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‘Fatal flaw’ in class action case

‘Fatal flaw’ in class action case

THE FEDERAL COURT has knocked out a law firm’s slant on the definition of ‘class’ in the Aristocrat class action, claiming the criterion injected a “fatal flaw” into the proceedings.…

THE FEDERAL COURT has knocked out a law firm’s slant on the definition of ‘class’ in the Aristocrat class action, claiming the criterion injected a “fatal flaw” into the proceedings.

In Dorajay Pty Ltd vs Aristocrat Leisure Limited (2005) the applicant, Dorajay, represented by Maurice Blackburn Cashman (MBC) defined the represented class in a way which, in effect created an ‘opt in’ process. But in the Federal Court, class actions are run on an opt out basis, said Allens Arthur Robinson (AAR) partner Michael Rose.

In the Federal Court, everyone in a class is assumed to be represented until they decide to opt out, which happens at a certain stage in the proceedings. “What this means in shareholder class actions is that represented classes can potentially have thousands of people in them,” said Rose, who worked for Aristocrat in this case.

“That can be administratively difficult for the lawyers and financially risky for the funders. So to avoid that problem in the Aristocrat case, MBC defined the class as shareholders who acquired shares during a relevant period and who instructed MBC as their lawyers.”

By requiring class members to instruct MBC in order to take part in the action, the lawyers in effect created an opt in process, when the Federal Court Act specifies an opt out process, said Rose.

“In this case, the judge said that she was concerned that this requirement that class members instruct MBC had the potential to subvert the Federal Court Act and, in particular, to turn what is an opt out process into an opt in process. And, as a result, she said it was an abuse of process. She has said the case can’t continue as a representative action while it has got that class definition in there,” said Rose.

It was alleged in this case that poker machine manufacturer Aristocrat failed to give certain disclosure to its shareholders about its financial position in 2002 and the first half of 2003.

Shareholders say they suffered loss after profit downgrades and a drop in the share price in the first half of 2003. The class action alleges misleading and deceptive conduct and a breach of disclosure obligations by Aristocrat.

“This ruling is particularly significant because the law in relation to the funding of class actions is still developing,” said Rose. He said courts have been tending to look more favourably on funding arrangements in recent years, but looking less favourably on anything which they think subverts the courts’ processes.

“So in this case the Court has said ‘we don’t like this idea attempt to control the class size by reference to the lawyers and we’re not going to let you do it’. So this means that funders and lawyers can no longer keep the class size at what they think is a manageable and controllable level.

“And in their own evidence in this case, the funders and the lawyers said if this control is taken away then this case will become ‘commercially unviable’. So, there is a real question now about how the case will continue and whether it will continue to be funded,” said Rose.

Justice Stone said that “while access to justice is an important consideration and there is a public interest in favour of representative proceedings, these are not the sole considerations”.

She said that if the definition of the class was not amended, each of the group members would be required to institute separate proceedings or, “to join together in a proceeding where each is a party to the action”. This would likely result in greater costs to the parties as well as to the courts, Justice Stone said.

This decision by the Federal Court has consequences for the funder, said AAR’s Rose. “One option is to just keep going as they are, with a single plaintiff, which they probably won’t do, I think. The other option would be to remove the reference to MBC and act on behalf of all shareholders during the relevant period, but they said that that is uneconomic for them. The third option is to stop this case and start again somewhere else,” said Rose.

Cases of this size need to be funded, he said, and the funder needs to be confident that there is going to be an adequate financial return. “The funders in this case have said that ‘unless we can control the class size, the economics of this case do not stack up’. And the control of the class size has just been removed by the court.”

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