Competing class actions GetSwift solution - only one can proceed

What you need to know

• The Court has addressed the problem of three competing open security class actions by allowing one to proceed and staying the other two.
  The preferred class action was the last to be commenced but had the most attractive funding arrangement, and the prospect of innovative ways to manage legal and expert costs.
• The funding commission favoured by the Court was the lesser of 20% of the net litigation proceeds or a multiple of 2.2 or 2.8 times the litigation expenses, depending on the timing of settlement.

What you need to do

• When facing multiple overlapping open class actions, consider an application to the Court for only one to continue.
• Whilst the Court will adopt a multifactorial approach in each case, consider whether the carriage can be simplified at an early stage to reduce costs and complexity (including subjecting the applicants' legal costs to the scrutiny of an independently appointed referee, the prospect of a Court appointed expert placing opinion evidence before the Court and a partly cost based funding model).

 

On 23 May 2018, Lee J delivered a decision regarding which of three competing open security class actions against GetSwift Limited should be allowed to proceed.

• In other recent cases the Court has preferred to adopt a "wait and see" approach (Cantor v Audi Australia Pty Limited (No 2) [2017] FCA 1042 in September 2017 and TW McConnell Pty Ltd v SurfStitch Group Ltd [2017] NSWSC 1755 in December 2017) or allowed both to proceed but closed the class in one (McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd [2017] FCA 947 (Bellamy's) in August 2017).
• In GetSwift, by contrast, Lee J chose one of three competing class actions to proceed and permanently stayed the other two proceedings.

Why are there competing class actions?

Lee J reviewed the current market where funders and solicitors are in competition for carriage of a class action by reference to the history of class actions in Australia. Initially, in the 2005 decision, Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394 (Aristocrat), it was thought that closed class actions (limited to class members who had retained certain solicitors or entered into a funding agreement with a certain funder) were not allowed. Later, the 2007 decision Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275, showed that closed class actions were permissible.

This enabled litigation funders to eliminate so-called "free-riders", who would take the benefit of a class action judgment without paying the costs. A closed class action could be started, then opened to allow others to register, then closed again, to give certainty in a settlement.

In Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016) 245 FCR 191, Blairgowrie Trading Ltd v Allco Finance Group Ltd (recs and mgrs apptd) (in liq) (No 3) (2017) 343 ALR 476; and Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527, the "free-rider" issue was further addressed by "common fund" orders, whereby the costs of the funder are paid out of the proceeds obtained by the group as a whole.

One other reason for the prevalence of competing class actions is the likelihood of settlement. Lee J observed that the time has come for the Court to recognise the reality that security class actions are overwhelmingly likely to be resolved by a court approved settlement. Despite over 60 funded securities class actions having commenced since the Aristocrat class action in 2005, not one has proceeded to judgment after a fully contested hearing.

What were the competing class actions here?

This decision involved three class actions which advanced substantially the same claims. Two further class actions on the same subject matter had been foreshadowed in the media but did not materialise.

Applicant	Announced	Funder	Commission
Perera	19 January 2018	ILP	25% of net proceeds or 22.5% of gross proceeds if less
McTaggart	20 February 2018	Vannin	10% if resolved in 2018, 20% if resolved in 2019, 30% if resolved later
Webb	after 20 February 2018	Therium	Lesser of 20% of the net litigation proceeds and 2.2 times expenses in the proceedings if resolved before 12 April 2019 or 2.8 times if resolved later

What can the Court do about competing class actions?

The Court noted the difference between Australia and other jurisdictions such as the United States and Canada where carriage of a class action can be determined by a certification process at commencement. This option was rejected when Australia's class action regime was designed on the grounds that the Court would have other case management tools. 

Lee J explored the options available for dealing with competing class actions.

The first option was to allow one to continue and permanently stay the other proceedings. The viability of this option was doubtful following comments of Beach J in Bellamy's, which cast doubt on whether it is appropriate to stay one class action merely because there is another class action dealing with the same subject matter.

The second option, which was suggested by Lee J, was an injunction to stop the other concurrent class actions proceeding. This was a novel idea, but one which Lee J considered would be legally possible.

The third option considered by Lee J was declassing two of the class actions, so that they would become individual rather than representative claims. As the parties all accepted that only one of the class actions should be allowed to proceed, Lee J gave only brief consideration to the options of consolidation of the proceedings, allowing a joint trail of the proceedings with each left constituted as an open class action, adopting a "wait and see" approach or closing the classes in two of the proceedings.

Comparative Analysis - a multifactorial approach

The Court considered a multifactorial approach to compare the competing open class proceedings, referring to the factors identified by the Court in Bellamy's and some new factors relied on by the parties in their submissions.

The factors considered were, in essence:

• the comparative likely net return to group members in each class action;
• the experience of the lawyers and the resources made available by each firm;
• the state of preparation of the proceedings, the respective merits of the common issues cases and of the individual cases of the representative applicant;
• litigation funding agreements, the number of funded group members, whether there was a deadlock provision in the funding agreement and any proposal for a common fund order;
• the costs estimated by each of the applicants' solicitors, measures to control legal and expert costs, and the position offered by each funder on security for costs; and
• the consequences of a permanent stay, closure or declassing order in each proceeding for those who would be affected.

