The nightmare scenario for the FD facing a class action
The British cultural acquisition of class actions may cause nightmares for the FD and directors of the target companies, but by the nature of the beast, the number of corporates joining actions far outweighs those defending them. David Greene, committee member at the London Solicitors Litigation Association, comments
he British adoption of ‘class actions’ is a recent phenomenon with a number of disparate causes. Even the title still strikes fear amongst the cognoscenti, bringing with it the picture of US-style class actions and bizarre claims, including the – wrongly – infamous ‘hot coffee’ litigation.
Such is the sensitivity, we have until now avoided the term, calling such claims ‘collective actions’, ‘group litigation’ or ‘representative actions’. In relation to an EU directive on the subject, the European Commissioner was asked if she was introducing ‘class actions’ into the EU, to which she replied she was not, having ‘left my Stetson at home’.
But the adoption of the nomenclature hides many different processes and many differences from the US class action, which is based on the opt-out class, i.e. you are in the claim unless you opt out. This is a rare beast here, but as explained below, times are changing. Further, in the US there is no liability for costs on losing. That potential liability is a huge disincentive to litigate.
David Greene, committee member, London Solicitors Litigation Association
Class action in the UK
The cause for the rise of class actions in the UK is, in parts, economic-, political-, technological-, lawyer- and law-driven.
Prior to the global financial crisis of 2008-09, class actions were a cottage industry mainly focussed on mass personal injury or product liability.
As the dust settled after the crisis, the Madoff scandal and the collapse of Lehman Brothers, those that had lost which included major institutions sought to recover their losses. The size of the claims and the nature of the corporations drew in the large City law firms, who then drew together City clients. Large groups of claimants started litigating and the large City firms became involved. For instance the RBS Rights Issue litigation drew together many major institutions against RBS.
Very recent changes in the law have also pressed developments. The Consumer Rights Act 2015 introduced a new opt-out process for claims relating to competition law. We see this being used in the claims against MasterCard in relation to their interchange fees. These are novel provisions and issues relating to bringing the claim at all went to the Supreme Court which determined in December that the claim could proceed. The claims in total are said to have a value of £14bn ($19.3bn).
Similarly, an old procedural rule (CPR 19.6) has had a renaissance and is currently before the Supreme Court as to its use as a potential opt-out class process in the well-known case of Lloyd v Google. This is a claim on behalf of 4 million iPhone users for alleged breach by Google of data obligations.
Claims for data breaches have also been brought on a class basis against BA – which has just settled – and Marriott. Liability may arise even without ‘fault’, for example if the breach arises from hacking or a rogue employee, as in the recent claim prosecuted by employees against Morrison’s supermarket – a claim that failed for fact-specific reasons.
Risks and rewards
These mass actions, however, need capital. This is either provided by the law firm or now, more commonly, by third-party funders.
It is the latter that have thrown fuel on the fire of class actions with litigation and its proceeds becoming an alternative investment product. That capital pays fees as cases progress, but it is the potential adverse costs that are a primary issue. Covering those costs money.
Unlike the US, we maintain the loser-pays principle. This potential downside undoubtedly dampens the enthusiasm of many a litigant and is a major factor in decisions made in the litigation process. Insurance for the potential loss is available, but it is expensive; if paid on a contingency basis, the premium may well exceed the cover being provided.
For companies facing a class action the first step will always be to bring out the insurance policy to see if the cost of defence and any liability is covered. Instruct solicitors quickly, because there will be early issues that can determine the course of events. For instance, the issue of liability for adverse costs in a case funded by a third-party funder is an essential early discussion.
The issue of the way the class has been built can also be early ground for debate. In the BA data case, BA settled quickly to get rid of the problem. If that is not an option, then these actions tend to be a war of attrition. The RBS Rights Issue litigation settled just before trial after five years. The Lloyds/HBOS shareholder claim failed at trial.
Due to the rapid growth of commercial class actions, companies may well find themselves approached to join a class of claimants. In the trucks cartel case and the Mastercard interchange fee litigation, the range of claimants runs from the Post Office to Morrison’s to Ryder to SMEs and micro businesses.
If you are approached, carefully consider the terms, potential liabilities, the funding and the nature of the group you are joining. In the US, even in an opt-out class action many prefer to run their own cases by opting out of the class. The essential issue is to understand fully the risks and rewards.