Christmas.

  When I saw the book at Hatchard’s, I suspected based on my prior visit to Old Bailey that I would be interested in the book. As it turns out, I found the book to be totally absorbing. Grant, the book’s author, is himself a barrister (and a QC – that is, Queen’s Counsel, an honorific indicating that the person so designated is “learned in the law”), and he has put together a masterful and compelling volume.

  The book consists of a series of accounts of eleven criminal trials, all of which took place in Old Bailey’s Courtroom No. 1, historically reserved for the highest-profile and most important trials. The trial accounts are arranged chronologically. The first trial described, involving “The Camden Town Murder,” took place in 1907, and the last trial described, involving the tragic murders of two pre-teen girls, took place in 2003. Along the way, he describes the trials of the obscure and of the famous, including, among others, the post-war trial of Lord Haw-Haw, and the “Trial of the Century” – the 1979 trial of the Liberal Party leader, Jeremy Thorpe.

  The chronological approach works well, as it highlights how much the court practices and procedures have changed over time. The role of the judge, the limits of advocacy, and the rights accorded the accused all changed dramatically during the time period covered in the book. The rise of mass media press coverage also has had a significant impact. But perhaps the most interesting effects of the chronological approach is that it illustrates how perceived injustices or shortcomings of earlier trials led to later changes in both the procedures and the law.

  Grant has chosen his examples well. The first case described, that of the Camden Town Murderer, Robert Hall, shows how the brilliant advocacy of one of the age’s most acclaimed barristers, Sir Edward Marshall Hall, led to the defendant’s acquittal, against all odds. As is the case throughout the book, Grant’s eye as an experienced barrister himself allows him to highlight the ways that Marshall Hall’s skillful cross-examination cast doubt on the Crown’s evidence. Grant also celebrates the brilliant oratory that a truly skilled advocate can bring to his or her task.

  Many of the Grant’s trial descriptions have a cinematic quality. Indeed, it is no accident that over time there have been a number of films based on Old Bailey trials. The most famous of these movies is Witness for the Prosecution, based on the Agatha Christie short story and play of the same name (which, coincidentally, my wife and I saw performed here in Cleveland last fall – it was excellent).

  Another movie based on an Old Bailey trial is 10 Rillington Place. The movie is based on the Old Bailey murder trial of Timothy Evans, who was accused of murdering his wife and daughter.

  The Evans murder trial is one of the eleven trials described in Grant’s book. The story is so lurid and fascinating that you would never believe it if it hadn’t actually happened. Grant skillfully tells the tale of Evans’s wife’s disappearance, of the police investigation, and of Evans’s arrest, as well as the hysterical media coverage that surrounded these events. Throughout his description of the subsequent trial, Grant details the flaws in the Crown’s case, as well as the shortcomings of Evans’s defense – his counsel clearly found the entire situation distasteful in the extreme. A large part of the Crown’s evidence was provided by Evans’s neighbor, a World War I veteran named John Christie.

  Evans ultimately was convicted and later executed. Sadly, after Evans’s death, the police uncovered evidence that Christie had been involved in a series of grisly murders. The investigation of the other murders ultimately led the police to conclusive proof that it was Christie, not Evans, who had murdered Evans’s wife and daughter. Evans’s conviction and execution were in fact the result of a tragic miscarriage of justice. As Grant details, the 10 Rillington Place Trial was instrumental in the ultimate elimination of the death penalty in Britain.

  The 10 Rillington Place Trial is truly remarkable, but the trial described in Grant’s book that I found most interesting was 1991 trial of Michael Randall and Pat Pottle, who were accused of aiding the prison escape of George Blake, a former MI6 agent who had been convicted of providing highly classified and sensitive information to the Russians. Randall and Pottle were peace activists and non-conformists who had met Blake while they themselves were in prison for prior convictions based on protest activities. The factual background of Blake’s conviction and escape itself makes the Randall and Pottle case interesting, but what makes the trial account compelling is the fact that Randall and Pottle conducted their own defenses. Not only did they manage to procure their own acquittals, but they did so despite having admitted in a book they wrote that they had in fact assisted Blake’s escape.

  Grant’s account of how Randall and Pottle cleverly managed to insinuate themselves with the jurors and convince them not to convict despite the evidence really makes for a great story. Grant’s somewhat philosophical reflection on the jury’s verdict – an example of what we in the U.S. would call “jury nullification” – is a fascinating essay on the importance of jury independence in an adversarial system.

  I think just about any reader would find this book to be a terrific read, but this book will be particularly rewarding  for anyone who is interested in the role of advocacy in an adversarial system of justice. Grant is a keen observer and sharp commentator. His eye for the telling detail and his narrative skill bring these trials to life. His own experience as a practicing barrister gives his observations a satisfying aura of authority. You come away not only entertained, but also with a sense that you truly understood what happened.

  I feel compelled to add a note of caution. Some American readers may find some features of this book a little off-putting. This book was written for a British audience. It assumes acquaintance with a host of crimes and trials that, from the way they are mentioned in the book, must be just common knowledge in Britain, but that were completely unknown to me. Grant also mentions a multitude of celebrities, politicians, authors, journalists, and other public figures with an unstated assumption that of course everyone knows these people. I recognized very few of these individuals’ names, and so whatever reference Grant sought to evoke was completely lost on me.

  However this last point is at most a minor quibble. I enjoyed this book. I liked it so much that as soon as I finished it, I immediately started reading it again. I liked it so much that I wish Grant would find eleven more trials to write about and publish another book just like this one.

Book Review: “Court Number One: The Old Bailey Trials That Defined Modern Britain” published first on

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A Final Round of Readers’ Travel Pictures

As a follow-up to my year-end activities, including publishing a list of my own top ten 2019 travel pictures, I have also been publishing pictures that readers have submitted of their 2019 travels. My first installment of readers’ 2019 travel pictures can be found here, the second installment can be found here, and the third installment can be found here. In this post, I am publishing the latest round of readers’ travel pictures, including some very distinctive pictures from Central Asia.

  But first, before the Asian pictures, I have this picture from California. This picture was sent in by Kelly Castriotta of Allianz.

      Loyal reader Neha Yardi of Howden in Mumbai send in a series of pictures from Uzbekistan, including the three extraordinary pictures described below.

  This is Registan – The Registan was the heart of the ancient city of Samarkand of the Timurid Empire, now in Uzbekistan. The name Rēgistan (ریگستان) means “sandy place” or “desert” in Persian. The Registan was a public-square, where people gathered to hear royal proclamations, heralded by blasts on enormous copper pipes called dzharchis – and a place of public executions. It is framed by three madrasahs (Islamic schools) of distinctive Islamic architecture. The place now has many small curio and souvenir shops where you can buy (bargain hard though) silk scarves, traditional fur hats, blue pottery, traditional ikat attire etc. and if I remember correctly there was also a café there where you can have nice coffee and relax.

    This is the statue of Amir Timur in the Amir Timur maydoni (I guess it means a square) in Tashkent, Uzbekistan. A lovely park surrounds the statue where you could take a leisurely stroll amidst flowers and trees and locals sitting and reading on the park benches or playing cards, board games etc.

    This is Mir-I-Arab Madrasah in the Kalon Mosque and Minaret complex in Bukhara in Uzbekistan. The structure is known for its intricate and stunningly beautiful blue tile work. You will find all shades of blue and various complex patterns which makes the structure look enormous and grand.

  I think everyone will agree that these pictures are extraordinary, and I am very grateful to these contributors for sending their pictures in.

  It has been a lot of fun publishing readers’ pictures, and I appreciate everyone that took the time to submit pictures. Unfortuately, all good things must come to an end, so I think this post will be my last edition of readers’ pictures. The flow of new picture submissions has basically stopped and so I think this is probably a good time to draw an end to this series. My thanks to everyone who participated, this has been a lot of fun.

    A Final Round of Readers’ Travel Pictures published first on

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Guest Post: Avoiding Event Driven Litigation through Good Cybersecurity Governance

Paul A. Ferrillo

In the following guest post, Paul A. Ferrillo takes a look at the recent findings that the SEC Office of Compliance, Inspections and Examinations issue with respect to its cybersecurity examinations of registered investment advisers and broker dealers. The findings, Paul suggests, provides good guidance from a number of perspectives with regard to cybersecurity governance issues. Paul is a partner with McDermott, Will & Emery. I would like to thank Paul for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article.

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The D&O Diary has done an exemplary job noting that there have generally been two fast ways that cause “event-driven” litigation for a company and its directors (through a derivative action) to be filed: 1) to either ignore published regulatory warnings, disclosure guidance or direction, and have those warnings come back and bite you following a disastrous event (like a big cyberattack), or 2) to ignore warnings and “red-flags” evidencing potentially ‘poor conduct’ or “red flags” not in conformance with such regulatory advice, and have those warnings eventually come back and be the cause of the event. Both 1 and 2 can be equally painful for a company. Associated stock drops coupled with regulatory actions, orders or proceedings will likely cause both securities and derivative litigation (and potentially other forms of breach or privacy-related litigation).

