Collective actions are not as common in Europe as they are in the US but this may be about to change.
Lawyers are garnering plenty of work from the troubles of Royal Bank of Scotland (RBS), the beleagued Scottish-based bank that in 2009 announced a loss of more than £24 billion, the largest in British corporate history. The claims flowing from the alleged misfeasance of those who ruled the bank in its heyday have been highlighting the difference in national regimes for handling large groups of disaffected claimants – especially between the US and Europe. But now a proposed new law in the UK may alter the legal landscape for collective actions there and will pose new challenges, albeit largely welcome ones, for lawyers.
New York-based Thomas A Dubbs, Senior Partner of Labaton Sucharow and a specialist in plaintiff class actions suits in the securities field, says: ‘The new rules set out in the UK’s Financial Services Bill (FSB) will open new options for UK investors. But if the FSB is passed, lawyers will have to make more discriminating judgments as to whether clients should pursue actions in the UK or the US.’ These will be affected, he says, by a range of issues; from substantive law matters to the mechanisms of bringing proceedings to costs and potential damages.
While several class actions against RBS have been forging ahead in the US, UK lawyers have been left considering the possibility of bringing collective suits at home and the hurdles involved in the process. ‘Handling collective actions here is time-consuming and difficult so it’s really a cottage industry,’ says David Greene, a Partner of London firm Edwin Coe and known for his work on such high-profile cases as the Railtrack shareholder action against the UK Government and the Northern Rock investors case. Greene confirms the supremacy that the US has gained in class actions since 1966 when changes to federal court rules facilitated their growth, enabling many consumers and businesses to pursue claims which they could not bring individually. The US opt-out scheme, under which those in a class who do not want to participate must specifically decline to be included in the action, is now truly tried and tested and is also underpinned by rules on the payment of costs and lawyers methods of charging.
So when confronted with clients who want to participate in collective actions for redress, English lawyers must be frank, Greene says: ‘You’d always advise them to take part in an action in the US if they could – there’s no downside in the US system.’ Anthony Maton, a group action specialist and Partner of the London office of global claimants firm Hausfeld & Co, agrees. ‘It would be silly for UK investors not to be involved in a relevant US class action if they could,’ he says, adding that directors of investor companies should be duty-bound to consider the possibility. Not surprisingly, US firms specialising in claimant representation have been visiting Europe of late to recruit clients for their actions and recent US legislation has helped fuel their search. ‘The Class Actions Fairness Act of 2005 made changes to how actions are handled and litigants with the largest losses now take the lead,’ Maton explains. ‘US lawyers want to represent large foreign investors in big securities cases so they can be lead counsel.’
‘Presently we bring all our class actions in the US and don't really consider bringing them elsewhere... it's taking European countries a long time to provide proper mechanisms for class action.’
Cohen Milstein Sellers & Toll
Nonetheless, it is not all plain sailing for non-US organisations who want to be part of US class actions, as one securities fraud class action against RBS in the US demonstrates. As a result of the catastrophic collapse in the value of RBS shares, the claimants in the case known as In re Royal Bank of Scotland pls Securities Litigation are arguing that RBS and some of its officers and directors mislead investors about parts of its business, including its exposure to US subprime assets and the benefits that would flow from its acquisition of part of Dutch bank ABN AMRO. Two US-based pension organisations have been appointed co-lead plaintiffs to represent all plaintiffs who bought RBS ordinary shares between 2007 and 2009 regardless of where they were domiciled and where they bought their shares. But such cases normally involve strike-out actions by defendants keen to use jurisdictional arguments to disqualify foreign claimants.
Cohen Milstein Sellers & Toll, based in Washington DC, is one of the co-lead counsel in the case which is pending in a US Federal Court in New York, with Partners Steve Toll and Julie Reiser handling the case. ‘As is common in these cases, the defendants have made motions to dismiss all the litigation or, alternatively, the inclusion of foreign investors who bought securities on foreign exchanges,’ reports Reiser. Toll and Reiser say that the issue of whether a non-US investor who purchased shares of a non-US company on a foreign exchange is a key issue that will soon be considered by the US Supreme Court in Morrison v National Australia Bank (NAB) and with that decision expected in mid-2010, the RBS case judge may well wait until then to make her finding.
Many US courts have considered claims by non-US investors concerning purchases made on non-US exchanges and as the decisions have differed with the facts of each case, it is hard to predict case outcomes, Toll says. Tom Dubbs, also a co-lead counsel in the RBS case along with the Wolf Popper firm, and the lawyer who will argue the NAB case in the Supreme Court reports: ‘The Supreme Court took the case with a view to harmonising the area so there will be fewer inconsistencies in the tests courts use
on important threshold issues.’ Hopefully, the NAB case will render a ruling that clarifies the situation. But on the subject of where to bring class actions, the thinking is clear: ‘Presently we bring all our class actions in the US and don’t really consider bringing them elsewhere,’ says Toll. ‘It’s taking European countries a long time to provide proper mechanisms for class action.’
