Class actions: a multi-billion dollar bean-feast
June 2015

Securities class actions are going global. While litigation for collective redress has been commonplace in the United States for several years, it is rare in other countries where formal legal mechanisms have often been lacking. However, this is steadily changing, with many jurisdictions now recognizing that such regimes are necessary in order that those harmed can be rightfully compensated. The number of claims around the world is expected to pick up, with a greater willingness among shareholders to seek redress in a climate of more stringent regulation and rigorous enforcement measures.

The potential exposure for businesses, and the size of the pot that beneficiaries can claim, is set to rise dramatically across the world. Litigation consulting firm Cornerstone Research reports that, in the US, settlements in class-action lawsuits were $4.8bn in 2013. While a drop in the number of large cases led to 2014 witnessing a 16-year low, at $1.1bn, that figure has already been exceeded this year. Class actions recoveries specialist Goal Group predicts that, by 2020, annual settlements outside the US will reach $8bn.

In the US, a growing array of law firms has built expertise in this field, with each practice typically choosing to represent either claimants or defendants. The best-known claimant firms, including Quinn Emmanuel and Hausfeld LLP, are now leveraging their US experience internationally, particularly into common law jurisdictions such as the UK where the legal system is similar. Michael Lacovara, Partner at Freshfields in New York notes that these claimant firms have been probing at the system ahead of the adoption of formal class action regimes – for example, by trying to bring group claims under more limited existing group litigation rules and also in seeking to replicate US class-action tactics and funding mechanisms to force settlements.

"Class certification is paramount and a pivotal moment in US securities and antitrust class action litigation," Mr Lacovara tells us. At this preliminary stage, the named plaintiffs must satisfy the court that their interests and injuries correspond directly to those of a defined group of class members and that they can represent the interest of all members of a proposed class. The court's decision on class certification is supposed to be distinct from a trial on the merits, although these must be weighed up to a degree when determining whether to certify the class. In the US, a large majority of actions settle after this decision has been made, long before a trial on the merits.

In the US, a well-developed ‘cottage industry' has evolved in assisting lawyers representing class claimants. This entails service providers giving notice, via print and digital media, to all potential class members, and developing and administering the financial and other benefits of a settlement or judgment. Courts here are increasingly attentive to the quality and effectiveness of these services – requiring both claimants' counsel, and the consultants and service providers they retain periodically, to report to the court to ensure that notice to absent class members is effective and comprehensive, and that class members are in fact receiving the fruits of successfully litigated or settled claims. It is to be expected that, just as leading claimants' counsel have begun to offer their services in jurisdictions with emerging class action regimes, so too will these other participants in the class action ‘ecosystem'.

The global spread of class action litigation is being driven in part by the 2010 US Supreme Court decision in Morrison v. National Australia Bank Ltd., which limits the ability of non-US investors to bring securities class action (and other) claims in the US courts and, in some instances, prevents US investors from bringing US lawsuits against companies listed outside the US. This has led some plaintiffs looking to other jurisdictions in which to bring claims, just as many countries introduce formal class action regimes as an efficient means of affording relief to broad groups of similarly-situated potential claimants.

Class action regimes: two types


Opt-out – whereby all members of a defined (and usually court-certified) group are automatically enrolled, being bound into the action, unless they specifically choose not to participate.

Opt-in – whereby claimants must specifically opt in to the action. This often entails advertising in order to build a group of claimants.

Worldwide summary


North America

Canada: opt-out, with court certification of the class of plaintiffs. The majority of securities class actions have settled after the class has been certified, with very few proceeding to trial. One advantage of avoiding a trial is that filing a settlement claim is done confidentially, whereas acting as a plaintiff in a trial is a matter of public record.

United States: opt-out, with rare instances of opt-in. The class of plaintiffs must be court-certified. The vast majority of securities class actions have settled after the class has been certified. The US regime has been criticized for encouraging claims which are without merit, with cases fuelled by factors such as punitive or treble damages for certain claims, rules which allow losing parties to escape paying the winner's costs and law firms offering ‘no win, no fee' terms. The US Congress has legislated in an attempt to reduce the potential for abuse.

Europe

Belgium: both opt-in and opt-out, decided on a case-by-case basis.

