Risk managers urged to prepare for rising group actions across Europe

Jennette Newman, vice-president of the London-based Forum of Insurance Lawyers (FOIL), which represents the defendant insurance lawyer community, discusses the rise of group legal actions in the UK and across Europe with Commercial Risk Europe’s Adrian Ladbury. FOIL says its main mission is to advance a “reforming agenda for a more transparent and proportionate claims environment” that benefits claimants and insurers alike. Ms Newman, who is a partner at Clyde & Co, says risk and insurance managers need to make sure their response to such claims is strategically organised on a cross-border basis. Adrian Ladbury [AL]: Why have group claims become more common in the UK in recent times – what are the factors? Jennette Newman [JN]: While group litigation has been available in some form in UK courts for more than a century, with significant cases being heard each year, the past five years have seen group litigation undergo major expansion and development. Factors for development include: ‘Conflict-free’ boutique litigation firms, akin to those of the US plaintiff bar, have established themselves in the UK with a focus on corporate bodies and individuals. An increase in the number of litigation funders entering the UK market. The presence of funders willing to invest in shareholders’ collective actions, in particular, is considered a fundamental ingredient in the rise of group investor actions during recent years. Strengthening legislation, for example the General Data Protection Regulation (GDPR) in the European Union, and a greater awareness of rights. The new opt-out regime under the Consumer Rights Act 2015 for competition cases is currently being tested by wide-reaching, high-value claims. If successful, these claims will have a significant impact on the risk landscape in England and Wales. An increasing complaints culture. However, it is important to note that group actions still have to satisfy rules on commonalities. Group litigation orders (GLOs) need a common issue of fact or law and there have been a number of cases where the court has refused to make a GLO where the test was held not to be satisfied. A judgment was recently handed down in the Lloyds shareholder action, dismissing the shareholders’ claim – brought under common law – that they were misled into approving the acquisition of HBOS at the height of the financial crisis. This was the first such case to reach judgment. Another action making its way through the courts is the Tesco accounting misstatement group action, brought under statute, which recently survived a strike-out application by the defendant. These cases have sought to limit developments somewhat. How this landscape develops in the future will be critical, however it appears there is an increasing and developing head of steam. [AL]: What impact, if any, will the EC Collective Redress Directive have upon this? Will the UK actually adopt this post-Brexit? [JN]: Consumers are set for greater rights to redress across Europe as the new legal action for the joint enforcement of consumer claims, as announced in the European Union’s New Deal for Consumers, is becoming a reality. Under the directive, each member state is to designate at least one qualified entity that is authorised to enforce consumer claims and must also be appropriately funded. To avoid the risk of abuse, the qualified institutions must meet various criteria, including proof of at least 12 months’ activity in the field of consumer protection before the application is made. In addition, the qualified entity must not be profit-oriented and must be economically independent of groups that could conflict with consumer interests. For purely domestic procedures, member states are to define criteria for qualified entities that are consistent with the objectives of the directive. These do not necessarily have to meet the requirements in place for cross-border procedures. It is to be expected, however, that the national legislators will be guided by the criteria of the directive, including, in all probability, the UK. To avoid the abuse of rights and to protect against the feared so-called ‘American conditions’, the European Parliament and the European Council have agreed on the need to provide for reimbursement of costs to the losing party – the ‘loser pays’ rule. It remains to be seen how this will be implemented in national laws, and should act as a safeguard for a potential flood of unmeritorious consumer rights claims. However, businesses should expect to see an expansion in class actions irrespective of when this legislation comes into force. We expect data privacy, consumer rights and competition claims to increase in any event. The UK has already introduced opt-out class action mechanisms for some types of claim and we are seeing increased uptake in opt-in mechanisms that were already available. For example, in the UK, the recent Court of Appeal case of Lloyd v Google established that a representative action claiming compensation for consumers can proceed without the need to claim financial harm or distress. The Court of Appeal in Merricks v Mastercard has also recently set a lower threshold for opt-out group consumer and competition claims, which would lead to increased volume in what would be the jurisdiction’s largest class action lawsuit. Appeal to the Supreme Court was heard in May, with a judgment expected later in the year. This could open the door to an initial flood of significant opt-out claims. The case has the potential to reshape how lawyers organise mass litigation and restrain or expand the power of the claimants’ bar. If the Supreme Court upholds the Court of Appeal’s judgment, it is expected to significantly facilitate consumer-type claims in the future. As the UK left the EU on 31 January 2020, with the transition period set to expire at the end of this year, there will be no legal requirement for the UK to implement the directive. The UK government has previously suggested the UK will remain aligned with the EU on consumer issues, however this is subject to ongoing negotiations, the outcome of which remains clouded in uncertainty. It is to be hoped that the position becomes clearer in the next few months. [AL]: What kind of claims are being brought and which classes of insurance are being triggered? Do group clams tend to inflate the value and volume of claims? [JN]: Securities class actions are being filed in record numbers and, as might be expected, activity is most prevalent in the US, Australia and Canada. The industries that most commonly face securities class actions are consumer-facing, such as the retail, automotive, insurance, pharmaceutical and financial services industries. Increasingly, companies and directors and officers are exposed to consumer class actions, with large group claims being filed by consumers and representative organisations in relation to breaches of data protection, environmental and health and safety laws. The trend towards collective actions following high-profile and often global cyber breaches, continues to evolve. In the UK, the courts are increasingly recognising the suitability of collective actions in cases of large-scale data breaches. Following the British Airways payment card incident in 2018, a UK law firm acting for a plaintiff sought to commence a group action against the company, seeking compensation under Article 82 of the GDPR for inconvenience, distress and annoyance associated with the data leak. In October 2019, the High Court in London granted a GLO that paves the way for thousands of claimants to bring a legal claim against the