As Toll, Greene and others point out, wouldbe litigants on the other side of the Atlantic have been poorly served by the law. As the law in England and Wales has no US-style opt-out class action mechanism, multiparty claims have been brought through the use of test cases, consolidated actions and representative actions with group litigation orders providing procedural management schemes for the actions. And for breaches of UK or EU competition law, representative actions, or ‘follow up’ actions, can be brought by a ‘specified body’ before the Competition Appeals Tribunal once there has been a finding of anti-competitive conduct. All options present sizeable administrative challenges and court responses can be discouraging. A case brought by the consumer group Which? against JJB Sports over the pricing of football shirts proved to be difficult and many feel it will deter others. David Greene tries to form committees for claimants who will be part of a running group – which happened in the Northern Rock litigation – but he admits that ‘this isn’t always possible’.
Even if claimants can be organised, other conundrums exist. In England, a ‘costshifting’ principle prevails. ‘In the US, both parties pay their own costs. Here, generally, the loser pays so the potential liability for costs is a big issue,’ says Greene. Anthony Maton also confirms that funding is a hurdle. ‘If you take on the potential costs of a large institution represented by a large firm, it’s a big factor in deciding whether to proceed. So you need cost regimes to accompany any collective action law reform.’ While the established view is that the ‘loser pays’ rule deters frivolous litigation, lawyers and businesses have worked to fund what they see as meritorious claims. Court orders for cost capping can be sought. In the Railtrack suit, an agreement was reached with the government that the maximum costs which could be awarded against the claimants if they failed would be £3 million. But the costs issue can give rise to satellite litigation Greene warns: ‘Defendants can attempt to dispose of the whole case on the basis of costs alone.’
‘[I]n England and continental Europe, moves have been afoot to catch up with the US and better serve both the access to justice for prospective litigants and judicial economies.’
Third-party funding is used in litigation too, but funders are generally disinterested in group actions, Greene says. ‘They want relatively easy cases with big prospects of success and high damages and solvent defendants. Group actions can be complex and messy.’ After-the-event insurance can also be used under which a premium is only payable if the party succeeds. Relief in some fields may be on the way, however. In his Civil Litigation Costs Review of January 2010, Lord Justice Jackson made suggestions for reform to contain escalating litigation costs in personal injury and defamation cases. The proposals included a system of qualified one-way cost-shifting with claimants only making a small contribution to the defendant’s costs if a claim was unsuccessful and if they had behaved reasonably, which could remove the need for after-the-event insurance – but only in these practice areas.
The other thing is fees. In the US, contingency fees, or ‘no-win, no-fee’ arrangements, enable lawyers to get a percentage of the damages, although Tom Dubbs confirms that in class actions courts must approve fee awards and in big securities cases large clients are now negotiating fees keenly. In England, however, contingency fees are seen as encouraging lawyers to bring weak cases. But as David Greene points out: ‘In England, lawyers can’t use contingency fees but third party funders can.’ Conditional fee arrangements are permitted under which lawyers can act on a ‘no-win, no-fee’ basis with an hourly rate supplement. The Jackson review contains, among its suggestions, that lawyers be allowed to enter into contingency fee agreements, but again, his recommendations relate to personal injury and defamation cases. In any event, David Greene says: ‘Many lawyers will not be attracted to contingency fees unless the claim is very substantial – commercially with the limits on damages in this jurisdiction, the return on settling the claim or winning it at trial does not provide a high enough return to match the investment and risks.’ But another and more substantive issue in the UK is that quite apart from the methods of bringing actions, local laws can be a drawback. ‘The US Securities Exchange Act offers better prospects for taking action than company law here, so litigants are often better off in the US anyway,’ reports Anthony Maton.
Cases of blackmail
Not surprisingly, in England and continental Europe, moves have been afoot to catch up with the US and better serve both the access to justice for prospective litigants and judicial economies. In February 2008, the Civil Justice Council of England and Wales (CJC) produced a report to England’s Lord Chancellor on the need for reform, based on earlier research by Professor Rachael Mulheron of Queen Mary University of London. Believing that a gap existed in collective redress mechanisms, the CJC suggested that a generic form of opt-out regime could fill it. Its suggestions for avoiding possible excesses included that courts determine whether an opt-out or opt-in system would be most suitable. Other bodies have been at work too. The Office of Fair Trading (OFT) in late 2007 recommended to the Government that representative bodies be allowed to bring actions for consumers or businesses on an opt-in or opt-out basis as approved by a court and it made recommendations for case funding but those recommendations remain in limbo.
