The English class action?

October 2015 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

The English group litigation system is far removed from the opt-out, US-style class action model. We are, however, seeing a significant change in the group litigation landscape in the UK and, following the financial crisis, interest in big-ticket group litigation is on the rise – particularly in the financial services sector.

Increasing shareholder activism and pressure on institutions from their stakeholders is just one reason for this. Cases such as the ongoing RBS rights issue litigation and the pending action against Tesco for profit overstatements in its recent accounts would previously have faced insurmountable barriers – including lack of access to funding, the risks of a loser pays system and ineffective or untested mechanisms for bringing group claims. The RBS case in particular confirms that large-scale shareholder claims can now be successfully launched in England and the novel solutions adopted in that case have paved the way for other cases to follow. Against a backdrop of wider claimant-friendly changes, England is likely to be an increasingly popular forum for large-scale group litigation claims based on financial breaches and generally within the financial services sector.

How are group claims brought?

Group claims can be brought in England and Wales in one of three ways. The first is a standard claim with multiple parties, where claims “can be conveniently disposed of in the same proceedings” (Civil Procedure Rules, Part 7.3). In 2013, a €52m claim for unpaid bonuses was successfully brought against Commerzbank by 104 claimants – 83 of whom were represented by one law firm and 21 by a different law firm. The case is notable as the two claimant groups brought the claims together using a cooperation agreement rather than using group litigation procedures. While this may be feasible when dealing with limited numbers of claimants, larger claims with more significant numbers of claimants have to rely on group litigation mechanisms to bring their claims.

The representative action is the closest mechanism to the US class action, being an opt-out action brought by a single representative on behalf of all of the claimants in the group. Such claims can be brought “where more than one person has the same interest in a claim” (CPR 19.6) and generally results in a declaration of liability which each claimant must then enforce individually, proving their own losses.

Although representative actions are procedurally straightforward and allow unnamed claimants to remain anonymous until late into the proceedings (a key factor for some claimants), they are currently rarely used.

There are a number of practical issues in representative actions. There are risks around others simply piggybacking off the representative’s proceedings without themselves incurring any liability for own side and adverse costs – although agreements can be put in place to deal with the representative’s liability and control over the proceedings. Perhaps more fundamentally there is little guidance as to how the courts would deal with key issues, the most important being how to define the group of claimants and select suitable representatives in such a way that ensures claimants do not risk later being time barred from bringing a claim.

Group litigation orders (GLOs) are becoming the vehicle of choice for financial services and large scale corporate litigation. GLOs were introduced 15 years ago as a new procedure for multiparty claims. They are used far more than representative actions in commercial cases, although are still not particularly well used (only 92 have ever been registered, of these 17 were in the last five years).

GLOs are essentially a case management device “for the case management of claims which give rise to common or related issues of fact or law” (CPR 19.10) – a more straightforward test than for representative actions. GLOs are intended to give the court greater flexibility to manage the often conflicting interests within the pool of claimants.

GLOs (which must be court approved) are opt-in – claimants must appear on the group register in order to have a claim. Once registered, individuals are then bound by the judgment and the costs consequences of bringing the claim. The effect is that GLOs bring greater certainty around the process that the court will use. This does, however, come at the cost of a heavy administrative burden, especially where there are very high numbers of claimants to identify at an early stage in proceedings.

With GLOs there can be a number of complex case management issues for the court and the parties to get to grips with. These can stem firstly from groups of claimants being represented by a number of different law firms. Each such group can often have differing views over how the case, or elements of it, should be pleaded. There can also be differing levels of engagement in the case by each group. For example, a group may wish to take only a passive role in the litigation, relying on the other groups to actively pursue the case, although defendants are not expected to face liability for duplicative costs occasioned by the claimant groups being represented by a number of different law firms.

