Dispute resolution briefing
Performance ratchets are
common in the private equity
context and are designed to reward management for achieving financial or exit-related
targets (see box “Ratchet example”). In May 2004, the Inland Revenue announced in
an answer to a frequently
asked question on its share
scheme website that it would
be imposing tax charges on
ratchets unless the employat it
determ the full amount for his
shares when e acquired them
(www.inlandrevenue.gov.uk/
shareschemes).
Collective claims
Learning from the US experience
To manage risk today, corporate counsel
need to consider how disputes may arise
in future, and plan accordingly. One
possible development is an increase in
collective litigation against companies.
An examination of parallels and differences between the experience of collective claims in the US and in England and
Wales, identification of the business areas that may be vulnerable to collective
claims, and an exploration of how this
area may develop in England and Wales
can help to identify the steps necessary
to manage risk effectively.
(Detailed commentary on collective
claims in the field of competition law is
beyond the scope of this article.)
The US experience
Class actions in the US are a long-standing exception to the usual rule that litigation is conducted by and on behalf of
the individual named parties (Califano v
Yamasaki, 442 U.S. 682, 700-701 (U.S.
1979)). Class actions allow one plaintiff
to sue a single defendant on behalf of
others for the same legal harm, and are
intended to avoid the courts managing
numerous, duplicative actions.
Class actions brought under Rule 23 of
the Federal Rules of Civil Procedure permit one or more plaintiffs to bring a lawsuit on behalf of a larger group of individuals, many or all of whom may have
no knowledge of the claim. If a court
certifies a claim to proceed as a class action, “absent” class members are bound
by the final judgment.
When a complaint is filed as a class action, the court ordinarily permits the
parties to engage in fact discovery to determine whether certification of the
class is appropriate, and, in addition, a
plaintiff must satisfy one of three further requirements in order to justify
class certification (see box “Class certification”). Depending on which of these
three requirements is satisfied, the class
may be considered mandatory (with no
opportunity to opt out), or class members may be given a chance to opt out to
pursue their individual claims against
the defendant. In federal court, a defendant does not have the automatic right
to appeal a class certification order.
However, the defendant may seek permission to appeal the order if certain
conditions are met.
Damages and costs. In the US, damages
awards in class actions can amount to
billions of dollars. Claims are generally
funded on a no-win, no-fee contingency
basis. As a result, plaintiffs’ lawyers
bear the costs of the litigation but may
stand to receive a substantial percentage
of any monetary judgment awarded
against a defendant, while the damages
received by each individual class member can be quite small. It is not unusual
to see class action settlements that provide coupons, credits, or a few dollars to
each class member, but nevertheless pay
plaintiffs’ counsel millions or tens of
millions of dollars.
In the US, unsuccessful plaintiffs are
usually responsible for paying a defendant’s costs, but these costs exclude
lawyers’ fees and represent a tiny fraction of the overall expense of the litigation. This approach is quite different to
that in English proceedings, where
lawyers’ fees make up the majority of the
This article first appeared in the January/February 2008 issue of PLC Magazine.
©Legal & Commercial Publishing Limited 2008. Subscriptions +44 (0)20 7202 1200
costs awarded (see below). While some
US statutes shift the burden of paying
lawyers’ fees onto the losing party, these
are the exception rather than the rule.
As a result, the expense of litigating a
class action, even for a successful defendant, can be enormous.
A class action may be an efficient use of
the court’s time if properly certified.
However, with stakes so high, class action defendants often settle claims after
they are certified for class treatment.
Collective claims in England & Wales
Class actions in the US mould do not exist in England and Wales, but collective
claims can arise. The closest mechanism
to the US procedure is the group litigation order (GLO). A GLO enables a
group of common claims, which give rise
to common or related issues of fact or
law, to be managed as a single case (Civil
Procedure Rules 19.10 and 19.11)
(CPR). Once a GLO is made, a group
register is established, but, in contrast to
the US, individual claimants must opt
into the group to take advantage of any
settlement or judgment (CPR 19.12).