While some regulatory bodies have not been prolific with their guidance to companies, firms, directors and officers as to “what to do to avoid” or “how to handle” the big cybersecurity “ugly mess,” the Securities and Exchange Commission (SEC), for example has been a lot more helpful and direct to registered entities.

On January 27, 2020 the US SEC Office of Compliance, Inspections and Examinations (OCIE) issued a helpful summary of the findings it has made in targeted cybersecurity examinations of registered investment advisers and broker dealers (hereinafter referred to as the “cyber observation memo”).

The cyber observation memo follows yearly examination memorandums and advisories on the points of emphasis that it wants its registered firms to both identify, remediate and otherwise control for. It’s no secret that the practices the SEC identified as “important” in prior years – 2016-2019 – are approximately the same practices that it highlights in the cyber observation memo where firms have done a “good job.”

The cyber observation memo is helpful for another reason – to clarify the ground rules for the registered entities and their directors and officers. If you do not follow what the SEC has “suggested,” and you subsequently have a major data breach or other cyber incident that affects customer data, do not be surprised if the SEC assesses a fine or penalty. Regulated firms and their directors and officers would do well to avoid enforcement actions and fines, especially since there may be related public disclosure obligations as well. So “RIA emptor” or “Registered Investment Adviser Beware!”

What Registered Investment Advisors (RAI) should be thinking about when it comes to cyber

Here are the key factors the SEC has identified that each RIA or broker-dealer should be considering:

Identity and Access Management (IAM). 2018 and 2019 presented firms with two different problems: (1) that the Internet is awash with billions of stolen credentials and passwords allowing criminals to get access to networks; and (2) certain nation-state attackers, knowing financial firms have adopted cloud and SAAS resources to allow their businesses to operate both remotely and more efficiently, have attacked corporate email systems to gain access to financial firms’ email servers and steal both customer and business information. How do you stop these attacks from occurring? There is no foolproof method, but a strong IAM program would help. In the cyber observation memo, the SEC lists elements of such a program.

Data Loss Prevention topics

The cyber observation memo offers a list of good practices and procedures to help guard against data loss:

Vulnerability Scanning. Establishing a vulnerability management program that includes routine scans of software code, web applications, servers and databases, workstations, and endpoints both within the organization and applicable third party providers.

Perimeter Security. Implementing capabilities that are able to control, monitor, and inspect all incoming and outgoing network traffic to prevent unauthorized or harmful traffic.

Detective Security. Implementing capabilities to detect threats on endpoints.

Patch Management. Establishing a patch management program covering all software (i.e., in-house developed, custom off-the-shelf and other third party software) and hardware, including anti-virus and anti-malware installation.

Inventory Hardware and Software. Maintaining an inventory of hardware and software assets, including identification of critical assets and information (i.e., know where they are located and how they are protected).

Encryption and Network Segmentation. Using tools and processes to secure data and systems, including: (i) encrypting data “in motion” both internally and externally; (ii) encrypting data “at rest” on all systems including laptops, desktops, mobile phones, tablets, and servers; and (iii) implementing network segmentation and access control lists to limit data availability to only authorized systems and networks.

Have a Plan and Practice it

This is older piece of advice, but one that is often over looked in the heat of business or the economy: make sure that you have a practiced and tested cyber incident response, business continuity and crisis communications plan.

These are the first documents that a regulator will ask for during an examination. And these are probably the first documents that the firm’s directors and officers will ask for when reviewing the cybersecurity posture of the firm. If you are not practicing what to do when you get attacked, then you are not being realistic of your chances of effectively responding to a devastating cybersecurity attack.

Vendor Management is Critical

The Internet has created so many efficiencies for business. Nearly everything can be outsourced – from manufacturing to HR to payroll to cybersecurity itself – by using a managed service provider. But what really do you know about your vendor? What program do you have in place to both identify and monitor the cybersecurity of your critical vendors? And maybe your less critical vendors too? The SEC OCIE recommends a fulsome vendor management program. We do too.

Finally, none of the above is any good (most of the time) unless your board and senior executives buy into both your regulatory cybersecurity compliance strategy and your data loss prevention strategies. Update to date network servers and operating systems are critical in today’s environment; so are machine-learning solutions for network security and things like good IAM programs. And both cost money.

“Buy in” by the board and senior management is important. Some boards are very focused on cybersecurity. Many are not. To avoid event-driven disasters, they really need to focus upon the fact that ANY company or firm is a target in today’s threat filled environment.

Many states and regulatory schemes require board signoff of cybersecurity initiatives and compliance. The SEC has always considered good cybersecurity and good cyber governance to be essential. Good cybersecurity is not just an IT responsibility; it’s everyone’s responsibility at the firm. Chief Information Security Officers and IT executives should make it standard to meet with boards and senior executives once a quarter to talk about cybersecurity. Having your outside forensic advisor available to board members helps too, and adds a sense of comfort to discussions.  Having directors who actually understand digital transformation and cybersecurity issues would be bonus additions to any board of directors.

The SEC OCIE cyber observation memo is good guidance from many perspectives. Clients, customers and investors like stability and appreciate good cybersecurity, but they do not like data breaches or ransomware attacks. Regulated entities and their directors – beware! The world — and the SEC — are watching.

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About the author

Paul Ferrillo is a partner with McDermott, Will & Emery. He focuses his practice on corporate governance issues, complex securities class action, major data breaches and other cybersecurity matters, and corporate investigations. He can be reached at [email protected].

Guest Post: Avoiding Event Driven Litigation through Good Cybersecurity Governance published first on

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Guest Post: D&O Insurance Pricing Trends

Jeff Hirsch

As I have noted in prior posts, and as a result of a number of factors, the current marketplace for D&O insurance marketplace is disrupted, with many buyers experiencing significant price increases. In the following guest post, Jeff Hirsch, Head of Product at Scale Underwriting, takes a detailed look at current D&O insurance pricing trends. A version of this article previously was published on the Foundershield blog. I would like to thank Jeff and Foundershield for allowing me to publish this article. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jeff’s article.

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  With a hands-on approach in 2019, the D&O insurance industry continued its market corrections to make up for poor underwriting results in year’s past. Starting in 2018’s Q4, we saw steeper premiums, higher retentions, reduced capacity, more restrictive terms, and plenty of non-renewal.

  Historically, D&O underwriters reacted to linear claim trends—claims that were often based on business judgment errors, usually in terms of inaccurate financial forecasting. These claims were relatively easy to follow and understand, and their impact on pricing was objective.

  Also, D&O underwriters’ fears were focused on accounting misstatement claims and other exposures that were more fundamental. However, event-driven lawsuits and data breach litigation climbed last year—merger objection lawsuits topping the list of cases. Also, the US Securities and Exchange Commission (SEC) lawsuits hovered near-record high, as well.

  Among the big names, Google faced two Derivative Actions lawsuits, and Boeing faced a Securities Class Action (SCA) lawsuit. Plus, numerous breach and non-breach events motivated legal actions among several companies, including Federal Express, Facebook, Marriott, etc.

  This past year was not at all dull in terms of D&O claims activity. Here’s how 2019 wrapped up and what 2020 has up its sleeve regarding D&O pricing trends.

  What Affects D&O Premium?

Even with much event-driven litigation and high profile cases underway, a few elements impact D&O premiums historically, including:

  Company size

Number of employees

Operating costs

Business scope

Market trends

Company’s financial security

Business ownership structure

  Experts are calling the D&O industry a hard market, and expect the trend to continue for a couple of years. About one in every 11 companies are being sued, but it’s not necessarily that fraudulent activity is honestly to blame—that’s not plausible.

  Source: Stanford Law School – Securities Class Action Clearinghouse

  As mentioned, however, the SACs and litigation trailing after high-profile events are causing price hikes in the sector. Chubb drove this point home in a June 2019 white paper entitled, “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation.” Highlighted in the document was the astonishing amount of $23 billion, which was the cost of securities litigation over the last five years.

  Shockingly, half of that went to attorneys while the other half covered settlements.

  With the uptick in SCA lawsuits, many insurers are adjusting their underwriting approach, even exchanging growth for fair pricing. Many are taking a more conservative approach by reducing primary commercial D&O aggregate limits.

  Some are doubting whether rates can outpace claim expenses and payments loss trends.

  How Much Has D&O Pricing Changed?

The most significant D&O pricing changes relate directly to the increase in SCA lawsuits. Although for nearly every D&O risk, rates are up. We’ve also seen a rise in excess lines, which is vastly different from even one year ago.

  The 2019 take-home message is that premiums are up. This approach seems to be a step in the right direction to counteract inadequate pricing of the past. However, losses are also up. Experts are predicting the D&O dynamics of a hard market to play out well into 2020, if not the entire year. (All pricing charts in this article are from Trans Re’s 2019 Update to its U.S. Public Directors and Officers Liability Insurance Market Analysis (here) and are published in this article with the authors’ permission.)

