Class action risks in the wake of COVID-19

What you need to know

• 2020 was already shaping up to be an important year for class actions, with significant court decisions, legislative reform and a parliamentary inquiry on the horizon.

• As the Global Financial Crisis showed, economic downturn can increase the prospect of class actions as individuals and businesses seek to recover losses. Key areas of focus include shareholder claims, employee claims, consumer claims and insurance coverage claims.
• At a policy level, COVID-19 has provided some impetus for reforms that assist businesses to reduce class action risk and may provide cause for pause in implementing other 'plaintiff-friendly' class action reforms. But reforms should be properly thought through, rather than quick "make-do" options.

Shareholder claims against listed companies

How serious is the exposure around earnings guidance and the like?

The impact of COVID-19 on trading conditions for many businesses may have given rise to the need to revise or withdraw earnings guidance. Delays in doing that creates class action risk (particularly in view of the availability of market based causation – see our article 'Market based causation finds its feet in first shareholder class action judgment - but that does not mean damages will follow').

However, the recent dismissal of the Myer shareholder class action demonstrates the challenges in proving loss, particularly in volatile markets.  Indeed, the ASX has released guidance that companies' continuous disclosure obligations 'do not extend to predicting the unpredictable' and reminding companies to review their published guidance in light of COVID-19 and amend or withdraw it if necessary. 

The fact an announcement should have been made earlier and that there was a price drop when it was made does not mean there will be damages. There needs to be focus on exactly what should have been said earlier, what was actually said in the later announcement, what the market already knew, and what it was reacting to.

In many cases, it will be a question of 'who could say the market didn't already know and hadn't already priced in that COVID-19 meant previous guidance was out the window?'

Stripping out general market movements to identify whether the company's share price was actually reacting to particular information will also be a challenge for the event study experts.

What protections has the government introduced?

Recognising the unprecedented disruption caused by COVID-19, parliament has conferred broad powers on the Treasurer to exempt or modify the operation of the Corporations Act. For example, if it would not be reasonable to expect compliance or if it is otherwise necessary or appropriate to facilitate the continuation of business or mitigate the economic impact of COVID-19.

The Australian Institute of Company Directors (AICD) recommended the introduction of a temporary safe harbour for listed companies and their directors to prevent shareholders from bringing class actions in connection with earnings guidance or forward-looking statements made in the context of COVID-19. Further, the Business Council of Australia has sought the introduction of a 'good faith' defence to such cases and that claims only be permitted by ASIC (a proposal that has subsequently been endorsed by the AICD).

On 25 May 2020, the Federal government announced a six month temporary amendment to the continuous disclosure laws in sections 674 and 675 of the Corporations Act. During this period, a breach will require information to be withheld from disclosure where the company knows or is reckless or negligent with respect to whether that information would, if it were generally available, have a material effect on the price or value of the company's shares. This is a subjective test (unlike the usual objective "reasonable person" test).

We don't think this change will have any impact on class action exposure.

• While "knowledge" and "recklessness" are high bars, it is enough to show "negligence" (ie a lack of reasonable care). In practice, it is not clear that this adds anything to what was already needed.
• Most continuous disclosure class actions also included claims under misleading or deceptive conduct laws – to the effect that the company misled the market (including by silence). Those laws haven't changed.
• The changes only apply to information that is not disclosed to the market. It does not apply to information that has already been disclosed to the market and companies will need to ensure that such disclosures do not expose them to a misleading or deceptive conduct claim. See our article 'Temporary changes to Australia's continuous disclosure requirements'.

Other exposure for listed companies

Other areas of class action risk for listed companies include:

• claims in the context of capital raisings (which could impact not only the listed entity but also their professional advisers, including lawyers and auditors); 
• claims made against directors (both in the context of shareholder claims and also with respect to decision making and responses to the COVID-19 pandemic); and 
• claims in relation to failures to disclose material operational decisions (that is, decisions that may have a material effect on the price of securities such as standing down employees or closing/suspending operations or facilities). 

Employee claims

The employment landscape has been an emerging area for class actions in recent years, particularly in relation to classification of employees and provision of entitlements.

As government restrictions on public gatherings and movement have been imposed in response to COIVD-19, Australian employers have been forced to take unprecedented actions. These may attract the attention of law firms and litigation funders, particularly in relation to:

• scaling down operations, standing down employees and/or implementing redundancies; and
• directions given to employees (for example, with respect to working from home or leave and pay arrangements).

