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6 August, 2007  
A matter of class

The judicial tide has turned against “free riders” who don’t sign-up and pay fees to class action lawyers. The legislative tide may also be turning against them. The man waving the baton is class action guru, law reformer and litigator, Dr P. Cashman – a man in the right place at the right time

imageAccording to US law professors Mark Ramseyer and Eric Rasmusen, “unlike US federal judges, Japanese lower court judges are not appointed as middle-aged workaholics with verifiable political credentials. Instead, they are ordinarily appointed in their late 20s, straight out of the national law school”.

Our judges are almost universally selected from the ranks of practising lawyers. As a general rule, the judges support the lawyers’ interests, and the lawyers reciprocate by saying judges do a wonderful job while being hugely underpaid.

According to Japanese legal academic Yukiko Hasebe, Japanese judges “are expected to intervene to assist litigants in person where necessary”. Apparently, even in major civil cases (i.e. those involving more than $A14,000 – which must go to district courts instead of summary courts) 58 percent of cases have at least one “litigant in person”.

In Australia lawyers and judges collectively treat the litigant in person (LIP) as a “free rider” and a thorough nuisance, who gets in the way of the business of the law, meaning lawyers making money.

At the same time, lawyers don’t actually want anything to do with potential clients whose cases would be unprofitable, although public relations and advertising motivations do prompt some pro bono assistance, and it must be admitted that there are some idealistic lawyers (usually young and not particularly rich) who do genuine pro bono as opposed to self-serving pro bono.

LIP guidelines issued by some courts are attempts to cope with the masses of unprofitable LIPs generated by some jurisdictions, especially in family law.

The “worst” LIPs are those who could provide profitable work for lawyers, but who choose not to. In 2002 the NSW Law Society issued a position paper which says:

“Litigants who appear in court unrepresented by choice are not entitled to assistance by the court and, for the purposes of the proceedings, should be treated as legally qualified advocates.”

Some judges, to their credit, disagree with that. The Sydney Morning Herald reported:

“NSW Law Society president Kim Cull … argues some people deliberately choose not to use lawyers and they should not benefit from extra assistance. However, [Family Court] Justice Faulks says self-represented litigants should not be treated as pariahs.”

Of course, Kim Cull did not say SRLs should be treated as pariahs. She would never say that.

In recent years lawyers have been working on the “class action” concept. The general argument is that lawyer-run ordinary litigation has become uneconomic for small claims. The solution is not to bring fees down, but to ratchet-up the number of clients in some cases. Lots of little fees in the one class action case can then add up to one big fee.

A 1988 Australian Law Reform Commission report said:

“Unless the cost to the individual of recovering compensation can be reduced, the result is that a person may be held accountable for causing damage of $500,000 to one person, but escape liability if damage of $1,000 is caused to each of 500 people. This situation brings the law into disrepute.”

The “reform” solution, say the lawyers, is not to adjust small-claims court procedures, nor to create a better “test case” legal environment, nor to encourage ASIC and the ACCC and the like to obtain court orders in favour of classes of people who have lost out, nor to promote compensation schemes under the umbrella of industry regulation. After all, none of those creates much work for lawyers.

Instead, expensive class actions and big handouts to litigation lenders (financiers) are the way to go. And let’s not forget the lawyers for the targeted defendants. They effectively get a slice of the action too.

There is one sort of class action which can be used to illustrate the business model. It is called a shareholder suit, and it originated in the US. Shareholders sue their own company. The Economist magazine says:

“Shareholder suits, in particular, seem a dubious remedy, because they do no more than transfer money from a vehicle the shareholders already own back to themselves – minus large legal fees – resulting in a large net loss to the shareholders. Only a very talented lawyer could argue that America is better off for that.”

There are a lot of talented lawyers in Australia.

In the Dorajay case (2005), a proposed class action where Aristocrat Leisure Ltd was being sued by people who had bought shares in it between September 20, 2002 and May 26, 2003, it was alleged these shareholders had been misled by the company as to its profits.

One doesn’t know how many of those shareholders are still in the company, and how many are suing it from outside, as it were.

The biggest problem with class actions is “free riders”. These are people who stay on the sidelines and do not sign up to pay fees to the law firm(s) running the class action, nor to pay the “litigation funders ” who will often be on the scene as well.

Down the track, free riders seek to take advantage of any win, while still not paying fees if at all possible.

The solution proposed in the Dorajay case by Maurice Blackburn Cashman, which is Australia’s leading class action law firm, was that unless members of the class “opted in” and signed-up to pay legal fees and the litigation lender’s cut, then they were “out”.

This is contrary to the traditional view in Australia that every possible member of the class is automatically “in” unless imagethey opt out, which leads to a sort of compulsory pro bono for free rider LIPs. This traditional point of view has been under attack by class action lawyers for some time. Justice Margaret Stone (pic) in Dorajay, however, stuck with it:

“I find it an extraordinary proposition that the definition of the representative group should be used to confine a representative group to the clients of one solicitor, however narrowly the group is otherwise defined. In my view there is no support in principle or authority for this proposition and it is repugnant to the policy of the Act.”

About four weeks later Justice Hartley Hansen of the Victorian Supreme Court endorsed that decision in the Rod Investments case.

imageOn July 19 the judicial tide turned, in the Multiplex (proposed) case, where shareholders and ex-shareholders may want to sue their company. It is another MBC case.

Justice Ray Finkelstein (pic) of the Federal Court said the class could exclude those potential claimants who would not sign up. Clayton Utz partner Andrew Morrison subsequently said the judgment…

“opens the door for the plaintiff bar and litigation-funding clubhouse … If litigation funders and lawyers can now set the rules for club entry to suit themselves, whose interests are genuinely at issue in the action?”

The legislative tide, in Victoria anyway, may be about to turn too. On June 28, the Victorian Law Reform Commission issued draft proposals in respect of (inter alia) class action procedure.

imageThese proposals were overseen by class action guru Peter Cashman (pic), who is currently a full-time commissioner. He is also linked to the University of Sydney and to Maurice Blackburn Cashman itself.

The MBC website records (August 12, 2005) that:

“Dr Peter Cashman, who helped pioneer the use of class actions as a remedy for consumers in Australia, has joined the University of Sydney as an associate professor in the law faculty. Dr Cashman will retain his position as special counsel at Maurice Blackburn Cashman and will continue to assist the firm in class actions.”

The right man in the right place at the right time?


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