Litigation: Plan of actions

As class actions look to take off in the UK it’s worth considering the role they can play for claimants. By Vincent Smith

A great deal has been said recently about the growing threat of a US class action culture in the UK. Even the more thoughtful commentators (for example Simon Kamstra in the The Lawyer, 25 June) regard the predicted growth of collective actions for damages with some misgivings.

But there has been far less focus on the obvious need for individuals, and increasingly businesses, to be able to come together so as to make their claims in court.

For individual claimants in particular the drawing back of state funding through legal aid – as well as the risks from the ‘loser pays’ costs system – mean that access to the courts has become the preserve of the rich (or the very poor) except for the smallest of claims.

Most small and many medium-sized business claimants are in the same position. All would benefit from better dispute resolution mechanisms to spread these costs and risks across a wider number of claimants in a single case.

Taking effective action

There is, then, a need to develop some form of a more effective collective action device so that privately funded claims can be brought, where they are merited, to claim compensation for mass wrongs. We can learn from abroad; not just from the US, but also from Australia, Canada and some European countries, such as the Netherlands and Sweden.

The thinking to date in the UK on this has been characterised by timidity caused by fear of the perceived ‘excess’ of the current US class action system without taking account of its benefits.

Two areas where collective actions have become well developed elsewhere are both economic in nature – cartel law and financial service (securities) fraud. In both of these areas the loss is caused to the market (or at least to a large number of market participants) and the victims may not be aware that they have been harmed.

They are also areas where public enforcement authorities (both at European and at UK levels in the case of cartel law) are looking at and encouraging more private claimants to come forward. The damage caused by these economic wrongs can be huge and high profile.

These are both areas in which the burden of bringing a case will normally be beyond the resources of a single individual or small business. The economic, accounting and other expert evidence required to succeed in a claim in these areas makes a means of collecting similar claims together of prime importance.

The effects of these kinds of wrong are also likely to be felt on an international scale. So, for example, the vitamins cartel has led to action being taken by public enforcement bodies and/or private claimants in Europe, as well as in the US, Canada and Australia.

Moreover, shares in the Italian company Parmalat were widely held (a class action has been brought in the US, for example), as will normally be the case for any major listed company in a global financial market.

Collective power

What then are the essential characteristics of an effective collective redress mechanism? At the very least it should offer:

•Ease of access and administration. A system that, for example, requires each individual claimant to fill out a lengthy form and to individually pay separate court fees before they can join in is unlikely to be attractive to individual consumers or small shareholders.

•The ability to reach a ‘critical mass’ of claims. To attract private funding for experts and possible insurance against adverse costs, a realistic minimum size for the collective claim must be attainable.

•Inclusiveness. There will always be some differences in each claimant’s situation; what is important is that they have a sufficient commonality of interest for their claims to be heard together. And not all of the claimants will necessarily be in the same country, so the mechanism for bringing a claim needs to be similarly international in its reach (even if the solution relies on national court rules).

•Efficiency. Both the courts and defendants, as well as the claimant group, have an interest in ensuring that access to redress is provided in as efficient a way as possible. This is likely to mean that the courts will need a wide discretion to deal with the wide variety of collective claims that may arise. There also needs to be effective means for ensuring that compensation awarded is distributed fairly to the claimants.

The importance of experience

Significant lessons can be learnt from experience in the UK and elsewhere to date. The first is that robust court supervision of collective actions is essential from the beginning of the case. This must mean the court should be given a broad discretion to deal with a wide variety of collective claims in the fairest possible way.

Second, experience (especially in the competition field) suggests that a system that requires consumers and individual shareholders to sign up to potential litigation will not create a group large enough to spread the risks of the case. A claim mechanism that included, for example, all Parmalat shareholders (unless they chose not to participate) would achieve this.

Well-managed collective cases can bring access to justice to meritorious claimants in a highly efficient way, thus reducing the potential burden on the courts.

For example, in France more than 12,000 individual claims for compensation for mobile phone overcharges have been made in a large number of courts across the country.

A similar trend can be seen in the UK with claims against excessive bank charges by individuals. An effective collective resolution in one court is clearly preferable from a public policy (as well as a private claimant) perspective.

Keeping claims in check

Avoiding the excess that has appeared in the US is important, and this can be done by avoiding the combination of automatic treble damages and jury assessment of the amount of damages in civil cases (which can be highly unpredictable). The ‘loser pays’ rule, which has no parallel in the US, also acts as a powerful control to weed out unmeritorious claims and keep UK dispute resolution balanced as between claimant and defendant.

Without more effective collective redress – particularly for economic wrongs with largescale effects – individuals and small businesses will continue to lose out. Corporate governance in powerful businesses will continue to pay less attention to compliance. And public confidence in the fairness of financial and other markets will continue to slide.

Vincent Smith is a competition partner at Cohen Milstein Hausfeld & Toll