The recession, with the government’s bail-out of the banks, could provide fertile territory for lawyers that specialise in group litigation.
One of them, David Greene, head of litigation at Edwin Coe and president of the London Solicitors Litigation Association, points out that there have been a number of rights issues by banks in the past six months. Royal Bank of Scotland hit investors for £12bn in April and HBOS raised £4bn around the same time. In situations like this the question for shareholders, he says, is ‘whether the prospectus was in any fashion misleading or giving rise to some claim for misrepresentation’.
But, as Greene is well placed to observe, group litigation is never straightforward - the legal mechanism, he says, is a mess. He is currently representing some 40,000 private Northern Rock shareholders in a judicial review challenge to the compensation package offered by the government. It is, as he reflects, ‘extremely difficult to bring people together’. ‘We have to go through a huge administration exercise. We’ve done that before. We brought 50,000 shareholders together for Railtrack.’
That litigation, following the company’s renationalisation, illustrates the problems of such large-scale group actions. At one point shareholders were asked to pitch in a minimum of £30 each, in an effort to stump up a total of £900,000 to make a £2.25m payment into court.
It is unlikely that the current economic distress will provide a sufficient spur on its own to hasten reform of group litigation. Nonetheless, there has been plenty of activity from policy-makers, both at home and in Europe, over group actions. Earlier this year the Civil Justice Council (CJC) came down in favour of an ‘opt-out’ class action model, to enable easier access to justice for consumers wanting to bring collective or multi-party claims. The report followed an 18-month research project that found ‘overwhelming evidence’ that meritorious consumer claims were not being pursued. ‘Access to justice is… still disproportionately weighted against claimants, whether they are groups of consumers, small businesses, employees, or victims of mass torts,’ it said. ‘This has resulted in few claims being brought and, significantly, demonstrates that a number of meritorious claims simply have not seen the light of day.’
The CJC blueprint envisages that the courts take a greater role by certifying cases. The CJC was clear that it wasn’t promoting US-style class actions, insisting instead on retaining full costs shifting prior to certification and then leaving it to the judge to decide the costs liability.
European policy-makers are considering a white paper on collective action for damages in competition cases, following a green paper published in 2005. Neelie Kroes, the EU competition commissioner, favours a pan-European system to give consumer groups or trade associations the ability to pursue companies breaching antitrust rules through the courts.
‘The suggestions in this white paper are about justice for consumers and businesses, which lose billions of euros each and every year as a result of companies breaking EU antitrust rules,’ says Kroes. ‘These people have a right to compensation through an effective system that complements public enforcement, while avoiding the potential excesses of the US system.’
Diana Wallis, vice-president of the European Parliament and coordinator for the European Parliament’s Committee on Legal Affairs and the Internal Market, says legislation could be proposed in the New Year. She also reports that the European Commission is awaiting research on bringing ‘mainstream consumer cases’.
‘The question nobody has yet answered is how do you fund these actions in a way where the funding doesn’t take over the original intent of recompensing the losers?’ She says the idea of US-style contingency fees is ‘absolute anathema’ to most European countries. ‘We don’t want a US model,’ she adds.
Greene observes that the EC has changed its position and become much more conservative. ‘By the time the white paper came out they rejected the US system entirely and talked about it in derogatory terms,’ he says. ‘For me, there’s a danger in throwing out the baby with the bathwater.’
Splitting the differenceThere is a prospect of a two-tier system in Europe, with the UK developing the ideas formulated by the CJC. ‘The problem that we have at the moment is that a number of European countries are going forward with their own models,’ Wallis explains. ‘If you don’t get one all-singing, all-dancing system [of redress], and it could be our system because we have free movement of judgment, you are bound to have forum-shopping.’ She points to recent corporate scandals, such as the Italian company Parmalat which collapsed in 2003, where European consumers have used the US courts. ‘Frankly, I’d rather have collective action systems of a European nature coming through the front door than the US system through the back door,’ she says.
This is a view that other claimant lawyers would subscribe to. The lawyers who specialise in personal injury multi-party actions hold out the Vioxx fiasco as evidence that complex product liability litigation is in a very sorry state. In November 2007 the drugs manufacturer Merck announced plans to pay more than $4.85bn to alleged American victims of the anti-arthritis drug who claim to have suffered heart attacks and strokes as a result of taking it. However, the pharmaceutical company has refused to make agreements with the UK claimants (and claimants elsewhere) who took their legal action in New Jersey, Merck’s backyard, bypassing the UK court after they were denied legal aid. The New Jersey judge subsequently ruled against the UK claimants.