Germany: claimants have used arrangements, both opt-in and opt-out, whereby they assign their rights to a company created to pursue the claims. This approach has been adopted in other civil law jurisdictions where no formal regime exists.

Italy: introduced an opt-in regime in 2014.

Netherlands: opt-out. In the case of Dutch Collective Settlement Foundations, the membership remains confidential until when and if the Foundation reaches a settlement. When settlement papers are submitted to the court for approval, a register of the Foundation's members must be supplied and may technically be a matter of public record.

UK: collective actions have been a feature of the UK legal system but they are less developed than in other jurisdictions and a formal opt-in class actions regime is being introduced. In an effort to avoid the criticisms of the US regime, the UK system will keep its ‘loser pays' costs rule and will not allow contingency fee arrangements.

For some time, the European Commission has been considering the application of a coherent and consistent pan-European approach to collective redress mechanisms. In 2013, it published recommendations for member states, which include adopting an opt-in system in most cases, with a ‘loser pays' costs rule. While the Commission's recommendation is non-binding, it does request implementation of the recommendations across all 28 member states within two years.

Africa

South Africa: collective actions are a feature of the legal system, but a formal class action regime is yet to be developed.

Asia Pacific

Australia: opt-in and opt-out. Introduced into legislation two decades ago, proceedings brought before the Federal Court, under Part IVA of the Federal Court of Australia Act, operate under an opt-out model. However, it is also possible to model an opt-in procedure whereby the class is defined as those who have ‘signed up' with a lawyer or person funding the particular litigation.

Hong Kong: an opt-out system may be introduced.

For other countries, in the above regions and elsewhere, the volume of securities class actions is less substantial than the main markets, but is growing rapidly. While some have formal regimes for securities class actions, others currently have systems which are limited to consumer relationships or to certain classes of plaintiff, or have no formal collective redress mechanisms.

A clear trend is emerging, with claimants increasingly exploring and instigating litigation in jurisdictions including Canada, Australia and the Netherlands. International companies listed on several exchanges find themselves having to defend securities class actions in multiple jurisdictions.

Over the last five years, asset managers and custodians have taken on fiduciary or contractual responsibility to support investors in participating in securities class and collective redress actions, in order that these clients are made good for the financial impact of corporate wrongdoing. "Today, it is important for institutional investors to know how to monitor, understand, evaluate and participate in securities class and collective redress actions on a global scale," says Noah Wortman, Chief Operations Officer, Americas for Goal Group.

Institutional investors should ensure that they manage and monitor securities class actions across the world, in order to determine the capacity in which they wish to become involved and the actions required to do so successfully. While participation can involve becoming a lead claimant, often it will be limited to a passive role as a class member in the action.

Ensuring an understanding of the different jurisdictions and their claims processes is also key. Several jurisdictions outside the US require participants in a class or collective redress action to opt-in at the start of a case. While it might take as long as five to seven years for a settlement to be paid out, it is imperative that investors' claims are filed in a timely and accurate fashion in order to secure the rightful returns.

The market is reaching a turning point. Historically, the complex and lengthy class action claims process was frequently considered by custodians, trustees and fund managers to be too time-consuming and burdensome – and thus disproportionate to the likely settlement pay-outs that might be achieved. Today, this view is in the minority – thanks to the level of pay-outs rising and with a number of service providers having automated the process of class action participation across several countries. Nevertheless, several fiduciaries and other service providers are still not ensuring client participation in class actions in countries other than the home jurisdiction, and there even remains a high level of non-participation by eligible parties in US cases. Goal Group's analysis shows that just under 24% of possible claims in the US are not being filed. Moreover, if these US rates of non-participation are experienced in non-US activity, more than $2bn of investors' rightful returns will likely be ‘left on the table' each year by 2020.

This leaves many fiduciaries in a predicament. There is no real excuse for failing to identify and file securities class and collective redress action claims where the associated cost is insignificant compared to the likely payout. While the legal regimes and procedures vary around the world, several low-cost automated services are available and serve up a standardized approach. It is predicted that the global class action growth will mirror the growth of the US class action scene in the early part of the 21st century. Consequently, it is very much in the interests of investors and fiduciaries to claim back their rightful returns, on a global scale.