    According to Kevin LaCroix, executive vice president of RT ProExec, particular companies face significant increases. Some of these firms include those with a recent initial public offering (IPO), financial troubles, or a hefty claims history.

  While this comes as no surprise, given the D&O activity on 2019’s docket, it’s still a jagged pill to swallow for some business owners. Some other major events that continue to impact the D&O sector include:

  Event-Driven Litigation

Also known as “bad news” claims since they often cause a severe price fall, disappointing shareholders, and the public alike. The most common scenarios are human-made or environmental disasters, product problems, and cyber attacks. However, event-driven litigation often calls upon the strength of a D&O policy.

  Brand Value

According to Allianz, the loss of a company’s reputation or brand value is ranked as the ninth top business risk overall. From environment to social and governance failings, many variables factor into whether a company is “hot or cold.” What’s more, is that D&O underwriters consider the social media temperature of a company to gauge reputation.

  Economic Growth

Whether it’s politics, trade wars, or something else entirely, experts predict a slow-down in economic growth in 2020. What this means is that more businesses will inevitably shut, facing insolvency or bankruptcy. While this outlook does seem bleak, it impacts the D&O sector significantly. Mainly because these insolvencies will translate into D&O claims.

  Litigation Funding

The fact that litigation funding is now becoming a global investment class only makes sense, especially in light of other trends influencing the D&O space. Investors are looking for a better return on investment (ROI) after years of relatively risky business. The litigation funding industry, which tops $10 billion globally, has grown significantly in recent years. Plus, the US market makes up half of that.

  High Profile D&O Suits

The once highest-valued private unicorn’s headlined a Fortune article titled, WeWork’s Legal Floodgates May Have Just Opened. With such a bold title, who can help but shake their heads at this calamity. The most significant problem is many of the directors and officers named in WeWork’s claims are shaking their heads back at us—in denial.

  At the heart of this unfortunate situation is the issue of the “entire fairness standard.” But let’s back up. In San Francisco County Superior Court on November 4, former WeWork employee Natalie Sojka filed a lawsuit against former CEO Adam Neumann, SoftBank, and specific members of WeWork’s board of directors.

  Sojka claimed that they used their control of the company to benefit themselves, which turned out to be detrimental to the company’s minority shareholders.

  The ongoing class action lawsuit continues to unveil severe accusations, including breaching fiduciary duty. Since the business was spiraling already, some believe the company’s leadership was stuck between a rock and a hard place—aka choosing the SoftBank buyout or JP Morgan’s loan offer.

  Nevertheless, Neumann and several other individuals (not to mention WeWork, in general) are in hot water because of the decisions that were made. The entire process has destroyed billions of dollars of value. To make matters worse, hundreds of people were laid off during the incident, not to mention the mounds of cash investors lost along the way, too.

  Cost of D&O Insurance by Company Size

It’s no surprise that company size impacts the cost of D&O insurance. According to a price index report by TransRe, a property and casualty reinsurance company, rates are picking up across the board.

  Large-Cap Companies

The report shows an upturn in D&O pricing in 2018, and it’s been climbing since. That said, prices for all D&O layers up 3.4% for large-cap companies. As mentioned, experts predict the climb to continue throughout 2020.

    Mid-cap Companies 

Mid-cap companies show an uptick in the working layer D&O premiums with a 7.1% increase. The report shows an overall increase of 8.4% for all D&O layers for mid-cap companies, but only 5.4% for excess lines.

      Small-Cap Companies

Small-cap companies were the outlier last year, whereas this year, the differences aren’t as profound. With an 11.6% increase for all D&O layers, small-cap companies are experiencing the same uptick in overall D&O premium costs.

    The D&O Market Outlook for 2020

As the D&O sector continues its much-needed transformation, here’s what we can look forward to in the new year.

  D&O Rates Will Keep Climbing– While several factors are causing even private company D&O rates to push higher, the need for the coverage is palpable. The private company D&O market buyers will have to sustain increases. Of course, these increases shouldn’t be as much as large private companies. Keep in mind, though, that rates for large-cap companies are increasing less than those of small-cap companies despite the significant losses being paid in the large-cap sector.

Lawsuits Will Be Filed– Much like the adage that a district attorney could find a way to “indict a ham sandwich,” the plaintiff’s counseling representing minority investors can (and do) come up with clever ways to bring a lawsuit. What’s more, is that these lawyers aren’t necessarily looking at company size to indicate success.Think of it this way, they’re aiming for 400-pound Tuna—or otherwise known as juicy allegations—rather than 4-pound Fluke. The point is that the numbers don’t have to be in the billions to begin a lawsuit. In short, no matter what you’re fishing, you still have to launch an expedition.

D&O Insurance Protection Is Two-Fold– Firstly, if the board of directors is found in the wrong, D&O coverage will typically protect against a plaintiff verdict and contribute to a settlement. Secondly, D&O insurance will cover defense costs for the directors and officers as well as the entity itself (in most cases). Keep in mind, however, that plenty of caveats to coverage exist. Still, this “duty to defend” is significant value in terms of D&O insurance. After all, D&O lawsuits—even if they ultimately fail—can cost massive amounts of money.

Underwriters May Ride the Pricing Wave– On the one hand, large private company cases could intimidate many in the underwriting community. Only, amid the industry chatter about the “hard/hardening market,” some forget that these discussions don’t segment the public and private market.On the other hand, though, large private companies typically function more like publicly traded companies than startups—especially regarding some regulations, corporate governance, and compliance. What this means for the underwriting community is that they can justify an increase in rates.

  With such significant past changes, D&O players are learning now more than ever how to roll with the punches. Although more transition lies ahead, overall, players are gearing up for another rousing D&O game in 2020.

Guest Post: D&O Insurance Pricing Trends published first on

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Directors’ Duties in Insolvency and the D&O Insurance Implications

A recent judicial ruling out of the U.K. provides an interesting perspective on director’s duties under applicable law when a bankrupt company is in liquidation. As discussed below, the Court held that the director’s duties continue in relevant respects even if the director’s powers cease as of the date of the bankruptcy filing. The circumstances of the case provide an interesting example of a claim that arose against a former director post-liquidation. As discussed below, the circumstances also provide an illustration of why the purchase of post-liquidation run-off coverage is advisable. Though the circumstances arose under U.K. law, the situation bears enough similarities to what might arise under equivalent U.S. law that the liability and insurance lessons are instructive even in the U.S. context.

  A copy of High Court of Justice Insolvencies and Companies Court Judge Sally Barber’s January 20, 2020 decision in Re Systems Building Services Group Limited can be found here. A January 31, 2020 memo about the decision by the Stevens & Bolton law firm can be found here.

  The Liquidation

At relevant times, Brian Michie was the sole director of Systems Building Services Group (the company). The company went into administration on July 12, 2012.  Gagen Sharma was appointed as administrator. The company exited administration through a creditors voluntary liquidate on July 3, 2012, and the company dissolved on February 24, 2016.

  Post-Liquidation Developments

In connection with a separate company proceeding with which she was involved, Sharma was found liable for misfeasance in her office-holder position and ordered to pay damages. She was herself declared bankrupt, and she agreed to an 8-year restriction on serving in bankruptcy positions.

  Stephen Hunt subsequently was appointed as administrator for a number of the companies in connection with which Sharma had previously served, including Systems Building Services Group. Following an investigation, Hunt applied to have the company restored. The company was restored on May 3, 2017.

  The Successor Liquidator’s Breach of Duty Action

Hunt then filed claims against Michie for breach of his director’s duties under the Companies Act 2006. Specifically, Hunt alleged that in connection with the prior liquidation proceedings Michie had purchased properties from the company (with Sharma acting as liquidator) at a price substantially under marketplace values. Hunt also filed claims against Michie with regard to three cash payments paid out of the company’s bank account after the company had entered administration. Hunt filed a number of other claims having to do with payments made by the company prior to entering administration.

  The Director’s Defenses

In response to Hunt’s action, Michie raised a number of defenses. Among other things, he argued that Sharma should have been joined as a respondent to the proceedings. Michie also argued that his general directors’ duties did not survive the company’s entry into administration and voluntary liquidation and would only survive with respect to any exercise by that director of powers “qua director” (that is, in the function or capacity of a director). Michie argued further that Hunt had failed to show that any specific duty applied to him following the beginning of the liquidation.

  Judge Barber’s Rulings

While noting the limited amount of case law addressing the point, Judge Barber rejected Michie’s arguments. Among other things, she accepted Hunt’s counsel’s argument that “in an administration or a creditors’ voluntary liquidation … the officeholder and the director owe independent duties to the company.” In insolvency context, the directors’ duties, as preserved by the applicable statute, require the director “to have regard to the interests of the creditors as a whole.”