‘A strong business lobby has opposed reform on the basis that it could introduce an American-style litigation culture and could lead to blackmail.’
Now however, the UK Government wants to deal with the matter on an industry basis. In November 2009, the FSB was published. Proposing to introduce measures to ward off future financial mayhem, it contains a section permitting collective actions to improve the position of consumers in the financial services sector and which will enable courts to approve collective actions on an opt-out or opt-in basis. What prompted the dismissal of a generic form of action? Were vested interests at work? Possibly. ‘A strong business lobby has opposed reform on the basis that it could introduce an American-style litigation culture and could lead to blackmail,’ reports David Greene.
The responses so far appear to be muted. Although Anthony Maton favours the idea of a generic class action, he still welcomes the Bill’s proposed scheme. ‘The financial services sector is a good area for the first step and we’ll see how the system works,’ he says. Rachael Mulheron is optimistic about the regime. ‘The Bill is well drafted and the system proposed is very flexible. I believe courts will administer the scheme sensibly. The Ministry of Justice has indicated that other departments can put forward evidence of need in their sector after consultation with stakeholders to take forward their own enabling legislation in future too so I can foresee extensional action,’ she says. The Bill is progressing well in Parliament and Mulheron confirms that draft rules of court, which will aid the organisation of such cases, have already been prepared to accompany the legislation and are intended to be flexible enough to be used for any form of collective proceedings that the legislation may allow. Further afield in the US, Tom Dubbs observes: ‘This is an English solution, based on the perceived problems of the US system. It has many positive features and is a step forward. The majority of class actions in the US are securities actions in the financial services sector so the approach isn’t irrational.’
Elsewhere in Europe, the class action landscape is patchy, though legislators in some countries are considering improving available methods to help mass claimants. Around 13 EU Member States already have collective redress systems for consumer actions. France and Germany are seen as potentially good places for group litigation and actions in civil law jurisdictions can be less costly than those in England. ‘Bringing actions in France and Germany can be markedly less expensive than here,’ notes David Greene. Anthony Maton says that his firm is looking at options to bring actions in other European jurisdictions. The EU too has been considering helping consumers achieve better access to justice. In April 2008, it published a White Paper on compensation for victims of breaches of its antitrust laws which has been adopted by the European Parliament. Wary of US-style litigation, it recommended opt-in representative actions. A Green Paper on Consumer Collective Redress for consumers, published in late 2008, has gone through the consultation stage and is moving ahead.
But if the FSB becomes law, how will it affect action strategies and the interests of lawyers in working internationally? Although it could make bringing collective actions in the financial services sector easier, cost-shifting will remain. As Tom Dubbs says: ‘It’s a question of the extent to which the various funding schemes in the UK permit the collective action reforms to be meaningful.’ As to lawyers’ costs, David Greene believes that few US firms would find the returns in the UK attractive enough to want to have much work there. But US firms may still feel that their experience is worth having in some form or another. Co-lead counsel in the RBS case Steve Toll and Julie Reiser say that if the claim by the non-US investors isn’t allowed in the US, UK-based claimants may consider trying to proceed in England. In this case, the firm could then lend its expertise to the suit, says Steve Toll: ‘We would then try to explore being a consultant but this hasn’t been done yet.’
Those not domiciled in the UK are excluded from the scheme proposed by the FSB so US litigants will not be able to participate. For UK litigants, the substantive law issues will determine whether they may have broader scope for action in the US, although they will have to contend with questions of jurisdiction. US lawyers will be looking for them – in large securities cases especially – where the investors with the largest losses will be appointed lead plaintiffs regardless of where they are geographically. And as Tom Dubbs explains: ‘If a US court accepts the case, UK clients are as well or better off in the US. Then if they’re knocked out – they’ll be able to fall back on action in the UK.’
UK clients will have to consider other issues too. Actions in the US are slower than actions in the UK, contends David Greene, with the initial strike-out process taking many months and the class certification process, which comes later, taking up to another year. UK litigants can sometimes view the US tradition of jury trials as a lottery, but Tom Dubbs notes that the success rate for plaintiffs in complex securities actions is mixed. In the US, punitive damages and, in competition law cases triple damages, can be awarded. But Dubbs explains: ‘Punitive damages here are not routine and in those cases where they are awarded, the rate of appellate reversal is high.’
So lawyers have plenty of thinking to do to weigh up all the odds. For their clients at least, with reforms like those proposed in the FSB, the options in the UK may be improving.
Diana Bentley is a former practising lawyer and is now a journalist, writer and public relations adviser based in London. She can be contacted by e-mail at email@example.com.
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