Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—3d Cir.: Securities plaintiff failed to opt-out of class action settlement, (Aug 13, 2025)

By Mark S. Nelson, J.D.

The appeals panel reiterated the lower court’s theory that disobeying the terms set by the court in the class notice could make class actions difficult to manage.

A claimant in a private securities case must opt out of the proposed class in compliance with the trial court’s reasonably crafted class notice in order to avoid being stuck with whatever class settlement is later approved instead of being able to pursue their own (potentially more lucrative) individual claim, said a Third Circuit panel. The case involved a series of metaphorically flashing red lights that suggested that a claimant had not adequately given notice they wished to be excluded from the class, but which neither the claimant’s nor the defendant’s counsel recognized until late in the litigation. For reasons of judicial efficiency, the appeals panel held that Federal Rule of Civil Procedure (FRCP) 23 does not embrace a “reasonable indication” standard for opting out of a securities class action case (Perrigo Institutional Investor Group v. Papa, No. 24-2861 (3d Cir. Aug. 12, 2025)).

Warning lights unheeded. The case arose in the aftermath of a failed tender offer by Mylan N.V. to acquire Perrigo Company plc, the world’s largest maker of over-the-counter healthcare products. Perrigo and its officers allegedly made numerous material misrepresentations and omissions about the company’s financials while defending against Mylan’s tender offer. Those alleged misstatements prompted shareholders to sue Perrigo for federal securities law violations.

One of the potential class members, a duo of funds collectively known as “Sculptor” (Sculptor Master Fund, Ltd. and Sculptor Enhanced Master Fund, Ltd.), claimed that it tried to opt out of the securities law class action brought against Perrigo. However, neither Sculptor’s nor Perrigo’s lawyers realized that Sculptor had not provided the opt-out notice required by the district court’s class notice until Sculptor’s individual claim had been litigated for three and a half years. A footnote to the opinion contains a more detailed explanation by Sculptor’s former counsel for the failure to seek exclusion plus a note that “[t]he District Court found that the record ‘suggests Sculptor’s former counsel did not prepare the opt-out request.’”

Once the error became known, Sculptor tried to exclude itself from the class, but the district court denied this attempt. The Third Circuit then took up the case and affirmed.

FRCP can deliver tough love. The appeals panel made it clear what result it was going to reach early in its opinion when it characterized the nature of the FRCP thus: “…the Rules fault litigants who fail to follow their directives. So when parties deviate from them, even by mistake, they usually have to live with the consequences.” Anyone who has listened to U.S. Supreme Court oral arguments in cases involving the FRCP understands that even justices who might in other contexts invoke leniency will nevertheless impose a form of judicial tough love against even the most sympathetic parties who violate the FRCP.

In the district court and again on appeal to the Third Circuit, Sculptor argued that it had demonstrated a “reasonable indication” to opt out or, alternatively, it had shown excusable neglect or the district court’s class notice terms offended principles of due process.

With respect to Sculptor’s first theory, the Third Circuit held that a “reasonable indication” is insufficient to opt out of a class action under FRCP 23. Although FRCP 23 does not specify any particular opt-out procedures, courts are free to exercise discretion in crafting the terms of a class notice, including the terms for opting out. The appeals panel also examined the text of FRCP 23 and concluded that a “reasonable indication” standard would render the rule’s other language superfluous.

Moreover, the appeals panel noted a trio of reasons why compliance with the district court’s opt-out terms is necessary: (1) the lack of any terms for opting out, such as those prescribed by the district court here, would make class actions even more cumbersome than they already can be; (2) a district court ultimately needs to know who is and who is not in the class when it comes time to approve a proposed class settlement; and (3) allowing district courts to set the rules for opting out reduces the risk that an enterprising claimant might try to game the system by intentionally both remaining in the class action case and litigating their own individual claim in order to take advantage of whichever produces the best result.

Sculptor had cited opinions from the Second and Tenth Circuits that purport to allow a “reasonable indication” to opt out. The Third Circuit, however, declined to adopt the views of those courts, which were expressed somewhat in 1982 and 1974, respectively. The Tenth Circuit opinion contains a lengthier discussion, while the Second Circuit opinion treats the subject via footnote.

