Subscribe

Class is in: the future of collective action

Class actions have featured frequently in the press in recent years, often with a theme of a developing crisis for Australian business.

In part, this attention has been driven by the fact that class action activity has significantly increased. The increase in filings is, however, only one part of the equation – a proper assessment of class action risk requires looking behind the hype and raw numbers.

" The biggest potential agent for change is the possibility courts will permit third party funders to be remunerated on a 'common fund' basis."
Jenny Campbell & Belinda Thompson, Partners, Allens

To facilitate a more holistic assessment, we have analysed class actions filings over more than a decade. These data allow us to draw out the trends emerging over the last decade through a series of five-year comparisons and identify the newly emerging trends.

FEWER COMPANIES ARE FACING CLASS ACTIONS

Class action risk has increased significantly over the course of the past decade – more claims are being filed and more law firms and third-party funders are promoting claims. Although filings are lumpy, a new baseline has been set in recent years.

Click image to zoom Tap image to zoom

That is, however, only half the picture. A closer look at the data reveal the number of companies facing class actions has fallen. This anomaly arises from the increasing number of companies facing more than one claim in relation to the same conduct.

In some cases this is because multiple law firms have commenced competing class actions in relation to the same conduct – this occurs quite frequently in shareholder class actions. In others it is because the same firm has brought multiple actions on behalf of different customers.

For example, eight class actions have been commenced against Standard & Poor's in respect of its rating of eight different collateralised debt obligations. While these cluster or competing claims create their own complications, the exposure is not necessarily any higher than it would be from a single class action.

NEW LAW FIRMS ARE THE BIGGEST CONTRIBUTOR TO RISK

A common perception is the entrepreneurial pursuits of litigation funders are the biggest contributor to class action risk. While that undoubtedly has been the case in the past (and may be again), our analysis reveals the biggest contributor to class action risk right now is the number of 'new' law firms looking to commence class actions.

More than one-quarter of the class actions filed since 2013 have been commenced by 15 firms who have filed either one or two claims in that period. This trend is resulting in claims at the more speculative end of the spectrum.

Moreover, the relative inexperience of these firms in running class actions – in particular, a lack of understanding of what is expected of them when they take on the responsibilities of bringing a class action on behalf of a group of people extending beyond their clients - can also create significant practical and reputational issues for the defendants they sue.

THE FINANCIAL SERVICES SECTOR IS THE MOST FREQUENT TARGET

Banks and financial services companies are the most frequent class action targets. The most common claims made relate to the miss-selling of financial products, the rating of financial products, lending practices and compliance with trustee obligations.

Click image to zoom Tap image to zoom

It is, however, important to consider this trend in context. Filings in this sector have been significantly affected (and distorted) by cluster claims – such as the 11 bank fees class actions and the eight class actions against Standard & Poor's.

It remains to be seen whether filings in this sector are sustained in the years to come, particularly as the limitation periods in respect of global financial crisis-related losses expire. Indeed, financial services class action filings have fallen (as a percentage of overall filings) in the past 18 months.

While financial services class actions can be very significant and high-profile, this is the sector most likely to face smaller class actions in terms of the number of group members, amounts claimed and public interest.

The vast majority of class actions are settled, but almost one-third are dismissed or otherwise discontinued with no money changing hands. This suggests so-called ‘blackmail settlements’ (companies paying to settle unmeritorious claims) are not as common as some suggest.

AUSTRALIA IS A REGIONAL OUTLIER

Class action activity in Australia has not been mirrored in other parts of the region or the rest of the world. Indeed, it is often said Australia has become the jurisdiction outside the United States in which a company is most likely to face a class action

Representative and group actions (in various forms) are slowly gaining traction in New Zealand, Hong Kong, China and Singapore – often without the benefit of a formal class actions regime. In Japan, class actions are limited to claims brought by registered consumer organisations (as is the case in many European jurisdictions).

Class actions in those jurisdictions are not currently seen as presenting the same business opportunities for lawyers and funders as in Australia. The most likely places for that to change in the medium term are Hong Kong and New Zealand.

COMMON FUND – A POTENTIAL GAME CHANGER

Looking ahead, the biggest potential agent for change is the possibility courts will permit third party funders to be remunerated on a 'common fund' basis. This would see funders receive a commission from the total amount recovered in a class action and not just from the class members who have signed funding agreements.

If permitted, this would encourage a race to file class actions and significantly increase the amount required to settle class actions. The legality of the 'common fund' approach is currently before the Full Federal Court (sitting as a court of first instance) in the shareholder class action against QBE.

Jenny Campbell & Belinda Thompson are Partners at Allens

For further details and analysis read Allens’ Class Action Risk 2016 report.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

05 Sep 2016

How Asia is responding to the green challenge

Benjamin McCarron | Managing Director, Asia Research and Engagement

Momentum is growing in Asia behind regulations and initiatives to tackle the growing global problem of climate change. The last few years has seen a number of major domestic initiatives to encourage more sustainable approaches to green finance across Asia.

30 Aug 2016

Can you trust the future of banking?

Andrew Cornell | Managing Editor bluenotes

What finally sees off an ageing, ailing business model is not always the most obvious threat. In journalism, for example, the end of print newspapers may not come just because Facebook or the iPhone are now what is read on trains.

31 Aug 2016

Where really is the value in ‘services’?

Robyn Haydon | Author and consultant

Services are the building blocks of getting things done. They're part of making products; making buildings, bridges and rockets to Mars; and of making lives better in the community.