Take on a class action and you risk the change of becoming a victim if things go wrong. With collective redress becoming more popular in England and Wales, what should law firms do to protect their practices from the dangers of class actions? Nick Bird reports
It couldn’t have been any clearer. Professor Rachael Mulheron’s report to the Civil Justice Council last month identified ample evidence of a need to reform collective redress procedures. Her core recommendation was for an ‘opt-out’ regime - one where the class members would have the ability to ‘opt out’ but would otherwise be ‘in’. The design, cost and funding issues of such a regime fell outside the scope of her report but it followed in the wake of a report to the Government last year recommending the legalisation of contingency fees in limited circumstances and the regulation of third-party funding of litigation.
The pressure of anticipation has been felt by lawyers for some time now. Specialist legal teams have been formed, US class action firms have established a presence in London and websites are pregnant with updates on progress.
Class actions have certainly delivered large profits for a number of US firms. But for some, this has come at a cost. Just as the Civil Justice Council was publishing its report recommending an opt-out regime for us, the legal press was publishing the sentencing of one the US’s top class action lawyers. Until 2003 William Lerach had been at the leading class action firm Milberg Weiss. He got a two-year prison sentence, 1,000 hours community service, a $250,000 (£123,000) fine and has to pay back $8m (£3.9m) in fees. That followed a five-year investigation into illegal kick-backs paid to class action plaintiffs which resulted in Lerach, the firm itself and three former partners being indicted. The firm and one of the former partners are fighting the charges, but the whole episode is reported to have done significant damage to the firm’s practice.
Opt-out class actions, third-party funding, contingency fees and criminal prosecutions - where does all of this leave those responsible for protecting the practices of English and Welsh law firms? Are we looking on in slow motion at a cultural car crash between US-style class actions and our existing civil litigation practices? Probably not. For her part, Professor Mulheron is adamant that any opt-out regime will have to be drafted in a balanced fashion and fitted with ‘brakes’. And although the opt-out quality alone will have a huge effect in raising participation rates the key factors will relate to costs and funding. The worst abuses of the US system are perhaps fuelled by the combination of the large awards from juries, the lack of any risk for the defendant’s costs and the significant attorney fees awarded. This high-octane mix is unlikely to be present in any class action vehicle here Ñ we are more interested in its brakes.
But even if we can play down the prospect of a full-on US class action model, important risk management issues for firms and their insurers will remain. These arise both from acting in class actions and being the subject of them - to some extent in acting in class actions you open yourself up to becoming a victim of them if things go wrong. Needless to say, the US provides examples of this but we should not ignore our own experiences. The Accident Group litigation and the Legal Services Commission and Solicitors’ Regulatory Authority actions over the coal miners compensation show the temptations that exist when acting on large numbers of small claims and the massive scaling up when the subsequent claims and regulatory action is pursued.
It is precisely that gap - corporations avoiding small compensation payments to a large body of consumers - that the class action is commonly championed as filling. Indeed, that was the situation in the infamous class action case heard in the Alabama state court - Hoffman v BancBoston Mortgage Corporation. The action was brought on behalf of more than 700,000 mortgagors of the defendant bank to stop the bank from requiring each of them to keep a surplus of funds in the account and to require it to pay interest on the amount of the surplus. The 1995 settlement achieved both of these. The class counsel’s fees of $8.5m (£4.17m) were calculated by reference to the total amount of the surplus funds and were payable by deduction from the mortgagor’s account with the bank. In the normal way for class actions, the settlement was approved by the court at a fairness hearing at which the judge held that the settlement was fair and the lawyers’ fees were reasonable.
One Dexter Kamilewicz was one of the lucky ‘winners’ of the class action. He received $2.19 (£1.08) in interest but was debited $91.33 (£44.88) for the legal fees. He was less than pleased with this and sued the class counsel and the bank for legal malpractice and fraud. His case was dismissed by the Seventh US Circuit Court of Appeals because the federal court had no jurisdiction to review a state court’s ruling.
This result supported those who contended that judicial approval of a settlement at a fairness hearing rendered the class counsel immune from a malpractice suit. However, it sparked outrage in others and a clamour for reform that ultimately lead to the Class Action Fairness Act 2005. That Act provides for greater judicial scrutiny of class action settlements and class counsel’s fees especially in circumstances where the settlement itself is non-monetary.
The availability of a ‘collateral estoppel’ defence will depend upon the circumstances of the particular claim. The rationale in favour of the defence lies in the interests of having finality to the proceedings and the notion that the approval of the settlement by the judge should be a sufficient check on the competence of class counsel. It is most likely to be accepted in cases where it can be shown that the court at the fairness hearing had the opportunity to and did consider the substance of the allegation that forms the allegation of negligence against class counsel.
However, it was notably rejected in Stanley Janik v Rudy Exelrod & Zieff where the defendant lawyers had been class counsel in a claim where they recovered $90m (£44.2m) in unpaid overtime payments going back three years. The plaintiff later contended that four years’ payments could have been recovered had the claim been brought under a different statute. Class counsel sought to rely on the fact that the judge had approved the class certification order and that the order should define the scope of its duties to the class. This was rejected; the court held that there was a duty to absent class members to consider the other cause of action even if it fell outside the strict scope of the retainer.
Further, the court in the original claim had never had the opportunity to consider whether class counsel were failing in their duties to raise the alternative cause of action because the issue had never been raised. Accordingly, it could not be said that the court’s authority was being undermined.
These collateral attack and abuse of process arguments are common defences in lawyers claims in this jurisdiction. For example, the Court of Appeal recently considered the application of the principle in re-litigation claims in Laing v Taylor Walton [2007] finding in favour of the defendant solicitor. The principles are not dissimilar to those outlined above. However, the design of any future opt out Civil Procedure Rules is likely to have a significant effect on the operation of the doctrine in class action claims against solicitors just as the wording of rule 23 of the federal Rules of Civil Procedure is a key factor in its operation in US law.
If the claim is permitted to proceed beyond this first re-litigation hurdle then a host of new liability issues will be thrown up. Again, much will depend on the design of the regime but the US experience suggests that our law of fiduciary duties may play a role in regulating the duties between class counsel and the absent class members where there may be no contractual retainer. In turn this may throw up the problem of the different sub-groups of absent class members and the possibility of accusations that one group’s interests have been preferred over those of another. These conflict and other issues will also have to be considered from a professional conduct angle.
A new class action regime will certainly attract its own body of liability and regulatory principles and risk managers and insurers will be watching the design of the regime closely to make sure that they know where the brakes are.
Nick Bird is a partner in the lawyers’ liability group at Reynolds Porter Chamberlain.