With GLOs there will need to be a structure for: (i) consolidating pleadings into a single statement of case; (ii) cost sharing arrangements between the claimant groups; (iii) cooperation between the claimant groups for coordinating inter-parties correspondence with the defendants and for dealing with each stage of the litigation including disclosure, the appointment of experts and the interviewing of witnesses; and (iv) apportioning liability for adverse costs, a particularly contentious issue in a loser pays system.

The changing landscape – funding

Possibly the area of greatest change for group litigation has been the funding of litigation. With the implementation of the Jackson reforms in April 2013, certain restrictions around costs were lifted. No win no fee arrangements (in the form of damages based agreements or DBAs) were permitted in the UK for the first time although there has been very little uptake to date – particularly in the financial services sector, but also in the group litigation context. This is due to the requirement that firms conduct the entire case on a no win no fee basis – they cannot apply this to only a portion of their fees (although proposals have been made for a series of changes to DBAs in an attempt to encourage greater use of them).

The traditionally risk averse English legal market is now responding to increasing pressure from clients and other players interested in entering the English litigation market (including US, Australian and European law firms, funders and claims coordinators) to come up with creative funding arrangements.

In the context of group litigation, the self-funding model (including through payment of membership fees) is no longer the only method of financing English litigation. Third party funding by specialist litigation funders continues to advance in its sophistication. The size of the funding market has expanded considerably on where it was two to three years ago – which is particularly significant for financial litigation where the costs of bringing, and defending, a claim can be high.

Insurance against adverse costs is similarly expanding in capacity and, where previously claimants faced very high premiums payable up front, funders are now commonly funding that premium (in return for a three, four or five times multiple, in the event of success).

It is thanks to these developments that group litigation claims are increasingly able to launch successfully, where previously they may have failed at the first hurdle.

The changing landscape – external factors

Where previously claimants may have sought to bring claims in the US or Europe – even where the defendant is based in the UK – this has been changing. Claims management companies are becoming more experienced at coordinating claimants into the most favourable forum including: (i) mirroring group litigations already commenced, for example, in the US with claims in the UK (for example, FX group actions were filed quickly in the US, but others have since followed in the UK); and (ii) forum shopping, so that litigation facing difficulties in one jurisdiction is commenced elsewhere. There is greater scope for such forum shopping in the context of securities litigation where claimants may be based across a number of jurisdictions, and the UK may be particularly attractive where defendants are based there.

In the US, a series of decisions have signalled the end of the US court’s willingness to accept jurisdiction. The 2010 Supreme Court decision in Morrison vs. National Australia Bank dramatically limited investors’ ability to recover securities fraud damages on securities listed outside the US. As a result, claimants excluded from the US are actively seeking other jurisdictions in which to bring securities claims.

Given these changes, England is an increasingly attractive forum particularly for US claimants, given its common law system, English language and its extensive disclosure (discovery) system, which can be particularly critical in securities litigation cases which often involve allegations of misrepresentation.

Looking ahead

Further change is on the horizon. From October 2015, the Consumer Rights Act 2015 gives the UK Competition Appeal Tribunal the power to hear opt-out group actions following a finding of anti-competitive behaviour. Although only applicable to UK domiciled claimants, this is a significant development, offering an effective opt-out group litigation framework in the antitrust, follow-on action context for the first time.

This is particularly noteworthy for the financial services sector. In 2015, the UK’s Financial Conduct Authority was given competition powers for the first time. The FCA has since indicated that it is currently considering anti-competition investigations into a “significant” number of financial companies. It is only a matter of time before the FCA flexes this newly acquired power, and with it, new opportunities for UK claimants to pursue opt-out collective actions against offending financial companies.

Michael Brown is a partner and Elizabeth Clay is a senior associate at Bird & Bird. Mr Brown can be contacted on +44 (0)20 7982 6475 or by email: michael.brown@twobirds.com. Ms Clay can be contacted on +44 (0)20 7982 6537 or by email: elizabeth.clay@twobirds.com.

Michael Brown and Elizabeth Clay

Bird & Bird

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