Legg, Michael --- "Evaluating class action effectiveness" [2015] PrecedentAULA 46; (2015) 129 Precedent 10

Since their introduction in 1992, class actions have become an accepted part of the litigation landscape in Australia. However, despite this acceptance there remains an ongoing need to evaluate the effectiveness of the class action. This article considers effectiveness by reference to the goals set down for the class action.

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The objective of class action litigation when introduced at the federal level was to provide access to justice, to resolve disputes more efficiently, avoid respondents facing multiple suits and the risk of inconsistent findings, and to reduce costs for the parties and the courts.^[1] Similar objectives saw the introduction of class actions in Victoria and NSW.^[2] A further goal has been a regulatory one, by using class actions to vindicate broader statutory policies such as disclosure to the securities market, prohibiting cartels or fostering safe pharmaceuticals. The goal of the class action is to deter breaches of the law.^[3]

Modern society is characterised by mass manufacturing, mass promotion, mass investment and mass consumption– all of which give rise to mass wrongs, such as the mass-produced defective product, large-scale pollution, and misleading advertising or securities disclosures aimed at numerous consumers or shareholders. Individuals affected by such conduct are unable to seek compensation acting alone due to the costs of litigation compared with the losses or damage they seek to recover.

Class actions promote access to justice because they allow for the sharing of costs, economies of scale and can overcome the collective action problem. Groups of harmed persons may be large, dispersed and disorganised, and therefore suffer from a collective action dilemma. The benefits to the group – namely, recovery of damages – exceed the aggregate costs to the individual members of the group, making action desirable. However, because benefits are dispersed among the group, an individual may be unwilling to incur the cost of action alone as those costs would exceed their individual benefits. The class action allows the benefit to be pursued by sharing the costs.

The ability to aggregate claims and obtain economies of scale is also important because it attracts lawyers and litigation funders who are prepared to provide their labour, knowledge and/or capital in return for a profit. Indeed, in Europe, where grouping procedures were adopted without attending to incentives for lawyers, the result has been said to be ‘beautiful cars without engines’.^[4] Someone needs to be able to cover the costs of litigation and bear the risk of failure. Due to the collective action problem, individual group members are unlikely to do this.

While Australia has class action and funding infrastructure in place to achieve access to justice, the question remains as to what sort of access is being achieved. Class actions in a range of fields have been justified on the basis that they perform the valuable function of compensating large numbers of victims. An important criterion for measuring the success of compensation is that all of those ‘who are entitled to compensation ... actually receive compensation and in the amount to which they are entitled’.^[5] Put differently, a class action regime will not be effective if people with valid claims are excluded from compensation or, upon being included, do not receive complete compensation.

There are two main risks in ensuring the inclusion of all people with claims in a class action. The first is the use of the so-called ‘closed class’, where the group on whose behalf the proceedings are brought is limited to those who have entered into litigation funding agreements.^[6] In this framework, other similarly situated putative group members are excluded and do not receive the benefit of the class action. The second risk is that class actions depend heavily on notice to group members when it comes time to participate in settlements or prove individual claims. If that notice is limited in distribution or unclear, then group members may not participate due to lack of knowledge or misunderstanding.

The efficacy of class actions in achieving compensation requires a comparison between the losses suffered and the settlement or judgment achieved. Many factors can impact the size of a settlement relative to actual losses. A significant factor that the parties and the courts are expressly directed to consider by the federal and Victorian practice notes is the existence of ‘litigation risk’. Litigation risk refers to ‘the vagaries of litigation and the risks of failure as well as the expense to be incurred in protracted litigation’.^[7] Litigation risk exists in all proceedings because documentary evidence may be incomplete or a witness may forget or not be believed. Equally, the underlying law may be uncertain, which may impact on whether a claim would succeed or the calculation of the quantum to be recovered. Some courts have provided the comparison – in the Multiplex shareholder class action, group members recovered in the order of 62 cents in the dollar of the reasonable value of their claims, and in the Oz Minerals shareholder class action the total settlement sum equated to about 32 per cent of the value of the claims if they were completely successful. However, most judgments do not include this important indicia and frequently rely on suppression and non-publication orders.

Transaction costs, which directly reduce the amount of compensation received by the harmed person, are also significant in assessing the achievement of the goal of compensation. In litigation, these costs are legal fees and disbursements (for example, court filing fees, expert witness fees) and, in some situations, litigation funder’s fees. As already stated, financial incentives for lawyers and funders are necessary for the litigation to be brought. However, the need for both lawyers and funders to make a profit can result in increased transaction costs and decreased net returns to the class members.^[8] It therefore becomes important that legal fees and funding fees are fair and reasonable. While courts usually assess legal fees against this criteria, such criteria are not applied to the funder’s fee.^[9] Examples of the transaction costs incurred in class actions are set out in Table 1.^[10]

