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Employer's risk appetite weighs into defending ERISA class action

Employer's risk appetite weighs into defending ERISA class action

When faced with an Employee Retirement Income Security Act class action, an employer's decision to fight or settle must be based on robust analysis and preparation. Joel Feldman, global co-leader of Sidley Austin L.L.P.'s financial services/consumer class action practice team, details the process.

Whether to settle or fight an Employee Retirement Income Security Act class action is arguably the most important decision that counsel and senior management face.

The implications are significant. The right decision can save a company millions of dollars avoiding an adverse judgment. Conversely, the wrong decision can create dire results. So how can that decision best be made, and what steps can counsel and management take to maximize the likelihood of making the best decision?

For starters, the decision needs to be made as a partnership between in-house and outside counsel. No one has a lock on judgment. The more perspectives that weigh in and the more information evaluated, the better the decision will be. In-house and outside counsel need to consult with each other and crystallize their combined judgment on the chances of winning the case, either through motion practice, denial of class certification or trial. In-house counsel also needs to decide to what extent it wants to bring management into the process.

Another consideration is that no decision is final. The defense of a class action is fluid. There are ups and downs concerning the breadth of discovery, the facts that unfold in the deposition process, and how the court rules on discovery and substantive motions. The decision to fight could be correct when made, but subsequent developments could alter the analysis. The converse can also occur: A decision to settle might make sense unless the opposition's demands are not cost-effective. Then, continuing litigation becomes the correct route.

It is advisable to accomplish three things at the inception of a case to assist in the initial decision over whether to settle or litigate.

First, it is impossible to make a reasoned, well-informed decision without knowing what is at stake. Having said that, whether an exposure analysis is undertaken depends on many considerations, including review of U.S. Security and Exchange Commission disclosure requirements.

Second, it is important to undertake a preliminary investigation with interviewing of key witnesses and examination of key documents. It allows counsel to understand the critical facts — good or bad — applicable to the merits and class certification. It also fosters the development of rapport with key witnesses and assists judgments on their strength, all of which factor into the decision. Finally, it allows counsel to re-emphasize the importance of document and electronic preservation.

Third, based on the initial investigation, an early case assessment should occur. Weighing the key facts and documents against the legal standard, what are the realistic chances of winning a motion to dismiss, summary judgment or a trial on the merits? Are the material defense witnesses still at the company and, if so, will they be strong and credible testifiers?

A critical factor in the early merits case assessment is where the plaintiff's theory of the case fits in with ERISA case law precedent. Many of the ERISA class actions that I defend require the plaintiff to create new law or stretch the precedent to prevail. If a plaintiff is swimming upstream on its ERISA theory, either with little or negative precedent, why settle? That militates in favor of fighting the case.

Another critical consideration for the early case assessment — and one that is often overlooked — is whether the case is vulnerable to the denial of class certification. Most, but not all, ERISA actions whither upon the denial of class certification. So an early case assessment should include an evaluation of the chances of defeating class status. It is, accordingly, advisable to give serious thought to the facts applicable to the plaintiff's claim and the company's defenses. Are they uniform or will different facts and evidence apply to the outcome of each putative class member's claim? If the latter, then class certification should be denied. Why settle a class claim if, in your best judgment, it will become a claim on behalf of one person? The class certification assessment not only affects the decision on whether to settle or litigate but also can influence how you want to develop the record as the litigation unfolds.

Your location, as well as any rulings by the court you are in, should be factored into your early case assessment. Has your judge issued substantive ERISA rulings that could apply to your merits case? Has your judge issued class certification rulings that portend how she or he may rule on that?

Considerations beyond the chances of winning the case can also materially affect the decision over whether to litigate or settle. Business considerations must be taken into account. Does the ERISA class action attack a business practice that is legal but could use revision? Can additional disclosure solve the issue raised in the complaint? Is the client open to revision of the business practice at issue? If the answer to any of the foregoing is yes, then a classwide release, with inoculation going forward stemming from revised business practices or improved disclosure, could be a plus if a settlement can be achieved at an attractive price.

The foregoing considerations should allow for in-house and outside counsel, often in consultation with senior management, to decide whether litigating or settling is in the client's best interests. But remember one of the key opening points: Things can change. So it is important to periodically revisit the question of settlement versus litigation, based on the ongoing discovery of facts and evolving assessment of winning the merits or denial of class certification.

One final consideration for outside counsel that applies to the initial decisionmaking as well as throughout the case: Actively listen to your client. Different clients have differing tolerances for risk, different business models and differing goals. The same set of factors that may cause one to litigate could cause another to settle.

Joel Feldman is the Chicago-based global co-leader of Sidley Austin L.L.P.'s financial services/consumer class action practice team. He can be reached at jfeldman@ or 312-853-2030.

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