airline. A second data breach collective action has since been launched in the UK against credit reference agency Equifax for its 2017 data breach, seeking £100m in compensation for the 15 million affected UK consumers caused by a cyberattack it suffered. In October 2019, the Court of Appeal in the case of Lloyd v Google permitted an individual to bring a representative action against Google on behalf of a class of more than four million users and held in its judgment that: “Allowing a representative action in a case of this kind is not so much an exception to the rule… but rather an application of the rule.” The decision may pave the way for US-style mass ‘opt-out’-type litigation following cyber incidents leading to data breaches. The judgment, however, may face challenge, with Google given permission to appeal to the Supreme Court in March. [AL]: Will we see more and more collective claims brought for data breaches? [JN]: The courts’ recognition that collective actions are appropriate vehicles for large data breach claims was underscored by the Supreme Court in a case involving Morrisons supermarket. In the first action of its kind, 5,518 employees affected by the breach had brought a collective action against Morrisons. They alleged that the supermarket was directly or vicariously liable for a breach of the Data Protection Act 1998, when a rogue employee posted personal details of almost 100,000 Morrisons employees on a file-sharing website in 2014 and later notified the press of the data breach. An appeal to the Supreme Court ultimately held, in April 2020, that, on the facts, the claimants were unable to succeed in establishing vicarious liability. However, the victory for Morrisons does not rule out the possibility of claims against employers for affected data subjects in future collective actions. The use of collective action presents a significant risk to companies that often face a tremendous exposure to damages and costs, given the size of the class, in addition to considerable operational and reputational damage from dealing with large-scale litigation. This is particularly pertinent to data breach incidents, where risks from threat actors are ever evolving and often can affect a large number of individuals in multiple jurisdictions as a result of a compromise of their personal data. GLOs in the UK are opt-in, so will not inflate the value of claims the same way as opt-out, but they will raise the stakes generally. However, they do affect the ability of claimants to bring them in the first place, given that the economics commonly would not work for individual claims and their legal representatives. Indeed, there is also the importance of funders/lawyers in this ecosystem, with business models simply not working for individual claims. This again results in increasing value and volume of claims. [AL]: What should a risk manager/legal officer do when faced with a group action to mitigate the impact? [JN]: It is important to undertake an objective assessment of risk from day one when presented with a potential group action, in order to ensure appropriate plans are in place to mitigate the impact and ensure the business response is swift. As part of the same mitigation approach, businesses need to be conscious of the particular areas of class action risk in their business and ensure appropriate safeguards are in place to minimise the risk of that occurring. In terms of managing the risks, compliance and training programmes are key. It is important to be aware of litigation risk, for example in negotiating settlements and managing internal investigations in the best possible way to maximise privilege and restrict document creation that may fall within disclosure requirements. The types of claims being pursued as collective actions often also pique the interest of the media, presenting a reputational risk that will need to be managed with care. Effective management of this litigation risk will require a strategic approach coordinated across jurisdictions if necessary, with particular regard to the possibility of claims being made while regulatory investigations remain ongoing, which can significantly complicate the management of reputational concerns. Finality of settlement will be particularly crucial to ensure claim numbers and litigation costs do not spiral out of control. Legal officers will need to identify what classes of claims fall outside of the group action and ensure this remains tightly monitored. [AL]: What group actions are we now seeing caused by the economic impact of the pandemic? [JN]: In the US, securities class actions have already been filed against corporations and their senior management in relation to Covid-19, and there is certainly potential for shareholder claims to be brought in the UK as difficult economic conditions persist. Group actions in relation to business interruption insurance are expected to further surge in the coming months in many jurisdictions, including the UK, US, Canada, South Africa and Australia. There is also the potential for recessionary claims arising from the pandemic. Professional liability claims are a key area where claims rise in poor economic conditions. Although we have not seen GLOs in this area, there have been ‘managed claims’ against professionals and it may be that the dynamics of any mass claims against professionals are changed by the growth of litigation funding since the last financial crisis. It is understood that claimant lawyers are also preparing claims in other areas, including consumer protection, supply chain, data breach and privacy, and employment safety issues. [AL]: What, if anything, is being proposed to make the group action system more efficient, less expensive and fairer for all? Are we likely to see reform in the UK as in Australia to make it more difficult for group actions to be brought without a decent case? [JN]: The UK Government Consultation in 2020 for Opt-out Litigation has the potential for wide ramifications in the UK, particularly in respect of data breach claims. GDPR has built in mechanisms to allow for class actions, however the current landscape in the UK is commonly opt-in group litigations ordered by courts. Any change to opt-out would have the effect of removing some of the barriers to group litigation and will mean that claimant law firms will only have to find one affected data subject who is willing to act in the capacity as a class representative. Proposals to reform the rules governing Damages-Based Agreements (DBAs) in the UK are also under active consideration. DBAs are still quite rare and any reforms are likely to drive higher usage. The litigation insurance market now offers DBA insurance, and if DBAs are reformed that would enable claimant law firms to contribute an increasing share of the litigation funding mix. The courts are increasingly shifting exposure for defendants’ costs onto the funders. Therefore, insurers are less likely to be left out of pocket after covering the costs of successful defences of funded claims. The effect of the recent Supreme Court decision in Vedanta v Lungowe is that UK parent companies face increased exposure to group actions brought by non-UK claimants arising from the conduct of foreign subsidiaries abroad. This is likely to be an area of continued development, with further cases set to come before the appellate courts in the next few months, potentially further expanding parent company liability for foreign subsidiaries, and further resultant UK class actions will be more likely.

Risk managers urged to prepare for rising group actions across Europe

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