Should England learn from Australia?
18th February 2014
On 23 January 2014, a draft Consumer Rights Bill was introduced in Parliament that for the first time would bring “opt-out” class actions (claims filed on behalf of a group of claimants) to England & Wales in the field of competition litigation. If this bill is enacted, England & Wales will join Australia as Commonwealth realms allowing opt-out class actions—which, in contrast to opt-in class actions, require claimants to take action to withdraw from a case. While Australia has borrowed its language and much of its culture from England, in this instance, England can learn a valuable lesson from Down Under by rejecting opt-out class actions and properly regulating the related practice of third party litigation financing (TPLF).
Australia has experienced major problems with its litigation system recently. Those problems stem from the symbiotic relationship between class actions and TPLF. In TPLF, investors who otherwise have nothing to do with the underlying dispute agree to finance litigation in exchange for a portion of the claimant’s recovery.
TPLF funders in Australia have promoted the use of class actions aggressively. Class actions are a lucrative market for funders because the potential liabilities for a defendant facing opt-out litigation can be massive, with damages sought for claimants who may not even be aware that litigation is being brought on their behalf.
Faced with the expense as well as the financial and reputational risks of collective litigation, defendants are often coerced into settling these cases, even if they have valid defenses to the claims. Indeed, the availability of TPLF in Australia carries with it the risk that low- and no-merit claims will be funded in the hope of achieving a settlement. What’s worse, the nature of class actions means that funders enjoy opportunities for substantial control over the litigation, creating potential conflicts of interest for solicitors, whose duty is to the interests of claimants.
Litigation funding is already prominent in the UK. Lord Beecham noted in a speech in the House of Lords last year that he understood there to be 25 litigation funders established in England & Wales. It is an industry largely free from government oversight: a code of conduct applies only to the eight members of the Association of Litigation Funders, in which membership is purely voluntary. The penalty for breach is merely the risk of being booted from the organization.
Given these issues, should policy makers here be concerned about the potential engagement of TPLF funders in opt-out collective litigation? Based on the Australian experience, the answer is an unqualified “yes.” It would be naïve to think that in an unregulated environment that is becoming increasingly more competitive for funders, these investors would not set their sights on lucrative collective litigation, as their counterparts in Australia have done.
The combination of class actions and TPLF can be toxic. A recent report by researchers David Abrams and Daniel Chen notes that TPLF has increased the scale, complexity and duration of litigation in Australia. Moreover, in collective actions, funders are not necessarily concerned with scrutinizing the merits of individual claims. Unmeritorious claims, which might be unsuccessful if pursued individually, can be buried within a large class. In the UK, we have already seen funders willing to finance meritless cases that, while risky, carry a potential for large awards. In a recent lawsuit involving Excalibur Ventures LLC in which the claimant was funded by a TPLF investor, the High Court tossed the case, reportedly noting that it completely lacked merit.
The idea that TPLF promotes access to justice has been used as a justification for such funding. However, this benefit is considerably overstated. In securities class actions in Australia, for example, the claims of institutional investors with substantial claims—rather than mum-and-dad claimants—constitute the bulk of claims by value in funded cases.
The Australian example demonstrates that the growth of unregulated investment in litigation has made the civil litigation system, and particularly the class action system, increasingly entrepreneurial and profit driven, rather than focused on delivering justice. While both opt-out class actions and TPLF imperil the delivery of justice, the combination of the two exploits the worst features of each. The opt-out proposal presently before Parliament should be rejected, and TPLF should be suitably regulated.
Mary H. Terzino
Consultant, US Chamber Institute for Legal Reform