Call to review class actions

Australia’s class action procedures are due for review, University of NSW Associate Professor Michael Legg told an AILA NSW seminar.

In an interview with Resolve, he said the procedures could be improved without making the system more beneficial for either plaintiffs or defendants.

A/Prof Legg said no shareholder class actions had yet gone to judgement in Australia, so the issue of the causation standard was not resolved. Plaintiff lawyers and litigation funders had sought to argue that the proper causation standard should be indirect or market-based reliance, not direct or individual reliance, which was a more difficult hurdle to jump.

In a Full Federal Court action, Caason Investments Pty Ltd v Cao [2014] FCA 1410 (23 December 2014), Justice Kathleen Farrell considered the issue and said it was arguable to plead indirect reliance.

A/Prof Legg said the pendulum had swung more towards that argument, where previously “there was a lot of doubt about indirect causation being run successfully”.

Because plaintiff lawyers and litigation funders knew it could potentially succeed, indirect reliance would impact on settlement negotiations and mediations.

A/Prof Legg said defendants were often reluctant to go to trial because of potential reputation damage and regulator involvement if they were found to have breached disclosure obligations and/or engaged in misleading and deceptive conduct.

The Aristocrat class action settled while the judgement was being written and Great Southern settled only days before the judgement was to be handed down. The decision was annexed to the settlement. A/Prof Legg said the plaintiffs “got nothing in the judgement, but it did give certainty”. Because the settlement had occurred, there was no potential for an appeal.

Aristocrat settled for $144.5 million; Great Southern for $23.8 million.

A/Prof Legg said reputation damage was “hard to assess”. All shareholder class action settlements were on the basis of no admission of liability. Defendants argued a payment was made “in shareholders’ interests” to allow the business to continue. Plaintiff lawyers argued “they did something wrong and that’s why they’ve paid”.

If it were a large payout “people often say where there’s smoke there’s fire”. “If it’s smaller, they say the plaintiffs probably picked the wrong matter to pursue.”

Australia’s largest shareholder action settlement was Centro at $200 million; NAB was $112 million and Multiplex $110 million.

A/Prof Legg said headlines focused on settlement figures, but his research showed “you need to focus on how the settlement figure compares with losses suffered”.

In Centro, losses were about $1 billion, so the settlement represented only 20 cents in the dollar. In Aristocrat and Multiplex, it was 60 cents to 80 cents, so they were more successful actions because substantial losses were recovered.

A/Prof Legg said as class actions recovered larger sums, D&O insurance was relied on to a greater extent.

The sum insured was important. “In the US, settlements tend to be at the level of the sum insured,” he said. “But the level of insurance is not as determinative in Australia.”

Centro settled below the sum insured because Centro Properties was “effectively bust and the only assets were insurance and recoveries from other parties, for example PricewaterhouseCoopers”.

In the Aristocrat settlement, $100 million was covered by insurance.

A/Prof Legg said there was a long-standing debate about D&O insurance. “It ensures those who have lost money are compensated, but there’s an argument it undermines deterrence because, instead of those who are culpable paying, an insurer pays.”

He suggested D&O insurers should better monitor companies and their directors before agreeing to be on risk.

“But market conditions get in the way. If the market’s soft [potential insureds] will go elsewhere” to get lower premiums.

He said many commentators thought the market would harden after the Aristocrat settlement, “but that hasn’t played out”.

However, despite settlements totalling about $1 billion, premiums paid across the market were “well above that”.

A/Prof Legg said construction and mining companies tended to attract more class actions, perhaps because of the difficulty in accurately predicting the success or otherwise of their major projects.

Key developments in shareholder class actions were a lack of regulation for litigation funders, more law firms being prepared to run them, and more litigation funders, including from overseas. Those factors meant more class actions would eventuate.

Funders required substantial losses before they would participate, “otherwise it’s not worth their while”.

A/Prof Legg suggested D&O insurers should seek tighter regulation of litigation funders so “if a case is lost, those who bring it pay adverse cost orders”.

They could also seek tighter legislation in the federal, NSW and Victorian jurisdictions on criteria for mounting class actions. “You need a substantive common issue, but that doesn’t mean it has to be big and important.”

If there were only one substantive issue, the class actions were non-cohesive, involved lots of people, and were therefore not very efficient.

“With the experience we have now, it’s probably time for a review,” A/Prof Legg told Resolve.