‘It is a matter of shame for our country and court system that Merck is paying out millions of dollars in the US without admitting liability because the US court system means that Merck can be held to account,’ argues Mark Harvey, a partner at the south Wales claimant firm Hugh James and a former secretary of the Association of Personal Injury Lawyers.
Vioxx is the latest in a line of failed group actions. The list also includes the 2002 oral contraception pill (OCP) litigation, which dramatically fell apart following 44 days of legal argument and contributions from 10 epidemiologists. Before that came the failed Norplant contraceptive litigation, a failed attempt to take on big tobacco in 1999, and the notorious benzodiazepine tranquilliser cases, which drained £30m of taxpayers’ money without seeing the inside of a courtroom.
Tight controls on public funds have been introduced for complex cases as a result of what the Legal Services Commission (LSC) has described as the ‘bitter experiences’ of cases such as benzodiazepine. By direction of the Lord Chancellor, there is only £3m a year available for major multi-party actions and litigation is subject to an annual affordability review. This year the LSC is funding cases on Seroxat, the epilepsy drug Vigabatrin and the FAC (foetal anti-convulsant) litigation.
Hugh James is currently preparing a case on behalf of several hundred clients alleging harmful side effects as result of the anti-depressant Seroxat. That case is being funded through a combination of public funding for the generic issues and conditional fee agreements backed by after-the-event (ATE) insurance to cover individual liability.
Harvey says: ‘The consumer relies on the drug company testing the drug properly, and that system is licensed and therefore policed by a licensing authority that has managed to demonstrate over the last few years that it has been ineffective. Vioxx, Lipobay [the withdrawn cholesterol-lowering drug] and Seroxat, to a degree, are all drugs that have been licensed and have now been either withdrawn or their labelling changed to a significant degree.’ He argues that lack of access to proper redress through the courts has ‘not helped repair or compensate for that failure within the system which exposes the public’.
David Keegan, director of the LSC’s special investigations unit, denies that the £3m fund is too restrictive to take on the might of the drug companies. Instead, he says, ‘we set that budget on the basis of our experience’. Keegan says that the LSC is funding ‘three major pharmaceutical actions - and these are potentially precedent-setting cases on the operation of the Consumer Protection Act’.
Leading claimant firm Irwin Mitchell, which acted in the Vioxx litigation, has also been looking at the banking crisis. Jeremy Marshall, a dispute resolution partner at the firm, has been considering the legal position of Northern Rock shareholders. He believes the ‘credit tsunami’, quoting Alan Greenspan’s description, ‘has led and will continue to lead to a fallout’.
Marshall says: ‘Everybody will look after their own position and some will say that they were let down by the management of banks. We have looked in the past at running actions involving a massive [number] of shareholders.’
The difficulty here is the administrative costs of running any case if there is little value in a claim - possibly as little as £20 to £30 per shareholder. ‘It just doesn’t work,’ Marshall explains. ‘You need to have a steering committee and a very clear structure,’ he says, adding that those administration costs can outweigh the value of compensation in such claims. Marshall is mindful of the action taken by the consumer rights group Which? against the retail chain JJB Sports over replica football shirts. The group successfully sued JJB Sports to reimburse consumers who were overcharged for shirts, which sold for £39.99 each after a number of companies were fined for price-fixing. The number of claimants who recovered £20 was only in the hundreds, despite two million consumers being affected. As Dr Deborah Prince, head of legal affairs at Which?, explained in a letter to the Gazette at the time, that was ‘a direct result of the difficulties in bringing these types of compensation claims’ citing the ‘passage of time’ as well as ‘the relatively small amount of compensation’ (see [2008] Gazette, 13 March, 13).
Counting the costBrian Raincock, executive chairman of ATE insurer Law Assist, is sure that group litigation will follow in the downturn’s wake. ‘An awful lot of investors are extremely upset,’ he says. He also favours the opt-out model to help deal with what he describes as ‘the administrative nightmare of recruiting people in the first place and then organising the management structure and decision-making’. This is as much a problem for insurers as it is for lawyers - as Raincock points out, it is ‘important to have one body of claimants so the case will either win or lose for everyone’, thereby either triggering the insurance policy or not.
The problem of organising big group actions was dealt with in a novel fashion in the legal action brought against Equitable Life by 407 with-profits annuitants, which settled a few weeks before going to trial earlier this year. The details of the settlement are confidential, but Robert Morfee, a partner at Bristol-based firm Clarke Willmott, says his clients were ‘pleased with the result’.
The policyholders brought proceedings in the High Court in 2004 against the stricken life assurance company, arguing they had been mis-sold annuities. Problems with the litigation almost sank the action in 2004. Clarke Willmott had instructed insurance broker Miller Insurance to assemble a syndicate of insurers to provide £1m of ATE cover for the then 900 potential claimants. They raised £975,000 and Clarke Willmott agreed to provide the remainder of £25,000. But the action collapsed when insurers withdrew followed by half the clients.
