Household names up in arms over class action transparency legislation

In-housers baffled and furious in equal measure by lawsuit show-and-tell rules. By Andrew Pugh

In-house lawyers in some of the US’s biggest businesses are ­fighting plans that would force them to ­disclose potential losses from class action lawsuits.

The proposals, which have been drawn up by the Financial Accounting Standards Board (FASB) and which would apply to all publicly listed US companies, are set be put in place by this December.

The driving principles behind the plans are to protect investors and promote greater transparency among the major financial ­institutions and corporations. The FASB argues that, by forcing ­businesses to disclose potential damages, investors would be in a better position to decide where to place their money and reduce their risk of losses.

While the ruling sounds good enough on paper, general counsel fear that in reality it could ­produce the opposite effect and actually damage investors’ ability to make an accurate assessment of a ­company’s financial footing.

The Association of Corporate Counsel (ACC) is at the forefront of the opposition to the plans. Its ­letter of objection to the FASB has been signed by more than 150 of the biggest companies in the US, including the likes of McDonald’s, Bank of America, Citigroup and General Electric. That these companies are willing to oppose a plan aimed at satiating the populist appetite for greater transparency following the economic crisis illustrates the depth of their opposition.

Their biggest concern is the potential impact on share prices. The FASB ruling relates to ­potential losses from class action lawsuits, even though many claims are settled for a fraction of the headline claim for damages.

Corporate giants such as ­Walmart, for example, receive thousands of claims every year, many of them relating to so-called ’slip and fall’ claims. Under the new proposals companies would be required to disclose potential ­losses that, on paper, could run into ­hundreds of millions of dollars, but in reality would be far smaller.

“At the moment,” explains ACC vice-president Susan Hackett, “companies only report claims if they believe they’ll have a ­material impact on the bottom line, not those cases that include vastly overblown claims.”

Another big problem can arise when it comes to making the ­estimates. Companies will be forced to provide these far in advance of cases actually reaching court, when they still lack the means to assess thoroughly their credibility. Those opposed to the ruling claim that if they get the estimates wrong they could find themselves facing a second round of litigation if they are accused of misleading investors.

Disclosing potential losses also forces companies to show their hands well in advance of any ­settlement discussions. When a company has gone public with a figure plaintiffs are unlikely to ­settle for a lower amount and are far more likely to increase their demands.

“If you have a fairly substantial litigation portfolio, then this will put a huge amount of additional work and stress your way,” says Ken Grady, general counsel at New York Stock Exchange-listed Wolverine Word Wide. “You’ll be asked to make some extremely ­difficult calls.

“I understand the need to ­provide more transparency for shareholders, but this could have the opposite effect – this is taking place in a general climate of ­pushing for disclosure, whether there’s any benefit to the investor or not.”

Irwin Shur, general counsel at Snap-on, a company with a turnover of more than $2.5bn (£1.61bn), agrees. “Investors are meant to be provided with ­materials that allow them to make informed decisions,” he says, “but this tilts the balance in such a way that information could be ­disclosed that would suggest the company’s in trouble when it isn’t.

“Disclosures are meant to give shareholders accurate information about how a company’s performing, but this has gone so far that it would actually distort a company’s performance, which in turn could lead to volatility in share prices.”

One group certain to benefit from the ruling is the plaintiff bar. Divulging potential losses would essentially give it a road map by which to navigate its strategy. If companies’ quarterly results show their estimated losses moving either up or down, it gives ­plaintiffs a fairly good indication of what the companies are thinking.

Shur adds: “You could have a situation where a claimant brings a claim of ’x’ and says, ’you can either talk to me now or we can settle’. Rather than disclose a potential £100m lawsuit in their results, companies might instead decide to settle for £3m.”

While it may be good news for plaintiffs, it is not necessarily the same for defence lawyers. In-house teams will be relying on outside counsel to help assess their ­potential losses, but that runs the risk of the courts later deeming these communications a waiver of the client-attorney privilege.

The ACC believes this could actually deter management from engaging counsel on sensitive ­litigation matters to avoid this risk. The ACC’s letter of objections states: “The proposal thus could have the unintended consequence of chilling full and frank discussions between companies and their counsel (in-house and ­external), to the detriment of the company client.”

The fact that outside counsel will be instructed to assess potential losses also opens them up to the threat of legal action if they prove to be wildly inaccurate or misleading.

“The most disturbing thing of all,” says Hackett, “is that nobody knows why they [the FASB] want to make these changes. Who was complaining about the current rules? No one. There was no group suggesting the rules were incomplete or broke. This is a solution in search of a problem.”

The new ruling could be in place by 15 December. Dealing with the scope of the proposed changes will be a huge logistical challenge, with companies forced to assess and develop new disclosure processes. At a time when they are still dealing with fallout from the Dodd Frank Act, the timing could not be worse.

While the ACC is hoping the FASB will abandon its plans, there are few signs that it will, which is why the ACC is also urging the FASB to at least delay its ­introduction.

Surprisingly, several high-­profile Wall Street litigators contacted by The Lawyer were unaware of the proposals. That will not be the case for much longer.

andrew.pugh@thelawyer.com