  She added that “in my judgment, the duties owed by a director to a company and its creditors survive the company’s entry into administration and voluntary liquidation,” adding that those duties “are independent of and run parallel to the duties owed by an administrator or liquidator appointed in respect of the company.”

  Judge Barber then turned to the specific allegations against Michie. With respect to real estate that Michie purchased from the company in liquidation, Judge Barber noted, based on a detailed review of the evidence, that Michie “saw an opportunity to pick up an asset ‘on the cheap’ and took advantage of that opportunity,” which he knew about based on his position as the company’s sole director.

  She further concluded that when he made the purchase, Michie “acted entirely out of self-interest” and “without regard for the impact which his actions would have on the interests of the creditors as a whole.”

  Moreover, Sharma’s actions in selling the property to Michie at an undervalued price does not afford Michie a defense. Judge Barber noted that “the fiduciary duties owed by Mr. Michie to the Company as its director were independent of the duties owed by Mrs. Sharma as liquidator.”

  Judge Barber ruled against Michie with respect to the real estate transaction, as well as with respect to the cash payments in issue.

  Discussion

I acknowledge at the outset that this case arises under U.K. law. There undoubtedly are important specific differences between the U.K. law and the U.S. law. In particular, Judge Barker’s conclusions about the director’s continuing duties are very much a reflection of the applicable U.K. statutes. However, even if there are important specific difference between the law applicable in the two jurisdictions, the two legal system’s approaches in this context are sufficiently similar as a general matter that the outcome of these proceedings is instructive both in the U.S. as well as in the U.K.

  With respect to Judge Barber’s conclusions about the director’s continuing duties when a company is in administration, the law firm memo to which I linked above notes that this case provides “a cautionary statement of the law for any directors who might seek to use an insolvency proceeding as a means to purchase assets at a reduced prices from a weak or ineffective insolvency practitioner.” As to whether the ruling represents a substantial deviation from settled practices or reasonable expectations, the law firm memo quotes unnamed practitioners as saying that the ruling “merely underscores what most of the profession felt was already the position, i.e., a director’s duty continued beyond insolvency and were not just confined to the duty to cooperate with the appointed insolvency office-holder.”

  While the primary precedential value of Judge Barber’s decision is its conclusion with respect to directors’ continuing duties when a company is in administration, the overall circumstances of the case are also instructive as a thought problem for insurance issues in the insolvency context.

  The important thing to focus on when thinking about the insurance issues is that the successor liquidator only asserted his claim against Michie after the company went through liquidation and after the company itself was legally dissolved. Even after all of those seemingly terminal events, Michie was hit with a liability action seeking to recover damages from him for alleged wrongful acts he allegedly undertook in his capacity as a director, during the bankruptcy process.

  I have no first hand way of knowing, but I can only suspect that Michie’s costs of defending himself against Hunt’s actions were substantial. (Indeed, assessing this case from the perspective of Judge Barber’s decision, I have to assume that this was a painstakingly thorough proceeding of the kind that can only be processed at considerable expense.) Moreover, Michie stands liable for substantial damages as a result of Judge Barber’s rulings against him.

  When Michie was served with Hunt’s action against him, Michie clearly would have wanted to have had a D&O insurance policy in place to which he could turn for defense and indemnification. Michie would only have had insurance to which he could turn to then if at some point prior to the final dissolution and liquidation of the company, the company had purchased run-off D&O insurance policy that would protect him in the future for claims based upon prior alleged wrongful acts.

  Indeed, the circumstances in this case provide a sterling example of the reason why any well-advised company embarked on bankruptcy proceedings would make sure that run-off insurance protection is put into place to protect against the possibility of future claims arising from events prior to the completion of the bankruptcy proceedings.

  But there is more to thinking about the insurance issues here than just considering the advisability of having run-off insurance in place.

  These further issues have to do with the date of the alleged wrongful acts. A run-off policy will only apply to provide coverage for alleged wrongful acts that take place before the date the run-off policy goes into effect. Ideally, the run-off policy would not go into effect until the date of the termination of the bankruptcy proceedings. (I will leave it to U.K law practitioners to weigh in on whether that date in these circumstances is the liquidation date or the dissolution date).

  Of even greater importance, the run-off coverage should apply not just to wrongful acts that took place prior to the initial bankruptcy filing. The run-off coverage should also extend to wrongful acts that took allegedly place during the bankruptcy proceedings – as, by way of illustration, here, Michie is alleged to have committed wrongful acts during the process of the administration of the estate. Under these circumstances, the company would want to maintain its existing D&O insurance coverage in place through the completion of the bankruptcy, with the policy to convert to run-off upon completion of the bankruptcy.

  The bottom line for me is that this case shows how a claim can arise against a director even after the director’s company has been liquidated and dissolved. It is important to think about the possibility of these kinds of claims arising to think about the best way to structure the D&O insurance coverage in order to try to ensure that if one of these post-bankruptcy claims might arise, that there is insurance in place to help the former directors respond to the claims.

  One final note. I was deeply impressed with Judge Barber’s consideration of the issues in this case. Her decision is detailed, painstaking, and thorough. If her consideration of these issues is at all representative of the U.K. courts overall, the attorneys who appear in the courts and the parties the attorneys represent are very fortunate.

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Despite Factual Overlap, Later Claim Unrelated to Prior Demand and Suit

In numerous prior posts, I have meditated on the meaning of “relatedness” and what it takes to make two claims sufficiently similar that they should be treated as the same claim. That was the question that a Pennsylvania federal district court addressed in a recent decision in an insurance coverage dispute. As discussed below, on January 27, 2020, Eastern District of Pennsylvania Judge Timothy J. Savage, applying Pennsylvania law, concluded that, despite overlaps, a subsequent shareholder derivative suit was not sufficiently related to another shareholder’s prior demand letter and lawsuit to preclude coverage for the later claim. The court’s decision provides abundant grounds for further ruminations on the meaning of relatedness.

  Judge Savage’s January 27, 2020 opinion in the case can be found here. A February 6, 2020 post on the Wiley law firm’s Executive Summary blog can be found here.

  Background

In June 2018, Joseph D’Ascenzo filed a shareholder derivative lawsuit (the D’Ascenzo action) against Unequal Technologies Company (UTC), its CEO and director Robert Vito, and director William Landman. In his multi-count complaint, D’Ascenzo alleged that the defendants had wrongfully barred his efforts to fill an empty third seat on the company’s board by wrongfully disregarding the results of a December 2017 shareholder vote. The complaint contains numerous other allegations, including assertions that the company had disregarded corporate formalities, that Vito had engaged in self-interested transactions, and that Vito had attempted to raise corporate funds using misinformation.

  At the time D’Ascenzo filed his lawsuit, UTC was insured under a management liability insurance policy with a policy period of November 2017 through November 2018. The 2017-2018 policy was the latest renewal in a series of insurance policies that first incepted on November 19, 2013.

  UTC submitted the D’Ascenzo action to the insurer. The insurer denied coverage for the lawsuit, contending that the lawsuit was interrelated with a February 2015 shareholder demand and a June 2016 shareholder derivative lawsuit, and that that the later lawsuit was by operation of the policy deemed first made at the time of the prior demand and lawsuit, prior to the inception of the then-current policy. The insurer also asserted that the D’Ascenzo lawsuit was based upon alleged Wrongful Acts that allegedly occurred prior to the policy’s past acts date of November 19, 2013.

  The author of the prior demand letter and the plaintiff in the prior lawsuit was Landman, the UTC director who was one of the named defendants in the D’Ascenzo lawsuit. The demand letter had alleged that UTC’s business actions were eroding shareholder value, and that Vito had withheld required information, disregarded corporate formalities, and engaged in self-dealing. The demand letter sought the inspection of the company’s books and records and other relief. In the June 2016 derivative suit, Landman sought damages and an injunction barring Vito from concealing the company’s poor performance in the course of company fundraising efforts. The June 2016 lawsuit was settled and dismissed a month after it was filed.

  After the insurer denied coverage for the D’Ascenzo action, Vito and Landman each filed lawsuits against the insurer seeking a judicial declaration that the insurer has a duty to defend them in the D’Ascenzo action. The insurer filed a motion for judgment on the pleadings.

  The Relevant Policy Provisions

The Policy’s “related acts” provision provides that:

All Claims based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events, or the same or related series of facts, circumstances, situations, transactions or events, shall be deemed a single Claim for all purposes under this policy … and shall be deemed first made when the earliest of such Claims is first made, regardless of whether such date is before or during the Policy Period.

  The Policy’s “prior acts” exclusion provides that:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured that alleges, arises out of, is based upon or attributable to, directly or indirectly, in whole or in part, and actual or alleged Wrongful Acts which first occurred prior to November 19, 2013.

  The January 27, 2020 Opinion

In his January 27, 2020 opinion, Judge Savage denied the insurer’s motion for judgment on the pleadings, holding that “among the multiple claims asserted in the D’Ascenzo Action are several that are covered by the policy and are not excluded.”

