Class actions 2013/2014 – developments and trends

Summary and outlook for class actions in 2014 It is a growth period for class action litigation in Australia. Australian corporations now face an unprecedented number of large class action proceedings commenced in Australian courts. Symbolic of this trend: Over the last 5 years, we have acted for defendants in class actions with a total claim value of more than $3 billion. In the last 2 years there have been close to $900 million of class action settlements in Australia The largest class action funder, Bentham IMF , is on track to achieve a funded litigation portfolio of $2 billion. At least 6 class action trials are due to occur in 2014 and another 5 potential actions have already been promoted by major funders or plaintiffs’ firms. Several US commentators have identified Australia as a pro-plaintiff legal environment that is emerging as perhaps the most attractive forum for class action litigation after the US. While the promoters of class actions have continued to focus on shareholder class action claims against Australian companies for breaches of the continuous disclosure regime under the Corporations Act 2001 (Cth) (Corporations Act), a range of developments over the last 12-18 months indicate that new horizons within the class action and funding industries are opening. In particular: There is a renewed interest in “mass consumer claims” spurred by actions such as the Bank Fees class actions funded by Bentham IMF . Promoters are looking to prosecute claims across large consumer bases where the use of standard contracts or uniform processes for imposing charges created the possibility for significant contractual claims against large Australian corporations. Threatened class actions against mobile telecommunication providers are likely to emerge this year adopting a similar approach. Large scale product liability class actions are being pursued, particularly in circumstances where medical or pharmaceutical devices are the subject of a global class action or mass tort proceedings which can be “mirrored” in Australia on behalf of local claimants. Australia’s propensity for significant natural disasters continues to set the context for major class action litigation, exemplified by the current and threatened class actions emerging out of major bushfire and flood events. New horizons for financial class action litigation are being explored, including more claims in relation to failed investment schemes, and the targeting of those responsible for insolvent investment vehicles in an effort to create class action opportunities in areas traditionally not exposed, including several claims against trustees of failed funds under the trustees provisions of the Corporations Act. The spectre of class action litigation continues to be a major topic in Australian boardrooms. It is also notable that of the seven class actions commenced in 2013 which are listed in 2(B) below, five were related to allegations of corporate non-disclosure. This underscores the need for corporate Australia to continue to be pro-active in managing continuous disclosure risk in the context of an ever-volatile market. At the same time as these developments unfold, the domestic regulatory environment for litigation funders and plaintiffs’ law firms appears on the verge of change. Repeated calls for greater regulation of the litigation funding industry were met with limited enthusiasm by the previous federal government, apparently on the basis that it was reluctant to stifle the growth of funders prepared to finance class action litigation in the interest of promoting notions of access to justice. However, recent comments by the new federal Attorney-General suggest that this situation is about to change. We have previously argued that third-party funders be required to hold a licence and maintain basic capital requirements, similar to promoters of managed investment schemes. Licensing is advantageous because a healthy funding industry requires promoters with sufficient assets to support the costs immunity they grant to claimants and to meet adverse costs orders should the class action fail. This is important because respondents are often faced with the high costs of defending the action but with limited recourse to recovering those expenses. Defendants of class actions recognise that security for costs awards only ever address a small fraction of the total costs and foreign funders may have no real asset presence in the jurisdiction. Equally important are the questions around the independence of funders, their lawyers and the claimants to whom they owe relevant duties. A licensing regime would address the potential conflicts of interest between (for example) a funder's commercial priorities in settling for a profitable sum and claimants' interests in proceeding to judgment. Alongside this development, we have seen some interesting attempts to introduce contingency fee-style arrangements in Australia, albeit with limited success. Claims Funding Australia, a funder linked to Maurice Blackburn, applied to the Federal Court for permission to partly fund the equine influenza class action and then withdrew its application a short time later in response to statements by the new federal Attorney-General regarding increased funding regulation. This summary of the class action environment is merely an overview of the complexity and controversy of this type of litigation and its continued growth in Australia. A number of these themes are explored in this report. We hope you find it useful and informative. HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 03 2 S napshot of class action proceedings in Australia for the years 2013/2014 (A) 2013 class action settlements Settlements which were reached in 2013 include: NAME am ount Weerite Pomborneit bushfire est. $10m Travel Agent Commiss ions* $37m + costs GPT $75m Thiess * not disclosed Abalone* not disclosed Permax not disclosed Lehman Bros est. $85m+ Storm Financial $82.5m Thalidomide $89m + costs *settlement reached with one respondent. (B) 2013 class actions commenced Some class actions which have been commenced in 2013 include: NAME na ture of claim court Australian Capital Reserve Breach of trustee’s duties Federal Court of Australia Allco Breach of continuous disclosure obligations Federal Court of Australia Grand Western Lodge Breach of Licence conditions and duty of care Federal Court of Australia Leighton Breach of continuous disclosure obligations and misleading and deceptive conduct Federal Court of Australia Leighton (no 2) Breach of continuous disclosure obligations Supreme Court of Victoria Treasury Wine Es tates Breach of continuous disclosure obligations Supreme Court of Victoria WorleyParsons Breach of continuous disclosure obligations Supreme Court of Victoria 04 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS (C) 2014 class action trials Class actions listed for trial during 2014 include: NAME DATE COURT Kilmore East bushfire class action Trial commenced on 4 March 2013 – due to complete in April 2014 Supreme Court of Victoria Appeals to the CPDOs class action 3 March 2014 Federal Court of Australia City Pacific class action 10 March 2014 Federal Court of Australia DePuy ASR Hip Implants class action 2 June 2014 Federal Court of Australia Murrindindi bushfire class action 6 October 2014 Supreme Court of Victoria Air Cargo class action 27 October 2014 Federal Court of Australia Timbercorp class action – the plaintiff has applied for special leave to appeal April – June 2014 High Court of Australia (D) 2014 Potential class actions to be issued Proposed class actions identified by either Maurice Blackburn, Slater & Gordon or Bentham IMF include: NAME NATUR E OF CLAIM New South Wales bushfires Negligence Perth Hills bushfires Negligence Brooklyn Park Olives Failed Managed Investment Scheme Newcrest Breach of continuous disclosure obligations and misleading and deceptive conduct Hastie Group Breach of continuous disclosure obligations and potential breach of directors duties 2 S napshot of class action proceedings in Australia for the years 2013/2014 HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 05 3 2013 settlement trends (A) Summary Some key points arising from settlements announced and/or approved by Australian courts in 2013 include: The Federal Court refused to approve two class action settlements in 2013 on the basis that they were not “fair and reasonable” and in the interests of group members as a whole. In the Storm Financial class action, the Full Federal Court considered that in determining whether a settlement scheme is fair and reasonable, a critical factor which a court will consider is whether advance notice has been given to group members of critical terms (such as the payment of a premium to group members who had contributed to funding the class action). In the GPT Management Holdings Limited class action, the Federal Court stressed the need for solicitors to put before the court all matters relevant to the court's consideration of the quantum of professional costs and disbursements, including claims by an applicant for compensation for the time or expenses incurred in prosecuting the proceeding on behalf of group members. In the Kilmore East bushfire class action, the Supreme Court of Victoria confirmed that court approval is required for a claim against one defendant to be dismissed with each party bearing their own costs. (B) T rends in settlements in 2013 Settlements failing to receive court approval Of note in 2013, there were two settlements which failed to receive court approval, one of which was a result of intervention by ASIC . The legislation requires court approval of any settlement or discontinuance of a class action. In determining whether to give approval, courts consider whether the settlement/discontinuance is fair and reasonable in the interests of group members as a whole. Storm Financial class action In August 2013, the Full Federal Court upheld an appeal by ASIC against the approval of the settlement of the Storm Financial class action by Logan J on 3 May 20131. The settlement that had been reached between the parties in March 2013 provided for the distribution of $82.5 million (including interest and costs) among approximately 1,050 group members. This was the first instance that: (1) a class action settlement in Australia has been overturned on appeal; and (2) A SIC intervened in the settlement of a class action. ASIC ’s appeal against the settlement approval concerned the way in which it was intended that the pool be distributed amongst group members. In upholding ASIC ’s appeal, the Full Federal Court held that the payment of a “Funders’ Premium” of 35% of the settlement pool to those group members who had contributed varying amounts to funding the class action (the Funding Group Members) was neither fair, nor reasonable. This was for two reasons, namely: (1) the inequality of the opportunity afforded to all group members to share in the Funders’ Premium on the terms offered to the Funding Group Members. The court found that although there were no differences between the merits of the claims of the Funding Group Members and group members who were unrepresented, there was a large disparity in the outcome; and (2) the calculation of the Funders’ Premium by reference to the success fees obtained by commercial litigation funders was not justifiable for a number of reasons, including that: (A) the prospect of the Funding Group Members claiming any premium for funding the litigation was not mentioned until at least two years after the litigation had commenced; (B) the Funding Group Members funded the litigation without any expectation that they would receive a premium; (C) the financial effect of the payment of the Funders’ Premium to the Funding Group Members was disproportionate; and (D) there was no rational or mathematical basis for the Funders’ Premium to be 35% of the settlement pool. Although the court did find that funding of class actions by group members themselves should be encouraged as an alternative to commercial litigation funders, it made it quite clear that the terms and conditions of this type of funding: should be clearly defined at the outset of the proceedings and made known to all group members; and will still be reviewed and scrutinised by courts when they are asked to approve any class action settlement. In December 2013, Logan J approved a revised settlement scheme (which, amongst other things , no longer included the Funders’ Premium). In deciding whether to approve the proposed revised scheme, Logan J took into account whether there had been advance notice to group members of particular aspects of the revised scheme, given that absence of notice was a significant factor in the Full Federal Court’s earlier decision to uphold the appeal. 