The latest class action trends from Down Under

Tim:

Welcome to this episode of our litigation trending spotlight on class action podcast miniseries. My name is Tim West and I'm a partner in Ashurst's London dispute resolution practise.
In this episode, we are looking down under and talking with Nick Mavrakis of our Sydney office, where Nick is a partner specialising in class actions.

As most of our listeners will know, Australia has a really pretty mature and well-developed class action regime, where class actions have been a mainstay of the litigation landscape for the best part of a generation. And it's often seen behind the US as the leading class action jurisdiction in the world.

So practitioners and clients do tend to try and keep abreast of the trends emerging in the Australian market as they're often a harbinger of things to come in England and Wales. And that's particularly the case since increasingly funders and some claimant firms have a foothold in both jurisdictions and look to replicate claims and their approach to litigation.

And as we'll cover today, though, the traffic isn't all one way, with certain trends being exported from the UK to the Australian market, particularly in recent times the proliferation of data-based claims.
To that end, I'm also joined by Jon Gale, who's a partner in Ashurst's London dispute resolution team, whose practice focuses on defending group claims.

So welcome, Jon and Nick. Good to have you both here. Nick, let's start with you. What do you think are the top trends in the Australian market that we should be alive to in the UK?

Nick:

Thank you, Tim. And thank you, Jon. The trend, as you may know, class actions were introduced into the Australian jurisdiction almost 30 years ago, so there's a lot of the issues have been, jurisprudential issues, have been worked through and there's a well settled practice around the launching of class actions and the litigation funding environment.

And it's a very sophisticated plaintiffs' bar that launches these proceedings, and it's a very sophisticated and profitable at times litigation funding environment who really come together to try and develop claims that are highly profitable and remunerative to themselves, from both a legal fees perspective and a funding perspective.

And so we've seen over the years the proliferation of shareholder class actions. We've seeing the proliferation of pharmaceutical class actions, product liability, and banking type financial services disputes, and many more consumer claims arising out of the auto industry and other such industries.

And there is a very well-trodden path in a bookbuild process by which litigation funders and the plaintiff law firms launch a class action. They rely upon high levels of publicity. And it is an opt-out regime so that the moment they launch proceedings all the group members are part of that class action. And there is, unlike in the US, there is no need to certify. Once you launch then you're seized of jurisdiction and you are required as a defendant to defend those proceedings.

And so what we have seen more recently is a proliferation of data breach claims and privacy breach claims. We see that being a fertile area of exposure, particularly as we see cyber-attacks and ransomware attacks around the world. And it is indiscriminate in nature in terms of which industries it will be subjected to.

Tim:

Yeah, great. There's a lot to get into there. I mean, picking up on one of the first things you mentioned, securities class actions, that's an area in particular where the UK market is looking to Australia. Particularly in relation to the vexed question of reliance and how the Australian courts have approached that issue.

I mean, it's, I'd say, one key battlegrounds in UK securities class actions at the moment with the statutory framework that we've got under FSMA requiring claimants to establish that they placed reasonable reliance on the misleading statement or admission from a published information when deciding to make their investment decision.

And obviously establishing reliance can be highly costly in proceedings, and claimants potentially face a heavy evidential and disclosure burden in order to establish the basis of their investment decisions and therefore reliance.

I mean, what we've got here is obviously pretty different statutory framework to the position, as I understand it, in Australia. But perhaps you could briefly outline how the Australian courts have approached the question of reliance by reference to the "fraud on the market theory" which comes out of US securities litigation?

Nick:

Yeah, thank you Tim. So for many years, particularly when securities class actions became prevalent, many of them never went to trial and certainly none had proceeded to judgment . They would either settle before trial or they would settle during the course of a trial but never proceeded to judgment.

And invariably those securities class actions arose out of a significant event which impacted a share price. And they range from a crisis, it could be accounting impairment, it could be understating profits, et cetera, et cetera, where there was a real impact once the announcement was made and a price movement.