  The insurer had argued that there were “multiple overlapping allegations” between the D’Ascenzo action and the prior demand letter and lawsuit. Among other things, the insurer argued that the overlap included allegations that the third board seat improperly had not been filled; that UTC had failed to follow required corporate formalities (such as regular board meetings); that Vito had engaged in self-interested transactions; and that Vito had misrepresented UTC’s financial information to solicit new investors.

  In opposing the insurer’s motion, the UTC parties argued that the insurer “glosses over obvious distinctions”; that factual allegations surrounding the December 2017 and January 2019 shareholder meetings formed “the core” of the D’Ascenzo action; and that while the is some “overlap” with the demand letter and prior lawsuit, the “overlapping allegations do not form the basis” for the relief sought.

  In considering the insurer’s motion, Judge Savage noted that while there “are similarities” between the D’Ascenzo action and the prior lawsuit, there are “significant differences.” The parties, he noted are different and the relief sought is different. The later lawsuit, while “sounding much like” the earlier suit, is “not the same”; the later lawsuit “goes beyond” the earlier suit, complaining of irregularities in connection with the December 2017 election, which took place after the prior suit was dismissed. The “factual bases” of D’Ascenzo’s action “did not exist before the inception of the policy.” The demand letter is also “significantly different” in that Landman, who made the demand, is a defendant in the later suit.

  Judge Savage noted that while one of the counts in the D’Asenzo complaint “may be predicated on facts related to” the demand letter and prior lawsuit, “the other ten counts do not.” The request for relief, Judge Savage said, “does not rely on any of the allegations central to the relief sought” in the demand letter or the prior lawsuit. Rather, the “conduct at the heart” of the “other ten counts” began in 2017 and involved subsequent events. These events “occurred after the acts cited” in the demand letter, and involve “discrete acts” and ‘”claims that did not exist prior to the relevant policy periods.” Accordingly, Judge Savage said, the related claims provision “does not bar the majority of D’Ascenzo’s claims.”

  With respect to the prior acts provision, the insurer argued that the D’Ascenzo complaint involves  a “scheme to defraud” that began as early as 2008; an alleged failure to observe corporate formalities since 2008; and self-dealing transactions beginning in 2009, as well as actions by Landman beginning after he went on the board on November 7, 2013. The UTC parties, by contrast, argued that the “core” of the D’Ascenzo complaint has to do with the UTC board election and the “overwhelming focus” is on the election.

  Judge Savage said that while “some counts in the D’Ascenzo action may be based on conduct occurring before November 19, 2013,”  that Count VIII  of the complaint is “clearly predicated on specific allegations” beginning before the cut-off date,” and that Count VI “arguably involves pre-November 19, 2013 conduct” the “remaining nine counts are based entirely on events surrounding the 2017 and 2019 elections,” and the pre-November 2013 conduct “was not a necessary ‘but-for’ cause of the election claims.”

  Discussion

While he did not frame his analysis this way, Judge Savage’s consideration of the related claims issue is in essence a meditation on the meaning of relatedness. The insurer argued, the UTC parties conceded, and Judge Savage found that there was indeed “overlap” between the D’Ascenzo action and the demand letter and prior lawsuit. In effect, Judge Savage concluded that there was not enough overlap, or perhaps enough of the right kind of overlap, to make the claims sufficiently related to render them interrelated.

  One curious thing about Judge Savage’s conclusion on the relatedness issue is that he seems to have completed his analysis without express reference to the policy’s language on the issue. To be sure, he did, on page 12 of his opinion, recite verbatim the text of the relatedness provision. Otherwise, however, he made literally no reference to the policy language.

  Look, these days I am a policyholder-side kind of guy, and I like coverage decisions that favor policyholders, but even I have to concede that the policy language must be the reference point for any coverage issue. In that regard, it undeniably is (or should be) relevant that the policy’s relatedness provision deems as a single Claim all Claims that are “in any way involving the same or related facts, circumstances, situations, transactions or events.”

  Judge Savage specifically concluded that at least one of the counts in D’Ascenzo’s complaint is “predicated on facts related” to the demand letter. Even if it is true, as Judge Savage concluded, that the entire rest of the complaint does not rely on overlapping allegations, the fact that one of counts does overlap certainly does seem to suggest that the D’Ascenzo complaint does “in any way involv[e] the same or related facts” as the demand letter and the prior lawsuit.

  The “in any way involving” phrasing would seem to preclude any further analysis of whether the “same or related facts” overlap enough, but that kind of analysis is exactly what Judge Savage relied upon in concluding that the subsequent and prior claims were not related for purposes of the provision. In effect, he concluded – notwithstanding and without reference to the policy’s “in any way involving” requirement — that because most of the substantive counts in D’Ascenzo’s complaint did not overlap, the fact that one substantive count did overlap was not determinative.

  Judge Savage’s analysis of the prior acts exclusion issues is very much of the same nature. Even though the provision precludes coverage for Loss in connection with any Claim that “alleges, arises out of, is based upon or attributable directly or indirectly, in whole or in part” any actual or alleged wrongful act taking place prior to November 19, 2013, and he expressly concluded that at least two substantive counts in D’Ascenzo’s complaint involve alleged acts prior to the cut-off date, he nevertheless concluded that the prior acts exclusion does not apply because the “core” of the complaint related to alleged acts after that date.

  I would say that Judge Savage’s analysis seems inexplicable to me given the policy language, but as I further considered his conclusions it occurred to me that perhaps what is going on here is that Judge Savage has conflated a Capital C Claim with a lower-case c claim. There is only one Capital C Claim in connection with the D’Ascenzo complaint, even though the complaint itself asserts multiple lower case c claims. Indeed, in summarizing his decision, Judge Savage specifically said that “among the multiple claims” in the D’Ascenzo action are “several that are covered by the policy and not excluded.”

  However, both the related claims provision and the prior acts exclusion refer to Capital C Claims, not lower case c claims. The fact that there may be some small case c claims in D’Ascenzo’s complaint that are not related or that do not involve prior acts is not determinative; what matters for coverage purposes is whether the Capital C Claim that D’Ascenzo’s complaint represents is related or involves prior acts.

  If as I suspect the outcome of Judge Savage’s analysis is the result of his confusion of lower-case c claims with a Capital C Claim, his analysis is both misconceived and flawed and the outcome is contrary to the meaning and intent of the policy.

  In the end, and regardless of the outcome, this coverage decision provides fodder for further meditations on the meaning of relatedness. What makes any two things related? What makes any two things unrelated? What degree of similarity is sufficient to make them related? These are the vast and enigmatic concerns that perennially surround the relatedness issue. As I once noted,

  “Relatedness” is not self-defining. It is, in fact, a concept that recedes away from you the harder you try to think about it. At a certain level of generalization, everything in the universe is related, all joined together in the all-powerful and all- knowing mind of almighty God. Yet from another perspective, nothing is related, as all of creation consists of nothing more than chaotic, swirling bits of matter randomly spinning away within the cosmic void.

  Today’s Word of the Day: In his characterization of the allegations in the D’Ascenzo complaint, Judge Savage wrote “the gravamina of Counts I and VII and Count IX through XI are the December 2017 and January 2019 shareholder meetings and elections.”

  The word “gravamina” is the plural of the work “gravamen,” which is a law Latin word that, according to Merriam-Webster, means “the material or significant part of a grievance or complaint.” (Merriam-Webster advises that the plural of “gravamen” is sometimes written as “gravamens.”)

    Owing to my legal education, I have been known to use the word “gravamen” from time to time. But I have never used the word “gravamina.” Indeed, prior to reading Judge Savage’s opinion, I don’t think I had previously encountered the word “gravamina.” I also had no idea that the plural of “gravamen” is “gravamina.”

  Now I know. My world is enriched by the knowledge.

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Guest Post: Side A Excess D&O Insurance: Why Directors Need a Lot of It — Now!

In the following guest post, Paul Ferrillo, a partner in the McDermott, Will & Emery law firm, takes a look at Excess Side A insurance and discusses its importance as part of a well-structured D&O insurance program. I would like to thank Paul for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article.

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  When I and several of my colleagues now go to Directors and Officers (D&O) Liability insurance events, we often remark that “boy, we are getting old.” Indeed many of us remember when Side A excess D&O insurance (Side A) was just the jelly on a peanut butter and jelly sandwich. Nice to have, it added some sweetness to the sandwich, but it was pretty much an afterthought for most companies.

  Times changed, the form of Side A changed (and gotten better) and then suddenly large shareholder derivative settlements started to happen in M&A or “deal” related cases post the financial crisis. Side A became important because, under Delaware law, a corporation could not indemnify its directors or officers for the settlement of a shareholders derivative action (the same problem exists for a Chapter 11 bankruptcy, where both defense costs and settlement amounts likely won’t be indemnifiable).

