While the decision is presently under appeal, the GetSwift judgment is a landmark decision on the issue of competing class actions. Justice Lee of the Federal Court has — for the first time in Australia — resolved the issue of competing class actions by choosing one proceeding to continue and making orders permanently staying two others.
Previous decisions in this area permitted multiple competing class actions to proceed alongside each other or as "consolidated" actions. Corporate defendants (and their insurers) experienced significant delay and additional costs in defending multiple class action proceedings as a result. The GetSwift decision suggests that in the future a court will allow only one class action to proceed, which should result in less time and cost for defendants.
In this update, we explore the judgment and its likely implications.
In the wake of a disclosure to the market in January 2018 that caused its share price to drop more than 80%, GetSwift Limited was quickly identified by law firms as a target for a shareholder class action. Within days, five firms publicly announced that they were investigating a potential class action against the company.
Ultimately, three firms commenced proceedings against GetSwift. The three proceedings all concerned substantially the same subject matter, namely allegations of a breach of continuous disclosure obligations and misleading and deceptive conduct in a defined "class period" leading up to the announcement in January 2018.
In the initial case management process, Justice Lee ordered each firm and funder to confidentially put their "best foot forward" and submit details about the arrangements for their case, including the proposed funding commission and the number of funded group members who had retained the firm and funder.1
The details of the competing proceedings were as follows:
|Squire Patton Boggs|
Funder: International Litigation Funding Partners
Commission: 25 - 40% of gross recoveries, depending when the matter resolved (per the litigation funding agreement), but willing to seek common fund order capping commission at the lower of 22.5% of the gross recoveries or 25% of the net recoveries
Funded Group Members: 103
|Corrs Chambers Westgarth|
Funder: Vannin Capital
Commission: 10 - 30% of gross recoveries, depending when the matter resolved (per the litigation funding agreement), but willing to seek common fund order in same terms
Funded Group Members: 208
|Phi Finney McDonald|
Funder: Therium Capital
Commission: Would seek a common fund order for the lesser of:
Funded Group Members: 0
Does a court have the power to permanently stay competing class actions?
Previous decisions relating to competing class actions have stopped short of ordering a permanent stay and allowing only one proceeding to continue. In the decision of Bellamy's,2 Justice Beach noted that he was "loathe" to stay a proceeding where a significant number of group members had taken steps to enter into contractual arrangements with a particular law firm and funder to represent them. In a judgment regarding competing class actions against former electronics retailer Dick Smith,3 Justice Black of the NSW Supreme Court concluded that the likely increase in costs incurred as a result of a competing class action did not outweigh the right of class members in the competing proceeding to be able to select their own legal representatives and funder. Both decisions prioritised the right of group members to choose their firm and funder over the increased cost and delay caused by multiple actions about the same subject matter.
In contrast to these decisions, Justice Lee observed that history shows that shareholder class actions are highly likely to settle. With this in mind, he indicated that, where appropriate, the Court should take an active role in ensuring that unnecessary cost and delay was avoided by competing class actions being commenced against a defendant.
Consistent with that view, his Honour found that the Court does have the power to permanently stay competing class actions as an abuse of process. He held that allowing multiple class actions to proceed, in circumstances where the group members of a competing proceeding could join the continuing class action, would be unfair to group members who would be burdened with increased costs of multiple proceedings.
What factors are relevant for determining which competing class action should be allowed to continue?
The Court held that a "multifactorial" assessment of the competing proposals was necessary, in order to determine which proceeding was the most appropriate to continue. The relevant factors identified by Justice Lee included:
- the experience and the available resources of the plaintiff's lawyers;
- the proposed funding arrangements and likely net return to group members;
- the estimated costs of prosecuting the class actions;
- the state of preparation of the proceedings;
- proposals made by the plaintiff's lawyers to reduce and control costs (including those of expert witnesses);
- the financial positions of the funder and their proposed method of providing security for costs to the respondent; and
- the number of group members that had entered into funding agreements in each proceeding.
Importantly, his Honour held that the order (and speed) in which competing class action proceedings are commenced was not a factor that was relevant to the assessment. Justice Lee noted that giving the timing of commencement of an action any weight in would "encourage a race to the registry" and could result in poorly thought out claims being commenced and inferior funding terms being proposed. Such an observation is in the interests of defendants and their insurers, who often incur significant cost in pleading disputes in class actions.
In comparing the three competing proceedings, his Honour found that his assessment of several of the categories was more or less neutral, but also made a number of important observations about the multiple proceedings.
Litigation funding agreements and choice of firm and funder
Contrary to the views of Justice Beach in the Bellamy's decision, Justice Lee stated that the question of how many group members had entered into litigation funding agreements carried little weight, given that all three competing firms had indicated that they would seek common fund orders (and accordingly the funding agreements would not be relied upon). Justice Lee noted that there was no issue with common fund orders being made early in the proceeding. Instead, he suggested that making common fund orders earlier was preferable, given that it would allow the Court to assess the risk that the funder was taking on before the result of the litigation was known and would avoid the potential for "hindsight bias".