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Securities class actions are going global. While litigation for collective redress has been commonplace in the United States for several years, it is rare in other countries where formal legal mechanisms have often been lacking. However, this is steadily changing, with many jurisdictions now recognizing that such regimes are necessary in order that those harmed can be rightfully compensated. The number of claims around the world is expected to pick up, with a greater willingness among shareholders to seek redress in a climate of more stringent regulation and rigorous enforcement measures.

The potential exposure for businesses, and the size of the pot that beneficiaries can claim, is set to rise dramatically across the world. Litigation consulting firm Cornerstone Research reports that, in the US, settlements in class-action lawsuits were $4.8bn in 2013. While a drop in the number of large cases led to 2014 witnessing a 16-year low, at $1.1bn, that figure has already been exceeded this year. Class actions recoveries specialist Goal Group predicts that, by 2020, annual settlements outside the US will reach $8bn.

In the US, a growing array of law firms has built expertise in this field, with each practice typically choosing to represent either claimants or defendants. The best-known claimant firms, including Quinn Emmanuel and Hausfeld LLP, are now leveraging their US experience internationally, particularly into common law jurisdictions such as the UK where the legal system is similar. Michael Lacovara, Partner at Freshfields in New York notes that these claimant firms have been probing at the system ahead of the adoption of formal class action regimes – for example, by trying to bring group claims under more limited existing group litigation rules and also in seeking to replicate US class-action tactics and funding mechanisms to force settlements.

"Class certification is paramount and a pivotal moment in US securities and antitrust class action litigation," Mr Lacovara tells us. At this preliminary stage, the named plaintiffs must satisfy the court that their interests and injuries correspond directly to those of a defined group of class members and that they can represent the interest of all members of a proposed class. The court's decision on class certification is supposed to be distinct from a trial on the merits, although these must be weighed up to a degree when determining whether to certify the class. In the US, a large majority of actions settle after this decision has been made, long before a trial on the merits.

In the US, a well-developed ‘cottage industry' has evolved in assisting lawyers representing class claimants. This entails service providers giving notice, via print and digital media, to all potential class members, and developing and administering the financial and other benefits of a settlement or judgment. Courts here are increasingly attentive to the quality and effectiveness of these services – requiring both claimants' counsel, and the consultants and service providers they retain periodically, to report to the court to ensure that notice to absent class members is effective and comprehensive, and that class members are in fact receiving the fruits of successfully litigated or settled claims. It is to be expected that, just as leading claimants' counsel have begun to offer their services in jurisdictions with emerging class action regimes, so too will these other participants in the class action ‘ecosystem'.

The global spread of class action litigation is being driven in part by the 2010 US Supreme Court decision in Morrison v. National Australia Bank Ltd., which limits the ability of non-US investors to bring securities class action (and other) claims in the US courts and, in some instances, prevents US investors from bringing US lawsuits against companies listed outside the US. This has led some plaintiffs looking to other jurisdictions in which to bring claims, just as many countries introduce formal class action regimes as an efficient means of affording relief to broad groups of similarly-situated potential claimants.

Class action regimes: two types


Opt-out – whereby all members of a defined (and usually court-certified) group are automatically enrolled, being bound into the action, unless they specifically choose not to participate.

Opt-in – whereby claimants must specifically opt in to the action. This often entails advertising in order to build a group of claimants.

Worldwide summary


North America

Canada: opt-out, with court certification of the class of plaintiffs. The majority of securities class actions have settled after the class has been certified, with very few proceeding to trial. One advantage of avoiding a trial is that filing a settlement claim is done confidentially, whereas acting as a plaintiff in a trial is a matter of public record.

United States: opt-out, with rare instances of opt-in. The class of plaintiffs must be court-certified. The vast majority of securities class actions have settled after the class has been certified. The US regime has been criticized for encouraging claims which are without merit, with cases fuelled by factors such as punitive or treble damages for certain claims, rules which allow losing parties to escape paying the winner's costs and law firms offering ‘no win, no fee' terms. The US Congress has legislated in an attempt to reduce the potential for abuse.

Europe

Belgium: both opt-in and opt-out, decided on a case-by-case basis.