  Today, Side A insurance is not just a “must have”, it’s a vital thing for corporations to carry, and for directors to insist upon when they join a board of directors. The numbers of shareholder derivative settlements have increased, and so have settlement amounts, as many companies not only have just securities cases, but significant regulatory investigations where fines and penalties and defense costs have dramatically escalated the cost of doing business. Many of these regulatory settlements have reached $100 million alone. And several shareholder derivative action settlements have approached $200 million or more. We explain below that amount does right to the damages line in the shareholder derivative action.

  It’s not just amounts of Side A coverage that matter, but the type of Side A insurance, as well as the carrier chosen for the Side A tower of insurance. Some of these questions are harder to answer than most, but we do our best below to analyze how litigation and regulatory trends have made Side A a vital part of the D&O insurance equation.

  How Much Side A coverage should you carry? Probably A lot.

  There are lots of judgement calls here, so we won’t be presumptuous. No right answers here as it depends upon the financial status and business prospects of the company.  A good D&O broker can help give good perspective. But so can we.

  Let’s assume you are a $10 billion dollar market cap, publicly traded financial institution. You are regulated by a lot of different regulators (both federal and state). In terms of sizing your Side A tower of insurance, let’s assume hypothetically you announce a super big regulatory problem, and your stock drops 15% (big problems can cause that type of drop). Let’s assume the challenged conduct by the regulator is truly “not good” and that the board “should have” theoretically “known” about it (making the class action fact pattern not so great). The result of the announcement — a securities class action, a formal, regulatory proceeding and the inevitable Side A shareholder derivative action. What sort of D&O insurance should you carry (again, our view)?

  The securities class action math is a little simpler. Under conventional wisdom and settlement viewpoints (that have been around for years), the securities case should settle for, plus or minus, about $125 million or so, plus defense costs and expert fees.

  It’s the derivative action that now needs to be settled. Let’s make up a fine of $75 million coming down from the XYZ agency (that amount would not be unheard of for a bad case today).  So your Side A D&O tower should be near or exceed that amount.

  So for the heavily regulated public company at issue here, a traditional D&O tower with entity coverage might be $150-175 million. The Side A tower — probably $100 million would be a good measure. Too high you say? Just view previous articles from the D&O Diary on the growth of Side A derivative action settlements (especially event-driven D&O settlements). See Largest Derivate Lawsuit Settlements here (Kevin keeps a pretty up to date list on these settlements).  Too high you say? Directors and officers can read the newspapers and the blogs too. They see the writing on the walls too. Too high you say? Well a board needs good board members with both financial and (today) cyber experience. They will be unlikely to serve if their own personal financial interests are not protected through sufficient D&O insurance. Enough said. Again here a good broker can confirm or deny the math, but I bet we are not far off the mark.  Better to buy a lot — then too little.  Especially if economic times change, or if the fortunes of the company are changing for the worse.

  Type of Side A Excess

  There are many types of Side A excess D&O insurance – traditional Side A excess follow form, Side A excess difference in conditions coverage and other variants that either drop down, or have terms that require certain of their terms to drop down.

  We don’t pretend to know every form of Side A coverage. But we prefer “Side A excess difference in conditions (DIC) coverage” or Side A DIC coverage, which not only serves as excess Side A coverage, but it will drop down when underlying insurance refuses to pay. Certain Side A DIC coverage is broader than others, so again check with us or your broker for exact terms and conditions.

  Will your Side A carrier pay your claim?

  You have seen this issue come up a lot in the professional literature around D&O coverage.  Why?  Because with the plethora of carriers getting into the Side A mix, there are a plethora of attitudes around claims paying and claims-handling. There are some name-brand carriers that truly get the term “partnership” with their insured, and there are some, well….no comment.  This is spoken from the perspective of 25 years of experience at the mediation table where some Side A carriers have been great, and some have been very ineffective on the settlement of the “bad” case.

  Though there is no math here, some correlate that the new carriers in the market have charged the least amount of money to “get in” on the D&O game. Unfortunately, we have been primed that cheap D&O coverage means “good value.” See “Does a Low Price Mean Good Value or Bad Quality?” (discussing consumer research of the “value” of a cheaply priced product). In D&O land, cheap unfortunately most of the times doesn’t mean good. It means cheap. It means potentially that the insurer will give the insured a hard time about coverage. Or giving the insured a hard time about paying its limits when the insureds really need to settle the bad case.  Side A coverage is sometimes coverage of last resort.  The last thing a director needs is his D&O Carrier to take an aberrant position to avoid paying the claim.

  Our advice truly is caveat emptor, or buyer beware. Ask lots of questions if you are a director.  Of your risk manager, your broker, your defense counsel, and even friends who sit as directors on other public company boards. Side A coverage is no place to count your dollars. It’s a special coverage that directors need in today’s litigious and regulatory perilous environment. Make sure you can depend upon it when you really need it.

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  About the author

Paul Ferrillo is a partner with McDermott, Will & Emery. He focuses his practice on corporate governance issues, complex securities class action, major data breaches and other cybersecurity matters, and corporate investigations. He can be reached at [email protected].

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Delaware Court Rules “Larger Settlement Rule” Governs D&O Insurance Allocation

Before the ice age, before the flood, before some of the people reading this were even born, the big D&O insurance coverage issue was allocation – that is, the division of loss between covered and non-covered claims or between covered and non-covered parties. After a flurry of judicial decisions in the mid-‘90s, after the addition of entity coverage to the standard D&O insurance policy (also in the mid-‘90s), and after policy allocation language became more or less standardized, litigated allocation disputes became much less frequent. Indeed, the last time I had occasion to write about an allocation coverage decision on this blog was in 2007. (Although, to be sure, allocation is still very much an issue in many D&O insurance claims.) It was with some surprise and interest that I read a recent Delaware Superior Court decision in the long-running Dole Foods insurance coverage dispute dealing with the question of allocating the underlying settlements between covered and non-covered amounts. The decision itself contains some surprises, as discussed below.

  A copy of Delaware Superior Court Judge Eric Davis’s January 17, 2020 opinion on the allocation issue can be found here. A January 30, 2020 post on the Wiley law firm’s Executive Summary blog can be found here.

  Background

The Underlying Chancery Court Lawsuit

The November 1, 2013 transaction in which David Murdock, Dole Food Company’s Chairman and CEO, acquired Dole shares did not already own was the subject of a breach of fiduciary duty lawsuit filed in Delaware Chancery Court. In 108-page August 27, 2015 post-trial opinion (here), Delaware Court of Chancery Vice Chancellor Travis Laster found that and Murdock and C. Michael Carter, Dole’s COO and General Counsel, had employed “fraud” to drive down the Dole’s share price to lower the amount Murdock and Carter paid in the deal. Laster entered a damages award against Murdock and Carter, jointly and severally, of $148.1 million, as discussed here.  On December 7, 2015, Murdock and Dole reached an agreement to pay the shareholders a total (including interest) of $113.5 million, with the remainder of the judgment amount to be paid to the plaintiffs in a separate appraisal action, as discussed here. As part of the settlement, the defendants gave up their right to appeal the Chancery Court rulings and judgment.

  The Underlying Securities Class Action Lawsuit

On December 5, 2015, while the approval of the settlement of the Chancery Court action was pending, plaintiff shareholders filed a securities class action lawsuit against Dole and Murdock in the U.S. District Court for the District of Delaware, as discussed here. The plaintiffs in the securities lawsuit alleged that Dole and Murdoch misled investors in connection with the Dole take-private transaction, in violation of the federal securities laws. The parties to the securities class action lawsuit entered mediation. As reflected in the parties’ March 2017 stipulation of settlement, the securities lawsuit ultimately settled for $74 million. The total amount of the two settlements is $222.1 million.

  The Insurance Coverage Litigation

Dole maintained a $100 million program of D&O insurance consisting of a layer of primary insurance and eight layers of excess insurance. The primary layer and several of the lower level excess layers were exhausted by defense expense. In January 2016, after the parties had agreed to settle the Chancery Court lawsuit and after the securities lawsuit had been filed, the remaining excess insurers filed an action in Delaware Superior Court seeking a declaratory judgement that there was no coverage under their policies for any portion of the Chancery Court settlement. They also later argued that there was no coverage for the separate securities class action lawsuits.

  As discussed here, in a December 21, 2016 decision, Superior Court Judge Davis ruled in the coverage action that because Laster’s findings of fraud were not part of the post-settlement final judgment in the Chancery Court action, the fraud exclusion in Dole’s D&O insurance program did not preclude coverage for the settlement.

  As discussed here, in a March 1, 2018 decision, Judge Davis denied the insurers’ summary judgment motions in which the insurers sought to argue that under California law, which the insurers contended applied to the policies, coverage for the under the policy for the settlements is precluded as a matter of public policy. Judge Davis ruled, among other things, that Delaware law rather than California law applied to the policy’s interpretation, and that the Chancery Court’s determination that the individuals had committed fraud did not preclude coverage for the claim as a Delaware public policy.