Employers have also faced a range of challenges in managing workplace health and safety risks posed to employees by COVID-19. These challenges will continue as the economy reopens and staff return to workplaces. While workplace health and safety issues have not been a feature of the class actions instituted to date, it is an area to watch in the year ahead.

To proactively manage these risks, employers should carefully review their legal obligations, noting the variations made to the Fair Work Act (to accommodate the Federal government's JobKeeper Scheme), variations to modern awards that have been implemented by the Fair Work Commission, and announcements by various regulators about obligations under work, health and safety laws.

For more information regarding COVID-19 for employers, see our article 'Key issues for Australian workplaces' and webinar 'COVID19 Key issues for Australian workplaces: JobKeeper, variations to awards and more'.

Consumer claims

COVID-19 has also impacted consumers in a range of industries that may lead to class action risk. As recent class action trends indicate, no industry or sector is immune. Examples include:

• Banking and superannuation

A swathe of class actions were commenced against banks and superannuation funds following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. With individuals coming under increased financial strain in the current economic climate (such as in relation to mortgage repayments), lenders' compliance with responsible lending requirements may again be scrutinised.

A spotlight is also likely to be cast on superannuation funds. In view of the government's measures to allow people to draw on their superannuation balances to assist with mitigating the impacts of COVID-19, funds are likely to see a decline in balances and realisation of any investment losses. Investors considering potential claims may focus on the appropriateness of investment strategies, and valuations of real-estate and infrastructure assets. Unit pricing is a particular area of potential risk.

• Travel and entertainment

Already, a class action is being threatened against Carnival Corporation in connection with the COVID-19 outbreak on the Ruby Princess. The claim will likely involve allegations of negligence and failure to warn passengers of potential exposure to the virus. A special commission of inquiry in NSW has also been established in relation to the Ruby Princess, with the possibility of further public and coronial inquests and subsequent proceedings.

Further, with government restrictions resulting in cancelled and disrupted travel plans, travel operators have come under pressure in relation to cancellation fees and the provision of refunds (with media reports that a class action is currently being explored against several travel operators). Similarly, the entertainment industry has been forced to cancel events and subscription services (such as gyms) have been forced to closed. The ACCC has released guidance to assist consumers, urging them to be patient and noting that it is a complex issue. Businesses should carefully consider their legal rights and obligations before making decisions that are likely to come under scrutiny from consumers or regulators.

• Technology

With lockdown restrictions in place, more consumers are purchasing products online and working from home utilising online platforms. Recognising these risks, ASIC has provided advice to organisations, consumers and investors alike to heighten their cyber security vigilance. Class actions in relation to data security breaches have emerged in various jurisdictions including the United States (for example, with respect to conferencing platform Zoom). COVID-19 may be a catalyst for such claims to take hold in Australia going forward as increased pressure and scrutiny is placed over data safety, and this risk serves as a further reminder to businesses to ensure that they have robust cyber security practices and procedures in place.

• Retail

Changes in consumer spending, evidenced by grocery hoarding and increased demand for certain goods (such as hand sanitiser and other pharmaceutical products), has the potential to lead to allegations of inflated pricing, anti-competitive behaviour and misleading or deceptive conduct (for example, in relation to marketing). The ACCC has established a 'COVID-19 Taskforce' to focus its enforcement activities on businesses exploiting the pandemic to 'unduly enhance their commercial position or harm consumers'.

Insurance class actions – particularly business interruption

The operation of business interruption extension clauses in business insurance policies (eg due to prevention of access) is also sure to be an area of interest for businesses that have been shut down.

Ongoing class action reform

The continual evolution of the class action landscape looks set to remain, with a number of proposed reforms including the introduction of contingency fees in Victoria (see our article 'Contingency fees to be introduced in Victoria') and recommendations by the Australian Law Reform Commission (see our article 'Inquiry into Class Action Proceedings and Third-Party Litigation Funders, Australian Law Reform Commission Final Report 134').

More recently, the Federal government has confirmed that it will push ahead with a parliamentary inquiry into the class action industry, including the profits made by litigation funders and the broader impact of an increase in class actions on the Australian economy (which, at this time, is likely to impact businesses already under pressure due to the pandemic). The Federal government has also introduced measures to regulate litigation funders, requiring them to hold an Australian Financial Services Licence and subjecting them to oversight by ASIC.

Regulation of litigation funders could benefit from a proper rethink, as the current plan is for claims to be treated as "managed investment schemes" – a regime set up to deal with people who invest money in funds, not people who have similar legal claims.

Authors: Ian Bolster, Partner; James Class, Partner; Sally-Anne Stewart, Senior Associate; Justin Browne, Lawyer; and Alana Perna, Graduate.