Germany: claimants have used arrangements, both opt-in and opt-out, whereby they assign their rights to a company created to pursue the claims. This approach has been adopted in other civil law jurisdictions where no formal regime exists.

Italy: introduced an opt-in regime in 2014.

Netherlands: opt-out. In the case of Dutch Collective Settlement Foundations, the membership remains confidential until when and if the Foundation reaches a settlement. When settlement papers are submitted to the court for approval, a register of the Foundation's members must be supplied and may technically be a matter of public record.

UK: collective actions have been a feature of the UK legal system but they are less developed than in other jurisdictions and a formal opt-in class actions regime is being introduced. In an effort to avoid the criticisms of the US regime, the UK system will keep its ‘loser pays' costs rule and will not allow contingency fee arrangements.

For some time, the European Commission has been considering the application of a coherent and consistent pan-European approach to collective redress mechanisms. In 2013, it published recommendations for member states, which include adopting an opt-in system in most cases, with a ‘loser pays' costs rule. While the Commission's recommendation is non-binding, it does request implementation of the recommendations across all 28 member states within two years.

Africa

South Africa: collective actions are a feature of the legal system, but a formal class action regime is yet to be developed.

Asia Pacific

Australia: opt-in and opt-out. Introduced into legislation two decades ago, proceedings brought before the Federal Court, under Part IVA of the Federal Court of Australia Act, operate under an opt-out model. However, it is also possible to model an opt-in procedure whereby the class is defined as those who have ‘signed up' with a lawyer or person funding the particular litigation.

Hong Kong: an opt-out system may be introduced.

For other countries, in the above regions and elsewhere, the volume of securities class actions is less substantial than the main markets, but is growing rapidly. While some have formal regimes for securities class actions, others currently have systems which are limited to consumer relationships or to certain classes of plaintiff, or have no formal collective redress mechanisms.

A clear trend is emerging, with claimants increasingly exploring and instigating litigation in jurisdictions including Canada, Australia and the Netherlands. International companies listed on several exchanges find themselves having to defend securities class actions in multiple jurisdictions.

Over the last five years, asset managers and custodians have taken on fiduciary or contractual responsibility to support investors in participating in securities class and collective redress actions, in order that these clients are made good for the financial impact of corporate wrongdoing. "Today, it is important for institutional investors to know how to monitor, understand, evaluate and participate in securities class and collective redress actions on a global scale," says Noah Wortman, Chief Operations Officer, Americas for Goal Group.

Institutional investors should ensure that they manage and monitor securities class actions across the world, in order to determine the capacity in which they wish to become involved and the actions required to do so successfully. While participation can involve becoming a lead claimant, often it will be limited to a passive role as a class member in the action.

Ensuring an understanding of the different jurisdictions and their claims processes is also key. Several jurisdictions outside the US require participants in a class or collective redress action to opt-in at the start of a case. While it might take as long as five to seven years for a settlement to be paid out, it is imperative that investors' claims are filed in a timely and accurate fashion in order to secure the rightful returns.

The market is reaching a turning point. Historically, the complex and lengthy class action claims process was frequently considered by custodians, trustees and fund managers to be too time-consuming and burdensome – and thus disproportionate to the likely settlement pay-outs that might be achieved. Today, this view is in the minority – thanks to the level of pay-outs rising and with a number of service providers having automated the process of class action participation across several countries. Nevertheless, several fiduciaries and other service providers are still not ensuring client participation in class actions in countries other than the home jurisdiction, and there even remains a high level of non-participation by eligible parties in US cases. Goal Group's analysis shows that just under 24% of possible claims in the US are not being filed. Moreover, if these US rates of non-participation are experienced in non-US activity, more than $2bn of investors' rightful returns will likely be ‘left on the table' each year by 2020.

This leaves many fiduciaries in a predicament. There is no real excuse for failing to identify and file securities class and collective redress action claims where the associated cost is insignificant compared to the likely payout. While the legal regimes and procedures vary around the world, several low-cost automated services are available and serve up a standardized approach. It is predicted that the global class action growth will mirror the growth of the US class action scene in the early part of the 21st century. Consequently, it is very much in the interests of investors and fiduciaries to claim back their rightful returns, on a global scale.