The firm then created a special-purpose company with directors from the action group representing the clients. The court asked for each claimant to have sufficient money to cover their share of the estimated adverse costs of £5m - £12,500 each. ATE insurance was also provided through LawAssist.
‘We had a company limited by guarantee and everybody was a member and had to hand over conduct of the case to the company,’ explains Morfee. ‘It worked extremely well and I’d certainly do it again.’ This meant that the group action didn’t suffer from ‘fragmentation’ - in other words, more clients walking away. Discipline, Morfee explains, was tough. ‘All decisions were taken by the company directors,’ he says. ‘The clients had to like it or lump it.’
Under the ‘opt-out’ system as envisaged by the CJC – the same methodology as in the US - anyone eligible for compensation can claim after an award has been granted (or else they ‘opt out’ if they do not want to be involved). However, for an ‘opt-in’ action the claimant group needs to identified before the case gets to court, a process that has proved to be a major headache.
The US class action system comprises jury trials, punitive damages, and a very strong claimant lawyer profession funded by contingency fees - ‘plus, there’s no costs-shifting rule’, says Lianne Craig, a senior assistant in US firm’s Weil Gotshal & Manges’ London dispute resolution group. In other words, she argues that the US system is far more than a straight ‘opt-out’ model.
‘Some commentators don’t take on board that it’s all those factors working together that create the US class action monster,’ she says.
Greene would not argue for importing the US system ‘wholesale’, he says, ‘but there are various elements that assist in bringing a rightful action to court and one of those is the opt-out process’.
The arrival in London of US class action specialists Cohen, Milstein, Hausfeld & Toll (CMHT) in 2007 was heralded by some commentators in the business press as the introduction of US-style class litigation on these shores - ‘Big business beware’, began one Sunday Times article in March last year. The London office is so far best known for its legal action against British Airways and Virgin Atlantic on behalf of passengers over price-fixing.
According to Rob Murray, CMHT’s European managing partner, that settlement will deliver £73.5m for UK passengers and $50m for those in the US. A second similar legal action has been launched in the High Court against BA in relation to its cargo services, with clients signed up to conditional fee agreements. However, the passenger settlement was achieved through legal action in the US - as well as via ‘an extensive process of mediation’, says Murray.
Is the slow process of reform on this side of the Atlantic frustrating CMHT’s ambitions? ‘It is frustrating that there are certain types of cases that remain impossible or incredibly difficult to bring,’ says Murray. ‘But we didn’t set up a business model dependent on some reforms being passed at some point in the future.’
Jon Robins is a freelance journalist
The Civil Justice Council (CJC) paper Improving Access to Justice through Collective Actions was published in July as formal advice to the Lord Chancellor.
The CJC view:
‘Access to justice is… still disproportionately weighted against claimants whether they are groups of consumers, small businesses, employees, or victims of mass torts. This has resulted in few claims being brought and, significantly, demonstrates that a number of meritorious claims simply have not seen the light of day.’
CJC recommendations include:
- A generic collective action should be introduced;
- Collective claims should be capable of being brought by a wide range of representative parties;
- Collective claims may be brought on an opt-in or opt-out basis. Where an action is brought on an opt-out basis, the limitation period for class members should be suspended pending a defined change of circumstance;
- No collective claim should be permitted to proceed unless it is certified as suitable by the court;
- Collective claims should be subject to an enhanced form of case management by specialist judges;
- Where a case is brought on an opt-out basis, the court should have the power to aggregate damages;
- There should be full costs shifting.
European Commission
The European Commission published a white paper in April promoting ‘a new model for achieving compensation for consumers and businesses who are the victims of antitrust violations’.
The EC view:
‘At present, there are serious obstacles in most EU Member States that discourage consumers and businesses from claiming compensation in court in private antitrust damages actions.’ The white paper included suggestions to make damages claims by victims ‘more efficient, while ensuring respect for European legal systems and traditions’.
EC recommendations include:
- Single damages rather than multiple damages (in other words, full compensation, including compensation of the actual loss due to, for example, an anti-competitive price increase or the loss of profit as a result of any reduction in sales);
- Collective redress mechanisms, in particular, consumers and SMEs with small-value claims needed ‘better access to justice’. They ‘should have the possibility to regroup their claims and bring actions via suitable representatives’. However, ‘safeguards to avoid that such actions would lead to unfounded claims’ needed to be put in place (for example, only representative actions led by recognised consumer groups); and
- Disclosure to allow judges to get the full picture of a case.
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