1 ASIC v Richards [2013] FCAFC 89; Richards v Macquarie Bank Ltd (No 4) [2013] FCA 438. 06 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS Vioxx class action The Vioxx class action concerned claims for loss and damage allegedly arising from injuries suffered as a result of consumption of the anti-inflammatory medicine Vioxx. The Federal Court did not approve the proposed class action settlement.2 In May 2013, Jessup J found that: (1) the proposed settlement scheme did not adequately distinguish between the characteristics and medical histories of the group members; and (2) an advice from counsel as to whether the settlement was in the interests of the group members as a whole, rather than an affidavit put on by a Slater & Gordon solicitor, should have been provided to the court. The Slater & Gordon solicitor was not the ‘ideal person to be the source of assistance for the Court’ as his firm was a party to the settlement agreement and had a ‘very real interest in securing the settlement’. Costs and applicant's expenses – the need to put all matters relevant before the court In June 2013, in the GPT Management Holdings Limited class action, Gordon J refused to approve the quantum of professional costs and disbursements submitted by the applicant's solicitors ($9.34 million) on the basis that her Honour did not consider that the applicant's solicitors had put before the court all matters relevant to the court's consideration of the issue. Her Honour noted that: (1) the affidavit of the costs consultant engaged by the applicant's solicitors, inter alia, did not explain certain aspects of the methodology adopted by the costs consultant; (2) the applicant's solicitors had not explained why the amount claimed was substantially in excess of the estimated professional costs and disbursements that would be incurred as set out in the legal costs agreement entered into with most of the group members; and (3) she did not consider that the court had before it all matters relevant to the claim by the applicant for compensation for the time or expenses incurred by the applicant in prosecuting the proceeding on behalf of the group members. In November 2013, Gordon J approved amounts in respect of the applicant's solicitors' costs and disbursements ($8.56 million), and also the applicant's expenses claim, following an assessment by a court appointed registrar as to the reasonableness of the costs.3 Gordon J also indicated that, given the increasing number of class actions, it may be time for there to be a requirement that any legal costs agreement, or equivalent, between group members and a firm of solicitors should be approved by the court before it is binding on the group members. Court approval required for settlement of a particular claim, not just the entire proceeding The Kilmore East bushfire class action concerned the settlement of one particular claim against one defendant (the CFA ) on the basis that the claim be dismissed and each party bear their own costs. The CFA remained a defendant in relation to another claim. The court held that court approval was still necessary for settlement of a particular claim, and not just for settlement of the entire proceeding. The court noted that the settlement of the particular claim in that case could affect the interests of all group members and stated that it is plainly intended by the Supreme Court Act 1986 (Vic) that a court approval process protect group members.4 2 [2013] FCA 447. 3 Modtech Engineering Pty Limited v GPT Management Holdings Limited (No 2) [2013] FCA 1163. 4 Matthews v SPI Electricity Pty Ltd (Ruling No 16) [2013] VSC 74. 3 2013 settlement trends HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 07 4 T rends in litigation funding (A) Key developments during the year Productivity Commission – public inquiry into access to justice arrangements – litigation funding and class action procedures On 16 September 2013, the Productivity Commission released an issues paper in relation to its inquiry into Australia's system of civil dispute resolution, focussing on constraining costs and promoting access to justice and equality before the law. The inquiry will address, among other things, the extent to which litigation funding could lower the cost of civil dispute resolution, with specific reference to the following: (1) the risks posed by litigation funding arrangements, compared with the risks posed by contingent and other billing practices, and the regulatory responses required to manage these risks; (2) the benefits of litigation funding and areas of civil justice where the use of litigation funding would be appropriate; (3) whether litigation funding is encouraging a growth in litigation in some sectors, with a consequent adverse impact on access to justice for other litigants, and (4) whether firms are settling more cases due to the availability of litigation funding. The Productivity Commission will also consider the efficacy of class action procedures. The Productivity Commission is due to provide its draft report in April 2014 and its final report in September 2014. Exemptions for litigation funders As of 12 July 2013, litigation funders are not required to hold an Australian Financial Services Licence (AFSL). The Corporations Regulations 2001 (Cth) (Corporations Regulations) now exempt funders from the licensing, conduct and disclosure requirements in Chapter 7 of the Corporations Act. In order to rely on these exemptions, however, a funder has an obligation to maintain adequate arrangements, and follow certain procedures, for managing any conflicts of interest which may arise between the funder, lawyers and the funded parties (for instance, group members in a class action). ASIC guidance for litigation funders ASIC Regulatory Guide 248, entitled “Litigation schemes and proof of debt schemes: Managing conflicts of interest”, released on 22 April 2013, provides some guidance for funders as to how to comply with their obligation to maintain adequate arrangements and follow certain procedures for managing conflicts of interest. In order to satisfy the obligation, Regulatory Guide 248 indicates that a funder ought to be able to show, amongst other things, that it has written procedures for identifying and managing conflicts of interest and that those procedures are effectively implemented and regularly reviewed. These written procedures should deal with matters such as: how to effectively disclose conflicts of interest to members and prospective members; how to deal with situations in which the lawyer acts for both the funder and members; and how to deal with situations in which there is a pre-existing relationship between any of the funders, lawyers and members. (B) L itigation funders in Australia Key litigation funders remain: Bentham IMF Limited (formerly IMF (Australia) Limited) which is Australia’s largest funder; Hillcrest Litigation Services Limited; Argentum Centaur EI Funding Private Limited (UK based); Comprehensive Legal Funding LLC; International Litigation Funding Partners Pte Ltd (Singapore based); and Omni Bridgeway (Dutch based). A significant new funder is Claims Funding Australia Pty Ltd, which is owned by the principals of Maurice Blackburn. In light of Claims Funding Australia’s withdrawal from funding of the equine influenza class action, its continued operation in Australia is questionable. This is discussed further at 4(D) below. (C) R egulation of funding and possible changes Limited regulation – risks to defendants There has been limited regulation of litigation funding in Australia to date. This approach is reflective of the federal government’s apparent desire not to stifle the growth of litigation funding in Australia and thereby potentially limit access to justice for those who benefit from class actions. Consistent with this approach, the Corporations Regulations contain no capital adequacy requirements. This means that there is no obligation for litigation funders to have sufficient resources to meet, amongst other things, adverse costs orders imposed by courts. The Corporations Regulations therefore provide no prudential protection to defendants in class actions funded by litigation funders in recovering legal costs incurred in defending claims. This can be particularly problematic for defendants faced with class actions funded by foreign litigation funders with no meaningful asset presence in Australia. 08 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS Exemption from AFSL for litigation funders The question of regulatory control of litigation funders is a key issue, following the legislative amendments that took effect in July 2013, exempting litigation funders from the need to hold an AF SL (discussed above). In submissions to the Productivity Commission’s wider review on access to justice dated 18 November 2013, Australia’s largest litigation funder, IMF (Australia) Ltd (now Bentham IMF Limited) identified the need for further 'proportionate regulation' of litigation funders, addressing areas such as mandatory licencing under the AF SL regime, capital adequacy requirements, disclosure obligations and the funder’s duties to the court. In submissions to the Productivity Commission, Maurice Blackburn (associated with new funder Claims Funding Australia Pty Ltd) argue that regulation of litigation funding should aim to enhance competition and that competition will be increased if law firms are permitted to fund litigation either by way of the provision of funds to separate litigation funding vehicles or by means of contingency fees. They say that regulation should be kept to the minimum necessary to prevent significant and real prospects of abuse. New federal government’s approach? Recent media statements attributed to the federal Attorney-General, suggest that the Australian litigation funding industry is under “active review right now”. 