Overview of the Class Action Regime in Australia

by Quinn Emanuel Urquhart & Sullivan, LLP
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The Australian class action regime is among the most plaintiff-friendly in the world, and it has been reported that, outside of the U.S., Australia is the next most likely place in which a corporation will find itself defending a class action (Clark & Harris, The Push To Reform Class Action Procedure In Australia: Evolution or Revolution? (2005) Melbourne University Law Review 776(32)).

While the Australian national class action regime was introduced in 1992, it was not until the early 2000s that class actions became a mainstay of the legal landscape. The rapid growth in Australian class actions since then has coincided closely with the rise of third party litigation funding. Counsel for corporations doing business in Australia should be aware of the general parameters of class action litigation in that country.
Class action proceedings in Australia are termed “representative proceedings.” For ease of use, we will refer to class actions throughout.

The class action regime in Australia differs at the state and federal level. Federally, the class action rules are contained within Part IVA (ss 33A–33ZJ) of the Federal Court of Australia Act 1976 (Cth) (“Part IVA”). Part IVA comprehensively governs the conduct of class action proceedings in the Federal Court, including the make-up of the class of plaintiffs, the procedure required to ensure fairness to the defendants, and the way in which the proceeds of judgment should be distributed. Generally, at the state level, the rules are silent on these issues and are instead determined between the parties and the court on a case by case basis. However, the two largest jurisdictions in Australia, New South Wales and Victoria, have adopted, with only very limited changes, the rules in Part IVA. For the purposes of this review we will confine our discussion to those rules.

Key Features of the Australian Class Action Regime. In order for a representative plaintiff to institute class action proceedings in Australia, the following criteria must be met:

1. there must be seven or more people who have a claim;
2. the claims must be in respect of, or arise out of, the same, similar or related circumstances; and
3. the claims must give rise to a substantial common issue of law or fact.

Under Part IVA, a representative plaintiff does not need the consent of the class members in order to commence proceedings, nor do they need to know the details of the other plaintiffs. Instead, a class can be defined by a list of names or by other set criteria, but it is not necessary to specify the number of people in the class or the value of their claims. As such, Part IVA operates on the basis of an opt-out regime, whereby every potential claimant who falls within the definition is a member of the class unless they opt-out of the proceedings (though we note that a class can be defined in such a way that members are effectively required to opt in—referred to as a “closed class”). There is also no certification requirement in Part IVA, meaning that a judge is not required to certify the proceedings as appropriate to be brought by way of a class action.

A final important aspect of the Australian class action regime is the need for settlement approval. Once proceedings have been commenced under Part IVA, any settlement of those proceedings must be approved by the court. A settlement approval requires the court to reach an independent conclusion that the proposed settlement is fair and reasonable, and is in the interest of class members.

Litigation Funding. In addition to the procedural aspects of class actions in Part IVA, another important driver of the Australian class action regime is the presence of litigation funders. Litigation funders are third parties (generally companies) who fund litigation on behalf of the plaintiffs in exchange for a share of the proceeds of any settlement or judgment. Litigation funding in Australia is not a regulated industry and funders are particularly prevalent in Australia, at least in part, because there is a prohibition on lawyers acting for clients on a contingency fee basis. There are a number of publicly listed litigation funders in Australia, the most prominent of which, Bentham IMF Ltd (“IMF”), has recorded a return of over 300% on its investments. IMF’s public report to 30 June 2013, records that it has generated $1.278B in revenue, $849M of which was returned to clients and $429M of which was retained by IMF. In total, IMF has expended only $3.2M in lost cases and adverse costs orders (and a further $3.7M on withdrawal costs from cases). By any measure, the profit margins are significant.

Differences Between Australian and American Class Action Systems
Significant differences between the Australian and American class action systems are set out in the table below.


 Issues  Australia  America

Certification

No requirement for certification by the court of the proceedings.

Plaintiff required to satisfy the court that formal requirements for commencement of proceedings by class action have been met.

Common vs individual issues

Must be at least one substantial common issue of law or fact linking plaintiffs in the class.

Common issues are required to predominate over individual issues.

Contingency fees

Contingency fees not allowed for lawyers. Litigation funders entitled to operate on a contingency fee basis.

Contingency fees allowed for lawyers.

Costs

Generally the unsuccessful party must pay the costs of the successful party to the action.

Each party bears its own costs irrespective of success.

