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Group litigation and its effect on the compliance officer

Michael Cotter and Gordon Wignall, Setfords Solicitors and Pump Court Chambers, Solicitor advocate and Barrister, London, 23 October 2020


Hardly a week seems to go by without some announcement about a new class action. Group claims, for example, have begun in London under the banner of 'The Woodford Litigation.' This article looks at the causes of these cases and the procedures which govern them.

Other recently-begun cases have concerned Marriott Hotels (data breach) and Mercedes-Benz emissions (consumer rights).

It is by no means uncommon in today’s small world for a corporate undertaking to be the target of proceedings in different jurisdictions, so let us look briefly at this phenomenon around the globe.

Class action procedures have been available in the USA since 1938, in Canada since 1978 and in Australia since 1992. These have much in common. In this article we concentrate on England and Wales in the expectation that their rules (extant since 1999) will be of most practical interest to readers. (Scotland’s group procedures only came into force last month on 31 July, while Ireland’s courts make no provision for group litigation at all.)

Readers should be aware that court services around the globe compete actively to attract litigation to their own jurisdictions. Holland even has a court which hears its cases in English.

Key ingredients: some different procedures

“Group litigation” is reasonably self-explanatory as a descriptive expression. People around the world use many expressions to mean exactly the same thing, for instance “class redress,” “group actions” and “collective redress.” In England and Wales, a group action is only begun once the claimants' (plaintiffs') team has obtained a “Group Litigation Order” or GLO from a court.

In a ‘straightforward’ group action within any collective redress umbrella (for instance by way of a GLO from a judge in London), the aim is to identify those common issues of fact or law which must be determined by a court before the claimants can move on to resolve the various aspects of their claims.

For instance, in litigation concerning the speculative development schemes of the type common during the property crash of the 1980s (for instance off-plan construction in holiday destinations), all the contracts with the bank which provided funding to clients may allegedly have been defective for a handful of specific reasons. These arrangements between all clients and the bank must have been common. The courts had to resolve these problems first before looking at any 'individual' problems (such as the amount of damages or whether the relevant local authority was willing to grant the requisite planning permission).

A “representative action” as strictly understood in England and Wales (or in Ireland) is slightly different from a group litigation. In a representative action, all the claimants must have exactly the same shared, universal problem and that problem only.
A good example of a representative action here would be the construction of investment agreements which hold a class of property within a SIPP. All the claimants must ask the same question: do the applicable agreements, or do they not, fall within the ambit of schedule 29A Finance Act 2004?

Confusingly, however, in the US and in Australia, a class action in the widest sense (which we have described above) can only be propagated by a single “representative plaintiff” and that, too, is the basis for the new system in Scotland.

Group litigation is not altogether unique to lawyers acting on behalf of HNW clients. Some regulators also have their own group redress procedures that are governed by statute. In 2012, for instance, the old Financial Services Authority controversially imposed a “consumer redress scheme” in respect of unsuitable advice that prompted HNWs to invest in Arch Cru funds. Despite heavy opposition, the FSA used a procedure available in certain little-known provisions contained in the Financial Services and Markets Act.

Spurs and brakes

It is impossible to understand the practical effects of group litigation without understanding the wider issues which concern group litigation cases. These same issues exist throughout the globe, although in different forms, save that in the British Isles there is the complication that the “winner takes all” rule (i.e. the loser pays) exists when it comes to costs. In the US, claimants cannot expect to recoup any part of their legal costs from the other side.

Ultimately, group litigation is caused by private lawyers who want to generate profits for themselves at least as badly as their clients want redress.

Historically, the courts and other legal regulators have been nervous that profit-driven lawyers might be tempted to fabricate or to hide evidence.  This has resulted in a regulatory rule that states that no-one, including lawyers, should ever have any sort of share in the damages won by litigants (which rules out “compensation-sharing”).

The countervailing principle is that litigants should be able to have access to the courts. (This is not necessarily the same as access to justice, as a Lord Chief Justice wryly observed.) Another strong contributory factor is the imperative of consumers' rights; this is especially important when the damages may be too small for consumers to run the risks involved when taking action against well-heeled defendants without banding together.

In those countries which are the least risk-averse (such as the US), the prohibition against compensation-sharing has been abandoned comprehensively in favour of access to justice and the "consumer rights" imperative. Some countries remain very conscious of risk and there are half-way houses.

In the UK, lawyers can now extract a share of their clients’ damages when they meet with success. This is done either directly, by a straight percentage, or indirectly, by charging clients an uplift on their fees. In the US this is the only means by which lawyers are paid, but inevitably it has been controversial, with new rules about fees introduced on 1 December 2018.

