Competing Class Actions: Judicial Remedies for Overlapping Classes

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Australia has seen a prevalent increase in the number of class actions including the dominant rise of US-style shareholder class actions. With this in mind, we have produced a five-part series dealing with common and developing issues in shareholder class actions in Australia.

In the first part of this series we are examining ‘competing class actions’, the unique issues that are faced by both sides to the litigation, and the remedies used by Courts to resolve the conflicting interests.

COMPETING CLASS ACTIONS

A competing class action refers to a situation where more than one case is commenced against the same defendant arising from the same subject matter. The fact that there is more than one claim makes them ‘competing’.

As a representative proceeding, a class action can involve a vast number of people litigating the same issue. Because of this, there are often disagreements about how the case is run, who is entitled to join the action, and how the case is going to be funded.

These disagreements underpin the reason for the existence of competing claims. For example, one claim might only allow a person to join if they have a funding arrangement in place with a particular litigation funder whereas another claim might use a different source of finance. Although as a matter of law, the plaintiff may have a good cause of action (legitimate right to sue), they have no right to join the first claim unless they agree to the funding arrangement.

In theory, because every individual’s right to a legal remedy acts personally[1], there can be as many different cases as there are plaintiffs. This is why class actions are a preferred tool for dealing with multiple proceedings and providing defendants with some certainty as to cost.

This idea of ‘competing’ class actions is increasingly becoming a reality in Australia. Most of this arises due to the increasing prevalence of ‘no-win no-fee’ class action litigators and the commercial financiers that are required to fund these cases.

This position is supported by recent data, which demonstrates that 49.5% of all class actions in Australia are commercially funded, an increase from 23.4% six years prior[2]. Further, over the past decade 52.4% of all class actions commenced in the Federal Court have been securities or investor class actions.

PROBLEMS CAUSED BY COMPETING CLASS ACTIONS

Competing class actions create a range of obvious problems for stakeholders to the litigation. Principally, these issues concern certainty in respect of costs, content of different funding arrangements, and scarcity of resources. We have identified five different stakeholders in a typical securities class action: plaintiff, defendant, litigation funder, insurer, and judicial system. Competing class actions create issues for all these individual groups.

Plaintiffs

Competing class actions pose potential issues for plaintiffs and their lawyers. The fact that there is more than one action concerning the same subject matter dilutes the number of plaintiffs available to the one group. This places cost pressure on the plaintiff’s lawyers who are only adequately incentivised if there are enough claimants to justify proceedings, therefore enabling them to obtain competitive litigation funding. If there are too few plaintiffs, the process of generating a ‘book-build’[3] to generate claimant demand for the class action is strained. Without adequate demand, the class action is not worth commencing.

Defendant

The defendants face an obvious problem: if the quantity of potential plaintiffs is unknown then the value of the risk exposure is unlimited. Further, having to defend more than one class action places a burden on defendants as defence costs multiply. To some extent, this issue can be ameliorated by encouraging potential plaintiffs to join an ‘open’ class[4] and then, after enough time has elapsed, making attempts to ‘close’ the class. Courts have agreed that defendants are generally placed in a ‘very difficult position’ with respect to multiple class actions[5].

Litigation Funder

Competing class actions dilute the number of plaintiffs available to one particular funder, thereby reducing their percentage share of the proceeds and project management fees. Further, the complexity of class action litigation generally does not significantly increase with higher numbers of plaintiffs, so defence costs stay the same. The net effect to the funder in this situation is that the share of proceeds reduces whilst costs stay the same.

Insurer

The insurance company protects against the risk of a company being sued in a class action in exchange for a premium. Uncertainty about future litigation leads to an inability to accurately price risks. Competing class actions lead to uncertainty as an insurer is not aware of how many other pieces of potential litigation lay in wait. This inability to accurately price risks leads to very high premiums and, at worst a lack of insurance coverage. Lack of coverage is not an altogether unreal possibility; Australia has faced hard insurance markets before, including the Medical Indemnity Insurance Crisis beginning in 2000 which led to a lack of coverage and extremely high premiums for consumers[6].

Judicial System

Competing class actions lead to a multiplicity of proceedings. Although the judiciary exists to resolve disputes, this must be considered against the principles of 21st century case management. Judges are now very reluctant to allow two matters which share a similar factual basis to proceed as this takes up unnecessary judicial resources[7]. Multiple proceedings are also inconsistent with the overriding purpose contained in s 56 of the Civil Procedure Act 2005 (NSW), that is, to ‘facilitate the just, quick, and cheap resolution of the real issues in the proceedings’.

