Class Actions in Australia

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1 AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

2 Class actions are now firmly established as a means by which a large group or class of persons can bring a claim in Australia. Initially, product liability and migration claims were the main types of class actions commenced in Australia. However, over the last ten years, there has been a rise in the number of shareholder and investor class actions. Clearly, this is of concern to Australian business, financial institutions and professional advisors. Whilst there has not been the "flood" of class actions that some predicted, the amounts being claimed are large, legal costs are significant and the actions which have been commenced have generated adverse publicity for the respondents involved. This Guide adopts a Q&A approach to discuss:- what is a class action; how they are commenced; how they are funded; their recent history; the types of claims which are being brought; and the main issues and trends with regard to their future. We hope that it is helpful to all those who have an interest in class actions. This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions. For more information please contact us at aus.marketing@ashurst.com. Ashurst Australia (ABN ) is a general partnership constituted under the laws of the Australian Capital Territory carrying on practice under the name "Ashurst" under licence from Ashurst LLP, a limited liability partnership registered in England and Wales. Further details about the Ashurst group can be found at Ashurst Australia No part of this publication may be reproduced by any process without prior written permission from Ashurst. Enquiries may be ed to aus.marketing@ashurst.com. Ref: September 2013

3 Class Actions in Australia INTRODUCTION Class actions are now firmly established as a means by which a large group or class of persons can bring a claim in Australia. There has been a significant number of class actions brought over the last 20 years and many have resulted in substantial settlements. The development and availability of litigation funding and the growing number of law firms willing to represent claimants has contributed to the emergence of class actions. Initially, product liability and migration claims were the main types of class actions commenced in Australia. However, over the last ten years, there has been a rise in the number of shareholder and investor class actions. In fact, settlements of securities class actions in Australia have exceeded $1 billion. Clearly, this is of concern to Australian business, financial institutions and professional advisors. Whilst there has not been the flood of class actions that some predicted, their introduction has resulted in a number of cases being brought which would otherwise not have been pursued. The amounts being claimed are large and the actions which have been commenced have generated adverse publicity for the respondents involved. Ashurst has been involved in many of the most significant and high-profile class actions and has developed a specialist expertise in class action procedure. What is a class action? A class action is a term used for a court proceeding where the claims of a large group or "class" of persons are brought by one or a small number of named class representatives against the same respondent(s). They are also known as representative proceedings. In Australia, there are regimes for representative proceedings in both the Federal Court and in the State Supreme Courts. The NSW and Victorian Supreme Court regimes mimic that of the Federal Court, while some of the other States have a different model. When were class actions introduced in Australia? The Federal Court class action regime is set out in Part IVA of the Federal Court Act 1976 (Cth) (the Act) and was introduced with effect from 5 March Why were class actions introduced? Class actions were introduced on the recommendation of the Australian Law Reform Commission (the ALRC). 2 The ALRC considered that it was desirable to introduce class actions for the following objectives: to provide a more efficient way of dealing with group claims; and to ensure that persons with causes of action from "multiple wrongdoing" could have "access to justice" and were not prevented from doing so because of lack of resources or cost. These are commonly referred to as the "judicial economy" and "access to justice" objectives. In the Second Reading Speech to the Bill which introduced Part IVA of the Act, the then Attorney General said that class actions would provide "an efficient and effective procedure to deal with multiple claims" and "give access to the courts to those in the community who have been effectively denied justice because of the high 1 Similar regimes came into effect in Victoria on 1 January 2000, under Part 4A of the Supreme Court Act 1986 (Vic) and in NSW on 4 March 2011, under Part 10 of the Civil Procedure Act 2005 (NSW). 2 Australian Law Reform Commission "Grouped Proceedings in the Federal Court" Report No Page 1