TABLE 1 – SAMPLE CLASS ACTION SETTLEMENTS WITH LAWYER AND LITIGATION FUNDER FEES

Case Name	Settlement Amount*	Lawyer Fees	Litigation Funder Fees	Comments
Lopez v Star World Enterprises Pty Ltd (Product liability)	$1.45m	$700,000	No funder	Respondent insolvent.
Williams v FAI Home Security Pty Ltd (Product liability)	$910,000	$415,000	No funder	Legal fees agreement included a 25 per cent uplift but this was not charged.
GIO shareholder class action	$112m	$15m	No funder	Legal fees included a 25 per cent uplift.
Courtney v Medtel Pty Limited (Product liability)	$4.7m (estimated)	$2.3m	No funder	Legal fees included a 25 per cent uplift.
Harris Scarfe shareholder class action	$3m	$1.55m	No funder	Respondent's insurance was limited and would be exhausted by defence costs.
Vitamins cartel class action	$41m	$10.5m	No funder
Telstra shareholder class action	$5m	$1.25m	No funder
Aristocrat Leisure shareholder class action	$144.5m	$8.5m	$35m
Multiplex shareholder class action	$110m	$11m	Not disclosed as litigation funder was based offshore.
Pharm-a-Care Laboratories Pty Ltd v Commonwealth (Misfeasance in public office and negligence)	$67.5m	$5m	$24m
Corrugated Cardboard cartel class action	$120m	$25m	No funder	Largest cartel class action settlement in Australia.
Rubber Chemicals cartel class action	$1.5m	$1.1m	No funder	Second respondent was bankrupt. Part of settlement was in common stock that had to be sold.
Oz Minerals shareholder class actions	$60m ($39m and $21m)	$3.1m and $1.8m	$15m and another undisclosed amount.	Two shareholder class actions
Centro shareholder class action	$200m ($150m for two class actions and $50m for the other)	$21.1m for two class actions and $10.06m for the other	$60m for two class actions and another undisclosed amount.	Three shareholder class actions. Largest shareholder class action settlement in Australia.
GPT shareholder class action	$75m	$8.5m and $10,000 in additional expenses	Not disclosed
Great Southern financial product class action	$23.8m	$20m	No funder
Kilmore East-Kinglake bushfire class action	$494m	$60m	No funder	Legal fees included a 25 per cent uplift. Largest class action settlement in Australia.

Efficiency arises through the adjudication of numerous claims via a single proceeding. The idea is that one class action that resolves some or all issues for a group of persons is more efficient than numerous individual suits that all raise the same or similar issues. This saves party and court resources. Justice Lindgren explained the issue through the following rhetorical question:

‘But let it be assumed that in respect of the resolution of each woman's claim, two-thirds of the time to be spent will have to be devoted to issues unique to that claim and one-third to issues which are common to all claims. Is it still not preferable that the common issues be heard and determined once so as to be binding as between each claimant and the respondents rather than many times?’^[11]

However, the extent of the efficiency achieved turns on the cohesiveness of the claims contained in the class action. The greater the common issues, the further each individual’s case is advanced by the class action. Equally, where there is one common issue and a multitude of individual issues, then much still remains to be resolved. The class action procedure makes provision for sub-groups and individual issues as a way to resolve non-common issues. Nonetheless, the efficiencies achieved are reduced. In the worst case scenario, the individual issues are such that an individual group member or funder is not prepared to bear the cost of resolving those individual issues and the earlier common issue trial is for naught.

Class actions have also been said to provide a means whereby defendants can crystallise their liability in a timely and cost-effective way, by enabling finalisation of claims from all group members including those who are not specifically identified other than as falling within the description of the group.^[12] Indeed, the class action can provide an effective claims management tool for corporations.

Despite the efficiencies that can arise, the costs in Table 1 suggest that class actions are expensive to run. Additional costs are caused by the need to manage numerous claims, ranging from fielding general enquiries from group members through to obtaining sufficient information to validate and quantify claims as part of a settlement distribution process. There are also additional requirements for class actions that must be complied with, such as providing the right to opt out and seeking court approval of any settlement, both of which require court-approved notices. It must also be recognised that the aggregation of claims and the publicity attracted by class actions can give rise to high stakes litigation. When the stakes increase, then litigation is usually more hard-fought, with greater costs being incurred. If the class action is not closely managed by the court, then costs can become problematic. The sought-after cost savings may consequently be lost.

Deterrence involves an entity complying with the law because of the fear of the perceived consequences of non-compliance. Those consequences are usually sanctions of some kind that are unpleasant or costly. Deterrence is usually divided into two categories: specific and general. Specific deterrence aims to deter ‘the particular contravenor who might be tempted to re-offend’; that is, the entity the subject of the sanctions, while general deterrence is aimed at deterring others faced with similar circumstances ‘who might be tempted not to comply with the law’.^[13] The class action, like regulatory suits, achieves deterrence by imposing sanctions. However, rather than consisting of imprisonment or fines, the sanctions are the costs of litigation, the payment of compensation and reputational harm. The class action has the ability to better achieve deterrence by being able to combine all of the claims for compensation (even when losses are small) to ensure that the full social cost is imposed on the defendant. However, that ability is compromised if group members opt out or fail to claim.