For most of these factors there was no significant difference between the three class actions. However there were two key factors which distinguished the last class action commenced (the Webb class action) from the other two, and which are likely to operate to the advantage of, and produce a better return for, group members being non-parties to whom the Court has responsibilities of a protective nature:

• the superior partly cost-based structure of the funding model; and
• the proposal of innovative ways to manage the costs of the proceedings, including that ongoing legal costs be subject to the scrutiny of an independently appointed referee and the prospect of a court appointed expert placing opinion evidence before the Court.

Justice Lee was careful to point out that each instance of overlapping class actions must be dealt with on its merits as a matter of case management, and not all occasions of competing class actions would lead to the same procedural outcome.

What did the Court do here?

Despite the reservations expressed by Beach J in Bellamy's, Lee J decided that he had the power to stay two of the proceedings and allow one to proceed. Justice Lee made this decision on the basis that to allow duplicative open class proceedings to proceed would perpetuate unnecessary multiplicity and would not otherwise be an appropriate vehicle for enforcing the substantive rights of group members, bring the administration of justice into disrepute, and would amount to an abuse of the Court's process. Lee J highlighted the difference between staying proceedings in the context of ordinary litigation as compared to class actions. Ordinarily, a party whose claim is stayed is prevented from being able to vindicate its rights. However, if a class action were stayed the claims of the stayed applicants could be litigated in the remaining class action(s). Further, Lee J noted that each class member has the right to opt out and commence their own claim should they wish to do so.

Lee J favoured the making of a common fund order at an early stage on the basis that it would provide certainty to the parties. In addition, an early common fund order was preferable as it involved an early assessment of the litigation funder's risk before rather than after the result was known. Other reasons for an early common fund order were that it enabled class members to opt out if they did not agree to the funding commission proposed and it avoided the cost of the promoters of the class action undergoing a book-build.

Lee J chose the last class action (being the Webb class action) to be commenced as the one that should be allowed to proceed.

What are the implications for future class actions?

Lee J considered the practice of book-building, or signing up as many class members as possible to a litigation funding agreement before commencing proceedings to be expensive and unnecessary in circumstances where a common fund order would be made.

Lee J did not consider the fact that the other two class actions had been started earlier should give the proponents of those class actions an advantage because this would only encourage a race to court.

Each applicant was asked to put its "best foot forward" by filing material showing how it would run the case and demonstrating why its class action should be the one to proceed. To facilitate this, Lee J made orders requiring each party to submit a detailed proposal and prohibiting discussions between the applicants, their lawyers or the funders.

A potential issue – procedural arbitrage

As each of the competing GetSwift proceedings had been commenced in the Federal Court, it was possible for the actions to be case managed together and for the issue of competing class actions to be resolved at an early stage.

More difficult issues would arise if the proceedings had been commenced in different courts. Lee J commented that such a development would be undesirable but no doubt remediation responses will have to be fashioned consistent with the provisions of cross-vesting legislation, comity and the need to avoid multiplicity.

In this regard we note the existence of legislation in the US which deals with multidistrict litigation (MDL) which enables the transfer and consolidation of multiple class actions. This may be a matter for future law reform in Australia.

What does this mean for litigation funders?

Subject to any appeal, the decision is likely to place downward pressure on funding premiums including the use of partly cost-based funding structures and thereby reducing the chances of a windfall.

Lee J described the basis on which the commission was to be calculated as novel. The approach of tying the commission to the lower of 20% of net litigation proceeds and a multiple of either 2.2 times or 2.8 times the costs incurred, depending on the date of settlement, was a safeguard against a windfall to the funder in two ways.

If the settlement is large and early, the costs incurred will be relatively low and the commission will be calculated as a multiple of the relatively low costs. By contrast, if the settlement is for a relatively small amount, the commission will not be excessive by comparison with the amount to be recovered by group members.

Reform, will litigation funders be regulated?

The Australian Law Reform Commission is currently considering the regulation of litigation funders and what changes should be made to Commonwealth legislation. The report is due in December 2018.

The Victorian Law Reform Commission has also recently reported on the regulation of litigation funding and class action law reform, although the report has not yet been tabled in Parliament and so is not publicly available.

In his judgment, Lee J recognised the possibility of a conflict between the commercial imperatives and demands of a funder and the interests of applicants and group members of maximising the recovery. However, Lee J considered that these issues need to be managed by persons who owe duties both to the applicants and to the Court. Lee J was ultimately not troubled that there was no litigation funding agreement with a deadlock mechanism to resolve such conflicts in the case of the preferred class action proponent.

Reform, will certification be introduced?

Lee J observed that designers of the current class action regime deliberately excluded a certification mechanism on the basis that the Court would have extensive case management powers.

The present decision explicitly recognises that the absence of a certification regime means that the Court must be prepared to pro-actively exercise those powers to manage competing class actions.

Although mixed views were expressed on the desirability of certification in submissions to the Victorian Law Reform Commission, such a development is unlikely to proceed unless the various Australian class action regimes adopt a consistent approach.

At least until the issues raised in the GetSwift class action are canvassed in further cases, this decision to squarely address carriage and stay two competing class actions makes it less likely that a certification regime will be introduced.

 

Authors: John Pavlakis, Partner; Andrew Westcott, Senior Expertise Lawyer; and Stephanie Stacey, Lawyer