Class actions: are we moving toward an opt-out regime?
Herbert Smith Freehills LLP
United Kingdom February 27 2008
There appears to be a growing momentum toward the introduction of an "opt-out" regime for pursuing litigation on behalf of a number of parties who share similar grievances: so-called "class actions".
A Research Paper by Professor Rachael Mulheron, which was commissioned by the Civil Justice Council (CJC) and published on 8 February 2008, has concluded that:
there is a need for reform of collective redress mechanisms in English civil procedure; and
this need should be filled by the introduction of an "opt-out" regime, whereby an action can be pursued on behalf of a class of unnamed, or even unidentified, claimants who are deemed included in the action unless they have specifically opted out.
The Paper has however consciously avoided consideration of either: (i) the actual design of such a regime; and (ii) importantly, how litigation conducted pursuant to such a regime should be funded and how costs should be dealt with, including to what extent the current costs-shifting rules should be retained.
The CJC commissioned the Paper as part of its investigation into whether initiatives should be proposed to improve collective redress mechanisms. The CJC is expected to make recommendations to the Ministry of Justice on this matter during 2008.
Potential impact
If an opt-out regime is implemented in this jurisdiction, defendants are likely to face a greater number of claims brought on a collective basis, i.e. by or on behalf of a large number of parties alleging similar grievances.
Whether such actions are likely to suffer from the perceived excesses of the US "class action" model will depend on the precise mechanisms proposed, and in particular how questions of costs and funding are resolved.
There is at present no direct equivalent in England and Wales to the US opt-out model of class action in which one or more parties can bring an action on behalf of a larger class which includes absent or unidentified parties. There are a number of existing mechanisms for pursuing collective litigation in this jurisdiction, but these generally require potential claimants to make a positive decision to opt in to the proceedings:
Representative actions: This is where a claim is brought by or against one or more persons as representatives of any others who have the "same interest" in the claim. A judgment or order is binding on all those represented in the action, but cannot be enforced by or against anyone who is not a party to the action without the court's permission.
Group litigation orders (GLOs): The court can make a GLO where a number of claims are brought which give rise to "common or related issues of fact or law". Although this test is wider than the requirement for the "same interest" in representative actions, only 62 such orders have been made since this procedure was introduced in May 2000.
Representative damages actions for breach of competition law: The Enterprise Act 2002 introduced provisions allowing follow-on actions to be brought in the Competition Appeal Tribunal for damages for breach of UK or EC competition law following findings of anti-competitive conduct. Such actions may be brought by a "specified body" on behalf of consumers who have specifically opted in to the action. The only action brought under this provision to date has been the widely publicised claim by the Consumer Association "Which?" against JJB Sports in respect of football replica kit, which settled earlier this year.
Collective actions can also be brought without any particular procedural mechanism. This can be done by including a large number of claimants to the action (as in the action against the government by the former shareholders of Railtrack, in which there were 44,918 individual claimants) or by having one or a small number of claims run as a "test case" which can then be used to resolve similar claims.
The CJC Research Paper
The Paper concludes that there is emphatic evidence of an "unmet need" for reform of collective redress mechanisms in English civil procedure, to facilitate the litigation of widespread grievances in circumstances where, in the author's view, those grievances are not presently being addressed or compensated. This, the author asserts, is not 'a solution in search of a problem'. The reasons for her conclusion include the following:
The types of group action pursued under the GLO regime are not nearly as wide-ranging, and the numbers much smaller, than those brought under opt-out collective actions in Australia and Ontario over the same period.
The "gaps" the author has identified, where one might expect collective actions to be brought in greater numbers than at present, include: the lack of shareholder actions based on non-disclosure or misleading disclosure, compared to the position under opt-out regimes; the rarity of private damages actions for anti-competitive conduct, despite the existence of numerous cases in which such conduct has been proved by the relevant authorities; and the lack of compensation claims where regulators have identified unfair terms which are widely used by businesses in consumer contracts.
The participation rates under the English opt-in regime vary considerably but, the author concludes, opt-out regimes generally attract a higher degree of participation than opt-in regimes.
An opt-in regime often causes procedural difficulties because of the task of identifying the sheer numbers of claimants at the outset, the low value recovery per class member, and the task of preparing individual pleadings up front.
The English county court system has been overwhelmed by individual actions by bank customers relating to alleged unfair charges (the author estimates some 53,000 such claims have been brought in the past 2 years), which the author suggests is a reminder of how inefficient and burdensome widespread unitary litigation can be. Such claims have now been stayed pending the outcome of a test case brought by the OFT in the Commercial Court against seven banks.
English claimants have sought to join US opt-out class actions even where there would have been a jurisdictional basis for permitting the action to go ahead in England. In some of these cases, English claimants have encountered problems and been 'dumped out' of the US class action, such as in the Parmalat Securities Litigation and litigation concerning the anti-arthritis drug Vioxx.
The author also points to the marked increase in certain types of employment claim (equal pay, minimum wage, sex discrimination and Working Time Directive) over the past 2 years, arguing that a collective opt-out regime would provide better access to justice and deal with such claims more efficiently. The author concludes that access to justice and judicial efficiency would be enhanced by a generic opt-out regime, but that such a regime must be drafted in a measured and balanced fashion, with in-built requirements to provide procedural fairness to both claimants and defendants. One such requirement would be a "superiority" analysis, meaning that the court would only permit an action to proceed on an opt-out basis if this were preferable to the other procedural mechanisms available (e.g. GLO, representative action) for the dispute in question.
There have been numerous recent initiatives, both UK and EU, considering the need for reform of collective redress mechanisms.