5 Reportedly, Senator Brandis considers that regulation of funders is necessary: (1) in order to protect companies and unsophisticated consumers from opportunistic claims, and (2) to inhibit moral hazards and conflicts of interest. At the date of this publication the federal government has not announced any reform, however, given the Attorney-General’s comments, it seems likely that some form of regulation will be considered by the federal government. Any litigation funding reform may involve a review of: (1) prudential conditions that may need to be placed on funders in an effort to restrict speculative funding by third parties that do not have the capacity to meet adverse costs orders, particularly as certain active funders in the Australian market are offshore shelf entities with limited assets in the jurisdiction; and (2) current restrictions placed on legal practitioners from funding litigation, as, unlike third party litigation funders, legal practitioners have duties to the court which may prevent such conduct. The Attorney-General’s comments led to Maurice Blackburn’s withdrawal from funding of the equine influenza class action, discussed further below.6 It is possible that any proposed reforms may be included in the Productivity Commission’s wider review on access to justice. (D) C laims Funding Australia As mentioned, Claims Funding Australia Pty Ltd (CFA) is a new litigation funder owned by the principals of the plaintiff law firm Maurice Blackburn. CFA was proposing to co-fund the equine influenza class action (being run by Maurice Blackburn) with litigation funder, Argentum Centaur El Funding Private Limited (Argentum), pursuant to a co-funding agreement. CFA made an application to the Federal Court of Australia for orders as to whether it would be justified in providing funding to the applicant and some or all of the group members. The application was set down for hearing before the Full Federal Court on 24 and 25 February 2014. The Full Federal Court was asked to consider a number of issues including: (1) whether Maurice Blackburn’s interests in the funding arrangements between CFA , Argentum and the claimants would conflict with Maurice Blackburn’s duty of loyalty or its duties to the court as solicitors for the claimants; (2) whether Maurice Blackburn would contravene the prohibition against contingency fees under s 325 of the Legal Profession Act 2004 (NSW); and (3) whether Maurice Blackburn’s interest in the funding arrangements are against public policy or an abuse of process. Withdrawal of application In January 2014, the CFA withdrew its application stating that: “The new Commonwealth Attorney-General has plainly stated that he is proposing to introduce further regulation of litigation funding and that he is strongly opposed to litigation funding companies, that are owned by the principals of law firms, funding lawsuits in which that law firm represents the claimants. In these circumstances it seems likely that even if court approval were obtained the co-funding arrangement will be prohibited by regulation". 5 M erritt C., “Attorney-General George Brandis wrong on funders: Mark Dreyfus”, The Australian, 15 November 2013. 6 M aurice Blackburn update at http://www.mauriceblackburn.com.au/areas-of-practice/class-actions/current-class-actions/equine-influenza-class-action/ update-on-funding-of-equine-influenza-class-action.aspx 4 T rends in litigation funding HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 09 Implications if CFA had been permitted to fund the equine influenza class action If CFA had proceeded with its application and been allowed to fund the equine influenza class action: (1) it would have changed the funding landscape as lawyers would be able to establish a funding arrangement with their clients which does not trigger the prohibition against contingency fees; (2) it may have seen the development of new relationships in the funding market; and (3) it may have causes an increase in competition in the funding market. It will be interesting to see if the federal Attorney-General introduces some form of regulation in 2014 to prevent law firms funding litigation in which they act and whether the question of contingency fees will be revisited. 4 T rends in litigation funding 10 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS 5 K ey legal developments during the year (A) Ca se updates (1) Australian thalidomide class actions Background Two representative proceedings were issued in the Supreme Court of Victoria in 2010 and 2011 claiming damages in relation to the drug ‘thalidomide’ which was distributed in Australia and New Zealand in 1960 and 1961. These proceedings were brought almost 50 years after distribution of thalidomide to the public ceased at the end of 1961. The first proceeding (Robbins proceeding) was issued in 2010 and the second proceeding (Rowe proceeding) in 2011. The proceedings were brought against Grünenthal GmbH (a German domiciled company which had manufactured the drug) and the Distillers Company (Biochemicals) Ltd and Diageo Scotland Limited (Distillers defendants) (UK based companies involved in distributing the drug). The plaintiffs were represented by Gordon Legal and Slater & Gordon. The proceedings were issued on behalf of persons: (A) born in New Zealand and Australia in the period 1 January 1958 to 31 December 1970; and (B) whose mothers consumed the drug thalidomide whilst pregnant with them; and (C) who had suffered since birth from one or more birth malformations. The Robbins proceeding related to persons born in New Zealand and the Rowe proceeding related to persons born in Australia. Settlement A confidential settlement (which was approved by the court) was reached by the Distillers defendants with the lead plaintiff in the Rowe proceeding on 18 July 2012. As a consequence, a confidential process was put in place to permit the Distillers defendants to review the claims of all claimants in the class actions. To permit this to occur all parties agreed not to take any step in either proceeding towards a trial of the issues before 31 August 2013 (a period of more than 12 months) or such later date as agreed by the parties. Following the approval, the class of claimants in the Rowe proceeding was closed. The plaintiffs and the Distillers defendants announced to the court on 2 December 2013 that a settlement of both class actions had been reached between them (but not Grünenthal). The settlement was approved on 7 February 2014. The settlement provides for a payment of $89 million by the Distillers defendants without admission of liability. The class of claimants in the Robbins proceeding was closed prior to the approval hearing on 7 February 2014. (2) Abalone class action7 In a decision handed down on 7 November 2013, the Supreme Court of Victoria found that the State of Victoria did not owe a duty to take reasonable care to protect the plaintiff from economic loss. It also found there to be a failure to establish breach of duty and causation. A compromise had been reached between the plaintiff and the second defendant on 18 September 2013. Background The plaintiff brought proceedings on behalf of a closed class, with all group members being identified by name. The plaintiff claimed damages for loss of income suffered by it by reason of diminished availability for commercial harvesting of abalone. The plaintiff claimed the State of Victoria was vicariously liable by the actions of the Minister for Agriculture, the Secretary to the Department of Primary Industries, the Chief Veterinary Officer of the State of Victoria and the Executive Director of Fisheries Victoria) (together the State tortfeasors) for various breaches of duty in relation to the outbreak of an infectious herpes-like virus which affected wild abalone off the coast of Victoria. The plaintiff’s case was that the State tortfeasors owed the plaintiff a duty of care, basing the action on McHugh J’s characterisation of Pyrenees Shire Counsel v Day8 ((Pyrenees) in Graham Barclay Oysters Pty Ltd v Ryan9 (Graham Barclay Oysters). Duty of care Beach JA found that the State tortfeasors did not owe a duty of care to the plaintiff to protect it from economic loss. The primary reasoning was that a duty should not be imposed in circumstances where the State may owe inconsistent, conflicting duties and indeterminate obligations to, inter alia, members of the relevant class. In addition, it was said that the potential liability of the State tortfeasors would be disproportionate to any fault that might be attributed to them, in preferring the interests of one group over another. His Honour noted that Pyrenees stands as the authority for the proposition that when statutory powers are conferred and exercised, they must be exercised with reasonable care. This is distinct from cases such as this, where there is a complaint that the power itself was not exercised. The approach of the High Court in Modbury Triangle10 was preferred, being that, by reason only of the fact that the State tortfeasors had caused investigations to be undertaken and had the capacity to decide whether or not to exercise a statutory power 7 Regent Holdings v State of Victoria [2013] VSC 601. 8 1998) 192 CLR 330. 9 (2002) 211 CLR 540. 10 [2000] HCA 61. HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 11 did not mean the State assumed a responsibility to protect anyone who might have suffered loss. In addition, in Sullivan v Moody,11 the High Court said that if a suggested duty of care would give rise to inconsistent obligations, that would ordinarily be a reason for denying that a duty of care exists. Where a public authority or its officers are charged with exercising powers in the public interest or in the interests of a specified class of persons, the law would not ordinarily subject them to a duty to have regard to the interest of another class of persons. Application of the Wrongs Act In its defence, the State relied upon ss 48, 83 and 85 of the Wrongs Act 1958 (Wrongs Act). Beach JA found that the Wrongs Act had no application in the present case, as the question of whether any of the State tortfeasors owed a duty of care alleged is to be determined with reference to the common law principles discussed above. Conclusion Beach JA found that the plaintiff failed to establish that any of the State tortfeasors owed a duty to take reasonable care to protect the plaintiff from economic loss. In addition, the plaintiff was unable to demonstrate causation or breach. (3) Victorian Kilmore bushfire class action Update The long running trial of the Kilmore class action commenced on 4 March 2013 in the Supreme Court of Victoria. During 2013, the court sat for 145 days and heard evidence from more than 60 witnesses, including 10 experts. The Kilmore class action concerns the largest and most devastating of the Black Saturday bushfires. The fire commenced in Kilmore East on 7 February 2009 and spread through a number of towns including Kinglake. The fire caused 119 deaths and damaged or destroyed more than 1,700 properties. The plaintiff is pursing the action against SP AusNet, Utility Services Corporation, the Secretary to the Department of Environment and Primary Industries, the Country Fire Authority and the State of Victoria. The expert evidence in the Kilmore class action is complex. To date there have been more than a dozen expert witness conclave meetings and the concurrent evidence session concerning one aspect of the expert evidence occupied 4 weeks of the trial. That concurrent evidence session was attended by 10 experts and the court sat with 2 assessors, whose primary role was to assist the court in understanding the evidence of the experts. The remaining expert evidence will be heard in 2014. The trial is expected to conclude in May 2014. (4) Victorian Kilmore Bushfire class action – rulings of interest During 2013 the Supreme Court of Victoria delivered 29 published rulings in the Kilmore class action. Among these were rulings concerning questions regarding: (A) whether or not the trial ought to be streamed live on the internet; (B) the appointment and role of assessors to assist the Court; and (C) whether or not insurers ought to provide security for the plaintiff’s costs. Live streaming of trial on the internet The opening submissions of the Kilmore class action trial were streamed live to the public via the internet. In Matthews v SPI Electricity (Ruling No 14)12 Forrest J explained his reasons for permitting the broadcast of the remainder of the trial via live streaming to group members and their immediate families. Central to that reasoning was the principle of open justice and in particular the need to facilitate access to the trial by those persons affected by the proceedings who live in country Victoria and are unable to travel to Melbourne on a regular basis. Appointment of assessors The complexity of certain of the expert evidence also gave rise to a decision by the Court to appoint two independent experts to sit with the judge during the trial. The options available to the court when considering complex scientific evidence include referral of particular issues to be determined by a special referee, or appointment of an assessor. The former determines the issue on his or her own in a hearing separate from the trial, the latter sits with and provides assistance to the judge during the trial. In his consideration of these options in Matthews v SPI Electricity (Ruling No 19)13, among other things, Forrest J highlighted the significance of the evidence concerned to the determination of the case and the likely mix of legal and factual matters expected to arise during the concurrent evidence session. Ultimately, his Honour determined that in the circumstances, referral to a special referee was inappropriate and the appointment of two assessors was the preferable course. 