Again in contrast to the earlier decisions, His Honour commented that the importance of a group member's right to choose a particular law firm and funder was "somewhat exaggerated". His Honour observed that as long as a funder could adequately fund the litigation, it was unlikely that a group member would consider the identity of the litigation funder to be material. While he acknowledged that the situation in respect of a law firm was different, Justice Lee indicated that group members that sought to be represented by a particular solicitor could choose to opt out of the class action which was allowed to continue. While his Honour considered it was relevant that only 208 class members had signed funding agreements in one of the proceedings (compared to over 1000 in Bellamy's), he cautioned against plaintiff firms conducting "book builds" (encouraging class members to enter into funding agreements) where it was the intention of the firm to seek a common fund order for their proceeding.
Proposed litigation arrangement and likely return to group members
His Honour found that the funding proposal on offer from the Phi Finney McDonald class action was superior to the other class actions. Rather than a flat percentage on the settlement or judgment sum, Phi Finney McDonald proposed a funding commission that was tied to the amount in legal fees charged by the firm to the funder to run the class action. In other words, the longer that the matter continued (and the higher the legal fees), the greater the funding commission. Whilst acknowledging that this structure could suggest an incentive to run the matter for longer so as to obtain a larger commission, the Judge concluded that this structure was attractive because it more accurately reflected the commercial risk that the funder had taken on and resulted in a better return to group members in the "vast majority of scenarios".
Controlling and reducing costs
The Judge also observed that Phi Finney McDonald's class action had proposed two "novel" initiatives to control and potentially reduce the legal costs in prosecuting their class action. These proposals were:
- the involvement of a Court-appointed referee to conduct periodic reviews of the reasonableness of the firm's legal costs (rather than the firm appointing their own cost consultant to provide an opinion at the conclusion of the matter); and
- the involvement of a joint or court-appointed forensic economist to assist the Court in determining questions of causation and the quantification of loss and damage (rather than the parties engaging separate experts to provide their opinions on these issues).
Justice Lee indicated that significant costs could be saved if either proposal was adopted. In respect of appointing a costs referee at the early stage of the proceeding, he noted that this may allow plaintiffs firm to receive approval from the referee before engaging in various stages of work, which would cause the litigation to be run in a more cost effective and efficient manner.
Which class action should be allowed to continue?
After considering all the relevant factors, Justice Lee concluded that the Phi Finney McDonald proceeding should be allowed to continue, on the basis that it was likely, under most scenarios, to result in greater returns for group members than the other proceedings; and because it had proposed innovative measures to reduce their legal costs.
His Honour ordered that the Squire Patton Boggs and Corrs Chambers Westgarth proceedings be permanently stayed as an abuse of process.
In a not unexpected development, on Friday 1 June 2018 Squire Patton Boggs appealed Justice Lee's decision. The Full Bench of the Federal Court of Australia will hear and consider the appeal in the coming months. However, while the decision is under appeal and if Justice Lee's decision is upheld, the Court's refusal to allow competing class actions to proceed may have wide-ranging implications for future prosecution of class actions in Australia.
First, it is now less likely that a court will allow two competing class actions to proceed against the same defendant for a substantially identical claim. This will result in increased competition between law firms and funders regarding the terms of their proposed class actions, in order to maximise the chances of their proceeding being allowed to continue over any other competing class actions. The intensifying competition between litigation funders is already clearly evident. The typical funding commission of between 25% - 40% on offer 12 months ago has been slashed to rates as low as 10% being offered by funders in the recent class actions announced against AMP Limited.
Second, litigation funders may now be less inclined to fund proceedings where another plaintiff firm and funder have announced a class action, especially if the commission rates being offered are lower than the funder's internal target for return on investment. Instead, litigation funders may be attracted to fund more innovative and creative class action opportunities. These could include proceedings against insolvent entities (where the intended recovery would be against a company's insurance policy) or class actions unrelated to shareholder claims (ie. product liability, consumer and mass tort allegations).
Third, in the process of identifying which class action should proceed, it can be expected that the court will seek inventive submissions from competing class action plaintiffs, designed to reduce the cost and complexity of class actions. These suggestions could dramatically change the way that class actions have typically been run in the past. For example, any agreement by a class action plaintiff and defendant to jointly retain an expert witness to opine on issues of causation or quantum could eradicate the pre-trial step of separately retaining and briefing expert witnesses, saving both group members and defendants significant amounts in legal costs that would otherwise be incurred.
Finally, we observe that Justice Lee's decision was referred to in the Australian Law Reform Commission's class action discussion paper released last Thursday evening (summarised by us here). The ALRC has specifically sought comment on the factors considered in this decision in proposing amendments to Part IVA of the Federal Court Act. The proposal under consideration by the ALRC would require the court to determine, in the case of competing class actions, which proceeding will progress and to stay the others, except where it was inefficient or antithetical to the interests of justice to do so.