Class actions: what your business needs to know

Class actions in Australia have seen steady growth since the 2012 hearing of Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) [2012] FCA 1028. In this case, three councils brought proceedings on behalf of 72 other councils, charities, churches and not for profit groups, who collectively lost over $200 million from the collapse of Lehman Brothers.

Historically, more than half of all class actions in Australia have been brought by shareholders, generally against listed companies. Claims usually arise out of alleged misleading information from the companies to the market which directly affects the value of group members’ shareholding.

Recently, however, we have seen a shift toward more class actions relating to general commercial disputes. There are currently 113 active class actions in either the Federal Court of Australia or the Supreme Court of New South Wales.

Noting the shift towards class action litigation, in our opinion, it is important for directors, shareholders, small business owners and individuals to have an understanding of class actions; how they work, and more importantly, how they differ from other proceedings.

Why class actions are different

While similar to individually brought proceedings, class actions have several procedural differences which you should be aware of. They include:

1. Class members: There will be a class if the facts establish that the claims arise out of the same or similar related circumstances and those claims give rise to substantial common issues at law. At least seven group members are needed to make up a class.

2. Open or closed classes: The class action must be brought as either an ‘open’ or ‘closed’ class. In an open class, everyone is included unless they expressly opt out. In a closed class, each class member is known and potential parties must opt in to the proceedings.

3. Common issues: The issues complained of by the lead plaintiff must be common to each class member. The Court will need to determine that facts, acts, matters and circumstances are common in order to establish that liability can be proved on behalf of each class member, as opposed to just those members who lead evidence in the proceedings.

4. Litigation funding: Litigation funding of class actions is more common than in general commercial litigation. The terms of the funding arrangements are relevant, and the Court is often asked to make a ‘common fund’ order. This essentially results in each member of the class paying a proportion to the funder (from any settlement or judgment proceeds), whether they have entered into the agreement directly or not.

5. Approval of settlement: A settlement agreed to by the lead plaintiff (and often the litigation funder, who can generally elect to settle matters pursuant to the litigation funding agreement) needs to be approved by the Court if it is to be enforceable. This requires a balanced consideration of the competing interests of the funder, lead plaintiff and group members including how the settlement proceeds are to be divided between the group members.

With the above matters in mind, the approach to be taken to a class action will depend on whether you are defending such a claim or are looking to join one. Here are five tips to bear in mind in each case.

If you are named as a defendant in a class action claim

1. Buy time to investigate the matter properly and do not say or do anything that could be considered an admission of liability. Apart from helping a claimant’s case, such admissions can be a basis to void or limit the coverage of any relevant insurance policy.

2. Investigate the facts of the claim as early as possible to assess the nature and scope of the claim and potential exposure. Only then can you properly brief internal parties (including directors, shareholders and key employees), progress any insurance coverage, engage external lawyers to advise, contact any other defendants and consider how to manage internal HR and external PR matters.

3. Engage external lawyers early and take advice not just on the claim itself, but also on your insurance arrangements, how to manage any HR issues and in relation to any media and communications steps. It’s generally best to engage your lawyers for substantive investigations of the issues and to engage relevant service providers, so that privilege is maintained over any documents that are created in the process.

4. Notify your insurer of the claim and get a decision on policy coverage and indemnity as soon as you can. Involve your lawyers early in negotiations with your insurer to help resolve any issues around policy coverage, and to avoid the uncertainty, risk and cost of an indemnity dispute.

5. Take media and communications advice early so you have scripts ready for use in case of media or other queries. Identify your spokesperson (or people) who will deal with media and staff enquiries.

If you want to join a class action claim

1. Consider the direct financial ramifications of joining any class action. Also, carefully review your litigation funding agreement (if a funder is involved) to determine if there will be any liability if the proceedings are not successful (including liability for costs).

2. Consider non-financial ramifications, including criticisms that may be levelled if you elect not to proceed (despite minimal risk of adverse financial costs) and judgment is ordered in favour of other group members.

3. Review the definition of Group Member closely and discuss with key stakeholders of the business whether to proceed or not. Note that there are strict timelines to both ‘Opt In’ and ‘Opt Out’.

4. Seek independent legal advice regarding prospects of success and whether you should assist with providing evidence, should such a request be made by the solicitors acting for the group members.

5. Ensure that your media and communications consultants are kept up to date so scripts can be prepared in case of negative publicity as a result of deciding to join or not join the proceeding.
   
   

Authors: Gavin Stuart and Adam Cutri