The class action wave: the tide is not turning
Time and time again I get asked by senior management across a range of business sectors; “how real is the threat of class action litigation?” – and the answer I always give is “very real”. So, it struck me that it was worth exploring some of the reasons why that is and what businesses can do to manage that risk.
We’re talking here about legal claims made jointly by hundreds, thousand or in some cases millions of claimants against a corporate. These claims often involve enormous compensation claims and can present an existential threat to businesses. In the UK, these are either known as “group actions” where claimants elect to join the claim, or US style “class actions” where vast numbers of claimants can become entitled to a share of winnings, unless they opt out.
Perfect storm – the big drivers
Worryingly for corporates, a number of forces are in play to create a “perfect litigation storm”. The first is the ability to quickly and cost effectively gather large numbers of claimants to form an action group. Whether these are SMEs or individuals, social media and technology are now powerful tools to identify common problems, build momentum around an issue and build a group of litigants. Social media has transformed both the rate at which common cause can be built and the number of claimants that can be found and, as claimant law firms know, the larger the group then the larger the likely damages pot, which also raises the stakes for the corporate defendant.
The second driver is the growth of litigation funding for such actions, with growing numbers of specialist investors moving into the litigation market. Whilst the risks for investors can be quite high, careful case selection does generate investment returns. Literally billions of dollars of investment capital is being deployed into litigation cases as investors and asset managers look for a diversified asset class. Litigation fits the bill nicely given that it’s not correlated with the equity and other mainstream asset classes.
There are now around a dozen active litigation funders driving more and more litigation. The US model of litigation attorneys funding their own cases in return for a share of the damages is also beginning to find its way into the UK market, helped by increasingly creative models where funders are investing in litigation law firms to fund US style contingency fee cases. All of this adds to the tidal wave of capital available to fund litigation.
The final driver is ever-increasing regulatory complexity; around data laws, the rights of customers, competition laws, shareholder rights and employee rights etc. Essentially this means that more things can go wrong, and when they do, more people tend to be affected. Data breach is a good example, often hundreds of thousands of people can be affected – and that makes for a very large class action. And in some markets, the regulators don’t tend to discourage meritorious group actions against errant corporates, because that can drive better corporate behavior in the future – a means by which businesses can be held to account, even if the regulator doesn’t take enforcement action itself.
So, what can corporates do to spot trouble on the horizon and take appropriate action? The first is monitoring what’s going on out there. What are regulators looking at, which competitors are having action taken against then? Both of these are very good early warning signals. Another route is to look at the well-known claimant firms and see where they are trying to build a book of claimants – social media can also be a powerful tool to spot these trends, with software now available to monitor alert business to relevant content.
It’s also vital that businesses spot and manage embryonic claims. So often, we see ineffective early responses to claims, sometimes causing huge financial and reputational issues further down the line. We encourage businesses to ensure the board and senior management are properly informed and that issues are grasped and resolved proactively to stop them snowballing out of control.
Group litigation is an area where context and background are hugely important – not only regarding its causes, but also its effect. If you don’t understand the litigation landscape, then it is very hard to understand the true exposures you face – in terms of balance sheet as well as corporate reputation.
It is how a business responds to events early on that determines the level of class action risk, rather than the events that trigger the claim. So, if you can see a claimant group being assembled, or you receive a letter of claim, or if the regulator is circling, then don’t turn a blind eye. Devise a strategy that’s based on outcome scenarios, which enables you to work back from the worst-case scenario and aim for a much more favorable outcome; whatever seems expensive now may turn out to be wise investment and a fraction of the final cost of a lengthy high-stakes legal case.
The bottom line is: no business can afford to ignore the very real threat of a group or class action. The best defence strategy is to understand the landscape, keep a sharp look out for the risks and act early and decisively.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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