19 Jul 2013

After 20 years, action industry finds a class of its own

by Stuart Clark, Ross McInnes

Australian courts could become the jurisdiction of choice outside the US for plaintiffs, lawyers and funders promoting class actions.

Since its introduction in 1992, the Australian class action regime has become a key feature of the legal landscape. Barely a day goes by without the threat of a new class action.

Australia has also made its mark on the class action stage internationally, its plaintiff-friendly regime and a thriving class action industry driven by an active litigation funding sector. As a result, Australia is the place outside North America where a corporation is most likely to find itself defending a class action.

The class action regime in this country comprises essentially identical rules in the federal court system and the courts of the two most populous states, NSW and Victoria.

On any view, it is a more plaintiff-friendly procedure than the class action rules found in the US.

First, the Australian class action procedure has no certification requirement -- that is, there is no threshold requirement that the proceedings be judicially certified as appropriate to be brought as a class action.

Once a class action has been commenced, it continues until finally resolved by judgment or settlement unless the defendant can convince the court to terminate the proceedings on certain limited grounds. Second, there is no requirement that common issues predominate over the individual issues.

In reality it is sufficient for the representative plaintiff to show there is at least one substantial common issue of fact or law.

It does not matter that the common issue or issues are insignificant when compared with the individual issues.

Third, the Australian rules, unlike those in the US, expressly allow for the determination of "sub-group" or even individual issues as part of a class action.

This means Australian courts have generally declined to discontinue a class action simply because it is more properly described as a mass of individual claims with some common connections.

The classic example of this type of action is one involving a drug or medical device. In the US, courts have been reluctant to allow such actions to proceed as class actions, given the unique issues of causation usually raised by individual class members.

As a consequence, an Australian representative plaintiff can commence a class action claiming damages for injuries allegedly suffered as a result of their use or exposure to an allegedly defective product -- for example, a drug or medical device.

This is despite the fact that there will be myriad individual facts and circumstances that must be taken into account before any individual group member can be found to be entitled to recover damages -- let alone determining the quantum of those damages.

Fourth, a representative plaintiff can define the class members by description.

This means that a person who meets the criteria set out in the class definition will be a class member unless they "opt out" of the proceedings.

Thus, a person may be a class member, and thus bound by the outcome of the proceedings, without their knowledge or consent simply on the basis that they fall within a class definition.

Australian courts have tried a number of class actions involving product liability claims to final judgment over the past few years.

These include class actions involving medical devices and pharmaceuticals.

In each case the trial proceeded by way of a trial of the representative plaintiff's claims by a judge sitting alone.

However, each of these trials only finally resolved the claims of the representative plaintiff.

In Courtney v Medtel Pty Limited & Others, for example, the court found in favour of the representative plaintiff and made an award of damages in his favour.

The parties where then faced with the prospect of either negotiating a "global settlement" or resolving each subsequent claim by way of a hearing or other method of adjudication.

Not surprisingly, a negotiated "global settlement" was achieved.

Two uniquely Australian initiatives have driven the growth of what is best described as the Australian "class action industry". These are the plaintiff law firms styled on their US counterparts -- a number of which now operate as publicly listed corporations -- and the recent emergence of the litigation funding enterprises.

Australian lawyers are prohibited from entering into contingency fee arrangements with their clients under which their professional fees are calculated by reference to the amount of any judgment or settlement received by the client.

However, the prohibition only applies to lawyers. Litigation funders are not so constrained, and have found a very profitable role in the class-action market.

Litigation funding agreements are commercial arrangements under which the funder agrees to pay the fees and out-of-pocket expenses of the lawyer representing the plaintiffs.

The funder will also agree to satisfy any adverse costs orders that may be made against an unsuccessful class plaintiff as a consequence of Australia's "loser pays" rule.

In return for accepting this risk, the funder will take a portion of any judgment or settlement, usually 30 to 40 percent, calculated after the cost of the proceedings have been reimbursed.

It has proved a popular enterprise -- particularly in light of the financial success of a series of shareholder-based class actions which delivered very significant profits to the litigation funders.

Australia is now home to a number of publicly listed litigation funders, as well as numerous private enterprises.

A number of overseas funders have also entered the domestic market.

Australian plaintiff law firms have combined with funders from the US and other jurisdictions to pursue claims, and principals associated with some of Australia's leading plaintiff lawyers have ventured into the litigation-funding business themselves as shareholders.

The impact of litigation funding on the class action industry has been profound, and the class-action landscape has moved well beyond anything imagined when the regime was introduced in 1992.

During the past 20 years, the subject matter of class actions has varied.

Although traditionally a forum for settling mass tort or product liability disputes, the start of the new millennium saw a trend towards class actions being commenced to settle shareholder and financial services disputes.

Some predicted that interest in product liability class actions would wane.

However, in the past few years Australia has seen a renaissance of product liability claims with recent filings focusing on medical devices and prescription medications. There are two potential reasons for this.

First, the major plaintiff firms and litigation funders have focused their attention on the shareholder and financial services claims and became the dominate players in that field. This has left a gap in the market for emerging firms to pursue product liability claims.

The upskilling of a greater number of firms in class action litigation has resulted in more claims being commenced by different plaintiff law firms.

Second, ongoing tort reform in Australia has continued to reduce the availability of personal injury, motor vehicle and industrial claims.

As a consequence, an increasing number of plaintiff lawyers, particularly the larger firms, have turned their attention to exploring product-based class actions.

The Australian class action industry is ever-expanding, some of its key players extending their interests to overseas jurisdictions.

For example, the leading litigation funder, IMF (Australia), is funding litigation commenced in a number of other jurisdictions. It has also established a wholly owned subsidiary, Bentham Capital, in New York.

Slater & Gordon, one of Australia's leading plaintiff law firms in the class action industry, and a publicly listed corporation, has also extended its reach in the international arena, purchasing a large plaintiff law firm in Britain.

As members of the Australian class action industry expand their international reach, there has been a corresponding increase in the presence of international participants in the local industry.

This may be due to the plaintiff-friendly regime.

It could also be attributed to developments in other jurisdictions, for example, the recent ruling of the Supreme Court of the US which limited the ability of non-US investors to pursue claims for compensation from foreign companies through the American legal system.

This has resulted in Goal Group, a London-based class action consultancy firm which recently opened an Australian office, to estimate that the income from class action settlements in Australia will reach $US3.4 billion ($3.7bn) annually by 2020.

There can be little doubt that the Australian class action industry will look to extend this new found foreign interest to products claims.

Class actions are still a (relatively) new feature of the Australian legal landscape, and are yet to see their full potential.

That said, the class action industry has matured rapidly over the past 20 years, and is now a significant feature on the Australian legal landscape. As class actions come of age in Australia, the country's courts have the potential to become the jurisdiction of choice outside the US for plaintiffs, lawyers and funders promoting class actions.

The potential implications of this for the global business community led to the US Chamber of Commerce's Institute for Legal Reform entering the debate in Australia earlier this year, arguing in favour of greater regulation of Australia's litigation funders as one way to curb the growth of the class action industry.

This is not something that will be resolved in the short term and manufacturers and distributors would be wise to follow developments in Australia closely.


This article was first published in The Australian, July 19 2013

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.