A ‘class action’ is a lawsuit in which either one person, or a number of people, sues a company or institution on behalf of a larger ‘class’ of those who share the same, or a similar, grievance.
The advantage of this kind of action is that not every single person with a claim has to file - and more importantly, fund - his or her own separate lawsuit. As a result, class actions allow people whose damages are too small to warrant an individual lawsuit to have their cases represented.
Class actions have allowed individuals to hold some of the world’s most powerful firms and organisations accountable for their actions. These lawsuits have covered a wide range of issues including the mismanagement of monies invested with a corporation or pension scheme, economic and environmental effects of disasters such as oil spills or other pollution, and different kinds of alleged institutional discrimination.
The history of class action
The first instances of these sorts of claims were seen in thirteenth century England, when villagers initiated a ‘group litigation’ against feudal landlords or parishes. By the eighteenth century, however, these had more or less petered out as individuals took affairs into their own hands.
In the United States in 1833, Equity Rule 48 was passed for ‘representative litigation’ to be carried out when an excessive number of similar, individual cases had been filed. This has now been subsumed into more up-to-date legislation for these kinds of lawsuits.
One of the first precursors of the type of ‘class action’ we see today was The State of Tennessee v. John Thomas Scopes (1925), a case that challenged the constitutionality of the Butler Act, a Tennessee law that made it unlawful to deny the divine creation of man, as written in the Bible, and teach instead the theory of evolution.
It’s generally agreed that the use and visibility of these lawsuits grew substantially from the 1950s onwards, as activists in civil rights and environmental movements utilised class action to gain publicity for their causes and redress for wrongs. Notable amongst these are:
- Brown v. Board of Education of Topeka (1954) which led to the ruling that segregated, or so-called ‘separate but equal’ schools were unconstitutional, and
- Anderson v. Pacific Gas & Electric Co. (1996), a civil action settlement dramatised in the film Erin Brockovich, in which the residents of Hinkley, California proved that the energy company was knowingly dumping waste contaminated with a carcinogen into the area’s groundwater.
Class actions effectively came into being in Australia in 1992, when Parliament amended the Federal Court of Australia Act to include ‘representative proceedings’. There have now been a number of high-profile class action cases in the country. Let’s look at some of the world’s largest class action lawsuits in comparison with those that have developed in Australia.
10 biggest class action lawsuits
in the world
In a landmark case, investors in energy trading company Enron filed suits under both US federal and state securities laws against Enron Corporation itself, as well as some of its named directors the company’s accounting firm Arthur Andersen, and some of Andersen’s partners and employees. They also pursued Enron’s former law firm Vinson & Elkins.
The suit claimed that Enron directors had deliberately disguised losses within specially created entities (SPE) called Raptors, which it failed to disclose in its annual reports and filings to the country’s stock market regulator, the United States’ Securities and Exchange Commission (SEC). The Raptors were created to shield the company from mark-to-market losses in its growing equity investment arm. They were partly designed to minimise risk, but also to bypass accounting treatments that would decrease the company’s earnings.
The case was settled in 2006 with US7.2 billion (AU9.3 billion) awarded to investors who lost everything when the company collapse in 2001. This remains the largest settlement to date in a shareholder securities class action. The accountancy firm Arthur Andersen went into liquidation due to its losses. Several of Enron’s executives also received prison sentences for fraud.
This class action was initiated by lawyers representing investors who held stocks with the telecommunications company from April 29, 1999 until June 25, 2002. Litigation was taken against WorldCom itself, as well as senior employees including CEO Bernard Ebbers and Accounting Director Buford Yates.
Senior executives such as Ebbers and Yates were accused of fraud concerning their improper classification of expenses as ‘capital costs’, and for making false entries to revenue statements. Ultimately, the SEC found that WorldCom’s earnings and assets had been overstated by over US11 billion (AU14.24 billion).
The case was settled in 2005 with US6.2 billion (AU8 billion) awarded to litigants
This case was initiated in 2005 by retailers who objected to the processing rates set by credit cards, including Visa and MasterCard.
The ensuing lawsuit claimed that store owners had paid excessive fees for accepting Visa and MasterCard, because of an alleged conspiracy to fix rates amongst the credit card companies.
The preliminary settlement reached, in 2012, awarded litigants an estimated US7.2 billion (AU 9.38 billion), an amount that would be larger than even the Enron case had it been paid to all initial claimants in full. Instead, the settlement was reduced considerably as some of the largest retailers in the US chose to opt out, possibly because accepting this settlement could put limitations on future lawsuits against the defendants. This means that the compensation that these credit card companies finally pay out could, indeed, exceed that of the Enron agreement.
A series of class action lawsuits, initiated in 2005, were filed against the Swiss securities company Tyco International Ltd., its former officers and directors, and the company’s auditing firm Pricewaterhousecoopers.
The legal actions alleged that these individuals and companies made false and misleading public statements, and omitted information about Tyco’s finances. The SEC later concluded that aggressive accounting had been used to inflate profits, and that millions of dollars had also been hidden in executive compensation.
The case was settled in 2007 with US3.2 billion (AU4.3 billion) being awarded to litigants. Two of Tyco’s top executives were also imprisoned for fraud.
