Class actions in Australia

Class actions are an established and important part of the Australian legal landscape. In recent years, Australia has become the most likely  jurisdiction outside of the United States in which a corporation will face significant class action  litigation.

Recent developments in the Australian legal landscape – including increasingly plaintiff-friendly  class action laws, the acceptance of litigation funding and a growing number of plaintiff class  action legal practices – have facilitated that evolution. At least in part, these developments are  the direct result of judicial and legislative support for class actions (and third party funding of  class actions) as important means of facilitating access to the civil justice system. The checks  and balances in the Australian system have, however, helped to prevent what was predicted in the  mid-2000s to be an ‘explosion’ of class action activity.

This paper outlines some of the key issues and trends in Australian class actions.

For more details  on shareholder/securities class actions in Australia, click here for our separate note on that topic.

The Australian class action regime

Most class actions in Australia are commenced under the Federal Court of Australia’s representative  proceeding regime.¹

The key features of that regime include:

• threshold requirements: the following requirements must be met to commence a class action:
  • there must be seven or more persons with claims against the same defendant;
  • the claims must be in respect of, or arise out of, the same, similar or related circumstances;  and
  • the claims must give rise to at least one substantial common issue of law or fact;
• representative plaintiff(s): the claim is brought on behalf of all class members by one (or a  small number of) representative plaintiff(s) – the representatives are the only class members to be  parties to the proceedings;
• class definition: the class can be defined by a list of names or by a set of criteria (such as  all persons who acquired shares in Company XYZ during a certain period) – it is not necessary to  name members of the class nor to specify the number of people in the class or the total value of their claims;
• opt-out regime: every potential claimant who falls within the class definition is a member of the class unless they opt-out of the proceedings. A  class may, however, be defined in a way that effectively requires members to opt-in to the class  (including by entering into a retainer with a particular law firm or an arrangement with a  particular third party funder);
• settlement approval: once proceedings are commenced, any settlement must be approved by the court  – this requires the court to be satisfied that the settlement is fair and reasonable and in the interest of class members.

How are the class actions regimes in Australia and the United States different?

Class actions in Australia are different to class actions in the United States in (at least) the significant ways outlined in the table below:

Click here to view the table.

The absence of a class certification process and the low common issues threshold make it easier to commence and maintain a class action in Australia than in  the United States. As a result, the Australian class action regime has been described as ‘one of  the most liberal class action rules in the entire world’.2 The Australian position in respect of  costs is, however, generally acknowledged as being a significant deterrent to speculative  litigation and a key reason why Australia has not seen a proliferation of class action activity.

The entrenchment of third party funding Commercial third party litigation funders have been operating in Australia in an insolvency context  since the 1990s. In 2001, Australia’s largest and most active litigation funder listed on the  Australian Stock Exchange and expanded its business to include significant non-insolvency claims  and class actions. That move was controversial and led to many challenges, most of which (following  the abolition  of the torts of maintenance and champerty in most Australian states) were based on  public policy and abuse of process arguments related to third party entrepreneurialism in the  litigation process.

In 2006, the High Court of Australia gave its approval  to the concept of third party funding when it found that it was not contrary to public policy or an abuse of process (although individual funding arrangements may still fall foul of those imperatives).3 The ruling removed the questions  surrounding the validity of third party funding and has encouraged new funders to enter the Australian market. Third party funding has been the most significant factor in the development of  the Australian class actions landscape in recent years, with more than triple the number of class  actions commenced in the three years following the decision than in the three years prior.4 It is  now unusual for major class actions to be pursued without third party funding.

Since the High Court’s decision, various appellate court decisions have held that certain  regulatory regimes (such as the regime for managed investment schemes) applied to third party  funders. The previous Federal Government was, however, quick to legislate to remove that regulatory  burden. That action was taken on policy grounds related to the desirability of third party funding  in facilitating access to justice through class actions. As a result, third party funders are not  subject to any regulation beyond the general law (to the extent the funder is subject to Australian  law) and a requirement to have adequate processes  in place for managing conflicts of interest.  This means that anyone can fund litigation except for the lawyers involved in the case (who are prohibited from entering into an arrangement that involves taking a  share of the proceeds of the litigation).

There may, however, be a shift in that position as a result of the change of government in late  2013. The Attorney-General has raised concerns about the current regime and indicated that the regulation of the third party funding industry is under ‘active consideration’. That consideration has,  however, been on hold pending an inquiry by the Productivity Commission into ‘Access to Justice Arrangements’. In December 2014, the Productivity Commission recommended that third party funders should be  subject to a licensing regime which focusses on capital adequacy and disclosure requirements.

In parallel with the debate around regulation, third party funders have become an increasingly entrenched, and accepted, participant in the Australian class actions sector. The level of that  acceptance is highlighted by the following recent decisions:

• the Federal Court held that it was in the interests of justice, and in keeping with its  supervisory  role in class action proceedings, to require that class members in an investor class  action be informed that there was a risk that funding for the proceedings would be withdrawn if sufficient  class members did not enter into an agreement with the third party funder;5 and
• the Full Federal Court held that a failure to provide evidence as to why a separate investor  class action was not being commercially funded was a factor  in favour of requiring the  representative plaintiff to provide security for the respondents’ costs.6

Moreover, the commercial imperatives of third-party funders have pushed the boundaries of what is  permissible under Australia’s class action regimes. The most obvious example of this is the way in  which they have changed the essential nature of many class actions from ‘opt-out’ to ‘opt-in’ cases  by only funding claims on behalf of persons who have entered into funding agreements.