Group litigation is very expensive to run and lawyers tend to be risk-averse (at least when it comes to speculating with their own fees). Because of this the “litigation funder” has come forward, taking advantage of the rule that scrapped compensation-sharing.

Litigation funders now tend to take risks to various extents, but they expect their attendant rewards. They are likely to pay the claimants' lawyers their standard fees (or a part of them) as long as the litigation is in progress. They also pay the premium required by yet another form of funding, which consists of insurance products which are now available to protect against the risk that a claimant might lose and have to pay the costs of the winning parties. This further product is called “after the event” or ATE insurance.
The US and Australia are at the least risk-conscious extreme. England and Wales have rapidly joined them. The comprehensive set of legislative provisions introduced in Scotland bears a close resemblance to the US system. Ask a traditional Irish judge in Ireland what he thinks of a litigation funder taking 30-40% of a person’s damages, however, and he may be appalled.

In Holland and in Germany (where group litigation takes place), the regulators still take a guarded approach to compensation-sharing. Compliance officers are undoubtedly aware that another strong spur to progress has been the EU, in the context of competition law reforms. The Damages Directive of 2014 has tried to bring all member-states up to speed with group litigation procedures.

During the years when they were part of the EU, England and Wales also took the Damages Directive as an opportunity to (tentatively) introduce the possibility of a new form of opt-out procedure in competition cases. In the main, lawyers for claimants must persuade clients to join a class action, this being the standard opt-in procedure. An opt-out procedure is one by which someone might find himself part of a class action which he never formally asked to join at all. Scotland accommodates both opt-in and opt-out procedures. In Australia and the USA they are the norm.

Compliance officers might also appreciate that the compensation payable by way of class action redress in competition cases, together with the legal costs, easily outstrips the fines that competition authorities are likely to levy. This is always well worth remembering when they warn other people in their firms about the widespread risks of such cartel-like behaviour as price-fixing, information-sharing and other such agreements with competitors.

The group litigation process

Processes for establishing and managing a group litigation claim in accordance with the common law are similar between jurisdictions, although they take different forms. Common-law jurisdictions include England and Wales, the USA, Canada, Australia and Ireland.
The key relevant stages are:

  • approval (or certification) of the class of litigants who can take part in the group litigation;
  • identification of the common issues of fact and law;
  • validation of the claim by a court;
  • the selection of test cases; and
  • procedures for determining individual issues.

In England and Wales, there is no formal certification procedure. The claimants' lawyers operate a 'register' containing major items of information which all sides to a claim can interrogate. A claim which should not be on the register results in irrecoverable legal costs and may be the subject of criticism. Compliance offices have an important role in making sure that systems always have data from which such key information can readily be extracted. Identification of the common issues of fact and law to be determined is generally a matter for negotiation between claimant and defendant lawyers. Validation of the claim by the court is the critical part of the process. For the most part the application for validation is made by the claimants’ solicitor and validation is the means of ensuring that that solicitor has the key fee-earning job and leads the proceedings. This leads to disputes about who should take the leading role.

Sometimes a defendant applies for the validation order in order to understand the extent of the claims against him/it. It also has the tactical advantage of throwing the claimants’ teams off guard.
The selection of test cases is an important process. Each side manoeuvres itself to choose a proportion of those cases which are apparently more favourable to its cause. This can be an extraordinarily expensive process but it can be made easier if the evidence which is analysed is in good order.

Once the test cases are determined, the court is able to give a range of answers to the common issues. By that stage, none of the parties really wants to litigate the individual issues. The process can be considered a failure if a settlement cannot be achieved at this stage.

In England & Wales any final settlement is a private matter for the parties. In the US and other jurisdictions, where the percentage recovery by the lawyers is a significant part of the process, the settlement must be agreed by a judge.

A growing phenomenon

Group litigation has taken off in this century, altough it was slow to develop around the globe beforehand. Class actions have grown in number because lawyers (together with litigation funders and litigation insurers) have realised that they can make significant profits in the ‘right’ cases. It has also prospered because national governments have realised that private litigants - and not just  can obtain redress for people and corporations. National governments might even ask themselves why they should engage in comprehensive regulation at taxpayers’ expense, if the market might gravitate back into compliance by means of private litigation.

Compliance officers have a valuable part to play in these cases. Group litigation can be won or lost according to how well their firms have kept case files up-to-date in the context of pre-existing regulatory requirements. Moreover, well- and consistently-managed files on clients can be subjected to suitable analytic processes during a litigation process.

To add value to the companies for which they work, compliance officers should appreciate that it is not just their regulators that their employers will expect them to satisfy, but also the demands of collective redress.

* Michael Cotter can be reached on +44 07498 210 972 or at https://cotter.legal/contact; Gordon Wignall can be reached at gordon.wignall@6pumpcourt.co.uk

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