And so for many years the plaintiffs wanted to push, like you are at the moment, the arguments around the "fraud on the market" theory that had evolved in US securities class actions, to avoid having to prove individual reliance. That is that a particular shareholder did have regard to the share price, or more directly the representation or the lack of representation in acquiring those shares or deciding not to sell shares.

But of course that is a very expensive exercise for funders and plaintiffs to have to undertake. And so they really did argue for many years that there was enough in our statutes, which do rely upon this concept of reliance and direct and indirect, direct reliance on fraud on the market.

And in 2019 in the Myer class action, which did actually proceed to judgment , the courts, our Federal Court of Australia, accepted for the first time in a very robust judgement that it is available. And thereby making it much easier to demonstrate a damages claim by individual shareholders at an aggregate level, simply by demonstrating that either the representation that was made or the lack of representation that was made had a real impact on the share price. And so in theory, because of the efficient market hypotheses, there was either the share price was undervalued, and therefore they were entitled to the difference between what it should have been worth and what it was in fact trading at. And that became a very sort of uniform way to reap the rewards from a claim and made it much more viable to launch shareholder class actions in that context.

And it is quite a seminal moment, and for 10 years+ we were having the very debate you're grappling with now. But they will, the plaintiffs and the funders, will continue pursuing that line because they know it's a very profitable endeavour if they're successful ultimately in that regard.

Tim:

And Jon, I mean as we've alluded to, claimants are advancing market reliance and price reliance type arguments here in the UK in securities class actions. But what do we think about their chances of a court accepting those in a section 90A FSMA context?

Jon:

I'm skeptical actually as to whether the courts will accept that line of argument. I think just sort of stepping back, so our listeners understand what section 90A does, it covers liability for untrue or misleading statements or omissions from information that was disclosed to the market via a properly recognised information service. And it's essentially a statutory fraud claim.

And as you've touched on, Tim, it requires proof by a shareholder who's bringing a claim, goes the conventional analysis of section 90A, it requires proof that they relied on what they say are the misleading statements. So really the investors need to say, "Yes, we were influenced by the information that we're saying is misleading. Or the omission affected our decision to buy shares, to hold shares or to sell shares." And that's really hard because most shareholders buy on price.

Nonetheless, and in recognition, I suppose, of those difficulties, exactly as you and Nick have touched on, there was a lot of discussion around the "fraud on the market" theory. It's something that we know claimant law firms and funders are thinking about hard trying to push.

Why do I say I don't think it will work in the English courts? First of all, I think it's really hard to square it with the wording of the legislation that we are dealing with. And that says that, I'll just read it out: "A loss is not regarded as suffered as a result of the statement or omission, unless the person suffering it acquired the relevant securities in reliance on the information in question and at the time and in circumstances in which it was reasonable for him to rely on." So the legislation I think is specifically referencing reliance on the information, and more than that, in fact, reasonable reliance.

So never say never. I certainly agree that claimant law firms, funders will continue to push it because of the potential rewards they can reap if they do, and because of the leverage they can exert simply just to try and drive a settlement through pressure tactics. But as to whether at the end of the day a court would accept it, if I had to put my money on it, I would say they won't.

Tim:

Yeah. I think if I was also a betting man, I'd be with you on that one. I mean, I think what is interesting though at the moment is how this issue's being approached in the current securities class actions that are going through the courts at the moment from a case management perspective.

I mean just to set the scene for that point, I mean in securities class actions, claimants often seek to postpone issues involving reliance and causation and quantum and limitation to a second trial. And they do that really for a couple of reasons from their perspective. The first is that it postpones incurring significant costs until the question of liability has been determined. And it also makes the first trial solely about the defendant's conduct. So it's obviously attractive from their point of view, but defendants obviously tend to resist those attempts to have a split trial.

And one of the things that's often argued is that the claimant's witnesses can potentially be influenced by the first findings trial when preparing their evidence in relation to reliance in a second trial. So I think in that context, I think it was an interlocutory decision that we got in the G4S securities litigation last year was interesting because there the court did order a split trial as the claimants wanted.

