What is your class action risk

Class actions have featured frequently in the press in recent years, often with an underlying theme of a developing crisis for Australian business. Ross Drinnan and Jenny Campbell examine the impact of the trend over the last ten years.

While there can be no doubt that class action activity has increased significantly in recent years, the real question is whether the risk for companies has increased and, if so, to what extent?

To answer that question, and provide practical guidance to directors and others responsible for managing class action risk, law firm Allens has conducted a survey of the class actions filed in the last ten years.

Number of claims

Figure 1 shows the number of class action filings in the Federal Court and Supreme Courts of NSW and Victoria in the period from 2005 to 2014, as identified in the course of Allens’ research. While filings might be described as “lumpy”, there is a clear upward trend.

Indeed, we identified twice as many class actions filed in the last five years (2010 to 2014) than in the prior five years (2005 to 2009).

Despite the significant increase in filings, the number of class actions filed is lower than might have been expected having regard to the size of the Australian market and the level of attention class actions receive.

The peaks were in 2010 and 2014, with 30 class actions filed in each of those years. This is not the “explosion” or “epidemic” some commentators predicted when the High Court gave the “green light” to third party funding in 2006. Nor, incidentally, does it match the number of claims filed in the late 1990s.

Moreover, the research has highlighted that, while class actions are often considered to be high-profile claims involving hundreds or thousands of group members, a significant number of class actions are relatively minor claims that attract little (if any) public attention.

Data in relation to the value of claims filed would obviously be instructive in this analysis. That information is not, however, routinely publicly available and, when it is, is often based on “pie in the sky” estimates rather than realistic assessments of the value of a claim. Accordingly, it did not form part of the analysis.

Types of claims

As can be seen from figure 2, natural disaster (largely bush fire), product liability and public interest class actions account for a more significant percentage of total filings in the last five years than in the five years prior. All other categories are relatively steady, save that there have been no new cartel class action filings in recent years.

On one view, these results are contrary to the general perception that shareholder and investor claims have assumed a new significance in the market in recent years. That said, the perception may be explained by the facts that shareholder and investor class actions are the most common types of class actions, have almost doubled in number in the last five years (in line with the general filing trends discussed above) and tend to be among the more high-profile claims.

Who is bringing the claims?

Maurice Blackburn and Slater & Gordon have long been considered the main (perhaps only) plaintiff class action law firms in Australia. Maurice Blackburn has retained that position, but there are now a number of firms who are just as active as Slater & Gordon.

A significant change in recent years is the large number of other firms who have entered the class actions market. Indeed, more than a third of the market is now made up of claims filed by law firms that have filed only one or two claims in the last three years.

The rise in the number of law firms commencing class actions is clearly one of the reasons for the increase in filings. The trend may, however, also have a further impact on class action defendants – in our experience, the relative inexperience of these law firms in the class actions context has the potential to create significant practical and reputational issues for the defendants they sue. To a large extent, these issues arise from the fact that class actions law and practice is now heavily embedded in hundreds of judgments and orders to the point where even the most careful reading of the legislation will give rise to misconceptions as to accepted and required practice.

Litigation funding

There has been a marked increase in the number of class actions that are funded by third party litigation funders. Approximately 20 per cent of the claims filed in the period between 2005 to 2009 were publicly identified as third party funded claims. That number had increased to approximately 35 per cent in respect of claims filed in the period between 2010 to 2014.

Of the funded class actions filed between 2010 to 2014:

• Fifty-four per cent were funded by IMF Bentham Limited.
• Twelve per cent were funded by other Australian funders.
• Thirty-four per cent were funded by offshore funders.

While there has been a significant increase in the number of third party funded claims, approximately two-thirds of class actions are not funded. The majority of these claims are run by lawyers on a “no win-no fee” basis.

How are claims resolved?
The vast majority of class actions are settled. Of the class actions filed between 2005 to 2014 which have been resolved:

• Approximately 63 per cent were settled.
• Approximately 34 per cent were dismissed/discontinued or the proceedings discontinued as a class action.
• Approximately three per cent were the subject of a final judgment.

The vast majority (but not all) of the dismissed or discontinued claims were filed by law firms not experienced in running class actions.

Class action risk

Class action risk has increased significantly over the course of the last decade – more claims are being filed and new law firms and funders are promoting claims. The trend is, however, not of epidemic or crisis proportions. That, of course, does not detract from the fact that class actions can be a very significant drain on financial and management resources, and potentially damaging from a reputational perspective when they arise.

In those circumstances, it is important for directors to be conscious of the types of conduct that may give rise to class action risk and, consistent with good risk management practice, to ensure that appropriate systems are in place to minimise the prospects of that conduct occurring. It is also prudent to have plans in place so that, in the event that something goes awry, the response can be measured and based on an objective assessment of the situation.

Research key findings

• Significantly more class actions have been filed in recent years and the trend is clearly upward.

• Despite that increase, the number of class action filings is still lower than might have been expected having regard to the level of attention class actions receive and some of the public commentary.

• Shareholder and other investor class actions account for approximately 47 per cent of all class actions filed in the last decade.

• There have been no significant changes in the types of class actions filed over the last decade, aside from the emergence of natural disaster and public interest claims.

• A wider range of law firms are filing class actions – more than one-third of filings in the last three years have come from law firms who filed only one or two claims in that period.

• A third party litigation funder was involved in approximately 35 per cent of the class actions filed in the last five years (compared with 20 per cent in the five years prior).

• Approximately two-thirds of class actions resolved in the last ten years have been settled. Most of the balance have been dismissed or discontinued. Very few have gone to final judgment.