Excusable neglect inapt. FRCP 6 allows a district court to overlook an untimely filing in the case of excusable neglect. The Third Circuit applied the Supreme Court’s four-factor test and reached the same conclusion as the district court, that Sculptor was not entitled to a finding of excusable neglect.

Factor one asks if prejudice would result from allowing the late filing. The district court found that this factor slightly tipped against Sculptor and that Perrigo could still obtain resolution of the maximum number of claims and, thus, global peace in the litigation. The Third Circuit agreed but noted that such peace cannot come “at all costs” and that the risk of prejudice arising from an upended (and already provisionally approved) settlement was what truly tipped the scale against Sculptor.

The second factor addresses the length of delay in making the required filing. Here, the Third Circuit emphasized that the court takes the length of delay in “absolute terms” such that “the operative period is the time between when the opt-out notice should have been filed versus the date leave was sought to file it late.” Intervening circumstances are not relevant. The appeals panel concluded that the three-and-one-half-year period between when Sculptor should have opted out and when it actually tried to opt out “strongly disfavors Sculptor” and, thus, belies any claim of excusable neglect.

Likewise, factor three, which focuses on the reason for the delay, weighed against Sculptor, the appeals panel said. Specifically, the panel noted that soon after the opt-out deadline, the district court asked class counsel to file a list of all parties who had opted out; several parties who were not on that list but wished to opt out quickly complained and the district court allowed them to opt out. Sculptor, by contrast, never made a similar and timely objection to its name not appearing on the list. The appeals panel also noted that Sculptor continued to maintain that it did not review the list when it was filed and that it had filed a timely opt-out notice.

Factor number four, good faith, the appeals panel said, weighed in favor of Sculptor because, as the district court had found, Sculptor did not act for “tactical advantage,” nor was its failure to opt out “intentional.” The appeals panel, however, did reject Sculptor’s assertion that the district court “minimized” Sculptor’s good faith.

Due process. The Due Process Clause in the context of class action opt outs requires only the generally applicable process that is due, which means notice reasonably calculated to apprise interested persons that an action is pending and also to provide them an opportunity to present any objections.

More specifically, in the class action context, the appeals panel said the Third Circuit has explained class notice thus: “…we have explained that, to comport with due process, ‘the notice should contain sufficient information to enable class members to make informed decisions on whether they should take steps to protect their rights, including objecting to the settlement or, when relevant, opting out of the class.’”

The appeals panel observed that the class notice in the Perrigo case contained three separate warnings about the consequences of remaining in the class and electing not to opt out. But Sculptor continued to argue that the class notice failed to distinguish between the elimination of “individual litigation” and the “loss of individual claims” due to failure to opt out. The Third Circuit suggested that Sculptor’s assertion overemphasized nuance. “Sculptor’s argument necessitates a hyper-technical reading of the notice that strains to create ambiguity where none exists,” said the appeals panel.

The case is No. 24-2861.

Judge: Krause, C.

Attorneys: Luke J. O’Brien (Calcagni & Kanefsky LLP) and Jesse Bernstein (Quinn Emanuel Urquhart & Sullivan, LLP) for Sculptor Enhanced Master Fund Ltd and Sculptor Master Fund Ltd. Samuel Groner (Fried Frank Harris Shriver & Jacobson LLP) for Perrigo Company plc. Reed Brodsky (Gibson Dunn & Crutcher LLP) for Joseph C. Papa.

Companies: Sculptor Master Fund Ltd.; Perrigo Institutional Investor Group; Sculptor Enhanced Master Fund Ltd.; Perrigo Co. PLC

MainStory: TopStory AlternativeInvestmentFunds FedTracker Securities FraudManipulation HedgeFundsNews InvestorEducation PrivateEquityNews PrivatePlacements PublicCompanyReportingDisclosure RiskManagement DelawareNews NewJerseyNews PennsylvaniaNews VirginIslandsNews