11 (2001) 207 CLR 562. 12 [2013] VSC 37. 13 [2013] VSC 180. 5 K ey legal developments during the year 12 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS In a subsequent ruling his Honour clarified the role the two assessors would perform during the concurrent evidence session.14 His Honour explained that the role was one to: assist the judge, with the final decision remaining that of the judge; ask questions of experts or Counsel to seek clarification of the evidence; consult with the judge both within court and outside the confines of the courtroom regarding the evidence as well as scientific concepts or technical matters underpinning that evidence; and provide the judge with non-binding advice from time to time on particular issues in respect of which there may be disagreement among the experts. Application for security for costs against plaintiff’s insurers The third of the bushfires rulings of interest concerned an application by SP AusNet to seek security for certain of its costs of the proceeding. 15 That application was primarily focussed upon seeking security from those insurers who seek to benefit from the conduct of the proceeding by the named lead plaintiff, certain of whom had also provided limited funding of the plaintiff’s costs. Ultimately the application was dismissed. Whilst the court considered there was power to order costs against insurers, it did not need to make an order of the kind requested on the basis of discretionary reasons. This is considered more fully at 5(c)(2) below. (5) Timbercorp Background In October 2013, the Victorian Court of Appeal dismissed the plaintiff’s appeal against Timbercorp Securities Ltd (in Liquidation) (Timbercorp Securities), three directors of Timbercorp Securities; and Timbercorp Finance Limited (in Liquidation) (Timbercorp Finance) (together, the Defendants) 16. In doing so, the Court upheld the trial judge’s decision which found in favour of the Defendants on all points. Timbercorp Securities was the responsible entity of 33 Australian registered forestry and horticultural managed investment schemes (Schemes). Timbercorp Finance offered finance to investors to invest, and to pay ongoing management fees, in the Schemes. In 2009, the Timbercorp group of companies collapsed at which time Timbercorp Finance had almost $477.8 million in outstanding loans. The plaintiff commenced group proceedings on behalf of all persons or entities who were “retail clients” that held or acquired interests in one or more of the Schemes. Key allegation – significant risks were not disclosed The plaintiff sought, among other things, declarations that: (A) the product disclosure statement (PDS) of each of the Schemes was defective on the basis that they did not disclose information about certain risks. The plaintiff contended that information about those risks should have been disclosed as “significant risks”, or risks that might have had a material influence on a retail investor’s decision to invest, in breach of disclosure obligations under the Corporations Act and the failure to do so, meant that the PD Ss were defective and therefore invalid; (B) the PD Ss and certain declarations by the Directors in Scheme financial reports contained false or misleading statements or representations entitling investors to avoid their investment in Schemes or to damages under the Corporations Act, the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Fair Trading Act 1999 (Vic) (FTA); and (C) as a consequence of Timbercorp Finance’s knowledge of and participation in the above breaches of the Corporations Act, the ASIC Act and the FTA by Timbercorp Securities, the relevant loans ought to be avoided ab initio. Both at first instance, and on appeal, all claims were dismissed with costs. Key issue: “significant risk” The key issue at first instance and on appeal was the correct construction of “significant risk” in the Corporations Act. The trial judge17 and the Appeal Court both rejected the plaintiff’s argument that as long as a particular risk might have significant or material consequences to an investor in a scheme, and was not remote or seriously unlikely, it was a “significant risk” for the purposes of the Corporations Act’s disclosure regime and is required to be disclosed in a PD S. The Appeal Court found that the concept of “significant risk” in the Corporations Act’s disclosure regime: (A) involved a consideration of a “range of issues”; (B) is “intended to be a flexible requirement tailored to the type of product involved and its particular circumstances”; (C) “amongst the constellation of issues in weighing ‘significant risk’, there is the probability of the occurrence, the degree of impact upon investors, the nature of the particular product and the profile of the investors together with other matters”; and 14 Matthews v SPI Electricity (Ruling No 32) [2013] VSC 630. 15 Matthews v SPI Electricity Pty Ltd & Ors (No 9) [2013] VSC 671. 16 [2013] VSCA 284. 17 Judd J – [2011] VSC 427. 5 K ey legal developments during the year HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 13 (D) the Appeal Court noted that “the constellation or group of issues is not closed and will vary depending upon particular circumstances”, such as the profiles of the investors to whom the product is marketed, the way in which the product is promoted, sold and distributed, and in some cases, the information that is publicly available. Application for special leave to appeal The plaintiff has filed an application for special leave to appeal to the High Court of Australia. The proper construction of “significant risk” is central to that application. The application is likely to be heard between April and June 2014. (6) Bank fees class action On 5 February 2014, Gordon J handed down her judgment in Paciocco v ANZ18 finding that late payment fees levied by AN Z on credit card accounts were penalties at both common law and in equity and were therefore unenforceable. The balance of the fees (being honour, over-limit and dishonour fees) were not held to be penalties. This is the first of several similar actions being prosecuted by Maurice Blackburn and funded by Financial Redress Pty Ltd (a subsidiary of Bentham IMF (Australia) Ltd) against CBA, Westpac (and its subsidiaries), NA B, Bankwest and Citigroup. Background On 22 September 2010, Maurice Blackburn commenced the first bank fees class action against AN Z alleging that a number of the fees charged by AN Z were penalties. A key issue in that proceeding (and one which Gordon J ultimately ruled against) was whether certain fees could rightly be classified as penalties if the penalties were not payable as a result of a breach of contract. In 2012, this issue was considered by the High Court which removed the necessity to demonstrate a breach of contract. Following the High Court’s decision, a new representative action was commenced against AN Z in 2013. Similar class actions have been commenced against other Australian banks. Judgment Gordon J ruled that late payment fees charged by AN Z on credit card accounts were either: contingent upon a breach of contract, being the failure of the customer to make a minimum payment by a certain date; or collateral (or accessory) to the primary stipulation that a customer was to make payment by a particular date. Her Honour further held that the late payment fees were extravagant, exorbitant and unconscionable and therefore constituted a penalty at common law and in equity. AN Zs defences as to the bases for the costs (such as increased provisioning and requirements for regulatory capital) were found to be insufficient. In contrast, the balance of the fees (honour, over-limit and dishonour fees) did not constitute penalties as they were not contingent on a breach of contract or collateral to the primary stipulation. They were held to be of a different nature, being driven by requests from the customer for extensions of finance and the consideration of those requests by AN Z. The service then provided, being the approval or rejection of these requests, justified the basis for the charging of the fees. Further claims that these fees were unconscionable, unjust or unfair were rejected. Limitation Periods As part of its defence, ANZ raised limitation arguments in respect of penalties incurred more than 6 years prior to the commencement of the proceeding. In opposition, the plaintiff submitted, among other things, that he should be entitled to rely upon principles under s27 of the Limitation of Actions Act 1958 (Vic) that extend limitation periods as a result of a mistake (in this case, being his belief that ANZ was entitled to charge certain exception fees and he was obliged to pay them). Her Honour ultimately ruled that such a mistake was applicable to s27. As a consequence the limitation period only began to run at the commencement of the original ANZ proceedings (being 22 September 2010). Next steps It is highly likely that both parties will appeal aspects of the judgment. In a statement by Bentham IMF on 5 February 2014, late payments fees were said to constitute 25% of all of the value of the claims (except for the claim against Citigroup for which the late payment fees are alleged to be higher). Based on estimates provided by Bentham IMF in December 2013, that could equate to damages of $65.5m for the late payment fees (out of an alleged total claim size of $243m). At the forefront of the plaintiff’s (and funder’s) minds therefore, will be a consideration of whether they should appeal Her Honour’s ruling in respect of the fees that were rejected as constituting penalties. The other banks involved in bank fees class actions will also be considering the implication of this ruling on the cases brought against each of them and whether their defences can be distinguished from those which AN Z was unsuccessful in running. 18 [2014] FCA 35. 