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Court lays down the law on class actions

The Full Court of the Federal Court has upheld an earlier decision to permanently “stay” two out of three class actions brought against the logistics software company GetSwift, clarifying the ground rules for courts dealing with competing class actions.

GetSwift was launched in 2015 and listed on the ASX is 2016. After listing, the company made announcements to the ASX about various agreements and partnerships. In December 2017 the company raised $75 million of capital and the following month the Australian Financial Review reported that it had failed to inform shareholders that a number of those agreements had been terminated.

The capital raising had been at $4 a share but by February this year the share price was around 50 cents.

Between February and April, class actions were launched by law firms Squire Patton Boggs working with litigation funder International Litigation Partners; Corrs Chambers Westgarth working with Vannin Capital Operations; and Phi Finney McDonald working with Therium Capital Management.

The lead applicant in each action was seeking to represent essentially the same investors in claims that were substantially the same.

An important consideration is that each of the GetSwift class actions was “open class”, which means that investors in GetSwift during the relevant period may be a group member in the class action, whether or not they retained the firm running the case or entered into a funding agreement.

In April the Federal Court set out to decide how to resolve the overlap, while protecting the interests of class members. It permanently stayed two of the three class actions and allowed one, the Webb class action led by Phi Finney McDonald, to proceed.

In his ruling, Justice Michael Lee said several features of the Webb class action stood out as being “advantageous” when compared with the others.

The court liked the funding model, under which the return to the litigation funder was the lower of a multiple of expenses (2.2 times in the event of a settlement and 2.8 times in the event of a successful resolution) or 20 per cent of the net litigation proceeds.

Lee said the two-tiered model prevented a windfall to the funder, where the proceeds are high, and guarded against disproportionately low proceeds, compared with the expenses.

The court also liked some innovative features of the case, designed to reduce costs. These included the appointment of a referee to monitor costs and willingness to appoint a joint expert on questions of loss causation. The court found that the Webb class action was likely to produce a better return for class members.

In upholding that decision last week, the Full Court provided general guidance on the range of factors to be considered and the options open to a judge in dealing with competing class actions. These include:

  • an assessment of the various funding and cost models to identify which model is likely to best motivate the class applicant’s lawyer and funder to achieve the best outcome for class members; and
  • identifying which legal team is likely to secure the best result for the class.

The Full Court said there was no “silver bullet” and that different judges may take different views, depending on the circumstances of the cases before them. In a 1999 case, Johnson Tiles Pty Ltd v Esso Australia, the Federal Court ordered that two proceedings be consolidated and a third be “declassed”. And in a 2008 case, Kirby v Centro Properties Ltd, the competing claims were dealt with in a joint trial.

The Full Court recommended that judges should not put too much emphasis on costs, as this might promote a “rush to the bottom”.

The Full Court was critical of the general failure of solicitors and litigation funders to reach agreement when it comes to consolidating proceedings.