Critics say that claimants are unwilling
to pursue GLOs because of the potential
costs. In the event of an adverse costs order, group members will be severally liable for an equal proportion of the common costs of the claim, including
lawyers’ fees, unless the court orders
otherwise (CPR 48.6A(3)). The general
rule is that an unsuccessful claimant
must also pay the individual costs of
their own claim plus an equal proportion, with the other group claimants, of
the common costs of the claim, including lawyers’ fees (CPR 48.6A(4)). This
1
contrasts with the US costs position (see
“The US experience” above).
Class certification
In England, parties also have the ability
to bring representative proceedings on
behalf of others who have a common interest and grievance, where the relief
sought is beneficial to all members of the
group (CPR 19.6 and Duke of Bedford v
Ellis [1901] AC 1 HL). A judgment or order is binding on all parties represented
in the action. However, any order is only
enforceable against a represented party
with the permission of the court. Further, a represented party can only enforce a judgment or order with the
court’s permission. The general rule is
that, while the parties to the proceedings
are liable for costs, the represented parties are not (Moon v Atherton [1972] 3
All ER 145). This means that the party
to the litigation assumes the risk of any
adverse costs order.
To obtain certification in a US federal
court, the plaintiff must establish
that:
Areas of vulnerability
GLOs made by the courts in recent years
are illustrative of the areas in which collective claims may arise. They include
claims based on: product liability; nuisance and other environmental wrongs;
industrial injury; and illness suffered
while on holiday.
In addition, a plaintiff must satisfy
one of three further requirements in
order to justify class certification:
Class actions in the US are frequently
seen in areas of:
• The party opposing the class has
• Consumer finance (actions by borrowers against mortgage companies
or other creditors).
• Securities (actions by shareholders
against public companies).
• Employment (claims by employees
seeking more wages from or asserting
discrimination by employers).
• Toxic tort (actions by victims of environmental disasters).
• Consumer protection (actions by patients against pharmaceutical companies for defective drug products).
• Antitrust (actions by consumers or
companies alleging, for example,
price fixing).
2
• The class is sufficiently numerous
(with at least 40 members).
• There are common issues of law
and fact between the claims of the
putative class members.
• The plaintiff’s claim is typical of the
putative class members’ claims.
• The plaintiff is an “adequate”
class representative (that is, that
the plaintiff’s interests are not in
conflict with the putative class
members’ interests and the plaintiff’s lawyers are experienced in
the prosecution of class actions).
• The prosecution of separate actions against the defendant would
create the risk of inconsistent adjudications.
acted or refused to act on grounds
generally applicable to the class,
making final injunctive relief appropriate with respect to the class
as a whole.
• The court finds that questions of
law or fact predominate over individual questions, and so a class
action is superior to individual adjudication.
• Personal injury (actions by victims of
a mass disaster or consumers of tobacco products against tobacco makers).
If trends seen in the US are followed,
then there may be a growth in consumer
finance and securities claims. Factors
encouraging this development include
the credit crunch and provisions in the
Companies Act 2006, which came into
force in October 2007 and which provide
shareholders with a statutory right to
bring derivative actions on behalf of a
company against directors of the company for breach of duty (for background, see Opinion “Derivative actions: a step too far?”, www.practicallaw.com/9-202-0407). It remains to
be seen whether the procedural and
other checks and balances that have been
put in place prevent unmeritorious
claims. However, in the context of the
current economic uncertainty, there is a
risk that the number of such claims will
increase.
Cross-jurisdictional claims
The international scope of some collective claims means that corporate counsel
need to be alive to the prospect of crossjurisdictional claims. For example,
multinational corporations whose parent companies are based in England or
Wales can face group claims arising
from the activities of their subsidiaries
in other jurisdictions if the claimants
could be denied justice in their jurisdiction (Connelly v RTZ Corp Plc (No 2)
[1988] AC 584; Lubbe and others v Cape
Plc [2000] 1 WLR 1545). Denial of justice might include the absence of funding, legal representation, expert advice
and court procedures for group claims.
English entities may be required to defend a class action in the US. A foreign
company may be subject to personal jurisdiction in a US court if, through its
business activities or operations in the
US, it has had a sufficient level of contact
with a particular state or with the US as
a whole and the exercise of jurisdiction
over that entity otherwise meets the US
constitutional standard of due process
(see, for example, Fed. R. Civ. P. 4(k)(2)).