But what they also did do at the defendant's request was set up a parallel process of sampling of the various claimant's cases on reliance. And they required that all the claimants in that sample provide the defendant with proper particularization as to their reliance cases. For example, whether it was said that particular named individual reviewed the relevant published information and relied on it, or whether the only evidence they were going to put forward was more so on some generalised basis.

So yeah, it's going to be a key battleground, as I say, and will be very interesting to see how that develops.

Just moving to another topic, I mean, Nick, I think one of the features of having a more mature class action regime is that you'll have more experience in settling class actions than we do. I mean, that's obviously from a client's perspective the key thing, is seeing the light at the end of the tunnel. And I think I'm right in saying that there was an empirical study done in Australia that tells us that two thirds of all finalised class actions involving a funder were settled.

Now the mechanisms for settlement are obviously going to be different between here and Australia. And even here they differ depending on how the claim is brought.

But from the client's perspective, what can we learn in terms of how best to bring a class action to a close, based on your experience in Australia?

Nick:

That is actually the key question we have found over the years, that the boards of our clients when confronted with a class action, that is the very question they ask. They're not sitting there saying,

"How long can we defend this for it?" It's more a case of, "Ultimately if we wish to settle, how do we settle this?"

And there are various ways one can settle sort of a mass claim, but once the Federal Court of Australia or our various Supreme Courts are seized of jurisdiction in relation to a class action, one needs to get court approval to approve that settlement. And that mechanically involves demonstrating to the court that it is a reasonable settlement. And the judge has to not rubber stamp, but literally has to be satisfied that the amount and the admissions that have made and the damages that have been agreed to is reasonable given the claim that is made.

And mechanically how that occurs is one obtains a senior counsel's opinion, a king's counsel's opinion, on the prospects. And that becomes a confidential exhibit that is provided to the judge. And the judge then gets a level of satisfaction that there has been at least a view expressed at the highest levels on the plaintiff's side. Or alternatively, there's an independent opinion provided or amicus, a friend of the court, who does provide that opinion and is satisfied given the quality of the evidence that settlement is reasonable.

Now, that's the mechanics. And I mention that because often these cases, as you've pointed out, that they do settle. And they often settle after a very large mediation, and sometimes it takes several rounds of mediation to resolve a claim. But there's two dynamics that occur in that mediation for this market to be cognizant of, and it's an unfortunate outcome, but the litigation funders are in that room, and invariably they are, to use that expression, they are calling the shots.

And yes, you have the plaintiff law firm whose duty is to the clients and to the groups to pursue that claim. But ultimately the funder, and this is built into the litigation funding agreements, the litigation funder has ultimate rights in relation to a settlement amount.

And regrettably, often what happens is they built into a settlement their reward, their remuneration, their profit margin. And of course judges have criticised that. But often the costs, the approved costs, and the funding amount, the funding fee, is a larger proportion of the settlement amount that ultimately goes through to the group members.

Now, the difficulty with that is they use that as a negotiating tool in the mediation. You will be in a mediation and they will say: "Well, we can't settle for 10 cents in the dollar because the court won't approve it. We cannot get a king's counsel to sign off on that being a reasonable settlement."

So those mechanisms become a negotiating tool in the context of a mediation. And that informs, of course, when a mediation should be undertaken. And just like most commercial litigation, you try and do it at the point where you can extract most leverage. And regrettably, that often happens when the evidence has already been filed.

So that you can walk into a settlement and say, "Well, you've led this evidence on liability, we deny liability or alternatively admit it on a narrower ground, but then let's move on to damages." So what it means for our clients in the UK is with the larger class actions they will take a long time and are invariably expensive, because to get the best outcome you need to go through the evidence and file your evidence to put yourself in a good position to be cognizant of that dynamic.

Tim:

Yeah, absolutely.

Jon, I mean, one of the things that we've often spoken about recently is the potential trend from a settlement perspective of the use of voluntary redress schemes as a means of settling class actions on a client's own terms. What are your thoughts on that?