4 costs of taking action". He also said that class action procedures "mean that groups of persons, whether they be shareholders or investors, or people pursuing consumer claims, will be able to obtain redress and do so more cheaply than would be the case with individual actions." 3 Another justification for the introduction of class actions was said to be the regulatory impact of such legal remedies which would encourage "a greater degree of compliance with laws the purpose of which is to prevent or discourage activities which cause loss or injury to others." 4 Why are class actions controversial? There were concerns expressed that the introduction of class actions to Australia would result in a flood of "US style litigation" and lawyer led speculative claims where "the lawyers are often as much the litigants as the plaintiffs themselves, and with the same or even a greater stake in the outcome than any member of a group." 5 Other commentators warned that their introduction would increase the cost of doing business in Australia and would lead to the rise of so-called "greenmail" litigation 6 and the promotion of unmeritorious claims which would otherwise never have been brought. What are the threshold requirements before a class action can be commenced? A class action can be commenced where: seven or more people have claims against the same person(s); the claims are in respect of, or arise out of, the same, similar or related circumstances; and the claims give rise to at least one substantial common issue of law or fact. 7 These threshold requirements have been liberally interpreted by the Courts and as a result are generally not difficult to satisfy. When bringing a class action, it is not necessary to name or specify the number of individuals within the class. Are class actions "opt-in" or "opt-out"? The Australian class action regime employs an "opt-out" model. This means that all potential claimants who fall within the definition of the class become members of the class on the filing of the claim whether they are aware of it or not. They will all be bound by the judgment of the Court or any approved settlement unless they opt-out of the proceedings before a date which is fixed by the Court. The Court will require that all class members are notified of the action, their right to opt-out and the process for doing so. If a class member chooses to opt-out, they will no longer be bound by the outcome of the proceedings and will be able to pursue whatever claim they may have in separate proceedings. The "opt-out" model can be distinguished from the "opt-in" approach which requires potential class members to indicate positively that they want to be part of the group on whose behalf the claim is being brought. If they do not opt-in, they will not become members of the class and will not be bound by the final judgment or approved settlement. 3 Commonwealth, Parliamentary Debate, House of Representatives 14 November 1991, 3174 (Michael Duffy, Attorney General Second Reading Speech) 4 ALRC Report No 46 p.33 5 Callinan J in Mobil Oil Australia Pty Ltd v The State of Victoria (2002) 211 CLR 1 at [183] 6 "Greenmail" litigation is described in the US as a practice whereby high profile class actions of dubious merit are brought with the intent of obtaining a quick settlement. 7 Section 33C, Part IV of The Act, Section 33C of Part 4A of the Supreme Court Act 1986 (Vic); Section 157 of Part 10 of the Civil Procedure Act 2005 (NSW) Page 2

5 The Australian Courts have allowed a class to be defined in such a way that only those claimants who have retained a particular law firm and/or entered into an arrangement with a particular litigation funder are able to be members of the class. Such classes are commonly described as "closed" as all the members are known to the law firm and/or litigation funder. The real effect of closed classes is to convert the opt-out regime into an opt-in regime for these actions. Closed classes are attractive to third party litigation funders and claimant law firms as it provides greater certainty in relation to the number of persons in the class and the returns the funder will gain if successful. It is also argued that closed classes encourage settlement as the respondent(s) are able to better assess their potential overall liability. The use of closed class mechanisms was for a number of years controversial and challenged as being contrary to the intent of the legislated class action regime. However, since Justice Finkelstein's 2007 decision in the Multiplex class action the use of such mechanisms has been judicially accepted and has become increasingly common. Who can bring a class action? Class actions are usually brought by a single class representative who becomes the applicant in the proceedings. The class representative brings the proceedings on behalf of all the class members. There can be more than one class representative, in which case, each become applicants in the same class action. This is common where the threshold criteria for commencing a class action are met but there are other differences between groups of class members which make it appropriate to distinguish between sub-groups. Group members are not listed by name in the pleadings and play a "passive" role. 8 Does the "loser pays" rule apply and can a successful respondent obtain a cost order against the class members? The "loser pays" rule generally does apply but a successful respondent(s) can only obtain a cost order against the applicant(s) who is the class representative(s). The remaining class members are immune from adverse costs orders. 9 It is common for litigation funders to meet cost orders made against the class representative(s) and to provide security for costs (where sought by respondent(s)). In other words, independently funded class actions enable class members to avoid exposure to cost orders. However, where there is no litigation funder, the unsuccessful class representative(s) will normally be liable to the respondent(s) for any cost order. Unless the class representative is privately funded, has been deliberately chosen as a "man of straw" or there are other class members who could contribute to fund costs orders, the Courts have been reluctant to make an order that the class representative or other members provide security for costs. The Courts do not like to risk stifling proceedings through security for costs orders. However, a recent Full Federal Court decision has suggested that the representative applicants may need to provide evidence that third party funding was not available as this would be a relevant consideration in assessing an application for security of costs. 10 Does the court have to approve any settlement? Yes. Once proceedings have commenced, any settlement with the class representative requires the approval of the Court. 11 The Court will consider whether the proposed settlement is a fair and reasonable compromise of the claims of the class members. 8 Finkelstein J in P Dawson Nominees v Brookfield Multiplex Limited (No.2) [2010] FCA 176 at Section 43 (1A) of the Act. Unless they are a subgroup representative party or in relation to the determination of individual issues 10 Madgwick & Ors v Kelly & Ors [2013] FCAFC Section 33V of Part IVA of the Act; Section 33V of Part 4A the Supreme Court Act 1986 (Vic); Section 173 of Part 10 of the Civil Procedure Act 2005 (NSW) Page 3

