On July 23, 2003, the U.S. District Court for the Northern District of California approved a $6.2 million settlement in In re: Cylink Securities Litigation, 274 F.Supp. 2d 1109 (N.D. Cal. 2003). The Court's written opinion provides an interesting window into several angles of the settlement process.

1. The money for the settlement came exclusively from Cylink's directors and officers liability insurance policies. Cylink carried three such policies--one primary and two excess policies, each providing up to $5 million in coverage for claims and claim-related expenses. All of the policies were so-called "wasting policies," i.e., defense costs are deducted from coverage. As a result, the more protracted and expensive the litigation, the less coverage is available. Defense costs at the time of settlement stood at $1.8 million, meaning that total available coverage was $13.2 million.

2. The layered nature of the three policies of coverage means that the first excess carrier has no incentive to contribute to the settlement fund except to the extent that liability (and defense) costs will break through the first layer and the second excess carrier only to the extent there is a threat that liability (and defense) costs will break through the second layer. The Court observed that this feature complicates any negotiated resolution as it requires the negotiator (and the three carriers involved) to play off against one another to achieve a mutually beneficial allocation.

3. To obtain court approval of the settlement, plaintiffs' counsel was obliged to assume the "awkward posture" of showing "the weaknesses of their case, its improbability of success and the barriers to their clients' recovery in order to make the negotiated settlement appear attractive." As the Court noted, "throwing one's case into question before the judge and opposing counsel without undermining it is, to say the least, a delicate exercise." To do so, plaintiffs' counsel was forced to demonstrate that they would face significant obstacles in establishing liability and damages--they must establish materiality together with actual knowledge of falsity or reckless disregard for the truth and hence defendants' actual intent to deceive or reckless disregard of the truth. Moreover, plaintiffs' counsel demonstrated that even if they were to prevail at trial on behalf of the class, the available source of recovery might well disappear as the source of the settlement fund was Cylink's directors and officers liability policies. Given the precarious state of Cylink's finances, there was considerable uncertainty whether Cylink could pay any significant amount in satisfaction of the judgment.

4. Plaintiffs' counsel offered a declaration from an economic expert comparing the amount of the settlement to others of its kind. The expert stated that the proposed settlement constituted 13.6% of potential losses, compared to a median percentage of 7.0% in cases analyzed in a study by Cornerstone Research. Using a different "market drop" approach developed by Mukesh Bajaj, the proposed settlement was 2.1% of the market drop as compared to a median drop of 2.95%.

5. The court selected plaintiffs' counsel after soliciting "bids" from law firms interested in representing the class. The resulting counsel's fee agreement provided for plaintiffs' counsel to receive 25% of the first $500,000 of recovery, 17.5% of the next $500,000, 15% of the next $4 million and 10% of the remaining $1.2 million. Based on that sliding fee scale, plaintiffs' counsel requested and was awarded $932,500 in fees, roughly 15% of the gross settlement amount.