Jon:

Yeah. Well, thanks Tim. I mean, as you say, it's something that we are seeing clients more and more interested in. And I think it very much links with what Nick was just saying, they're aware of the expense of litigation, the time it will take up, and the reputational implications that it will have.

And they are looking at ways that they might address a problem that might otherwise morph into a class action. So one way of doing that is to establish a voluntary scheme to provide for compensation, at least for monetary losses.

There are advantages and there are disadvantages to that. I think in terms of the potential advantages, on its face, at least in theory, you might get some cost savings because a settlement directly with an individual means that the lawyers and the funders who would otherwise be involved don't have to be paid. And so as Nick was saying, you sort of don't have them sitting around the table, or at least they don't have as much leverage in one sense because they don't have as many claimants.

It's also possible, that if you've got a client who is operating in a regulated sector, as many of our clients are, at least in some circumstances they can look favourably on this kind of scheme. And if you get it right, it has optical advantages in suggesting a sort of almost pastoral approach to customers and how you're treating customers, and an opportunity to step back and try and redress some of the reputational harm that might have been caused by the incident that led to the class action.

But there are very real potential disadvantages that mean we always counsel our clients to think very carefully about whether they want this kind of scheme. And if they do, how they go about implementing it. I mean, most obviously it runs the risk of substantially swelling the number of claimants, particularly as many claimants will come forward if they can think they can get a payout without having to deal with lawyers or the litigation process. There can also be really substantial costs involved in just sort of setting up, administering a scheme. And in particular based on my experience, just in verifying the validity of the claims that you're dealing with.

And the final point I think I'd make is that if you get it wrong it can compound the problem and lead to even more adverse publicity.

But Nick, what's your experience of these kind of schemes in Australia?

Nick:

There are very few statutory schemes to resolve mass claims. Our regulators very early on, prior to the GFC, worked out very quickly that, and that may become a feature in the UK, is that while ever they pursue entities for breaches of various obligations and acts, particularly in the financial services and banking industries, that they could be left to prosecute the civil liability actions and to pursue them from a regulatory perspective, from a deterrence, a general and specific deterrence.

And were quite vocal 15 years ago plus in allowing from an access to justice perspective, and indeed encouraging on one view, the private bar, particularly the litigation funders and the class action law firms, to take over the damages. So a dichotomy emerged where the regulators were quite happy to prosecute and do what they're good at, and stay out of the damages side and let the private market work through that issue.

And particularly because they could justify it to the parliament on the basis that the litigation funding environment did encourage access to justice and just allowed the private claimant's bar to look after that aspect.

And I think we see that dichotomy emerging across a range of regulators in different stages of their evolution. And most recently you see that in the privacy regulator field, allowing freeing up the regulator to pursue entities for data breaches but not the compensation aspect of that, and allowing the class actions to take over that portion of it, to pursue what we call follow on class actions. And you see that in the competition law space, you see that across all regulated industries, and so it doesn't really feature much.

With our post-GFC banking crisis, of course, many of the banks to stay on the side of the government and the regulators, entered into voluntary remediation schemes to provide redress for wrongdoing and financial claims that we tend to see in both markets. But that was purely voluntary and with sort of very light touch supervision by the regulators.

Jon:

Really interesting.

Tim:

Moving now to a topic that we've sort of been touching on as we go along the way, and I said at the start that trends aren't all one way. There are some things that have been happening in this market that have also been arguably exported to the Australian market, and particularly I think where that applies is the issue of data breaches.

Jon, from a UK perspective the story's obviously dominated by the Supreme Court decision in Lloyd and Google, and there are some things we're seeing that you can tell us about. But perhaps, Nick, you could tell us a bit about the status of the data-based claims and how exactly it is that the claimants are putting those?

Nick:

Yeah. Thank you, Tim. It's relatively new in our jurisdiction, there were a number of significant alleged data breaches in September, October of last year.

And so the class actions, there's two significant ones that have been launched. That they really rely upon obligations in the various privacy acts for companies broadly to have the reasonable systems in place to ensure the protection of confidential information of customers. That's a provision that is common amongst many jurisdictions, including in the UK.