5 K ey legal developments during the year 14 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS (B) S ecurity for costs: a turning point 2013 also saw two significant judgments in relation to security for costs in class actions. (1) Willmott Forests class action The first is the decision of the Full Federal Court of Australia (Allsop CJ, Jessup and Middleton JJ) in Madgwick v Kelly19, which overturned the first instance decision of Murphy J in Kelly v Willmott Forests Ltd (in liquidation)20. In summary, the Full Federal Court ordered the applicants in three related class actions to provide security for the costs of the respondents. The decision is significant as it is the first occasion that an Australian court has ordered applicants that are individuals, without backing from litigation funders, to provide security for the costs of the respondents. Background Three representative proceedings were commenced in the Federal Court on behalf of investors in failed forestry plantation schemes promoted by Willmott Forests Ltd. Each of the respondents to the proceedings brought an application for orders that the applicants provide security for their costs. The applicants opposed the applications on the basis that, if security was ordered, it would stifle the litigation. Murphy J refused the applications. The Full Federal Court overturned the first instance decision. Some of the factors that the court took into account in reaching its conclusion are discussed below. Evidence of willingness or ability to contribute to security The court’s decision highlights the types of evidence that the court will consider in relation to the question of whether an order for security for costs would stifle the proceeding. It demonstrates that applicants must provide evidence of the financial circumstances (such as assets) of those persons who stand to benefit from the proceedings in determining those persons’ ability to contribute to security. As Jessup J emphasised, such evidence is necessary to enable the court to objectively assess such persons’ ability to contribute to security. The court confirmed that the unwillingness of persons who stand to benefit from the proceedings to contribute to security for costs is of relevance, though not in itself determinative. The reasonableness of any unwillingness must also be considered. Availability of litigation funding The court held that the availability of litigation funding is relevant to whether the litigation is likely to be stifled by an order for security. The court held that, in the absence of evidence of the availability of litigation funding, it is not possible to hold that the provision of security would stifle the proceedings. Allsop CJ and Middleton J warned, however, that they should not be taken as promoting a rule that applicants should always seek to obtain litigation funding to avoid an order for security. Lawyers acting under conditional costs agreements The court also considered whether the applicants’ solicitors were ‘standing behind’ the applicants or would benefit from a successful outcome, such that they could be taken into account as persons being reasonably required to contribute to a fund to service the respondents’ costs. The applicants’ solicitors were acting pursuant to a conditional costs agreement and the respondents had argued before the primary judge that the applicants’ solicitors therefore stood behind the litigation or stood to benefit from the litigation. Both the primary judge and the Full Court rejected the respondents’ argument. The Full Court affirmed the primary judge’s finding that a lawyer acting under a conditional costs agreement should be distinguished from a litigation funder and should not be required to contribute to a fund for the costs of the other side of the litigation. Balancing the competing policy considerations The court held that the primary judge erred by: (A) failing to engage in the balancing exercise between the policy of s 43(1A) of the Federal Court of Australia Act 1976 (Cth) (FCA) (that is, the immunity of group members from a costs order), and the risks of injustice to a respondent in having no real capacity to recover the costs of successfully defending the litigation; and (B) wrongly concluding that an order for security would undermine the costs protection provided to group members under s 43(1A) of the FCA . The court remitted the matter to the primary judge to fix the amount and form of security. Allsop CJ and Middleton J held, amongst other things, that: (A) it was fair that the group members standing to benefit from the proceedings make a real, but not oppressive, contribution to a pool of funds for security; (B) the most obviously fair and appropriate approach would be to calculate each group member’s contribution rateably by reference to their investment in the schemes; and (C) there would be a need in setting the amount of security not to risk stifling the proceedings. Reconsideration by Murphy J Murphy J considered the quantum and staging of security in Kelly v Willmott Forests Ltd (in liquidation) (No 2)21. On 5 August 2013, his Honour made orders, amongst other things, establishing a procedure for notifying group members that the court intended to fix security for costs in the sum of $6.58 million (the amount requested by the 19 [2013] FCAFC 61. 20 [2012] FCA 1446. 21 [2013] FCA 732. 5 K ey legal developments during the year HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 15 respondents) payable in three stages and for seeking information from group members which may be relevant to ascertaining whether that proposed order for security may stultify the proceeding. This evidence was received by the court on 4 October 2013. On 14 February 2014, his Honour published his reasons for decision fixing the quantum of security to be provided by the applicants22: In summary, his Honour: (A) declined to make orders fixing security in the sum of $6.58 million (as sought by the respondents) on the basis that such an amount is highly likely to stultify the proceedings; (B) ordered that, at this stage, security of $1.73 million be provided within 28 days. If the security is not provided the proceedings will continue to be stayed without further order. The amount of $1.73 million is the figure that “known group members” pledged to contribute towards security in response to circulars sent out to all group members by the applicants’ solicitors following orders made by Murphy J in August 2013. In his Honour’s view, if he were to presently order security greater than $1.73 million a real injustice would be done to those applicants and group members who: ––have contributed to security; or ––are financially unable or reasonably unwilling to do so; (C) was mindful of this potential injustice. He noted that if security for costs must be assessed by reference to the failure of unidentified group members to respond to circulars ordered by the Court, it would be difficult, if not impossible, for an applicant to avoid an action being stayed. Murphy J saw this as a new problem in Australian class action jurisprudence following the decision of the Full Court in Madgwick. His Honour stated that he considered that to balance the respondents’ legitimate concern to obtain some security for costs against the risk of stultifying the proceedings, the better approach is to “winnow the class down”; and (D) intends to revisit the quantum of security after: ––opt out and class closure has occurred; and ––the solicitors for the applicants have sent further correspondence seeking contributions, or further contributions, from group members with large investments in the failed forestry plantation schemes. The proceedings have been relisted for further directions on 7 March 2014 (2) M atthews v SPI Electricity Pty Ltd & Ors (No 9) The second significant judgment in relation to security for costs in class actions is the decision of Derham AsJ in Matthews v SPI Electricity Pty Ltd & Ors (No 9)23, in respect of an application by SPI Electricity Pty Ltd (SPI) for orders that the group members’ insurers (Insurers), or alternatively the plaintiff, provide security to SPI for third party disbursements incurred by SPI from 28 March 2013 to the conclusion of the trial of the common questions. This summary considers only the application for security from the Insurers. In summary, his Honour held that: (A) without needing to reach a final view, the power existed to make an order for costs against the Insurers; and (B) the proceeding before the court was not an appropriate case for the court to exercise its discretion to make such an order. Background As mentioned above, the trial of the proceeding commenced in the Victorian Supreme Court before Forrest J on 4 March 2013 seeking damages for personal injuries, property damage and economic loss suffered as a result of the Kilmore East bushfire. There is significant participation of Australian insurers in the Kilmore class action. In the context of an application to close the class, Counsel for the plaintiff advised the court that over 5,000 group members had made an insurance claim in relation to losses sustained as a result of the Kilmore East fire.24 Twenty-four insurers were named as respondents to the security for costs application. Certain of the insurers had also provided limited funding of the plaintiff’s costs. Power to award security for costs against the Insurers The Insurers contested the power to make an order for security for costs against them. It was submitted that the Insurers stand in the shoes of the group members and that a costs order against the Insurers would be the same as an order against the group members which was prohibited, subject to some exceptions, by s 33ZD of the Supreme Court Act 1986 (Vic) (SCA). Derham AsJ distinguished the funding of costs by certain of the Insurers from the position of a traditional litigation funder on the basis that the latter does so for profit. His Honour also identified the difficulties associated with identifying potential consequences for the trial if security were ordered but not paid. At the time the security for costs application had been made, the trial of the proceeding was underway. In his Honour’s view, “[t]here could be no stopping the trial, the biggest in the history of litigation in this State, that had been planned 22 Kelly v Willmott Forest Ltd (in liq) (No 3) [2014] FCA 78. 23 [2013] VSC 671. 24 Matthews v SPI Electricity (Ruling No 13) [2013] VSC 17 at [80(g)]. 5 K ey legal developments during the year 16 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS and prepared for nearly three years, and for which a special Court Room had been constructed in the William Cooper Centre.”25 Ultimately Derham AsJ dismissed the application. In summary, his Honour concluded, without needing to reach a final view, that the power conferred by s 24 of the SCA to make orders for costs against a non-party is not curtailed by s 33ZD of the SCA and the power existed to make an order for costs against the Insurers. Derham AsJ considered that he did not need to come to a final view in relation to this issue because even if the power did exist, he would not have exercised his discretion to make the order. This was because there was no suggestion of any risk that the Insurers would be unable to meet a costs order made against them at the conclusion of the trial. (C) Access to foreign documents As companies face a landscape of growing multi-jurisdictional litigation, access to documents in other courts may become an increasingly important issue. The following case, which dealt with such a request in 2013 indicates that the Federal Court may be reluctant to make orders simply to facilitate access to documents used in foreign proceedings where the legal principles or other judicial considerations particular to the case differ on the relevant issue. (1) ASR hip implant class action The ASR hip implant class action is set to be heard by the Federal Court of Australia in June 2014. The applicants are claiming compensation on their own behalf and on behalf of group members for alleged loss and harm suffered as a result of allegedly defective hip implants. The respondents are DePuy International Limited (DePuy), who manufactured the implants, and Johnson & Johnson Medical Pty Ltd (JJM), who distributed the products in Australia. In deciding an interlocutory application in December 2013, the Federal Court of Australia refused to make an order which would have allowed the applicants to access documents prepared for and used in equivalent litigation in the United States. Background In July 2013, the first applicant made an application in US proceedings relating to the ASR hip implants seeking access to transcripts of depositions of some of the respondents’ witnesses in the US proceedings (US deposition material). Some of the documents sought are the subject of a confidentiality order made by Katz J in the US proceedings (Protected Documents). Katz J had indicated that he could not make an order in favour of the first applicant for access to the US deposition material unless there was an order made by the Federal Court in Australia to the same effect as the US confidentiality order. Therefore, to obtain access to the US deposition material, the first applicant brought an interlocutory application in the Federal Court of Australia seeking a suppression order (to prohibit or restrict disclosure of information) in terms reflecting the US order, on the basis that the Australian order was “necessary to prevent prejudice to the proper administration of justice”.26 Decision of the Federal Court On 5 December 2013, the Federal Court handed down its judgment refusing to make the orders sought for the reasons set out below27. This effectively prevented the applicant from accessing the US deposition material. Necessity Robertson J in the Federal Court found that the first applicant did not show requisite “necessity” as: 1 she did not provide evidence of any specific prejudice which might flow from the disclosure of the US deposition material; 2 she did not provide any evidence that the US deposition material was designated as ‘Protected Documents’ due to commercial confidentiality or the protection of trade secrets; and 3 the mere fact that the documents sought were kept confidential in the US proceedings did not establish that a suppression order was necessary. This finding reaffirms that the word “necessary” in s 37AG of the Federal Court Act presents a high threshold and it was insufficient that a proposed order is merely convenient, reasonable, sensible or that is serves some notion of the public interest.28 Lack of fit and congruence His Honour also considered several inconsistencies between the confidentiality regime in the US proceedings and the orders that were sought in the Federal Court in Australia. His Honour noted that the designation of particular documents as confidential in the US proceedings was intended solely to facilitate prompt discovery and preparation for the US trial, rather than being evidence that a document is objectively confidential. Because of this “lack of fit and congruence” it was difficult for the applicant to show on the facts that the proposed order was necessary to prevent prejudice to the proper administration of justice. 25 Matthews v SPI Electricity (Ruling No 9) [2013] VSC 671 at [126]. 26 Federal Court of Australia Act 1976 (Cth), s 37AG (1)(a). 27 Stanford v Depuy International Ltd [2013] FCA 1304. 28 Hogan v Australian Crime Commission (2010) 240 CLR 651 at [30]-[31]. 5 K ey legal developments during the year HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 17 His Honour also had difficulty in making a court order described as a ‘confidentiality agreement’ where there was in fact no agreement between the parties to the current Australian proceedings. The applicant was also in an unusual position as she did not know the content of the deposition material, and furthermore did not have the primary interest in retaining the confidentiality of the US deposition materials (the concerns over the confidentiality of the documents lay with DePuy and JJM). Ground of abuse of process The respondents had also submitted that the application was an abuse of process as it sought to circumvent the discovery process in the Australia proceeding and that the only purpose was to obtain the US documents. However, given his finding that the applicant had not shown that the suppression order was necessary, Robertson J did not find it necessary to address this ground. (2) N AB shareholder class action The decision of the Supreme Court of Victoria in the NA B shareholder class action in late 201229 also gives some guidance on the approach of Australian courts to the relationship between domestic and foreign proceedings. In September 2012, the plaintiffs in that case sought to gather evidence by deposing certain individuals in the District Court of New York, including current and former NA B employees. NA B successfully obtained an anti-suit injunction, preventing the plaintiffs from pursuing or participating in the US deposition proceeding. Factors which the court considered significant in granting the injunction included: (A) the proposed US depositions were to occur immediately before or during the class action trial; and (B) allowing the use of depositions would alter the consequence of orders made in the management of the Victorian class action proceeding. This decision indicates that defendants can restrain plaintiffs from initiating or partaking in foreign proceedings if it can be shown that those foreign proceedings could interfere with the proper conduct of the domestic case. 29 Pathway Investments Pty Ltd. v NAB Ltd [2012] VSC 495. 5 K ey legal developments during the year 18 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS 6 L egislative reforms (A) Western Australia The Law Reform Commission of Western Australia is currently finalising its report as to whether reform is required in respect of the principles, practices and procedures pertaining to representative proceedings in Western Australia, and if so, in what manner. ‘Act-based’ representative regimes currently exist in the federal jurisdiction, in addition to the New South Wales and Victorian jurisdictions, whereas the Western Australian regime is ‘rules-based’, coming under Order 18 Rule 12 of the Rules of the Supreme Court 1971 (WA). Both the Law Council of Australia and the Law Society of Western Australia have endorsed the introduction of an act-based regime in Western Australia in their submissions to the Commission. The final report of the Commission is due to be released early in 2014. (B) C ontingency fees – UK and Australia During the latter half of 2013, there was an increased focus on the current prohibition on contingent billing in all Australian states and territories and whether this should be lifted. This can be attributed to factors such as: the ongoing use of contingency fees in jurisdictions such as Canada and the United States; the introduction of UK legislation in 2013 permitting contingency fees or damages-based agreements (DBAs) for contentious work in England and Wales (summarised below); and the Australian government’s Productivity Commission inquiry into, amongst other things, the use of funding models such as contingent billing, litigation funding and class actions to improve access to civil justice. (1) U nited Kingdom From 1 April 2013, legislative changes were effected permitting contingency fees or DBAs for contentious work in England and Wales. These changes arise from the 2009 Jackson report, which recommended the introduction of contingency fees on the broad basis that as many funding methods as possible should be available to a litigant, and clients should be free to enter into contingency fee agreements with their lawyers if they choose to do so. Key points arising from the UK legislation and associated regulations include: (A) D BAs are only available to parties who are claimants (or counterclaimants), not defendants; (B) the defendant does not necessarily have to pay the full amount of a contingency fee if the claimant is successful;30 (C) if a DBA applies, the risk associated with enforcement / recovering costs from the defendant lies with the solicitor of the claimant; and (D) contingency fees are capped at 25% of the damages awarded for personal injury and clinical negligence claims, 35% for employment tribunal cases, and otherwise capped at 50% of damages awarded. DBAs will be prohibited for the new form of collective action which is to be introduced in the UK for competition law claims, but otherwise are available for multi-party litigation. To date, there has not been a significant take up of DBAs in commercial cases which may be due to uncertainties as to the interpretation of the applicable regulations. However, the introduction of the legislation may ultimately lead to an increase in larger value commercial claims as there are greater incentives for lawyers to pursue them. (2) Australia There have been calls in Australia to modify the current laws prohibiting the use of contingent billing. The Law Council of Australia is currently consulting with its constituent bodies in respect of contingency fees and has not expressed a definitive view to date as to whether or not it supports the lifting of the current prohibition on contingency fees. It has indicated, in its submission dated 13 November 2013 to the Productivity Commission in respect of the access to justice inquiry, that it expects to be able to provide more detail on its position prior to conclusion of the inquiry. 30 A claimant’s costs are assessed based on the conventional way of determining whether the hours spent and rates were reasonable. If the contingency fee agreed with the lawyer is higher than the figure arrived at through conventional assessment, the claimant will have to pay the shortfall out of the damages awarded. On the other hand, if the agreed contingency fee is lower than the figure arrived at, the defendant will only have to pay the lower contingency amount. HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 19 7 O verseas developments (A) U nited states Barriers to maintenance of class action In the United States, the Supreme Court has issued a series of rulings in recent years that have set higher barriers to the maintenance of class actions, and this trend has continued in 2013. In Comcast Corp. v. Behrend,31 for example, the Court decertified a class action brought on behalf of two million cable television subscribers alleging violations of federal anti-trust law. In the US, the Court must certify that the plaintiffs are able to adequately represent the class before the proceeding can continue as a class action. The Court stressed that class certification requires a "rigorous analysis" and held that a plaintiff seeking certification of a class action brought to recover monetary damages is required to demonstrate, through evidentiary proof, that the damages can be measured on a class-wide basis. The court held that the class action was improperly certified because the plaintiffs' damages model failed to show that damages could be determined on this basis. The court's opinion highlights the need for US courts to scrutinize the damages methodologies asserted by plaintiffs prior to certification, and shows that the need for assessment of damage issues on a plaintiff-by-plaintiff basis may result in the denial of class certification. The decision follows and extends the court's decision in Wal-Mart v. Dukes,32 in which the court rejected an employment class action due to lack of commonality and stressed the need for courts look beyond the pleadings before certifying a class action. Together, the decisions require plaintiffs to provide evidence at the class certification stage to show that the requirements for certification are met, even if the evidence relates inextricably to the merits of the claims. Thus, in practice, lower courts will be required to take a hard