The future of Class Action litigation and issues that impact finality
Over a three-part series, IMF Bentham Senior Investment Manager, Wayne Attrill, has summarised ‘hot topics’ in class action litigation, discussed during a recent Class Action Conference. The conference, presented by IMF Bentham (IMF) and UNSW Law, was part of a collaboration to support research into important issues at the cutting edge of class action litigation.
The final topic of this three-part series explores the issue of how to ensure class action litigants can finally and completely resolve their differences and, where appropriate, avoid further litigation.
Finalising class action litigation
The third topic, achieving finality in class action litigation, was discussed by an expert panel. The panel was moderated by Wayne Attrill and comprised:
• Justice Jack Forrest of the Victorian Supreme Court;
• Professor Simone Degeling from the University of New South Wales;
• Bill Petrovski, a partner and founder of William Roberts Lawyers;
• Jason Betts, a partner at Herbert Smith Freehills; and
• Brett Jordan, Senior Technical Claims Advisor, Major Loss Financial Lines of insurer AIG Australia.
Resolving disputes and providing parties with finality and certainty are key objectives of the legal system, yet are not all that easy to achieve under a class action regime which allows for class members to opt out of proceedings, does not prohibit multiple class actions concerning the same dispute and limits the initial trial to the determination of the applicant’s claim and common questions only, leaving class members’ claims to be individually litigated (if not settled). On the other hand, the courts should be slow to extinguish class members’ rights in a headlong rush for finality.
The panel discussed five current issues that impact finality:
1) Should it be easier to settle multiple claims without the need to commence a class action?
The panellists agreed that under the current regime, it is very difficult to achieve finality without a Court-approved settlement or judgment. The respondent is potentially exposed to follow on or ‘copycat’ actions if the respondent settles with some, but not all, potential claimants.
Bill Petrovski pointed out that a ‘settlement only’ proceeding would also raise challenges, with the Court needing to be satisfied of the fairness and reasonableness of the proposed settlement but lacking access to all the evidence and disclosure that would normally occur if settlement occurred closer to the trial.
2) Is it appropriate to ‘close’ an open class and should class members’ claims be extinguished if they fail to register an interest in participating in the class action?
Justice Forrest explained that class closure (the process by which class members are required to register their interest in participating in any settlement or judgment) is invariably ordered in class actions to facilitate settlement, because it enables the parties to know precisely who is in the class.
His Honour thought the main issue was when to order class closure. If too soon in the litigation, it might not be useful as the parties may not be ready to discuss a settlement.
Justice Forrest also thought there was no problem with class members’ losing their rights if they failed to register or opt out, provided their claims were financial in nature. He queried whether such a serious step should be taken with personal injury claimants.
Brett Jordan emphasised that certainty is very important to insurers and that an excessively permissive class action regime may lead to insurers withdrawing cover, reducing the resources available to respondents to resolve claims.
3) Is a ‘common fund order’ the answer to multiple or competing class actions?
Common fund orders provide that all class members, whether they have signed a funding agreement with the litigation funder or not, pay a Court-approved percentage of the settlement to the funder.
They are seen as the antidote to the ‘free rider’ problem. Litigation funders have tended to fund class actions with closed classes made up of claimants who have signed a funding agreement, so that all class members contribute to the funder’s return and there are no unfunded group members who ‘free ride’ on the funder’s contribution. Closed classes have, however, contributed to the problem of competing class actions.
It was thought that common fund orders would encourage litigation funders to support open class, class actions allowing one class action to be commenced for all potential claimants and avoiding multiple actions targeting the same respondent.
The panel was unanimous in its view that the availability of such orders has not prevented competing class actions. In fact, we have witnessed competing open class actions being commenced against the same company, e.g. Bellamy’s.
4) Is there a fiduciary dimension to class action settlements?
Professor Degeling examined this issue in light of Justice Murphy’s refusal to approve the proposed settlement in Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323. Professor Degeling observed that settlements are often a ‘flash point’ for fiduciary duties in the class action context.
In the Willmott case, the settlement imposed different burdens and benefits on different groups of class members, raising potential conflicts of interest on the part of the applicant’s lawyers and concerns with the overall fairness and reasonableness of the settlement.
In particular, class members who did not register were not entitled to share in any benefits of the settlement, while all class members would be bound by admissions that loan agreements they had entered into with certain lenders were fully enforceable against them. They would not be able to challenge the loans on any legal basis, even those that were not pleaded in the class actions. Class members were also required to indemnify the respondents against certain claims.
While the Judge was not certain the lawyers owed fiduciary duties to class members who were not also clients of the firm (i.e. open class members who had not signed a retainer agreement), as opposed to those who were their clients (who were clearly owed a fiduciary duty), his Honour thought that the lawyers at least had a duty to act consistently with the interests of all class members. Murphy J identified multiple conflicts of interest, between duties owed to clients and non-clients and between the lawyers and class members (e.g., in relation to the lawyers’ costs), which his Honour was not satisfied the lawyers had properly considered.
