Judicial comment on class actions & conduct of legal representatives

The Court was unequivocal that it was neither desirable nor acceptable for both actions to continue simultaneously as this would not only potentially result in inconsistent decisions but would also cause inefficiencies and duplication of costs, particularly those of the defendant.

In this regard, his Honour Justice Finkelstein noted the wide powers of the Court under section 33ZF of the Federal Court Act to make any order to ensure that class actions are run fairly and expeditiously. Thus, his Honour could alternatively order that the Vlachos action proceed and that the Kirby action be stayed.

Justice Finkelstein expressed concern that the proposal being made by the Kirby group (to expand the class) was not necessarily a proposal in the best interests of the current members of that class but rather was a proposal which would benefit the legal representatives and the litigation funder of the Kirby class by allowing them to retain control of the proceedings and generate legal fees. His Honour stated:

So far as the evidence presently stands it appears that [Kirby’s lawyers have] gone along with [Centro’s lawyers’] proposal notwithstanding that it may affect adversely Mr Kirby and the group he represents in terms of making the proceedings more difficult to settle. If there is a benefit to Mr Kirby’s group, it is not immediately apparent.

His Honour noted that each of the proceedings could be characterised as “lawyer-driven litigation”, being litigation where the lawyer investigated the potential for a claim and recruited the plaintiff and often the group. He stated:

Sometimes the person who is named as the plaintiff is simply a figurehead, with little at stake, and who is usually not very well informed about the theories of their case.

His Honour stated that on the material before him he could not have any certainty which proposal was favoured by members of the respective classes or even Mr Kirby himself. Notwithstanding that Mr Kirby had instructed his lawyers to agree to expand the class, His Honour stated that this “may not be good enough” in circumstances where Mr Kirby had not received independent legal advice.

Litigation Committee

With these factors in mind, his Honour was faced with the choice of which of the two proceedings to stay. He decided to “ignore altogether” the interests of the lawyers and litigation funders, to give no weight to the fact that Mr Kirby and Centro had nominated the Vlachos proceedings as the proper proceedings to be stayed and to leave out of account the fact that the Kirby action was commenced first in time.

Recognising that the decision he was asked to make would have a profound impact on the members in each group, his Honour was loath to proceed without knowing the views of members of both proceedings.

Ultimately his Honour expressed a preference to appoint a Litigation Committee to provide him with a recommendation as to whether it is in the represented groups’ interests to open the class. His Honour envisaged that members of both groups would be invited to nominate themselves as members on the Committee, providing reasons why their nomination should be accepted (eg size of financial interest, ability or experience in monitoring solicitors). The nominations would be returned to the Court which would, in conjunction with the lawyers, finalise membership of the Committee.

His Honour allowed the parties 21 days to make written submissions regarding whether the Litigation Committee ought to be instituted and if so, in what form and with what powers, but his judgment clearly indicated that he was minded to establish such a committee.

Auction process to appoint lawyers

Justice Finkelstein commented that any order to combine the group or stay one of the proceedings would essentially amount to a choice between which lawyers would run the litigation and “as a consequence, obtain the not inconsiderable benefit that will result from a successful action”. He stated he would be better placed to make that choice if he had information about the respective lawyers including:

• the experience of the firm and the particular lawyers in securities class action litigation;
• the dollar amount of the costs the firm expected to charge;
• details of the funding for the class action, including any commission charged; and
• the amount to be paid as fair compensation to the lawyers whose action did not proceed.

Thus in essence, the two law firms involved have been asked to enter into what his Honour referred to as “an auction process”, with the winning bid to be determined by the judge after receiving a recommendation from the Litigation Committee.

Conclusion

Class actions are a relatively new phenomenon in Australia and this decision indicates that the Federal Court will not shy away from using its wide discretionary powers to actively manage and shape such actions. Further, the Court is concerned to ensure that the interests of not only group members, but also importantly defendants, are not unacceptably mistreated as a consequence of the class action process.

Author

Deborah Shepherd Senior Associate T +61 (0)3 9321 9993 E This e-mail address is being protected from spambots. You need JavaScript enabled to view it