Deterrence scholarship has found that the certainty of being apprehended and punished has a greater deterrent effect than the severity or speed of the punishment. In the criminal law, courts have proceeded on the basis that deterrence is achieved not by harsher sentences but by ‘the impression on the minds of those who are persisting in a course of crime that detection is likely and punishment will be certain’.^[14] The class action aids in the certainty of apprehension because it harnesses private resources and incentives to pursue litigation in addition to that brought by government regulators. In short, the probability of being caught increases. However, class actions may also lead to over-deterrence. This may occur where the class action pursues claims that are high risk or of dubious merit but a settlement payment is still made because the defendant wants to avoid even a slight risk of loss and/or it is cheaper than defending the class action even if ultimately successful. The defendant and others in similar circumstances (responding to general deterrence) may then expend resources unnecessarily in seeking to avoid future contraventions.

However, a number of features of the class action can undermine effective deterrence. The first is that settlement rather than trial can reduce the force of a class action in communicating what is acceptable conduct because no violation is found. However, settlement does not completely deprive the community of an examination of the alleged illegal conduct, as the settlement of a class action requires court approval. Nonetheless, settlement may still be portrayed as a business decision based on weighing costs and benefits. Where there is no admission of liability, then it cannot be said that a defendant has contravened the law.

It has been observed that ‘[d]eterrence works best when it is focused on the culpable’.^[15] In class actions, as with regulatory suits, an important consideration is whether proceedings should be commenced against the corporate entity or responsible individuals within the corporation. Extracting compensation from the company may not deter individuals. Indeed, it is the shareholders who are ultimately sanctioned rather than the persons who are responsible for the contravention. Yet the corporation may be targetted because it has greater resources allowing for the payment of higher compensation, which in turn provides a greater return to a litigation funder.

Further, as foreshadowed by the above reference to shareholders being sanctioned, monetary payments will not achieve deterrence if they can be transferred on to third parties. For example, if a compensation payout can be passed on to customers without damaging the competitive position of the corporation, then deterrence may be undermined. A further example of the dispersion of deterrence is insurance. The usual concern is that insurance undermines deterrence because the wrongdoer is relieved from making payment. Instead, the payment is to be met by the insurance provider. If companies and directors are insulated from the costs of class actions, these costs are unlikely to inform their decision-making and deter law-breaking behaviour. But insurance may be central to there being funds for compensation where companies and directors do not have other resources.

The ability of the class action to achieve effective deterrence therefore depends on a number of factors. Some are within the control of the people bringing suit, such as who to sue. Other factors, such as insurance, involve larger policy issues as to what claims can be insured. Further, steps aimed at better achieving deterrence may compromise other goals, such as access to compensation.

Determining the effectiveness of class actions is difficult and, like beauty, may be in the eye of the beholder. It may also depend upon which goal is prioritised. However, more objective measures are needed, such as the amount of compensation received compared with losses, and greater transparency with respect to the amounts charged by litigation funders. Qualitative factors that will vary on a case-by-case basis must necessarily still play a role, such as an assessment of prospects of success and the reasonableness of a settlement sum, but courts should be upfront in their reasoning on these issues. Some are, but frequently suppression and non-publication orders leave little but recitations of the legal test – the settlement is ‘fair and reasonable’. Even group members may be none the wiser as to whether the class action has been used effectively.^[16]

Michael Legg is Associate Professor, Faculty of Law, UNSW. He teaches and researches in the areas of complex civil litigation, regulatory litigation and class actions. EMAIL m.legg@unsw.edu.au.

^[1] Second Reading Speech by the Attorney-General, Australia, House of Representatives, Parliamentary Debates (Hansard), 14 November 1991 at p3176; Bright v Femcare Ltd [2002] FCAFC 243; (2002) 195 ALR 574 at [152].

^[2] Thomas v Powercor Australia Ltd (Ruling No. 1) [2010] VSC 489 at [27]; Second Reading Speech by the Attorney-General NSW, Legislative Council, Hansard, 24 November 2010.

^[3] See Access to Justice Taskforce, Federal Attorney-General’s Department, A Strategic Framework for Access to Justice in the Federal Civil Justice System (September 2009).

^[4] Filippo Valguarnera, ‘Legal Tradition as an Obstacle: Europe's Difficult Journey to Class Action’ (2010) 10 (2) Global Jurist Article 10 at 42.

^[5] Peter Cane, Atiyah’s Accidents, Compensation and the Law (Cambridge University Press, 8^th ed 2013) 409.

^[6] See, for example, Rodriguez & Sons Pty Ltd v Queensland Bulk Water Supply Authority [2014] NSWSC 1565 at [22]- [23].

^[8] Jasminka Kalajdzic, Peter Cashman, and Alana Longmoore, ‘Justice for Profit: A Comparative Analysis of Australian, Canadian and US Third-Party Litigation Funding’ (2013) 61 American Journal of Comparative Law 93 at 104.

^[10] Based on the author’s research. An earlier version of this table appears in Legg and McInnes, Annotated Class Actions Legislation (LexisNexis 2014).

Precedent (Australian Lawyers Alliance)

Legg, Michael --- "Evaluating class action effectiveness" [2015] PrecedentAULA 46; (2015) 129 Precedent 10