The case also raised the importance of clear and unambiguous opt out notices, which class members rely on to make informed decisions about registering in, or opting out of, a class action and understanding the consequences of each option. The impact of fiduciary duties on class action procedure and settlement will be investigated further by UNSW with IMF Bentham’s support.
5) Is it time to legislate to achieve finality? If so, what type of legislative change is necessary?
Jason Betts spoke to a series of slides which proposed legislative reforms to the class action regime, with the aim of minimising competing shareholder class actions and ensuring that a ‘lead plaintiff’ has a meaningful role in directing the proceeding.
His proposals involved filing all class actions on an open basis, appointing a lead plaintiff (subject to Court approval and with restrictions on a plaintiff’s ability to be appointed in multiple actions), requiring all potential class members to register to participate in the proceeding within a certain time failing which their claims are extinguished, but preserving the opt out option (which arguably runs counter to the aim of achieving finality).
Wayne Attrill suggested a less ambitious approach may be to adapt the Canadian concept of a ‘carriage motion’ to Australian procedure, whereby the Court would determine the most appropriate representative applicant, applicant law firm and litigation funder to carry the action forward efficiently and in the best interests of class members as a whole, from amongst any candidates who presented themselves to the Court. Jason Betts thought this option would not comprehensively resolve the finality issue, particularly where competing class actions can be commenced in multiple jurisdictions in Australia.
Concluding remarks from the Conference
The conference closed with remarks from IMF Bentham’s Chief Executive for Australia and Asia, Clive Bowman. He noted the conference had brought together a diverse group of stakeholders, including regulators, academics, litigation funders, institutional shareholders, law firms (defence and plaintiff), barristers, insurers and judges from the Federal and State courts.
In his view, the discussion highlighted that the path toward resolving the above issues requires a complex balancing exercise, including (in a Settlement Distribution Scheme) balancing compensation being received on the merits with achieving an efficient and cost effective outcome and, more broadly, balancing the interests of achieving finality to disputes while not unfairly shutting out class members from pursuing their just claims.
For more information on Class Action litigation in Australia visit IMF Bentham’s dedicated Class Action Centre.
The final topic of this three-part series explores the issue of how to ensure class action litigants can finally and completely resolve their differences and, where appropriate, avoid further litigation.
Finalising class action litigation
The third topic, achieving finality in class action litigation, was discussed by an expert panel. The panel was moderated by Wayne Attrill and comprised:
• Justice Jack Forrest of the Victorian Supreme Court;
• Professor Simone Degeling from the University of New South Wales;
• Bill Petrovski, a partner and founder of William Roberts Lawyers;
• Jason Betts, a partner at Herbert Smith Freehills; and
• Brett Jordan, Senior Technical Claims Advisor, Major Loss Financial Lines of insurer AIG Australia.
Resolving disputes and providing parties with finality and certainty are key objectives of the legal system, yet are not all that easy to achieve under a class action regime which allows for class members to opt out of proceedings, does not prohibit multiple class actions concerning the same dispute and limits the initial trial to the determination of the applicant’s claim and common questions only, leaving class members’ claims to be individually litigated (if not settled). On the other hand, the courts should be slow to extinguish class members’ rights in a headlong rush for finality.
The panel discussed five current issues that impact finality:
1) Should it be easier to settle multiple claims without the need to commence a class action?
The panellists agreed that under the current regime, it is very difficult to achieve finality without a Court-approved settlement or judgment. The respondent is potentially exposed to follow on or ‘copycat’ actions if the respondent settles with some, but not all, potential claimants.
Bill Petrovski pointed out that a ‘settlement only’ proceeding would also raise challenges, with the Court needing to be satisfied of the fairness and reasonableness of the proposed settlement but lacking access to all the evidence and disclosure that would normally occur if settlement occurred closer to the trial.
2) Is it appropriate to ‘close’ an open class and should class members’ claims be extinguished if they fail to register an interest in participating in the class action?
Justice Forrest explained that class closure (the process by which class members are required to register their interest in participating in any settlement or judgment) is invariably ordered in class actions to facilitate settlement, because it enables the parties to know precisely who is in the class.
His Honour thought the main issue was when to order class closure. If too soon in the litigation, it might not be useful as the parties may not be ready to discuss a settlement.
Justice Forrest also thought there was no problem with class members’ losing their rights if they failed to register or opt out, provided their claims were financial in nature. He queried whether such a serious step should be taken with personal injury claimants.
Brett Jordan emphasised that certainty is very important to insurers and that an excessively permissive class action regime may lead to insurers withdrawing cover, reducing the resources available to respondents to resolve claims.
3) Is a ‘common fund order’ the answer to multiple or competing class actions?
Common fund orders provide that all class members, whether they have signed a funding agreement with the litigation funder or not, pay a Court-approved percentage of the settlement to the funder.