6 The parties will usually need to persuade the Court that the proposed settlement is in the interests of group members and not just in the interest of the applicant and respondent(s). 12 The Courts have described the task of approving settlements as an onerous one particularly where the application is not opposed. The Court then itself has to identify any features of a settlement which are obviously unfair or unreasonable. Recently ASIC intervened in and successfully appealed the Federal Court's approval of a proposed settlement of a class action arising out of the collapse of Storm Financial Limited. 13 The Full Federal Court held that while there was no issue with the overall proposed settlement, the proposed distribution of the settlement sum between group members was not fair and reasonable to all group members. The Federal Court has also refused to approve a settlement in the Vioxx case. 14 What is Third Party Litigation Funding? A third party litigation funder is a commercial organisation which enters into an agreement, primarily with the representative party, to pay the legal costs of the representative party and to accept liability to pay the respondent's costs if the class action is unsuccessful. In return, if the claim is successful, the funder receives its money back together with a share of the amount awarded which is normally between 20% and 40% depending on the size of the case, the timing of the settlement and the costs incurred. Third Party Litigation Funding has been criticised as allowing someone with no direct interest in the actual dispute to conduct and control the litigation. Unsurprisingly, it has been the subject of numerous challenges, however, in 2006, the High Court of Australia effectively gave its stamp of approval to litigation funding in the Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd case. 15 The High Court held that the third party litigation funding was not an abuse of process or contrary to public policy. Following this decision, the Australian litigation market has grown and nearly all of the major class actions are now funded by a third party. The market has been dominated by IMF (Australia) Ltd but there are a number of other funders including:- Argentum Investment Management Limited Comprehensive Legal Funding LLC Hillcrest Litigation Services Limited International Litigation Funding s Pte Limited LCM Litigation Fund Pty Ltd Litigation Lending Services Limited. A more recent development has been the emergence of other types of private funding: (i) (ii) (iii) funding by entities which are related to or closely associated with the claimant law firm; funding by a subset of the group of claimants; and joint funding through agreement between insurers and third party litigation funders. 12 Federal Court Practice Note CM17 1 August ASIC v Richards [2013] FCAFC Jessup J in Joan Reaves v Merck Sharp Dohme (Australia) Pty Ltd (No 6) [2013] FCA [2006] 229 CLR 386 Page 4

