When customers strike back

customers1Class action. These two words are enough to strike fear in the heart of any business executive. Between the potentially multi-million dollar settlements and bad press, class actions can do serious damage to a companys bottom line and its reputation.

But while the United States has traditionally led the world in class action activity, Australia is now the second most likely jurisdiction where businesses will face significant class action litigation. According to some legal experts, class actions are on the rise on our shores.

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In its recent report on the 25-year history of class actions in Australia, international law firm Herbert Smith Freehills revealed that 40 per cent of all class actions have been brought in the last six years.

Were talking about a massive trend in growth, Jason Betts, a litigation partner at Herbert Smith Freehills told IRW.

I should be clear were only talking about 500 or so cases, which doesnt sound like an enormous number in and of itself, but the value of the claims being brought is large, he said.

Australian consumers have had access to class actions since the current provisions came into effect on 5 March 1992, which stipulated that claims must be made by seven or more people against the same party and must arise out of the same or similar circumstances, among other criteria. But Betts says recent changes in the legal landscape have made class actions more common today.

In Australia, unlike the US, lawyers cannot charge contingency fees to cover the cost of bringing a case. The thinking is that contingency fees create an incentive for lawyers to commence claims at the margins of merit.

At the same time, Australia operates on the loser pays principle. This means it was very unattractive for law firms to run class actions, Betts said.

This all changed in 2006 when the High Court decision in Campbells Cash and Carry Pty Limited v Fostif Pty Ltd legitimised third-party litigation funding in Australia, allowing businesses to fund class actions on behalf of law firms and share in the proceeds if successful.   

Litigation funding took off around 2010, which coincides with the last six years of growth of class actions, Betts said.

While the data only show correlation, not causation, the end result is the same for Australian companies: a spate of high-profile class actions in recent years against Bonsoy, Volkswagen, Sigma Pharmaceuticals, Bellamys, Thorn Group (Radio Rentals parent company), and now possibly Woolworths.

To be clear, many of these cases do not directly involve retailers, or are technically securities class actions, a subset of class actions based on a corporation breaching their disclosure requirements. But Betts suggests no company is immune to the rise of class actions.

The fair call on this is that there is no pattern. People like to think of class actions as attracted to particular product groups or industries, but the answer is ‘no’. Its not sector based or product based. Youve got everything from food to financial products to motor vehicles to pharmaceuticals being subject to class actions, he said.

Betts advises that businesses in highly regulated industries, including retail, which is governed by Australian Consumer Law, could be at risk. Product recalls, or even a cluster of consumer complaints are red flags.

Class actions are opportunistic, they follow the suggestion of loss, he said.

Should retailers run for the hills?

But Andrew Watson, national head of class actions at Maurice Blackburn Lawyers, doesn’t think retailers have reason to run for the hills quite yet, citing a November 2014 report on class actions commissioned by the Australian government.

Most of the evidence shows that the growth in class actions has been quite moderate, and whilst arguably theres been a slight increase in the number of class actions due to introduction of state systems in Victoria, New South Wales and very much more Queensland, the fact is the number of federal class actions has remained remarkably static, Watson told IRW.

Maurice Blackburn is representing shareholders in the class action against Bellamy’s and the potential case against Woolworths, as well as in the consumer class actions against Thorn Group and Volkswagen.

And while Betts says class actions have surged in the past two-and-a-half years in particular after that report was published Watson says this still doesn’t indicate a trend.

Given the numbers are so small, theres not much utility to selecting short term periods and extrapolating. Youll find particular years when the number of class actions are very high followed by years when there are not as many, followed by years where there are very few, he said.

But even if class actions are on the rise in Australia, thats not necessarily a bad thing, according to some legal experts.

The only situation in which class actions become a bad thing is if you end up with pernicious class actions, where people are seeking money for the sake of it, rather than as a remedy for a wrongdoing, Mark Humphery-Jenner, an associate professor in the school of banking and finance at UNSW Business School,  told IRW.

Thats more common in the United States, where anecdotally you have the ambulance chasers looking for individuals to form a class to sue, even if the company hasnt really done anything wrong.

“Thats not really happening in Australia, where class actions are generally being used as a remedy for consumers and individuals, but theres clearly a risk of that occurring.

IRW contacted Woolworths and Thorn Group for comment on this story. Woolworths referred to a statement it made on 11 April 2017, which noted the company has not been served with proceedings by IMF Bentham, the third-party litigation funder proposing to fund a shareholder class action against it.

Woolworths considers that it has, at all times, complied with its continuous disclosure obligations. If proceedings are commenced, they will be defended on this basis, the statement concluded.

Thorn Group also declined to comment given the nature of the current class action and subsequent court proceedings.


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