A class action lawsuit representing investors of the Cendant Corporation between May 31, 1995 to August 28, 1998 was filed against Cendant for securities fraud.
Cendant Corporation focused mainly on business and customer services in connection with real estate and travel. In 1998, the company admitted that it had overstated its income, partly by issuing false profit statements for the previous decade by some US500 million. The announcement, unsurprisingly, caused the company’s share value to collapse.
The case was settled in 2000 with a US3.1 billion (AU4 billion) payout to litigants, and a jail sentence for the company’s former Vice Chairman, Kirk Shelton.
Under federal securities laws for fraud, two separate class action lawsuits were filed for investors who held stocks in the company between October 24, 2000 to February 15, 2001, and April 24, 2003 to April 27, 2004.
Nortel was a once leading supplier of fiber-optic equipment to Internet providers. That is, until, it began creating false account entries indicating that business was booming when it was, in fact, not. The fraud was eventually uncovered and Nortel’s share price plummeted.
The cases were settled in 2006 for US2.4 billion (AU3.1 billion).
This lawsuit was filed against American Home Products, maker of the chemical fenfluramine, which was present in the Fen-Phen drugs used to treat obesity and sold under the brand names Pondimin and Redux.
These drugs were not easily obtained by prescription, but available in weight loss clinics and online. They were withdrawn from the market in September 1997 after a study linked Fen-Phen use with potentially fatal heart valve damage.
In May 2002 a settlement of US3.75 billion was reached, which included US1 billion in future medical checkups for the victims.
Class action was brought on behalf of Citigroup investors who had acquired shares of the company during the period of February 26, 2007 until April 18, 2008.
The lawsuit followed a US government investigation into the poorly performing mortgage-backed securities that the bank had sold in the lead up to the 2008 financial crisis. Lawyers successfully argued that Citigroup and some of its senior executives at the time had misrepresented the company’s exposure to collateralised debt obligations (CDOs), which were a major factor in the 2007-2009 US property crash.
In July 2014, the Citigroup banking and financial services corporation agreed to pay US7 billion (AU2.3 billion) to settle the class action.
AOL Time Warner
Multinational media company AOL Time Warner was sued by its investors for fraud under federal securities law.
Not unlike Nortel, AOL Time Warner disguised its poor performance between 1998 and 2002 by forging dozens of transactions, suggesting that the company was generating more in advertising revenue than was true. It was estimated that this deception inflated the company’s value by US1.7 billion (AU2.2 billion).
In 2005, investors received a settlement of US2.5 billion (AU3.2 billion).
This class action was decided by a ruling on the case of Lawrence E. Jaffe Pension Plan v. Household International, Inc. et al. on May 7th, 2009.
The lawsuit was originally filed in 2002, alleging that the consumer finance company Household International, as well as some of its senior executives, made false statements that inflated the value of Household International’s share price. It was also claimed that the company had carried out unethical lending practices and concealed aspects of its loan portfolio. When rumours of these practices began to emerge in 2001, its share price plummeted and Household International was bought by UK bank HSBC a year later.
It was HSBC that then had to take responsibility for the US2.46 billion (AU3.1 billion) settlement that was awarded when the litigants’ claims were proven to have foundation.
Biggest Class Action Lawsuits
SP AusNet/Utility Services Group
A class action on behalf of 10, 000 survivors of Victoria’s 2009 bushfires, in which 119 people died and over 1,000 homes were destroyed.
The lawsuit was taken against power distributor SP AusNet and asset managers Utility Services Group after the Victorian Bushfires Royal Commission found that it was a faulty electricity cable that caused the Kilmore East-Kinglake bushfire.
In 2014 a AU500 million payout was secured, making it the biggest class action settlement in Australian legal history.
In 2010, leading litigation funder IMP Australia helped initiate more than ten class action lawsuits against leading banks, including Commonwealth Bank, ANZ, Westpac, and NAB, alleging that some AU400 million had been syphoned from customers.
Australian banks used to routinely charge up to AU45 if, for example, an account was to be overdrawn without prior agreement, the overdraft limit was exceeded, or late payments were made on credit card transactions. In early 2014, the country’s Federal Court found that the late fees charged by the Australia and New Zealand Banking Group (ANZ) were “extravagant, exorbitant, and unconscionable”. At the same time, the court ruled that some of the lender’s other charges were reasonable.
In April 2015, ANZ won leave to appeal this decision, and it is to be taken to the High Court. The ruling will set a significant precedent in the determination of cases against the other three banks cited in the class action.
Over 600 shareholders in a class action against Sigma Pharmaceuticals in a suit initiated in 2010.
The same day the suit was initiated, Sigma Pharmaceuticals unveiled historic US389 million losses that stemmed from significant asset ‘write downs’, where stock is considered to be overvalued by the company compared to its market value. The lawsuit accused the company of engaging in misleading and deceptive conduct in relation to earnings guidance provided at the time it undertook a AU300 million capital raising programme in September 2009.
In December 2012 the Federal Court of Australia approved a settlement of this claim, and Sigma paid AU57.5 million to litigants.
While class action lawsuits are sometimes criticised for being lengthy and costly, there is no doubt they have also contributed to giving the ‘little people’ a voice in the way that they are treated by powerful corporations and institutions. And there’s little doubt that these kinds of lawsuits will be here to stay.