7 Litigation funders offer a range of products from full funding as described above to more limited options which may only cover a portion of the costs, for instance, to a capped sum. The effect of the Federal Government's Corporations Amendments Regulation 2012 (No.6) is to allow litigation funders to operate without holding an Australian financial services licence or an Australian credit licence. Litigation funders are, however, required to put in place arrangements to manage conflicts of interest. 16 The chapter of the Federal Court of Australia Case Management Handbook on Representative Actions ("the Handbook chapter") says that "litigation funding has proven to be the life-blood of most of Australia's representative proceeding litigation at Federal and State level." 17 How are the class action lawyers paid? Law firms may act for class action members on a "no win no fee" or a "conditional fee" basis. If unsuccessful, the class representative(s) and class members are not required to pay any fee for their lawyer's services. If successful, the law firm charges their normal fee and may also charge an uplift (where allowed) which may be subject to a cap (generally 25%). 18 All Australian jurisdictions currently prohibit 'contingency' fees which are arrangements whereby the law firm charges by reference to a percentage of the amount awarded. This is permissible in the United States and has recently been introduced in the UK. The Law Council has noted that "it is generally not viable for most law firms to fund representative proceedings on a conditional basis." 19 As a result, the majority of recent class actions have been funded by a third party litigation funder. Where there is a litigation funder supporting the action, the law firm's costs will be met by the funder irrespective of the success or otherwise of the action. In return for funding the action, the litigation funder usually receives its money back and a 25% to 40% share of the amount paid by the respondent(s) to the class members. Can the Court stop a class action? The Court has the power to order that a proceeding no longer continue as a class action under s33n of the Act where it is satisfied that it is in the interests of justice for any one of the following reasons: the costs incurred if the proceedings were to continue as a group are likely to exceed the costs incurred if there were separate proceedings; the relief sought could be obtained by other proceedings; the class action proceedings will not provide an efficient and effective means of dealing with the claims; or it is otherwise inappropriate to bring the claims as a class action. The Handbook chapter notes that "if the common questions proposed are not truly common, or where there are arguably insufficient common questions so as to warrant consideration of whether the matter should be permitted to continue under Part IVA, the prospect increases that Court may make a s33n order in its volition or in response to a respondent motion." For more detail see Ashurst Australia Litigation Update from February 2013 and ASIC's Regulatory Guide 248: Litigation schemes and proof of debt schemes (April 2013). 17 Para 1.10 at p.2 18 In New South Wales some types of success fees including "uplifts" in damages cases are prohibited 19 Litigation Funding Standing Committee of Attorneys General (14 September 2006) at Para 1.53 at p.19 Page 5

8 What type of claims have been the subject of class actions? The types of class action which have been brought since the regime was introduced in 1992 have been identified in a Report prepared by Professor Morabito 21 in He identified the following Part IVA Proceedings as the most prevalent in the two periods and 2000 to 2009:- March 1992 September 2000 September 2000 to March 2009 Product Liability 36.8% Industrial/workplace 25% Migration 20% Shareholder actions 18% Industrial/Workplace 10.4% Investment and Property Schemes 12% Miscellaneous 8% Consumer Protection 9.4% Consumer Protection 7.2% Miscellaneous 8.6% Investment and Property Schemes 4.8% Investment advice 8.6% Loans/Guarantees 4.8% Product Liability 6.8% Shareholder actions 2.4% Taxation 2.5% Competition Law 1.6% Franchising 2.5% Franchising 1.6% Competition Law 2.5% Investment advice 0.8% Loans/Guarantees 1.7% Professor Morabito also noted that from 2004, there was a sharp decrease in product liability and migration class actions and a significant increase in shareholder and investor claims. In the period between 2004 and 2009, 25% of all Federal Court class action proceedings were shareholder claims. What type of claims are likely to be brought in the future? In recent years there has been an increase in the number of shareholder and investor claims. There has also been an increase in claims against professional advisors including auditors. Other emerging and potential areas which have been identified are: claims by residents and businesses following disasters such as bushfires or floods, employee/union claims for discrimination, claims by creditors against directors/advisors of failed companies, franchisee claims, claims by investors in Managed Investment Schemes, claims against trustees of Superannuation Funds, 21 Prof. Vince Morabito Australian Research Council An Empirical Study of Australia's Class Action Regimes. First Report pp Page 6