In recent times, funders have sought to further cement their entrenchment in class action  proceedings by asking the courts to make orders that would entitle them to receive a funding  commission from all group members who participate in a settlement or judgment in an ‘opt-out’ claim, including those  who have not signed a funding agreement. At this stage, the funders have not come up with a  mechanism for this development which has survived challenge (orders have been made by consent in two cases), but they continue to adapt their proposed approach  in an attempt to find a mechanism that is acceptable to the courts.

Other drivers

Aside from the entrenchment of third party funding, there have been a number of other sustained and  long-term drivers for the growing significance of class actions in Australia, including the  following:

• following the contraction of their personal injury law practices as a result of reform to  Australian tort law, traditional plaintiff firms have focussed on class actions as significant business opportunities;
• there has been (and continues to be) a growing focus on corporate governance and the role of  private litigation in enforcement – indeed, the heads of some of Australia’s peak regulators have  openly endorsed the role that class actions play in enforcement and deterrence;
• the introduction of, and amendment to, court procedures, rules and regimes directed at  facilitating the bringing of class actions;
• firms other than the traditional plaintiff firms have seen the significant business  opportunities this confluence of circumstances (sometimes described as a ‘perfect storm’) has  created and have developed plaintiff-focussed class action practices and relationships with third  party funders; and
• the increasing number of plaintiff class action practices and the ‘light touch’ approach to  regulation of third party funders has led to additional third party funders entering the Australian market.

​The prohibition against misleading and deceptive conduct

Another important factor is Australia’s statutory prohibition against misleading or deceptive conduct. In very general terms, in a commercial  context, a person will have a statutory cause of action in respect of loss caused by the misleading  or deceptive conduct of another. In establishing that cause of action, it is not necessary to prove  that the conduct was fraudulent, intentional or negligent – simply that it was misleading or  deceptive or likely to mislead or deceive. This enables many causes of action to be brought in  Australia that could not be brought in other jurisdictions.

Misleading and deceptive conduct claims are usually the primary basis for shareholder/securities  class actions in Australia. In proving those claims it is only necessary to prove that the company  misled the market; whether or not the company intended to do so, or was negligent in doing so, is  irrelevant. By way of contrast, most similar actions in the United States (including under SEC Rule  10b-5) require proof of scienter (intentional fraud or deceit).

Another telling example is that, in November 2012, in a class action focused on the rating of a  structured financial product, the Federal Court of Australia held that Standard & Poor’s had engaged in misleading and deceptive conduct in assigning a AAA rating to  the product because it misrepresented the risk of default  of the product. The Court also found  that the arranging bank had engaged in misleading and deceptive conduct by marketing the product by  reference to the rating. This was the first case in the world to find that a rating was misleading.

Trends in Australian class actions

Steady increase in major claims, but no ‘explosion’: Despite the so-called ‘perfect storm’ conditions for class action growth, there has not been an  ‘explosion’ (or even significant increase) in the number of class actions filed in recent years.  Class actions have, however, become an increasingly significant and evolved part of the Australian  legal landscape.

A potential policy shift: In recent years, the Federal Government has played a significant role in  the development of the policy and regulatory framework applicable to Australian class actions,  particularly through its facilitative approach to third party funding. This has largely been driven  by an acceptance, at a policy level, that third party funding of class actions promotes access to  justice. As mentioned above, there may, however, be a shift in that policy as a result of the change of government in late 2013   and the recommendations made by the Productivity Commission in December 2014.

Broader range of claims: There has also been an expansion in the contexts in which class actions  are being commenced.

Australian class actions were traditionally the domain of the product liability claim. The first  securities class action was filed in 1999. By 2009, shareholder class actions had overtaken product liability claims as the most common type of class action. Since about 2008, there has been  a marked increase in the number of non-equity investor claims – many, but by no means all, of these  claims relate to losses associated with the global credit crisis. In recent years there has also been a number of mass consumer claims, the most high profile  of which relates to the ‘exception fees’ charged by major retail banks. There has also been a slight  resurgence in product liability claims and a number of claims alleging anti-competitive conduct and  environmental damage.

Broader range of defendants: Traditionally, the defendant in Australian class actions has been the  company most directly connected with the alleged damage. In recent years there has, however, been  an increasing trend towards claims being brought against others alleged to have been involved in the loss including, for example, advisors,  auditors, brokers and ratings agencies.

Most class actions are settled: This is a clear trend. It is most likely simply a reflection of the  fact that the risks associated with a class action judgment (and inevitable appeals) are too high  for the class and defendants alike. It is also not unusual for proposed class actions to be settled before they are filed.

Some key examples

Click here to view the table.