  In two May 2019 rulings, discussed here, Judge Davis ruled on two further motions for summary judgment, the first granting the insurer’s motion for summary judgment on the Dole defendants’ bad faith counterclaim, and the second denying the insurers’ summary judgment motions, among other things, on consent to settlement and cooperation clause issues. In his May 2019 rulings, Judge Davis expressly left open issues relating to subrogation, allocation, and exhaustion.

  The Allocation Provision

The parties subsequently filed cross-motions for summary judgment on the allocation issue. The Allocation Provision in the Policy provides that:

  If in any Claim, the Insureds who are afforded coverage for such Claim incur Loss jointly with others (including other Insureds) who are not afforded coverage for such Claim, or incur an amount consisting of both Loss covered by this Policy and loss not covered by this Policy because such Claim includes both covered and uncovered matters, then the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of covered Loss. The Insurer’s obligation shall relate only to those sums allocated to matters and Insureds who are afforded coverage. In making such determination, the parties shall take into account the relative legal and financial exposures of the Insureds in connection with the defense and/or settlement of the Claim.

  Of significance to the Court’s ultimate ruling on these issues, the Court noted that “the factual record is bereft of any fact that show[s] that the Insurers and/or the Insureds engaged in any efforts to determine any allocation of covered Loss. Moreover, the parties do not discuss any allocation efforts undertaken by anyone in the various motions for summary judgment.”

  Historical Background on the Allocation Issue

Some background on D&O insurance allocation issues is pertinent here, and provides important context for the parties’ positions on allocation. Back in the day, D&O insurance policies did not have express allocation provisions. Insurers argued then, in reliance in a 1986 Southern District of New York decision in the Pepsico case, that amounts should be allocated between covered and non-covered amounts, based on the “relative exposure” of the defendants to the covered and non-covered matters.

  Policyholders urged that a different rule should apply, in reliance on a 1990 7th Circuit decision in the Continental Bank case, which had first articulated what became known as the “larger settlement rule.” Under the “larger settlement rule” as it ultimately was described by subsequent court decisions, allocation is appropriate “only if, and only to the extent that, the defense or settlement costs of the litigation were, by virtue of the wrongful acts of the uninsured parties, higher than they would have been had only the insured parties been defended or settled.”

  Insureds and policyholders duked it out for several years, with insurers urging the “relative exposures” allocation standard based on the Pepsico-line of cases, and policyholders urging the “larger settlement rule” allocation standard in reliance on the Continental Bank case.

  Then in 1995 there were a trio of federal appellate cases that came down squarely in favor of the “larger settlement rule” – the Nordstrom and Safeway cases in the Ninth Circuit (which can be found here and here), and the Caterpillar case in the Seventh Circuit. (I have to say, going through all this makes me feel ancient and even a little weary, as if I were hundreds of years old. Yes, there were dinosaurs back then. )

  In the wake of the 1995 trio of appellate cases, several things happened in quick succession. First, insurers modified their standard D&O insurance policies to incorporate entity coverage, which eliminated many of the disputes over allocation between covered parties (individual directors and officer) and non-covered parties (before entity coverage, the company itself). Next, insurers modified their policies to expressly include allocation provisions – much like the allocation provision in dispute in the Dole policy – that not only required an allocation but that incorporated the “relative exposures” test. Almost all D&O insurance policies these days contain an allocation provision, and most expressly refer to the “relative exposures” standard.

  The Parties’ Positions on Allocation

In their summary judgment motion on the allocation issue, the Dole parties argued that the Court should apply the Larger Settlement Rule, and they argued further than under the Rule, the entire amounts of both underlying settlements are recoverable unless the insurers are able to show that some uncovered liability increased the settlement amounts.

  The insurers argued in their summary judgment argued, first, that the Dole parties had the burden to prove allocation between covered and non-covered amounts. The insurers argued further that the allocation provision expressly requires an allocation between covered and non-covered amounts, and that the provision is specific enough that the allocation provision does not apply.

  The January 17, 2020 Opinion

In his January 17, 2020 opinion, Judge Davis, applying Delaware law to an issue of first impression in Delaware, held that the Larger Settlement Rule applies with respect to the allocation issue.

  In reaching this conclusion, Judge Davis found that while the allocation provision is “unambiguous,” it is “mostly unhelpful under the facts presented here.” The provision, Judge Davis said, speaks only to situations where the insurer and policyholder use their best efforts to arrive at a fair and proper allocation of covered loss.  The provision, he said, “does not address the situation where the parties fail to agree.” In the absence of language specifying what is to be done if the parties do not agree, and in light of the policy language, he said, the larger settlement rule applies.

  Specifically, Judge Davis said that the larger settlement rule applies in situations where “(i) the settlement resolves, at least in part, insured claims; (ii) the parties cannot agree as to the allocation of covered and uncovered claims; and (iii) the allocation provision does not provide for a specific allocation method (e.g., pro rate or alike.)”

  The application of the Larger Settlement Rule here would “protect the economic expectation of the insured – i.e., prevent the deprivation of insurance coverage that was sought and bought.”

  Judge Davis said that he found the reasoning underlying the Larger Settlement Rule to be persuasive, as the policy, but its terms, covers all Loss that the Insureds become legally obligated to pay. Any type of “pro rata or relative exposure analysis seems contrary to the language of the Policies.”

  The insurers urged the court to note and apply the relative exposure language found in the allocation provision, which Judge Davis rejected, noting that he “does not see how the Allocation Provision establishes a method in the event the parties cannot, using best efforts, agree upon allocation between covered and uncovered claims.” He specifically found that the Allocation Provision is “not drafted in a manner that would provide for a specific allocation manner in the event [the parties] cannot agree to allocation. This is especially true here where the parties did not even attempt to allocate covered and uncovered claims.”

  Finally, the court deferred resolution of the factual issues pertaining to the application of the standard and on the burden of proof on allocation issues for later proceedings in the case.

  Discussion

I suspect that for many insurer-side representatives – and indeed for many if not all of the excess insurers directly involved  in the case – Judge Davis’s ruling that the larger settlement rule applies may be something of a surprise outcome. (Although maybe not; I am guessing that by now the excess insurers involved in this overage dispute are getting mighty weary of Judge Davis’s courtroom.)

  The reason I say that Judge Davis’s decision that the larger settlement rule applies is surprising is that the allocation provision at issue has the “relative exposures” language. Allocations provisions of this very kind were the exact kind of provisions that the insurers adopted way back in the ‘90s when they wanted to try to circumvent the trio of appellate decisions and instead enshrine the “relative exposures” test directly in the policy.

  It seems odd, to say the least, for Judge Davis to say that application a “relative exposures” analysis here would be “contrary to the language of the policy,” given that the allocation provision – the very provision that he was construing – expressly referred to the “relative exposures” test.

  In the end, Judge Davis’s decision to apply the larger settlement rule rather than the relative exposures test does have a sort of matter-of-fact quality about it. He is right that the allocation provision in the Dole policy only addresses what happens if the parties use their best efforts to agree on a fair allocation. The provision does not, in fact, expressly say what should happen if the parties are unable to agree. When he put it this way in his opinion, it seems pretty clear that he is right about what the provision does and doesn’t say.

  But just the same, in so many policies out there, insurers have relied and continue to rely on this kind of language in support of an assumption that the “relative exposures” test would govern allocation disputes. (Indeed, in the 2007 blog post in which I last wrote about an litigated allocation dispute, the court had no trouble concluding based on nearly identical language, that the provision required application of the “relative exposures” standard.)

  There are some allocation provisions in some policies that do go further than the provision at issue in this case, that contain a provision that usually begins “In the event the parties are unable to agree…” However, these provisions usually only say that the insurer will in that event pay what it agrees it owes while the parties try to sort out the remaining disputed items. These “in the event” provisions usually do not expressly say that the “relative exposure” test will or will not apply to the determination of the allocation of the disputed amounts.

  It is worth noting that it was important to Judge Davis that there was no evidence that the parties had tried to agree on a fair allocation. It isn’t clear how it would have affected his decision if they had attempted but failed to agree. However, the fact that this was important to Judge Davis – he repeated it multiple times – does suggest that insurers could be better advantaged for subsequent disputes if they can show that they attempted but failed, using “best efforts,” to come up with an agreed allocation. On the other hand, given that the Dole parties are arguing the entire settlement amounts are covered and the insurers are arguing that there is no coverage at all, conversations about allocation here likely would have been futile.

  I wonder if this is the kind of decision that might motivate some insurers to go back and reconsider the language in the allocation provisions, in order to clarify what is supposed to happen if despite their “best efforts” the parties are unable to agree on an allocation. I am not going to make any language suggestions here – that is clearly somebody else’s job – but I will say that it is easy for me to envision language that would, from the insurer’s perspective at least, both address Judge Davis’s concerns and also ensure that the “relative exposures” test rather than the “larger settlement” rule would be applied in the event of an allocation dispute.