Recent Australian Cases
Australian courts are yet to provide guidance on a number of key areas, as the majority of class actions in Australia settle before judgment. Ambiguity exists in how damages should be quantified in securities class actions, how best to establish liability and link causation to the damages claimed, as well as discovery procedures. While recent case law has not provided answers to those legal questions, the following cases demonstrate the ability of Australian class actions to have an international impact.

In September 2012, the Federal Court of Australia handed down judgment on the representative claim brought by a number of local councils against Lehman Brothers. Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [ 2012 ] FCA 1028. Lehman Brothers was found to have engaged in misleading and deceptive conduct, was found to have been negligent in its promotion of synthetic collateralized debt obligations (SCDOs), and was found to have breached its fiduciary duties as a financial advisor to the councils. This decision is being appealed by Lehman Brothers in the High Court of Australia. Settlement negotiations are also continuing.

Further, in November 2012, the Federal Court ruled in a separate case brought by a number of local councils, that global rating agency Standard & Poor’s (S&P) had applied misleading AAA ratings to certain investments. Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200. As a result of their reliance on those ratings, the councils lost more than $16 million during the global financial crisis. The case held that, in certain circumstances, a ratings agency can owe a duty of care to investors. S&P, ABN Amro, and financial house Local Government Financial Services were ordered to repay the councils’ losses. They have appealed the decision.

The above two cases are significant for several reasons, but primarily because they were among the first global decisions to make findings regarding complex debt obligation products that were sold in the lead up to the 2008 financial crisis. These cases have sparked a litany of similar litigation around the world, with actions contemplated against S&P and other ratings agencies in the Netherlands, United States, and United Kingdom.

The Lehman Brothers case is also significant because it betrays a trend in the Australian class action industry, namely the rise of institutional investors participating in class actions (rather than so called “mum and dad investors”).
Prospective Changes to the Australian Regime
The rise in class actions in Australia has some commentators questioning whether such litigation is putting too much pressure on Australian businesses. In the past year, shareholder class actions alone accounted for $480 million in settlement payouts by Australian companies. Class action advocates argue that such actions are a business risk, and can be managed by improved corporate behavior, rather than attacking the mechanism through which Australians can enforce their legal rights.

There is a healthy debate within Australia about the best way to manage class actions into the future. With the change in the federal government following the election of 7 September 2013, it will be interesting to see what approach the new government takes in relation to some of the policy challenges associated with the regulation of litigation funding and the potential introduction of contingency fees. A discussion of these potential policy challenges is provided below.

Litigation Funding. George Brandis, the new Attorney General, has publicly commented that there should be a greater level of regulatory scrutiny of the class action industry. This may mean that litigation funders in the near future may be required to hold licenses similar to those held by promoters of managed investment schemes. The aim of such licensing is to ensure that litigation funders are adequately funded, so that plaintiffs and successful defendants are not left out of pocket. This approach has gained momentum and support from Australia’s largest litigation funder, IMF, and the U.S. Chamber Institute of Legal Reform.

Policy makers must also consider whether sufficient regulation exists to ensure claimants’ rights are balanced effectively against the interests of funders and lawyers. This question has recently come into sharp relief as a number of partners from plaintiffs’ law firm Maurice Blackburn have established a litigation funder, Claims Funding Australia (“CFA”), and sit on its board. CFA is proposing to co-fund several class actions in the Federal Court, with Maurice Blackburn engaged to act in those matters. The Federal Court is yet to approve this initiative. The Court is currently considering whether the fiduciary duties Maurice Blackburn owes its clients can co-exist with its business interests in funding the claim. The Court’s ruling in that regard, and the new government’s reaction to it, will prove interesting. If the courts allow this type of funding arrangement, it will create new opportunities for law firms to diversify the range of services they offer clients.

Contingency Fees. Australian lawyers are presently prevented by legislation from entering into contingency fee arrangements. However, this may change. The New South Wales Law Society has indicated some willingness to discuss reform in this area. A Law Society spokesman said that “The Council of the Law Society has considered an internal policy paper on the question of contingency fees and pursuant to resolutions passed at its August meeting it is to consider further issues.” There is also growing demand from the legal industry and its clients to introduce contingency fee arrangements. Advocates argue that those arrangements would lead to improved access to justice, particularly given the underfunding of free legal assistance services. Those opposed to the introduction of contingency fees point to the fear that lawyers may be driven to settle or maintain claims for their own interests rather than their client’s or the Court.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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