They are seen as the antidote to the ‘free rider’ problem. Litigation funders have tended to fund class actions with closed classes made up of claimants who have signed a funding agreement, so that all class members contribute to the funder’s return and there are no unfunded group members who ‘free ride’ on the funder’s contribution. Closed classes have, however, contributed to the problem of competing class actions.
It was thought that common fund orders would encourage litigation funders to support open class, class actions allowing one class action to be commenced for all potential claimants and avoiding multiple actions targeting the same respondent.
The panel was unanimous in its view that the availability of such orders has not prevented competing class actions. In fact, we have witnessed competing open class actions being commenced against the same company, e.g. Bellamy’s.
4) Is there a fiduciary dimension to class action settlements?
Professor Degeling examined this issue in light of Justice Murphy’s refusal to approve the proposed settlement in Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323. Professor Degeling observed that settlements are often a ‘flash point’ for fiduciary duties in the class action context.
In the Willmott case, the settlement imposed different burdens and benefits on different groups of class members, raising potential conflicts of interest on the part of the applicant’s lawyers and concerns with the overall fairness and reasonableness of the settlement.
In particular, class members who did not register were not entitled to share in any benefits of the settlement, while all class members would be bound by admissions that loan agreements they had entered into with certain lenders were fully enforceable against them. They would not be able to challenge the loans on any legal basis, even those that were not pleaded in the class actions. Class members were also required to indemnify the respondents against certain claims.
While the Judge was not certain the lawyers owed fiduciary duties to class members who were not also clients of the firm (i.e. open class members who had not signed a retainer agreement), as opposed to those who were their clients (who were clearly owed a fiduciary duty), his Honour thought that the lawyers at least had a duty to act consistently with the interests of all class members. Murphy J identified multiple conflicts of interest, between duties owed to clients and non-clients and between the lawyers and class members (e.g., in relation to the lawyers’ costs), which his Honour was not satisfied the lawyers had properly considered.
The case also raised the importance of clear and unambiguous opt out notices, which class members rely on to make informed decisions about registering in, or opting out of, a class action and understanding the consequences of each option. The impact of fiduciary duties on class action procedure and settlement will be investigated further by UNSW with IMF Bentham’s support.
5) Is it time to legislate to achieve finality? If so, what type of legislative change is necessary?
Jason Betts spoke to a series of slides which proposed legislative reforms to the class action regime, with the aim of minimising competing shareholder class actions and ensuring that a ‘lead plaintiff’ has a meaningful role in directing the proceeding.
His proposals involved filing all class actions on an open basis, appointing a lead plaintiff (subject to Court approval and with restrictions on a plaintiff’s ability to be appointed in multiple actions), requiring all potential class members to register to participate in the proceeding within a certain time failing which their claims are extinguished, but preserving the opt out option (which arguably runs counter to the aim of achieving finality).
Wayne Attrill suggested a less ambitious approach may be to adapt the Canadian concept of a ‘carriage motion’ to Australian procedure, whereby the Court would determine the most appropriate representative applicant, applicant law firm and litigation funder to carry the action forward efficiently and in the best interests of class members as a whole, from amongst any candidates who presented themselves to the Court. Jason Betts thought this option would not comprehensively resolve the finality issue, particularly where competing class actions can be commenced in multiple jurisdictions in Australia.
Concluding remarks from the Conference
The conference closed with remarks from IMF Bentham’s Chief Executive for Australia and Asia, Clive Bowman. He noted the conference had brought together a diverse group of stakeholders, including regulators, academics, litigation funders, institutional shareholders, law firms (defence and plaintiff), barristers, insurers and judges from the Federal and State courts.
In his view, the discussion highlighted that the path toward resolving the above issues requires a complex balancing exercise, including (in a Settlement Distribution Scheme) balancing compensation being received on the merits with achieving an efficient and cost effective outcome and, more broadly, balancing the interests of achieving finality to disputes while not unfairly shutting out class members from pursuing their just claims.
For more information on Class Action litigation in Australia visit IMF Bentham’s dedicated Class Action Centre.
[1] [2016] FCA 323, [308].
[2] Perell J in the Ontario Superior Court of Justice, in Smith v Sino-Forest Corporation 2012 ONSC 24 (CanLII) at [2] – [3], explained carriage motions in these terms:
“Practically speaking, carriage motions involve two steps. First, the rival law firms that are seeking carriage of a class action extoll their own merits as class counsel and the merits of their client as the representative plaintiff. During this step, the law firms explain their tactical and strategic plans for the class action, and, thus, a carriage motion has aspects of being a casting call or rehearsal for the certification motion.
Second, the rival law firms submit that with their talent and their litigation plan, their class action is the better way to serve the best interests of the class members, and, thus, the court should choose their action as the one to go forward. No doubt to the delight of the defendants and the defendants’ lawyers, which have a watching brief, the second step also involves the rivals hardheartedly and toughly reviewing and criticising each other’s work and pointing out flaws, disadvantages, and weaknesses in their rivals’ plans for suing the defendants.”