  A couple of final things about this ongoing coverage dispute. First, it is getting to the point that you could build an entire course about D&O insurance coverage issues based just on this one dispute. Second, I am beginning to understand why I have been hearing from various insurers that they are thinking of incorporating choice of law clauses — or even choice of law and choice of forum clauses — in their policies, in order to ensure that coverage disputes are not decided under Delaware law or even in Delaware courts. I am guessing that by this point the excess insurers involved in this case have had just about as much fun in Delaware as they can stand.

  How Should Insurers Respond to the Historically High Levels of Securities Class Action Litigation?:  As has been documented in several recent posts on site (most recently here), the rate of securities class action lawsuit filings is at all time highs. It is likelier now for a company to get hit with a securities class action lawsuit than it has ever been. This trend has had a significant impact on the D&O insurance marketplace. Insurance buyers face a significantly disrupted insurance arena.

  We already know part of the answer to the question of what insurers are going to do in response to these securities litigation trends — they are all trying to raise rates, and many are increasing retentions or cutting capacity.

  There are other things insurers can do to try to address these issues, at least according to a January 30, 2020 meme from John McCarrick and Andrew Lipton of the White and Williams law firm (here). In their memo, John and Andrew propose a number of steps insurers can take in light of the current litigation environment. Most of their suggestions are with respect to claims handling and resolution, rather than with respect to underwriting, risk selection, or limits management. Readers primarily involved on the claims side will find John and Andrew’s memo interesting and helpful.

Delaware Court Rules “Larger Settlement Rule” Governs D&O Insurance Allocation published first on

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USCIS Releases New Form I-9

On January 31, the U.S. Citizenship and Immigration Services (USCIS) released a new Form I-9, designated as the 10/21/2019 version.  The only changes are the additions of Eswatini and Macedonia, North to the list of countries in the drop down fields on the fillable version of the Form and an update to the Form’s instructions.

Employers should begin using the new Form I-9 as soon as possible.  Employers may continue to use the prior version of the Form (Rev. 07/17/2017N) until April 30, 2020.  After April 30, employers are permitted to use only the Form I-9 with the 10/21/2019 version date.

The current edition of the Form I-9 can be found at the USCIS website.

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Facebook to Pay $550 Million in Largest-Ever Privacy Settlement

In my recent year-end summary of corporate and securities liability trends (here), I identified privacy as an important area of growing area of corporate risk and specifically mentioned biometric privacy issues of particular concern. Almost as if to prove my point, on January 29, 2020, in its SEC filing on Form 10-K, Facebook announced that it had agreed to pay $550 million dollars to settle a biometric data privacy class action lawsuit that had been filed on behalf Illinois users in connection with the company’s use of facial recognition software.  According to plaintiffs’ lawyers involved in the case, the settlement represents the largest-ever cash settlement to resolve a privacy-related lawsuit. This massive settlement shows the significance of privacy issues and underscores the likelihood that privacy issues – particularly biometric privacy issues – are likely to be an important corporate liability battleground concern.

  Background

On April 2015, plaintiffs’ lawyers filed a putative class action against Facebook in the U.S. District Court for the Northern District of California on behalf of Facebook users and alleging that Facebook’s “tag suggestions” facial recognition feature violates the Illinois Biometric Information Privacy Act (BIPA), and seeking statutory damages and injunctive relief. (For further background about BIPA, refer here.)

  In April 2018, the district court certified a class of Illinois residents. In May 2018, the district court denied the parties’ cross-motions for summary judgment. Facebook appealed the district court’s ruling that the plaintiffs had alleged a sufficient injury to establish Article III standing.

  In an August 2019 opinion (here), the Ninth Circuit affirmed that district court’s ruling that the plaintiffs had alleged sufficient injury to establish Article III standing. The appellate court held that Facebook’s development and use of facial recognition technology without the consent of users constituted an invasion of the privacy interests that BIPA was intended to protect.

  In December 2019, Facebook filed a petition to the U.S. Supreme Court for a writ of certiorari, seeking to have the Court take up the case, and arguing that the district court had erred in concluding that the plaintiffs had adequately pled standing where they failed to allege that they had suffered a personal, real-world injury from the alleged violation of BIPA.

  In a January 21, 2020 order (here), the U.S. Supreme Court denied the cert petition, sending the case back to the district court, where trial was set to begin soon.  As a result of the parties’ mediation efforts, the parties reached a settlement. Facebook disclosed the settlement in its January 29, 2020 earning call with analysts. The settlement is subject to court approval

  Under the terms of the settlement, Facebook would be required to establish a $550 million cash fund on behalf and for the benefit of millions of the class of Illinois users. The district court’s class certification order defined the class as Facebook users in Illinois for whom Facebook created a stored-face template after June 7, 2011, the date Facebook made its tag suggestion feature available in most countries.

  Discussion

The most immediately notable thing about the settlement is of course its massive size. But as distracting as the gigantic size of the settlement is, there are some other things that should not be overlooked here.

  The first is that Facebook is not an Illinois company. It is a Delaware corporation that is based in California. Yet it was sued – not in Illinois, but in federal court in California – for an alleged violation of the Illinois biometric privacy law. Clearly the liability risk under BIPA reaches far beyond the borders of Illinois itself.

  One possible explanation of the settlement’s massive size is the potential under BIPA for per-violation damages, creating the possibility for a massively multiplied judgment. BIPA allows for the recovery of the damages of the greater of actual or liquidated damages of $1,000 for liquidated damages (for negligent violations) or $5,000 (for intentional reckless violations). Given Facebook’s millions of Illinois users, the potential damages in the case were enormous.

  It might be tempting to try to minimize this settlement as the odd outcome resulting from Illinois’s peculiarly strict privacy law. That fact is that though Illinois’s biometric privacy laws are strict, Illinois is far from the only state that has laws protecting biometric privacy. Both Texas and Washington state have long had legislation on the books protecting biometric data privacy. In recent years, a number of other states have enacted legislation protecting biometric data privacy, including Arkansas, California, and New York. In addition, a number of other states are considering legislation to protect biometric data privacy, including Alaska, Delaware, Florida, Arizona, Hawaii, Oregon, Massachusetts, New Hampshire, New Jersey and Rhode Island.

  Though there are many important things about this settlement beyond just its gigantic size, the settlement’s gigantic size does present its own message. The settlement clearly shows that significant risk that biometric privacy issues present for companies.

  Biometric privacy issues are likely to remain a significant concern and corporate risk exposure going forward, for the very basic reason that the breach or disclosure of biometric data cannot be remedied as are other types of data breaches; while a consumer whose credit card data is breached can cancel the old card and get a new credit card, an individual whose biometric date is breached or disclosed cannot change their biometric data.

  Thus, the potential breach of disclosure of biometric data will remain a significant concern, which in turn puts significant pressure on companies to protect, secure, and not misuse the biometric data. As this settlement demonstrates, companies alleged to have committed biometric data privacy violations could face significant liability exposure.

  For those readers interested in thinking about other potential areas of corporate privacy liability exposure will want to consider the statement by one of the plaintiffs’ lawyers from the Facebook case, who was quoted in a January 29, 2020 Law 360 article about the settlement (here) as saying that “Biometrics is one of the two primary battlegrounds, along with geolocation, that will define our privacy rights for the next generation.” So, for those readers who have read this far, the point is corporate privacy liability exposure will includes both biometric privacy exposures and geolocation exposures. Put it down on your watch list – there will be further biometric privacy violation lawsuits, and geolocation privacy could be next.

  There is one more aspect of this settlement that bears comment here, and that is the fact that it involves Facebook. You can speculate about why, but for whatever reason Facebook repeatedly finds itself representing a first-of-its-kind example of important liability trends. For example, Facebook was among the first companies to be hit with a GDPR-related securities class action lawsuit (about which refer here). Last year, Facebook’s massive $5 billion settlement with the FTC presented an example of privacy violations could lead to significant corporate exposures. A Cambridge Analytic scandal-related securities class action lawsuit against Facebook provided an example of how privacy-related allegations could lead to a securities class action lawsuit.

  While Facebook clearly has its own company-specific issues regarding privacy concerns, it would be a mistake to generalize about privacy concerns as problems that are peculiarly distinctive to Facebook and to Facebook alone. The vast reach of Facebook’s user base does multiply the seriousness Facebook’s privacy issues, but Facebook is far from the only company with liability exposures relating to privacy violations. Facebook may well have fallen into a peculiar pattern as being the first company to experience a particular problem but the liability exposures arising from privacy violations do not relate just to Facebook alone.

  I know there are some readers who will object that as serious as privacy liability issues may be, they are not D&O exposures. The fact is that any serious liability concern a company faces could be translated into a mismanagement claim or a disclosure omission claim. The likelihood is that we will see management liability claims followed in the wake of biometric privacy liability claims, as well as other types of claims alleging privacy law violations. I continue to believe that privacy-related issues represent a significant area of future corporate and executive liability exposure.

Facebook to Pay $550 Million in Largest-Ever Privacy Settlement published first on