Most significantly for the present discussion, the OFT published recommendations to government late last year aimed at improving the effectiveness of private damages actions for breaches of competition law. The OFT concluded that the availability of representative actions on behalf of consumers or businesses at large (i.e. on an opt-out basis) would encourage a greater number of well-founded actions to be brought, and that the absence of such a mechanism is a significant shortcoming in the present system.
However, rather than endorsing a universal opt-out approach, the OFT recommended that it should be open to the judge to decide, in the circumstances of each case but based on defined criteria, whether a given claim should be brought as a representative action on behalf of consumers or businesses at large, or on behalf of named consumers or businesses, or as individual actions. This parallels the suggestion in the CJC Paper that the court should permit an opt-out action only if it is the best available procedural mechanism for the dispute in question.
In mid-2006 the Department for Business, Enterprise and Regulatory Reform (BERR) issued a consultation on representative actions for breach of consumer protection legislation. In contrast to both the OFT approach and the current CJC Paper, it proposed that such actions should be brought by designated bodies only on behalf of named consumers, i.e. a strictly opt-in system, due to concerns that an opt-out system "represents a scatter-gun approach, may be administratively cumbersome, and may leave businesses open to inappropriate claims". BERR is expected to follow up on this consultation in the near future, though it is not clear what action they will take.
At EU level, the impetus for reform has also largely come from the competition and consumer spheres. A White Paper is expected from the European Commission in the first half of this year following on from a 2005 Green Paper which raised the possibility of collective damages actions for breaches of competition law. The European Commissioner for Consumer Affairs has also proposed the introduction of a collective redress mechanism for breach of consumer protection rules. A consultation has been launched regarding proposed "benchmarks" for effective and efficient collective redress systems, and studies are being conducted to evaluate existing systems within the EU. Although both the Competition Commissioner and the Consumer Affairs Commissioner have sought to distance themselves from the prospect of US-style class actions, with their perceived excesses, it is not yet clear whether any proposals arising from these initiatives will have an opt-out element.
The basic premise of the CJC Paper is that an opt-out system of collective redress would result in more group actions being pursued, with higher participation rates, leading to a higher proportion of claimants being compensated for wrongs suffered. On one level it is difficult to fault that logic: no doubt it is true that removing the need for claimants to choose to participate in litigation would encourage more claims to be brought. It is also possible to see the attraction of an opt-out regime in cases where the individual loss suffered is very small and not worth pursuing but, when aggregated, the loss is very large. However, serious questions remain as to whether the benefits of an opt-out system are sufficient to outweigh the very real risks it poses.
The big question is whether the introduction of an opt-out system represents a drift toward the excesses of the US model, where the perception is that some claims at least may be brought more for the benefit of the claimant lawyers who stand to earn a hefty contingency fee than for the claimants themselves, whose individual losses may be very small. Another issue is that the quantum of some US class action claims seems set to frighten defendants to the negotiating table; defendants may feel forced into settling unmeritorious claims to avoid the huge legal fees they would otherwise be bound to incur defending the action and which they would have no hope of recovering in the absence of a costs-shifting rule.
The great challenge in considering any proposed mechanism for collective litigation is to provide procedures which give access to justice to allow those who have suffered genuine wrongs to receive fair compensation, but at the same time protecting businesses and other types of defendant against unmeritorious claims. The CJC Paper recognises the need for procedural safeguards to ensure fairness for both claimants and defendants but, except for the requirement that the court would decide when to permit an action to proceed on an opt-out basis, it does not suggest what form such safeguards should take. The Paper emphasises that an opt-out action should be regarded as one of the possible procedural tools for bringing a collective action and that flexibility is key. However, how is the type of procedural mechanism to be decided; will different costs rules apply depending on which mechanism is used; who is going to pay for the application to the court to determine which mechanism should be adopted?
The Paper's author is conscious that she is addressing only part of the equation: she makes clear at the outset that her Paper addresses only the question of whether there is a need for reform, and that the design of any regime and the questions of funding / costs also require consideration. The CJC has separately considered the question of alternative funding structures for litigation in its report "Improved Access to Justice – Funding Options & Proportionate Costs" published in June 2007. That report recommended, among other things, that properly regulated third party funding should be recognised as an acceptable option for mainstream litigation (and the CJC has recently been considering what form such regulation should take) as well as the introduction of regulated contingency fees to provide access to justice in multi-party cases where no other form of funding is available. The report indicated that the CJC would publish a further paper on this subject following more extensive study of the American and Canadian systems. It is not clear when this further paper can be expected.
Clearly, the proposed mechanisms for bringing an action are crucial; for example, could claims be brought by one or a few individual claimants on behalf of an entire class, or only by particular bodies such as a consumer association or trade union (which would avoid the risk of actions being brought more for the benefit of the funders than the claimants)? And perhaps even more important are the funding and costs issues. It is to be hoped that any proposed opt-out regime would retain the current cost-shifting rule, which is so important to discourage unmeritorious claims and prevent defendants effectively being blackmailed into a settlement. However, operation of the cost-shifting rule presents obvious difficulties in the context of a claim brought on behalf of a class of unidentified claimants, unless the costs risk is borne by a lawyer or third party funder remunerated on a contingency basis, or perhaps by an adequately financed representative body.
In our view, therefore, a holistic approach is needed in considering any proposed collective redress mechanism. It seems to us that it is impossible to decide upon an opt-out regime without simultaneously considering and resolving the design of such a system and the questions of funding and costs. As so often, the devil is very likely to be in the detail.
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