Equally, English entities may be able to
pursue class actions in the US. In March
2007, the National Association of Pension Funds produced a policy paper
which stated that trustees should not
neglect opportunities to recoup losses
through class actions where the cost and
effort were commensurate with the expected return (Securities litigation questions for trustees, www.napf.co.uk/
Policy/governance.cfm).
This article first appeared in the January/February 2008 issue of PLC Magazine.
©Legal & Commercial Publishing Limited 2008. Subscriptions +44 (0)20 7202 1200
Future developments
Criticisms of the mechanisms for collective claims contributed to the Department of Trade and Industry (now the
Department of Business, Enterprise and
Regulatory Reform (BERR)) consulting
in 2006 (the consultation) on the introduction of representative actions in consumer cases (Representative actions in
consumer protection cases, 12 July 2006,
available
at
www.dti.gov.uk/files/
file31886.pdf; www.practicallaw.com/
0-204-0527). It proposed that representative actions could be brought by designated bodies on behalf of opted-in,
named, consumers who could demonstrate individual loss.
The limitation of these proposals to actions brought by designated bodies,
combined with the absence of available
public funding or contingency fees (Rule
2.04, Solicitors’ Code of Conduct)
seems to militate against US-style collective actions in consumer cases. However, BERR has not yet announced when
it will publish its response to comments
on the consultation paper.
If BERR is persuaded by the submissions from parties championing consumers, then there may be a move towards a US model in this area. The Office of Fair Trading’s recommendations
on private actions in competition law
claims, published in November 2007,
may be instructive in how such a move
could occur (see News brief “Collective
claims in competition law: a step
closer”, this issue). The recommendations include:
• Giving judges the power to order that
claims be brought on behalf of unnamed consumers and businesses.
Managing the risk
If US-style collective actions become more of a feature of litigation in England and
Wales, English businesses can apply the following risk management steps taken in
the US:
• Identify areas within the business that are most vulnerable to class actions, based
on an analysis of the most common sectors for such claims and developments in
relation to multi-jurisdictional claims.
• Carefully review policies and procedures within these vulnerable areas, and modify them to ensure that they comply with legal standards and regulatory obligations. For instance, if there is substantial vulnerability in relation to defective
consumer products, a company may want to adopt a directive that management
should emphasise the safety of all products and implement new procedures to test
the safety of the products.
• Educate and train management (and, in some circumstances, all employees) on the
business’s policies, procedures, and expectations, and on the corporation’s efforts
and commitment to operating in compliance with legal and regulatory obligations.
• Establish internal checks and self-audit procedures (and arrange for periodic external audits) to assure compliance with the relevant policies, procedures, business expectations, and legal and regulatory obligations.
• Maintain the proper perspective: corporate responsibility and legal compliance
need to be emphasised over short-term profits.
• Allowing lawyers to enter into conditional fee agreements with a percentage success fee above the current
maximum of 100%.
• Codifying the courts’ discretion to
cap costs, including, in some cases,
capping the claimants’ liability for
the defendant’s costs at zero.
Providers of third party funding are reported to be taking an interest in collective claims. A willingness by funders to
assume the costs risk could remove one
of significant brakes on collective claims
in England.
If US-style collective actions become
more of a feature of litigation in England and Wales, there are number of risk
management steps currently employed
in the US that businesses can put in place
(see box “Managing the risk”).
Laura Harcombe (London), Irene Freidel (Boston) and Patrick Madden (Seattle) are partners and Clare Tanner (London) is an associate in the class action litigation practice at K&L Gates.
PRACTICAL LAW COMPANY
“The Practical Law Company standard documents are up to date, well drafted and suitable for much
of our work. Combined with the high-quality update, it's an efficient and extremely useful service.”
Tina Webster, Partner, Thomas Eggar.
PLC
Property is the premium know-how service for commercial property lawyers. www.practicallaw.com/property
This article first appeared in the January/February 2008 issue of PLC Magazine.
©Legal & Commercial Publishing Limited 2008. Subscriptions +44 (0)20 7202 1200
3