As I have detailed in prior posts on this blog, securities class action litigation is well-established in Australia. According to a recent report from ISS Securities Class Action Services, securities class action litigation has grown “markedly” in the last ten years, to the point that outside North America, Australia “is the jurisdiction in which a corporation is most likely to find itself defending against a class action,” and indeed other than the U.S., Australia “is pulling ahead of almost all other countries in terms of active securities class action cases before the courts.” There are however important differences between the Australian and U.S. class action systems, and some of these difference post important challenges for both the courts and for litigants – and indeed have led to calls for reform. The October 23, 2018 report, entitled “Navigating the Australian Securities Class Action Landscape,” can be found here.
According to the report, the trend in the number of securities class actions increased each year between 2011 to the present. Indeed, in 2008, there were just six cases filed or investigated to be filed, whereas as of September 2018, there were already 22 cases being investigated to be filed or already filed. The report is careful to note that some of this apparent increase is attributable to the growing phenomenon of several cases being filed against the same defendant; however, as there currently is no mechanism under Australian procedures for the consolidation of these competing class actions, it makes sense to count each of the competing actions separately.
According to an interesting graphic in the report which shows the number of securities class action settlements in the past five years in seven jurisdictions outside the U.S. (Australia, Canada, Germany, Japan, Netherlands, Taiwan, and the United Kingdom), Australia, with 79, is almost even with Canada (80), and has the third-highest number of securities class action settlements, behind only Canada and the U.S. There are some other interesting details on the graphic, such as, for example, the Taiwan, with 75 settlements, is not far behind Canada and Australia, and that there have been 16 settlements in the U.S. in the last five years.
As the number of securities class actions has grown in Australia, so too has the aggregate amount of recoveries. According to the report, over the last ten years, settlements in class actions have exceeded $1 billion (including over half a billion in settlement disbursements in 2012 alone).
Because of these litigation statistics, and because Australia has an “opt out” class action system, there is a perception that the Australian system is like the U.S. system. However, there are important differences between the two systems. The report details several important differences.
Class Certification: In the U.S., in order for a class to be certified, claimants must satisfy four threshold requirements: numerosity, commonality, typicality, and adequacy. By contrast, Australia does not require any certification. The only requirement in order to commence an “representative proceeding” is that a claim must be brought by seven or more persons against the same person, and the claims must arise out of the same, similar or related circumstances. Because the criteria to initiate a representative proceeding are “not very hard to meet,” some claims are commenced “on little more than a wing and a prayer.” Also, as defendants intervene to argue that the litigation does not comply with pleading requirements, the case can become “mired in interlocutory applications that increase the cost and delay involved in representative proceedings.” Without these issues that can pop up intermittently as the case proceeds, cases in the U.S. can proceed toward settlement more quickly compared to Australia once a class has been certified.
Common Issues Compared to “Same, Similar or Related Circumstances: In the U.S., the system requires that questions of fact or law are common to the entire class, which allows the claims of all of the individual claimants to be resolved simultaneously. Australia requires only that the claims arise out of the same, similar or related circumstances. As a result, the initial trial in an Australian class action may only determine the representative’s claims and the common issues; individual claims may not be determined in the initial trial. These differences mean that a class action proceeding can last much longer in Australia compared to the U.S.
Costs and Fees: In the U.S., each party bears its own costs, and contingency fees are permitted. In Australia, by contrast, contingency fees are not permitted and “it is standard to have an adverse costs order where the unsuccessful party must pay the costs of the successful party in the action.” These restrictions in Australia “have given rise to the litigation funding structure that is so prevalent today.” Under this structure, the litigation funder, who is not subject to any restriction on the contingency fee arrangement, receives a percentage of the recovery. (I have detailed the rise of litigation funding in Australia in prior posts.)
Closed Classes: With the rise of litigation funding came the advent of “closed class” proceedings so that “free riders” could not join in recoveries in the proceedings. The problem was that under the “opt out” regime, claimants could wait until the common issues were settled and then register their claims without retaining the representative’s lawyers or entering a funding agreement with a litigation funder. In a “closed class” arrangement, the lawsuit mandates that only those claimants that have signed funding agreements with a specific funder and a retainer agreement with a specific law firm will be allowed to participate in the class action. These arrangements in effect “flip-flopped” the opt-out regime into an opt-in regime.
As courts tried to encourage litigants to proceed with an “open class” approach more in line with the objectives of the opt-out regime, they have tried a variety of approaches. As discussed here, in 2016, the Federal Court for the first time permitted a class action to proceed under a “common fund” order. A common fund order all group members, regardless of whether they have entered into a funding agreement, pay a funding commission to the litigation funder.
Competing Class Actions: The courts thought that in approving common fund orders, there were discouraging competing class actions; however, the paper notes, “they seem to have had the opposite effect,” as there has been a trend in Australia toward competing class actions. U.S. court procedures allow cases to be consolidated if they cover the same set of facts; Australia does not have the same consolidation procedures, which can allow for the possibility of multiple actions filed on behalf of the same set of claimants with respect to the same legal dispute. This possibility can lead to a race to the courthouse among prospective representatives. It can also mean that a defendant has to defend itself against the same types of claims multiple times; it can also mean multiple or overlapping recoveries.
According to the report, there have been a number of these competing class actions in recent years, including as many as nine in 2017 and as many as 4 so far in 2018. The report also shows that in the last ten years as many as nineteen separate securities class action defendant companies have faced at least two and in one instance as many as five competing class actions.
There are no set precedents on how courts are to deal with competing class actions, but the trend is that courts are allowing the competing cases to proceed. This puts prospective claimants in a dilemma as they may be forced to choose among competing class actions. The paper notes that in some instances the plaintiffs’ law firms involved, in order to avoid these kinds of problems, have agreed to enter collaborative arrangements so that they can have more control over the outcome. The paper details the consideration prospective claimants should take into account in choosing among competing class actions.
The report notes that because of the various uncertainties and procedural challenges involved with class action litigation in Australia, there have been “many calls for reform for the class action regime in Australia.” Perhaps, the report suggests, as courts and litigants become more experienced with the various obstacles, the courts and the various process participants can “develop more benchmarks or precedents to help guide a claimant in these murky waters.”
The reform initiatives mentioned in the paper are described in an October 18, 2018 memo from the Dentons law firm (here). The law firm memo also highlights an important difference between the Australian disclosure regime and the U.S. disclosure regime. The U.S. system is based on a requirement for public companies to make periodic disclosures, with the understanding that absent a duty to speak, companies have no disclosure obligation. Australian companies, by contrast, have a continuing disclosure obligation under with the companies must immediately disclose information a reasonable person would expect to have a material effect on the price or value of its securities. As part of the current reform discussion, one of the questions is whether the keep the continuing disclosure requirement, as it puts an enormous burden on companies and is subject to hindsight second-guessing.
One of the important practical consequences to Australian companies of the increase in securities class action litigation in Australia is that D&O insurance publicly traded Australian companies is now significantly more expensive than it was in the past; indeed, a number of D&O insurers have either left the Australia insurance market or significantly reduced their Australian capacity. Indeed, the recent scarcity of D&O insurance is cited as yet another factor in favor of reform of the Australian securities laws and class action procedures.
The Hayne Royal Commission investigation looking into improprieties in the financial services industry is even further roiling the D&O insurance marketplace and has also contributed to the rise of restrictions of policy terms and conditions.