The last seven months have seen yet another increase in the
level of securities class actions in Australia. It is a pattern
that has been looming and comes as no surprise for many in the
profession. However, viewed in a global context, it creates food
for thought and raises the question: Do we want Australia to become
as litigious as the United States? Is the system working as it
should?
Here's some data that puts things in context.
First, in the last seven months, there have been 12 new class
actions threatened or filed. The targets of these actions are
ASX-listed corporations, including Treasury Wine Estates Limited,
Leighton Holdings Limited, WorleyParsons Limited, QBE Insurance
Group Limited, Forge Group Limited, OZ Minerals Limited, Macmahon
Holdings Ltd, and Iluka Resources Limited. In the case of three of
the companies, there have been multiple class actions threatened or
commenced. Nine ASX-listed corporations have been subject to
allegations that they contravened their continuous disclosure
obligations and engaged in misleading or deceptive
conduct.
Second, it's important to note that this level of activity
does not include an array of other class actions that plaintiff
firms and funders have confirmed will be filed this year outside of
the securities area, such as the Queensland Floods class action.
Nor does the figure take into account the large number of
threatened, but not yet filed, class actions involving financial
institutions that may now emerge after the plaintiffs in the ANZ
Bank fees class action were successful in having one of the fees
characterised as a penalty.
Third, pro-rated by reference to the Australian population (say,
24 million), there need be only 12 filings a year to match the
level of federal securities class action filings in the US, the
traditional home of class action litigation. According to Stanford
University and Cornerstone Research's 2013 Year in
Review, plaintiffs filed 166 new US federal class action
securities cases in 2013. This is for a population of just over 310
million. The 166 filings is 13 percent below the historical average
of 191 filings observed annually between 1997 and 2012. The
indications are that Australia looks very likely to be outstripping
that ratio in the short term. The concept that the ratio of
securities class action litigation in Australia would be higher
than in the US is indeed a sobering one. Is it really suggested
that corporate governance standards and legal compliance suddenly
deteriorated to warrant this position?
Fourth, the US class action system is driven by a number of
factors that are not present in our legal system. This makes the
position all the more remarkable. For example, in Australia,
lawyers cannot charge contingency fees—a key financial driver
for the bringing of claims—although we do have litigation
funding, which is much more active in class actions here than in
the US. In Australia, we do not have jury verdicts for class action
claims and the attendant large and uncertain awards they can
produce. We do not have the American rule on costs that each party
bears its own costs regardless of the outcome of the litigation.
Rather, in Australia, plaintiffs are at risk of paying the
defendant's costs if they lose, although litigation funders
usually indemnify plaintiffs against this risk. We do not require
any fault or state of mind such as fraud or negligence for a
securities class action, compared to the US where scienter,
equating to an intent to defraud or recklessness, is necessary for
a claim. But the US also has a certification step, including
requiring that common issues predominate in class actions seeking
damages, which must be overcome before a class action can proceed,
and this is not present in respect of Australian class
actions.
The Productivity Commission's draft report on Access to
Justice Arrangements recommends the introduction of contingency
fees and makes no distinction between class actions and other forms
of litigation. Further, the recommendation does not provide any
detail on safeguards to protect consumers and seeks further
information on whether a cap should be placed on the percentage
lawyers may charge. The current growth in shareholder class actions
suggests that allowing contingency fees would be like throwing fuel
on a fire as Australia moved closer to the American model of
litigation. Lawyers would be able to take a percentage of any
recovery directly and, depending on the percentage charged, could
obtain a much higher fee than can currently be billed. The class
action with its ability to aggregate claims becomes even more
attractive as lawyers are able to take a cut from each claim.
Class action proponents have previously pointed to the low level
of class action activity in Australia to argue that we do not have
to fear the litigation culture or "hyperlexis" that is
associated with the United States. Those soothing tones may now
need to be re-evaluated. Perhaps Americans are about to lose their
mantle as the "most litigious people in the world".
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