And so the target of the claim invariably is, did they have systems in place to ensure that that particular cyber-attack would've been unsuccessful? So that's ultimately an issue that will play out in the class actions. Those particular matters are also the subject of a regulatory investigation. So the liability claim is effectively, did you have reasonable systems in place? And did you take adequate steps to protect that personal information?

Tim:

Listening to you speak there, Nick, I wonder whether if that event happened here, the cause of action that the claimants would be seeking would be a misuse of private information, which is a relatively recent tort that the courts have started recognising. It has in more recent times started being applied in a data context, particularly as a result of what the Supreme Court said in Lloyd v Google.

Nick:

Just on that point, Tim, it's a very good point you raise. There's a tort of privacy, it's just not recognised in our country. There's a statutory version of it, but only the regulator can pursue it, so the cause of action is based on misrepresentation or contractual or negligence. So you're absolutely right, so it's quite vexed how [inaudible] the claims.

Tim:

Yeah. Well, it's not a straightforward one here. I mean, Jon, we've seen a recent case brought against Google, Google are in the crosshairs again for a data-based claim. Do you want to tell us about the DeepMind case?

Jon:

Yeah, yeah. I mean, it's just sort of stepping back on this concept of the use of, misuse of private information as well. It's interesting, Nick, a lot of what you say unsurprisingly resonates with what we're seeing in this jurisdiction. A lot of cyber-attacks, deployment of ransomware, and increasingly a trend towards those who are deploying ransomware, exfiltrating data, putting it on the dark web as a means of increasing their leverage in getting a ransom.

I think, just sort of spending a little bit of time on the way the jurisprudence has developed, I think there was a high point of data breach litigation in this country about two years ago, where whenever one of these breaches were announced we were just seeing a flood of claims.

And I remember dealing with one particular claim where we'd been brought in when an attack happened. Our client announced the details of the breach to the market speedily, and we received the first claim or notice of claim on that day, which was really striking. And that was followed by a lot of claimants [inaudible] jumping on the bandwagon, advertising on social media to try and grow their following and make themselves into the lead solicitor when they were doing that.

I think since then actually things have got a lot harder. That's partly because of the decision of the Supreme Court in Lloyd v Google, but it's also because of some other decisions where the courts have been developing the case law around this.

There are claimants still seeking to rely on it. Tim, you mentioned the case that was brought against Google and its subsidiary DeepMind, which was an attempt to sidestep, I think, some of the difficulties that have been created by the earlier challenge by Mr. Lloyd against Google.

But there again, because of I think some of the peculiarities of our system and the requirement to show the same interest in bringing the representative action, then the court really had to analyse that on a sort of lowest common denominator basis. Which meant that the court just could not find that a viable claim existed to move forward, and the claims for misuse of private information were struck out and that case proceeded no further.

But what is clear is that the claimant law firms, funders haven't given up on this area. They're continuing to explore ways of bringing these claims, increasing reliance on competition. Which is the one area where we do have anopt-out mechanism in this country, and sort of seeking to refashion some claims in that area, which I think we will see more of, together with pressure and legislative change to introduce an opt-out mechanism in respect of class sections generally.

Tim:

Yeah, I'd agree with that. I mean, I think the interesting thing about the data-based claims here is that they do all have to be seen through the prism of the "same interest test" in the representative action procedure. And even though we might have the potentially available causes of action, say compared to a jurisdiction like Australia, when you apply the same interest test, it's just so hard to avoid the question of getting into individual assessment of loss. And I think that's just been the barrier.

And as you say, Jon, I think there are lots of people in the market who are now saying that it doesn't really make a lot of sense that there could be a specific opt-out procedure available for infringement of competition law, but then if you're the victim of a data breach, why is it that your claim is subject to a different sets of rules and procedures?

So I think that's going to be a very interesting area over the next few years in this jurisdiction, as to whether there is the wider reform as you say.

That's all we've got time for. Thank you for listening and be sure to check out our other episodes in this series on class actions. We welcome any feedback or questions, so do get in touch with any of us, our details are on our website.

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