9 telecommunications consumer claims; and cartel claims. Allegations of misleading and deceptive conduct by corporations and financial institutions under the relevant sections of the Australia Consumer Law, the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the various Fair Trading Acts will continue to be a focus of class actions in Australia. 22 What have been the main shareholder/securities class actions in Australia? Since 2000, there have been over 20 significant shareholder/securities class actions many of which have resulted in substantial settlements. Most shareholder class actions involve allegations of corporate misconduct i.e. that the respondent listed company has:- engaged in misleading and deceptive conduct by its statements to the market or failure to disclose relevant information to the market; and/or breached the continuous disclosure obligations in relation to material information. In bringing these claims, it is unnecessary for the claimants to prove intent to defraud or mislead investors. The table below identifies the largest shareholder/securities class action settlements. Action Settlement Settlement Applicant's Litigation Funder Date Amount Lawyers (including costs) Kirby v Centro Properties Limited 2012 $200 million Maurice IMF (Australia) Vlachos v Centro Properties Limited (including claims against the auditor) Blackburn and Slater Gordon ($31 million) Comprehensive Legal Funding Dorajay Pty Limited v Aristocrat Leisure Limited 2008 $144.5 million Maurice Blackburn ($8.5 million) IMF (Australia) Pathway Investments Pty Limited v National Australia Bank Limited 2012 $115 million Maurice Blackburn ($12.5 million) International Litigation Funding 22 Section 18 of the Australian Consumer Law, Section 1041H of the Corporations Act, Section 12DA of the ASIC Act. Page 7

10 Action Settlement Settlement Applicant's Litigation Funder Date Amount Lawyers (including costs) King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) 2003 $112 million Maurice Blackburn ($15 million) P Dawson Nominees v Brookfield Multiplex Limited 2010 $110 million Maurice Blackburn International Litigation Funding Hobs Anderson Investments Pty Limited v OZ Minerals Limited; Scott and Taws v OZ Minerals Limited 2011 $60 million Maurice Blackburn and Slater Gordon ($4.9 million) IMF (Australia) Litigation Lending Services Earglow Pty Limited v Sigma Pharmaceuticals Limited 2012 $57.5 million Slater Gordon Comprehensive Legal Funding Gaby Hadchiti & Ors v Nufarm Limited 2012 $46.6 million Maurice Blackburn and Slater Gordon International Litigation Funding Comprehensive Legal Funding Watson v AWB Limited 2010 $39.5 million Maurice Blackburn IMF (Australia) What are the current trends in Australia in class actions? There has not been the predicted flood of litigation since the introduction of the class action regime. On average, only 14 class actions are filed in the Federal Court every year. However, recent years have seen an increase in the number of shareholder and investor claims. There has also been a trend to include professional advisors as respondents in class actions. Institutional investors are now participating as class members in shareholder and investor claims. Some see it as a low risk way of potentially recovering part of their lost investment. The involvement of institutional investors is often pivotal in securing the funding of a potential class action. There has been a trend towards larger settlements and in 2012, there were more settlements than in any other year with the total exceeding $480 million. Signs are that the Courts are looking closely at each settlement to ensure they are fair and reasonable to all class members before giving approval. Virtually all major class actions are now funded by third parties and this trend will continue. Closed classes, which limit the class to people who enter into an agreement with a funder and/or retain a particular law firm, has become increasingly the norm. The Government and the Courts will continue to support the role of third party litigation funding in facilitating class actions. This will be subject to ensuring that the interest of class members are protected. More law firms are now willing to act for claimants in class actions. Recently, medium sized commercial law firms have entered the market and are establishing stronger relationships with third party litigation funders. Page 8