look at the merits of the plaintiffs' claims before class certification. In the context of securities litigation, however, the court's rulings present a picture that is less clear. Despite its recent rulings that lower courts must take a hard look at the plaintiffs’ evidentiary proof in support of class certification, in Amgen v. Connecticut Retirement Plans and Trust Funds,33 the court held that a plaintiff asserting violations of federal securities laws was not required to prove that allegedly misleading statements were "material" as a prerequisite to class certification. In support of their motion for class certification, the plaintiffs invoked the "fraud-on-the-market" theory, under which it is presumed that the price of a publicly-traded security reflects all publicly-available information because the market is efficient. Thus, a buyer would be presumed to rely on the accuracy of the public statements in purchasing decisions. The defendant opposed class certification, arguing that each class member must show reliance on an alleged misleading statement on an individual basis. The court held that materiality governs the question of substantive liability, not the question of whether certification is proper, and refused to require the plaintiff to do more than merely plead that the alleged misstatements were material before they could rely on the fraud-on-the-market theory to support class certification. Challenge to fraud-on-the-market theory Despite this ruling, in November 2013 the court agreed to hear a case that poses a challenge to the fraud-on-the-market theory itself (Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317). The case, an alleged class action based on securities fraud, calls into question the approach taken by US courts in securities cases since the Court's decision in Basic Inc. v. Levinson,34 over 25 years ago. In Basic, the court adopted a presumption of class-wide reliance based on the fraud-on-the-market theory, thereby paving the way for numerous securities fraud class actions. Basic facilitates class certification by removing the need for individualized proof that each class member relied on statements by the defendant. In Halliburton, the court has been asked to overrule or substantially modify its decision in Basic and to require proof that each member of a prospective class of investors actually relied on a misrepresentation by the defendant. If the court eliminates the fraud-on-the-market presumption, individual members of a proposed class will need to demonstrate reliance on a defendant's alleged misrepresentations and, as a result, class certification will become even more difficult for plaintiffs. Halliburton has potential significance beyond the securities context, as class action plaintiffs frequently seek to rely on a version of the fraud-on-the-market presumption in non-securities cases where the allegations involve consumer fraud, deceptive marketing, and products liability claims. The decision will be eagerly awaited. Use of arbitration provisions to thwart class actions Beyond these evidentiary considerations, the court's ruling in American Express Co. v. Italian Colors Restaurant,35 enables companies to thwart class actions through the use of arbitration provisions under which a plaintiff waives the ability to assert claims on behalf of a class. 31 133 S. Ct. 1426 (2013). 32 131 S. Ct. 2541 (2011). 33 133 S. Ct. 1184 (2013). 34 485 U.S. 224 (1988). 35 133 S. Ct. 2304 (2013). 20 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS The case was brought by a group of merchants who alleged that a credit card provider used its dominant market position to impose higher fees, in violation of federal anti-trust law. Over a vigorous dissent, a majority of the court upheld the enforcement of an arbitration provision that waived the plaintiff's right to assert claims on behalf of a class in the arbitration. The ruling is especially significant because enforcement of the waiver had the practical effect of precluding plaintiffs from bringing their claims at all – even on an individual basis – because the cost of pursuing individual claims was prohibitive. The ruling also represents an important extension of the court's holding in AT&T Mobility LLC v. Concepcion,36 in which the court upheld a waiver of the ability to seek class-wide arbitration of rights arising under California state law. In American Express, the fact that the claims arose under federal law rather than state law posed no obstacle to enforcement of the waiver. The importance of careful drafting of the arbitration provision, however, was illustrated by the court's ruling in Oxford Health Plans LLC v. Sutter37. There, the court refused to consider whether an arbitrator's ruling that an arbitration clause did not preclude class-wide arbitration was correct, an outcome that reflects the court's unwillingness to consider the merits of an arbitrator's ruling. Nevertheless, with careful drafting, American Express is welcome news for companies seeking to avoid class arbitration, even if the plaintiff's claims arise under federal law and even if there may be no other practical avenue for the plaintiff to pursue those rights. (B) UK/EU (1) U nited Kingdom In January 2013, the UK government published its plans for reforming the UK regime for competition law private actions, including the creation of a new 'opt-out' collective action for competition law claims on behalf of both consumers and businesses in the Specialist Competition Appeal Tribunal (CAT) (with the CAT to certify whether a claim is suitable for a collective action and whether it should proceed on an opt-out or opt-in basis). Under an opt-out regime, claims can be brought on behalf of a defined group and damages awarded to that group, without the need to identify individual group members; all those who fall within the group will be bound by the result (including a settlement) unless they actively opt out of the case. In Australia, class actions are currently conducted on an opt-out basis. This is a significant departure from existing procedures for multi-party litigation in England and Wales, which generally require potential claimants to make a positive decision to opt in to the proceedings, and there are concerns that it may lead to some of the 'excesses' of US-style antitrust litigation. The UK government recognises the possibility of frivolous or unmeritorious litigation arising from the introduction of an opt-out regime, but considers that its proposed safeguards (for example on certification, limitation on who can bring claims and costs/funding) will prevent this. The proposals were included in the Consumer Rights Bill which was introduced into the House of Commons on 23 January 2014. Much of the detail of the operation of the collective proceedings reforms will be contained in the revised CAT Rules which should be published for consultation shortly. Subject to Parliamentary schedules and approval, adoption is expected in late 2014. It is not yet clear when the reforms, if adopted, will come into force. (2) E uropean Union In June 2013, the European Commission published its long-awaited proposals for the future of collective actions in the EU , in the form of a non-binding Commission Recommendation (the Recommendation). The Recommendation invites Member States to adopt collective redress mechanisms at the national level for both injunctive and compensatory relief for breaches of EU law rights (such as competition, consumer and environmental law rights) which follow a set of basic principles set out in the Recommendation. While the concept of 'collective redress' is not new in some Member States of the EU , the Recommendation aims to ensure a coherent horizontal approach to collective redress in the European Union without harmonising Member States' systems. The European Commission recognised that collective redress proceedings improve access to justice for citizens and companies in disputes concerning EU law. Nonetheless, the Recommendation includes various safeguards aimed at avoiding the perceived excesses of US-style 'class actions' in Europe. It recommends an 'opt-in' system, with group members having to be identified before a claim is brought. Any exceptions to this principle should be “duly justified by reasons of sound administration of justice”. The Recommendation, while non-binding, states that Member States should implement the principles set out within two years after its publication. The Commission will then consider whether further action is needed. 36 131 S.Ct. 1740 (2011). 37 133 S. Ct. 2064 (2013). 7 O verseas developments HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 21 (C) Asia (1) H ong Kong The first meeting of the working group set-up by the Department of Justice to consider and make recommendations on the Law Reform Commission's (LR C's) Report on Class Actions (Report) was held in early 2013. This followed from an interim response by the Department of Justice on 27 November 2012 announcing its intention to study the LRC 's proposals. On 28 May 2012, Hong Kong moved closer to introducing a form of class actions regime with the publication of the LRC 's Report. The existing regime of "representative proceedings" under Order 15, rule 12 of the Rules of the High Court was viewed as providing an inadequate framework for dealing with large-scale multi-party disputes, as representative proceedings generally require identical causes of action, legal issues, and remedies among all plaintiffs. The Report's key recommendations are: (A) A new class action procedure to facilitate multi-party litigation with a view to expanding access to judicial remedies. This envisages introducing class actions on an incremental basis, initially to be permitted only with respect to "consumer cases" such as tort and contracts claims by consumers in relation to goods, services and property. (B) Standards for claims be introduced that would give courts greater flexibility in determining the types of claims and remedies that could be grouped under a single action. (C) A n "opt-out" approach for domestic class actions pursuant to which all class members would be bound by the litigation unless they opted out. (D) A requirement that (i) a representative of a class action prove to the court's satisfaction that suitable funding and costs protection arrangements are already in place before the class action is certified by the court; (ii) the court be empowered to order representative plaintiffs to pay security for costs if appropriate; and (iii) "truly impecunious plaintiffs" be given access to discretionary funding. (E) E stablishment of a class action fund to make discretionary grants. Such a fund "would be entitled (although not bound) to assist all class litigants (not only impecunious plaintiffs, as with legal aid) to bring actions for any kind of remedy"(Paragraph 8.56 of the Report.). (F) P rovision of funding on an interim basis by the Consumer Legal Action Fund. (G) A vailability of Legal Aid to eligible impecunious lead plaintiffs but only in an amount equal to the amount of costs that would have been incurred in the pursuit of an individual claim. The proposed regime, if adopted, would still leave significant barriers in place, which could potentially discourage class actions. The following drivers of the class action regime in the US have not been proposed for adoption in Hong Kong: (A) Punitive damages – The status quo in relation to damages awards will be maintained. Damages will be awarded to compensate the actual loss or injury suffered, except in extremely rare cases of egregious tortious activity (paragraph 3.24 of the Report); and (B) Contingency fees – Hong Kong does not allow contingency fees. The status quo is to be maintained (paragraphs 3.26 and 8.27 of the Report). Risk for the representative plaintiff The status quo that costs will "follow the event" is maintained. The Department of Justice (Legal Policy Division)'s suggestion that a 'no costs order' rule be put in place for class actions has not been taken forward (paragraph 8.4 of the Report). (2) Japan In Japan, a bill for a new consumer class-action system was enacted on 4 December 2013. The enforcement date has not yet been laid down, but will be within 3 years of the enactment. The new system is not retrospective, so will not be applied to consumer contracts executed, or torts committed, before the enforcement date. The new system will be restricted to contracts between a consumer and a business operator. It limits the entities that may bring class action claims to approved consumer organisations, and defines carefully the types of claims which can be brought. Direct monetary claims are generally permitted but damages for personal injury and death are to be excluded. As such, the new system and the claims brought under it are likely to be considerably different from those in the US and Australia. 