JUDICIAL REMEDIES FOR COMPETING CLASSES

Globally, courts have developed different methods of managing competing class actions. These include orders which:

  • Allow competing class actions to proceed separately;[8]
  • Join the matters together;[9]
  • Have one matter proceed immediately after the other[10]; and
  • Consolidate claims into a single matter.

Recently, the NSW Supreme Court in Smith v Australia Executor Trustees Limited; Creighton v Australian Executor Trustees Limited [2016] NSWSC 17 (‘Smith Proceedings’) ordered a joint trial to have two competing class actions heard together. The order of a joint trial is procedurally distinct from a ‘consolidation’.

Joint trial orders preserve both cases but allow evidence in one case to be evidence in the other, thereby allowing them to be heard together. On the other hand, ‘consolidation’ fuses two proceedings into one. Practically, this fusion disentitles two sets of legal representatives from being engaged.

In the Smith proceedings, Justice Ball was concerned with two class actions. First, a securities class action commenced by Slater & Gordon in the Federal Court as an ‘open’ class and second, a securities class action involving the same facts launched in the NSW Supreme Court as a ‘closed’ class by Meridian lawyers.

The real issue was whether both proceedings could continue with different litigation funders, different lawyers, and the risk of overlapping group members[11]. Justice Ball held that the most practical way forward to resolve this competing issue was to order a joint trial, at [22]:

“where there are common issues and a common defendant, the interests of justice strongly point to the proceedings being heard together, with evidence in one being evidence in the other, so as to reduce costs and avoid the possibility of inconsistent judgments”.

This remedy effectively addresses the concerns faced by all the stakeholders listed above. The defendant does not have to face a multiplicity of proceedings and will only endure the one set of defence costs whilst the judicial system does not have to expend public resources on multiple trials.

However, there is no hard and fast rule when it comes to case managing class actions[12]. What are essential are the interests of justice weighed against the competing considerations of all the stakeholders. Certainly, as the number of class actions increase, competing and overlapping actions will occur more frequently.

 

 

[1] In personam as opposed to In rem being the legal equivalency

[2] Professor Vince Morabito “An Empirical Study of Australia’s Class Action Regimes Fourth Report: Facts and Figures on Twenty-four years of Class Actions in Australia”

[3] Michael Legg: Entrepreneurs and Figureheads – Addressing Multiple Class Actions and Conflicts of Interest; UNSWLJ

[4] An open class refers to a situation whereby all affected persons are able to join an action. On the other hand, a closed class is where only people with certain characteristics can join the action i.e ‘only those persons who have purchased shares at a particular date’

[5] See the comments of Ball J in Smith v Australian Executor Trustees Limited; Creighton v Australian Executor Trustees Limited [2016] NSWSC 17 at [25]

[6] The collapse of insurer HIH at the beginning of the century also partly involved liquidity issues and price uncertainty. The inability to accurately price future risks sharply drove up loss ratios contributing to their demise.

[7] The comments of Justice Finkelstein in Kirby v Centro Properties Ltd (2009) 153 ALR 65 are instructive in this regard.

[8] See Technograph Printed Circuits Ltd v Methode Electronics Inc 28 F F. Supp 714 CN.D. 111. 1968 where the Court allowed seventy-four patent infringement suits to proceed in addition to a class action.

[9] Decision of Ball J in Smith v Australian Executor Trustees Limited [2016] NSWSC 17 where the court ordered a joint trial with ‘evidence in one being evidence in the other’.

[10] This was the defendants favoured approach in Labourers Pension Fund of Central and Eastern Canada v Sino-forest Corporation 2012 ONSC 1924

[11]By overlapping we mean a plaintiff in action 1 also being a plaintiff in action 2 thereby leading to a double recovery. The principle of double recoverability was denounced by Bowen LJ in McHenry v Lewis (1882) 22 Ch D 397 ‘a double action on the part of the Plaintiff would lead to manifest injustice’.

[12] In other jurisdictions such hard and fast rules apply. For example, in Canada it is generally accepted that only one proceeding can continue but that must be considered within the context of their class certification system under the Class Proceeding Act (1992). Australia has no such system.

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