How do class actions work?

A class action, also known as a ‘representative proceeding’, is a legal action brought by an individual or small group on behalf of a particular class of people who have been similarly impacted by another person or company’s alleged wrong. 

This article explains class actions in greater detail and how they work in Australia. 

Why are class actions brought? 

A class action may be brought for the following reasons:

1. The claimants cannot afford to bring individual claims
2. Individually, the estimated compensation does not offset the cost of litigation
3. The individual claim is not as strong as the group claim
4. The respondent has access to extensive resources to dispute the claim
5. A class action may be dealt with more swiftly 

How do class actions work? 

What is required to commence a class action?

A class action may be commenced in the Federal Court of Australia or a state Supreme Court by an individual or a few people on behalf of a group where:

1. 7 or more people have claims against the same person/company;
2. All of the claims are in respect of, or arise out of, the same, similar or related circumstances; and
3. At least one substantial common issue of law or fact emerges from all of the claims.

Who runs the class action?

A class action is generally commenced by an individual termed the ‘representative party’ or ‘class representative’ who represents the group’s interests in the proceedings. They commence and pursue the proceedings on behalf of the group. The proceedings will often rely predominantly on the factual circumstances of the representative party’s claim. They are also the person instructing solicitors about how to run the proceedings and making decisions about settlement offers. 

What does ‘opt-in’ or ‘opt-out’ mean and how does it work in Australia?

Australian class actions follow the ‘opt-out’ model. This means that individuals who fall within the defined group on whose behalf the claim is brought automatically form part of the claim unless they ‘opt-out’. 

When group members are notified of the proceedings, they will be given the opportunity to ‘opt-out’ by giving written notice according to the particular rules of the Court by a certain date. Failure to ‘opt-out’ by that date means the individual continues to be a part of the defined group and is bound by the outcome.  

By contrast, the ‘opt-in’ model requires individuals to expressly indicate their desire to be a part of the class.

What are open and closed classes?

Both open and closed class actions may be brought. A closed class action subverts to some extent the ‘opt-in’ model as it is only brought on behalf of people who sign an agreement with either the representative party’s solicitors or the third party litigation funder. 

An open class action, however, is brought on behalf of people who fall within the defined group whether or not they have signed such an agreement.  

What happens if the class action is settled?

A class action settlement requires Court approval to take effect. This is to ensure that the settlement is fair and reasonable with respect to the interests of the group and the respondent. The Court may take submissions from group members about whether they disagree or agree with the settlement. 

Following approval, a ‘settlement distribution scheme’ will generally be established which creates a framework for distributing the settlement amount among group members. 

What is the impact of a class action on an individual’s claim?

The judgement or settlement of a class action will generally be binding on all group members other than those who opted out of the proceedings. This means that group members cannot bring separate individual claims against the respondent for issues addressed in the judgement. However, the group or a sub-group may attempt to appeal the judgement. 

How are class actions funded?

The representative party is liable for the costs of litigation. However, private funding agreements are commonplace in class actions. 

Third-Party Litigation Funding

Third-party litigation is where a person or company who is unrelated to the proceedings enters into an agreement with the class representative whereby they pay some or all of the legal costs of the proceedings and the respondent’s costs if the claim is unsuccessful. In return for bearing the legal costs, the litigation funder is given a percentage of the damages award or settlement outcome. This percentage often ranges between 20-40% of the outcome.

Law Firms 

Law firms may run class actions on a ‘no win, no fee’ basis. This means that if the claim is unsuccessful, the claimants will not need to pay legal fees and if the claim is successful, legal fees plus a ‘success fee’ is charged. By contrast with litigation funding, the ‘success fee’ is calculated according to the legal costs rather than as a percentage of the outcome. 

Takeaway

Class actions are a cost-efficient and streamlined means of bringing legal action for an alleged wrong claimed by a group of people. Often, a class action has greater prospects of success than individual claims. While the representative party is heavily involved in proceedings, other group members may benefit from the outcome while playing a minimal role. Class actions are often funded by third party funders, run on a ‘no win, no fee’ basis or a combination of funding options.