7 O verseas developments 22 CLASS ACTIONS 2013: developments and trends HERBERT SMIT H FREE HILLS 38 [2013] NSWCA 212 . 8 Insurance Insurance, and particularly directors’ and officers’ insurance (D&O insurance), continues to play an important role in the substantive and strategic considerations relating to class actions. (A) Ava ilab ility of defence costs under D&O insurance policies The most significant development this year has been the decision handed down by the NSW Court of Appeal in Chubb Insurance Company of Australia Ltd v Margaret Moore and others38 in July 2013. The decision provided some much needed clarity in Australia on the issues originally raised in September 2011 by a decision of a New Zealand court (widely known as the Bridgecorp decision) concerning the advancement of defence costs under D&O insurance policies. However, the position is not yet settled, and an application for special leave to appeal Chubb v Moore in the High Court of Australia is expected to be heard in early 2014. If special leave is granted, it is likely that the appeal will occur in mid-2014. The original Bridgecorp decision allowed the claimant in that case to assert a statutory charge over all the proceeds of the defendant directors’ D&O policy so as to effectively ‘quarantine’ those monies for any liability those directors may have in the future if the claim against them was successful. Because the size of the claim exceeded the D&O policy limits, the NZ court held that the charge prevented the D&O insurer from funding the directors’ costs of defending the claim. This left the directors personally exposed to the significant ongoing costs of defending the claim while it remained unresolved. The concern for Australian D&O policyholders was that equivalent legislation to that applied in the Bridgecorp decision exists in New South Wales, the ACT and the Northern Territory and, if applied in the same way by the Courts of these jurisdictions, could produce the same outcome here. The original Bridgecorp decision was of particular importance in relation to class actions, as it had the potential to provide claimants, litigation funders and plaintiff law firms with a significant strategic advantage where claims were covered by D&O policies. This impacted both corporate and individual policyholders, as it is still common for many D&O insurance programs to provide coverage for ‘securities claims’ against the relevant company (commonly known as ‘Side C’ coverage) as well as coverage for claims against directors. Indeed, it was in this class action context that the issue was brought to a head, with former directors and officers of the Great Southern group who were defendants to a class action pending in the Supreme Court in Victoria. Recognising the widespread consternation in the Australian D&O market and the precedent value of any decision, Chubb, the D&O insurers for those directors and officers, took the somewhat unusual step of forcing the issue and seeking an expedited hearing by the NSW Court of Appeal, without a first-instance hearing before a single judge of the court. (A previous attempt to do this in the Centro case was thwarted in 2012 when the underlying litigation was settled on the first day of a hearing in the NSW Court of Appeal). The NSW Court of Appeal delivered its decision in relation to the Great Southern matter on 11 July 2013. The key points were: the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (NSW Act) only applies to claims initiated in NSW Courts – claims initiated in other jurisdictions (such as the Great Southern class action in Victoria) lack the requisite territorial connection required to allow the claimant to rely on the NSW Act; the NSW Act does not create a charge in circumstances where the events underlying the claim occurred prior to the inception of the relevant insurance policy; and importantly, any charge is limited to amounts which may become payable to a third party claimant as damages or compensation, and does not extend to amounts payable to a policyholder in respect of defence costs. However, because the NSW Court of Appeal was able to rule on the issue on the basis that the underlying claim was not initiated in a NSW court, the other findings on the operation of the NSW Act, while persuasive, are not binding on a court which considers the same issue in the future, for example, in relation to an underlying claim in the courts in NSW. The NSW Court of Appeal specifically recognised this when it commented that the NSW Act should be ‘repealed altogether or completely redrafted in an intelligible form.’ Nevertheless, at the time, the NSW Court of Appeal’s conclusions provided greatly increased levels of comfort to D&O insurers and their policyholders about the ongoing availability of defence costs coverage. However, that level of comfort has diminished in light of two recent developments: as noted above, the Chubb v Moore decision will be the subject of an application for special leave to appeal to the High Court of Australia in early 2014; and on 23 December 2013, the highest court in New Zealand, the Supreme Court, overturned the NZ Court of Appeal’s decision (which itself had overturned the first instance ruling) and held that a statutory charge would apply where the insurance policy limit was inclusive of defence costs. There will be considerable interest in the outcome of the special leave to appeal, and any appeal which results, particularly in light of the recent decision of the NZ Supreme Court. Whatever the outcome, 2014 is likely to see increased calls for legislative reform in this area to clarify the position for all interested parties. HERBERT SMIT H FREE HILLS CLASS ACTIONS 2013: DEVELOPMENTS AND TRENDS 23 (B) Ob stacle to insurance recoveries in respect of representative proceedings A potentially significant decision on insurance recoveries in a class action context was handed down in September 2013 in Morgan, in the matter of Brighton Hall Pty Ltd (in liq).39 The liquidator of Brighton Hall Pty Limited approached the Federal Court of Western Australia for an advisory opinion pursuant to section 511 of the Corporations Act. Broadly, the liquidator sought guidance as to how proceeds obtained under Brighton Hall’s professional indemnity insurance policy by way of structured settlement should be distributed as between a claimant (Lawrence) and a cross-claimant (State Trustees) involved in representative proceedings concerning Brighton Hall. Those representative proceedings arose from allegedly negligent financial advice by Brighton Hall concerning investment schemes. In giving its opinion on the questions put to it by the liquidator, the court was required to consider whether each representative proceeding constituted a single claim, or, if they did not, whether the multiple claims forming part of each representative proceeding could be treated as a single claim pursuant to the aggregation provisions of the insurance policy. The court reached the following conclusions: each representative proceeding was not a single claim for the purposes of the insurance policy because, by its nature, a representative proceeding is a procedure designed to facilitate the bringing of multiple claims before the court. The nature of each individual claim is not changed by reason of being included in a representative proceeding. Further, there was evidence before the court particularising each of the individual claims in the Lawrence proceeding; and the multiple claims comprising each representative proceeding could not be aggregated into one claim pursuant to the relevant clauses of the insurance policy because there was no sufficient ‘unifying factor’ between the claims. It was insufficient for there to be ‘common features’ between the claims such as consistent oral recommendations made to clients about certain schemes. Each individual claim related to different investment products, different clients, different times of investment, different circumstances of taking advice, different levels of investment and, importantly in the court’s view, different circumstances and times of suffering loss. As a result, a deductible of $25,000 applied to each individual claim for the purposes of the structured settlement reached with the insurer. The decision has a potentially wide reach, and could affect class action related claims under directors’ and officers’ liability policies (which often respond to shareholder class actions) and public and products liability policies (which can respond to product liability class actions). The key takeaway from this decision is that companies ought carefully review the aggregation wording in their liability insurance policies to ensure it does not permit the relevant insurer to reduce or avoid liability altogether for multiple claims brought as a representative proceeding which do not, when viewed separately, exceed the policy deductible or excess. (C) ‘After The Ev ent’ legal expenses insurance There appears to be renewed interest in the use of ‘after the event’ (or ATE) legal expenses insurance in a class action context. ATE insurance can take a number of different forms, but the basic principle is the same. An insurance premium is paid, which will usually cover: the insured’s own legal costs; and the costs of the other side which the insured becomes liable to pay if it loses. These are, of course, the types of costs which a litigation funder indemnifies a lead plaintiff for in a typical class action. The premium may be payable in tranches (e.g. after key interlocutory applications, stages in the litigation or trial). For some ATE insurance, there will be an ‘uplift premium’ in the event the claimant is successful – essentially this is the equivalent of a contingency fee, but obtained by an insurer (rather than a law firm) and therefore not subject to the current restrictions on contingency fee arrangements for lawyers. In Australia, if the claimant is successful, it may seek to recover some (or all) of the ATE premium as a legal cost from the defendant. Notably, the ‘Jackson Reforms’ implemented in the UK in 2013, have legislated on this aspect, as part of broad-ranging changes to the rules on the funding of litigation. In the UK , ATE insurance premiums are now no longer recoverable from unsuccessful parties. This has led to a retraction of the ATE insurance market in the UK . The coming year may see an increase in these types of arrangements being explored as an alternative to traditional third party litigation funding, or possibly a move to regulate them along with other types of litigation funding.