11 There has been an increase in the number of multiple class actions arising out of single events such as the collapse of a company or the sale of a particular type of investment. This may result in competing class actions with different law firms and third party litigation funders acting for separate groups of claimants. There are also new third party litigation funders entering the market including litigation funders from the US, UK and Singapore. The most active funder is still IMF (Australia) Limited. However, recent entrants and other participants in the Australian market include those set out on page 4 and funders which have links to plaintiff law firms. Up to 31 December 2012, IMF (Australia) Limited said that it had completed 142 cases of which it had only lost 5 with 94 being settled and 13 won at judgment. A number of these would have been class actions. IMF have also reported that they have generated revenue of $1.237 billion in the period since their listing up to 31 December 2012 with $815 million going to clients and $422 million to IMF comprising $140 million reimbursement of costs and $282 million net revenue to IMF. Class action lawyers are accessing reports and documents obtained by regulators such as ASIC and the ACCC to support their claim. These same regulators have publically given their support to class actions as having a positive role to play in enforcement and in deterring bad behaviour. There has been an increase in the number of class actions which involve allegations of mis-selling of financial products. The Corporations Act, the Australian Consumer Law, the Australian Securities and Investment Commission Act and the various Fair Trading Acts all prohibit conduct by corporations and financial institutions which is misleading and/or deceptive or likely to mislead and/or deceive. Allegations of misleading and deceptive conduct will continue to be an important element in shareholder, investor, product liability and other claims. What are the main differences between Australian and US class actions? Costs In Australia, the unsuccessful party will usually be ordered to pay the costs of the successful party i.e. the loser pays. As stated above, where the class action is backed by a third party litigation funder, the funder will pay the costs order made against the unsuccessful applicant(s). In the United States, each party bears their own costs irrespective of outcome. Common issues In Australia, there only needs to be one substantial common issue of law or fact to commence a class action. In the United States, the common issues must predominate over individual issues otherwise the class action will not be certified and will not proceed. Court certification In Australia, there is no requirement that the Court must certify the class. It is up to the respondent(s) to challenge the class on the basis that the threshold requirements have not been met or for the Court to discontinue the class action where it is satisfied that it is in the interest of justice to do so. It can be difficult for the respondent to challenge the class as the respondent generally has limited information available to it at the outset. In the United States, the plaintiff must satisfy the Court that the class action requirements of numerosity, commonality, typicality and adequacy are met before the Court can consider whether the class should be certified to move forward. With actions for damages, the Court in the United States is required to determine that common questions of law or fact predominate over individual issues and that the class action procedure is superior to other available methods of adjudication. Page 9

12 Lawyers' fees In Australia, contingency fees whereby lawyers are paid a percentage or amount calculated by reference to the award or settlement or value of property that may be recovered in any proceedings are prohibited. However, litigation funders are able to receive a percentage of the amount paid by the respondents to the class members. Conditional fees whereby lawyers can charge fees on a no win no fee basis are allowed in most Australian states. In the United States, lawyers are able to charge contingency fees based on a percentage of the amount awarded. Other differences Another significant difference is that class actions will be heard by a judge alone in Australia. They will not be determined by a jury as may be the case in the United States. There is also the potential for very significant punitive damages being awarded against the defendants in the United States which is not the case in Australia. Page 10

13 Ashurst Quickguides Ashurst's Quickguides are a mini-library of short legal summaries on a range of key issues relevant to businesses. If you would like further information on this guide, or details of other titles in the series, please speak to your usual contact at Ashurst. Ashley Wharton Melbourne ashley.wharton@ashurst.com Andrew Carter andrew.carter@ashurst.com Sonia Tame sonia.tame@ashurst.com Chris Goddard Melbourne chris.goddard@ashurst.com Adrian Chai Perth adrian.chai@ashurst.com Chris Davidson chris.davidson@ashurst.com Mark Elvy mark.elvy@ashurst.com Andrew Harpur Melbourne andrew.harpur@ashurst.com Fiona Hudgson Melbourne fiona.hudgson@ashurst.com Wen-Ts'ai Lim wen-ts'ai.lim@ashurst.com John Lobban Brisbane john.lobban@ashurst.com John Pavlakis john.pavlakis@ashurst.com Angela Pearsall angela.pearsall@ashurst.com Matthew Roser Canberra matthew.roser@ashurst.com Peter Voss peter.voss@ashurst.com Lucas Wilk Perth lucas.wilk@ashurst.com

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