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Focus: Class closure refused in recent class actions

16 November 2012

In brief: Although it is accepted the Federal Court has the power to make orders requiring class closure, two recent class actions show that it may not always be willing to exercise that power. Partner Peter O'Donahoo (view CV) and Lawyer Nadia Guadagno report on the reasons behind the decision and the implications for parties in class actions.

How does it affect you?

  • It is well established that the Federal Court has the power to make orders that have the effect of closing the class of group members by requiring group members who want to participate in the class action to register with the solicitors for the applicant. Group members who do not register may lose their right to benefit from the outcome of the class action and to bring a claim against the respondent.
  • Parties seeking orders to close the class will need to demonstrate that there is a compelling reason why group members should, at that particular stage of the proceeding, have to take this step.
  • The need to bring the proceeding to finality may justify closing the class. It will be easier for parties to establish this need exists if the proceeding or the settlement process has reached an advanced stage.

Closing the class

A person's consent is not required for them to become a group member in a class action;1 therefore, if a person falls within the group member definition in the applicant's pleadings, they will be included as a group member in the proceeding and will be bound by the outcome of the class action unless they opt out.2

While the opt-out process enables the court and the parties to know who is not in the class, parties are still left in the dark regarding the quantity and identity of people who are in the class.

Consequently, a practice has developed of seeking orders to 'close the class'. Such orders usually require that group members must either opt out or register to participate in the class action by a fixed date. If a person does nothing (ie does not register or opt out) they will continue to be a group member, but will be precluded from sharing in the benefit of any order or judgment in favour of the applicant and group members, and will lose their right to sue the respondent regarding any rights they may have that result from the applicant's claims in the class action.

Court's power to close the class

There is no express power in the Federal Court of Australia Act 1976 (Cth) (the FCA) to permit the court to close the class, however, it has been established that section 33ZF of the FCA, which confers on the court the power to do whatever is appropriate or necessary to ensure that justice is done in the proceeding, permits 'an order fixing a date by which claimants must identify themselves'.3

Section 33ZG of the FCA, which captures the court's residual powers under the FCA, and the court's implied powers, may also provide it with the authority to make such orders.

Orders of this kind have been made in a number of class actions in the Federal Court at various stages of the proceedings.4

For example, in the Centro class action,5 Justice Ryan made orders providing that:

  • under s33J and 33ZF of the FCA, respectively, group members may opt out of the proceeding or register to make a claim for compensation from the respondents in the proceeding before a specified date;
  • under s33ZF of the FCA, any group member who wishes to pursue a claim for compensation in the proceeding must, by not later than the specified date, deliver to the solicitors for the applicants a completed registration form; and
  • any person who is a group member and who neither opts out nor registers by the specified date is barred from making any claim against the respondents or any of them in respect of or relating to the subject matter of the proceeding.

Similar orders have also been made in class actions in the Supreme Court of Victoria,6 however, in contrast to the FCA, s33ZG of the Supreme Court Act 1986 (Vic) expressly provides the court with the power to make an order requiring group members to register by a certain date.

Cabaser/Dostinex and Permax class actions

In 2010, class actions were commenced against Pfizer Australia Pty Ltd, in respect of the drugs Cabaser and Dostinex,7 and against Aspen Pharmacare Australia Pty Limited and Eli Lilly Australia Pty Ltd, in respect of the drug Permax.8

In each class action, the applicant alleged that during specified periods the respondents failed to warn or adequately warn consumers that possible side effects of the drugs are compulsive gambling, hypersexuality, compulsive spending, compulsive eating and punding, and that the group members who consumed the drugs, suffered from one or more of those side effects, and as a result, suffered loss and damage.

Further, in each class action the applicant asserted that the respondents breached their duty of care to consumers and contravened ss 52, 74B, 74D and 75AD of the Trade Practices Act 1974 (Cth). The respondents deny the allegations and are defending the class actions.

Recently, all the parties in both class actions sought orders that would have the effect of closing the class of group members. The proposed orders fixed a date on or before which group members may opt out if they do not wish to participate in the proceeding or any settlement or register with the solicitors for the applicant if they wish to participate in the proceeding or any settlement. A further proposed order in the Cabaser/Dostinex class action provided that under ss 33ZF and 33ZG of the FCA and the implied powers of the court, and subject to further order, any person who is a group member and who neither opts out nor registers will be bound by any judgment in the proceeding, but will not be entitled to share in the benefit of any order or judgment in favour of the applicant and group members, and is barred from making any claim against the respondent in respect of or relating to the subject matter of the proceeding. A similar further order was sought by the parties in the Permax class action.

While Justice Bromberg was satisfied that the court had the power to make orders of that kind9 and that similar orders have been made in a number of other class actions in the Federal Court and Supreme Court of Victoria,10 his Honour was not prepared to make such orders at this stage of the class actions.11

Quoting Justice Finkelstein in P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No.2 ), his Honour held:

The class actions regime under Part IVA of the Federal Court Act is designed to require little or no active involvement by group members...In the context of such a scheme, there must be some compelling reason demonstrated before a court will order group members to go beyond their essentially passive role.12

'[T]he need to give finality to the proceeding' may amount to a 'compelling reason'.13

His Honour held that no compelling reason existed at this stage in either proceeding to warrant closing the class.

In the Permax class action, the pleadings were not closed, the common questions had yet to be settled and no settlement discussions had been undertaken. As such, his Honour was of the view that 'for the Court to impose upon group members a positive requirement to opt-in, at this juncture, would turn on its head the very nature of the opt-out model chosen by the legislature.'14

The respondents in the Permax class action submitted that they were not willing to enter into settlement negotiations because of the uncertainty as to the quantum of potential group members' claims. However, his Honour held this did not justify requiring a group member to take a positive step to enable the class to be closed. He observed that 'it is a common, if not an inevitable, feature of class actions that the defendant will be faced with uncertainty regarding the quantum of potential group member claims'15 and that while this may present difficulties, experience in Australia, and in other jurisdictions with opt-out regimes, demonstrates that respondents can still often successfully settle actions in those circumstances.16

In the Cabaser/Dostinex class action, the parties had commenced settlement discussions and the implementation of a process by which samples of claims were to be put forward by the applicant to be assessed by the respondent. It was expected this process would be completed by February 2013. His Honour held that while that circumstance represented a 'move down the track', it was still not a 'sufficiently compelling reason at this time to justify requiring a group member to take a positive step of opting-in on punishment of having that member's claim for compensation potentially barred.'17 However, his Honour observed that by February 2013, closing the class may be a 'justifiable step in facilitating the bringing of the proceeding to finality.'18

Justice Bromberg made orders that provided for group members to opt out of the proceeding and approved the publication of a notice that 'encourages' group members to register with the applicant's solicitors, without threat of sanction.19

Conclusion

While the court has the power to make orders that have the effect of closing the class of group members, it is a discretionary power that, according to Justice Bromberg, should only be exercised when there is a 'compelling reason' to do so. Such orders may be justified if there is a need to bring the proceeding to finality. The stage that the proceeding has reached or the progress of any settlement will be relevant considerations as to whether there is a compelling reason. Merely contemplating settlement or commencing preliminary assessments of known group members' claims will not justify closing the class.

Footnotes
  1. Section 33E(1) of the Federal Court of Australia Act 1976 (Cth), subject to the limited exception in s33E(2).
  2. Section 33J of the Federal Court of Australia Act provides a process for group members to opt out of the proceeding.
  3. McMullin v ICI Australia Operations Pty Ltd (1998) 84 FCR 1, 4. See also King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) [2002] FCA 1560, [5] – [6], [15]; Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No. 2) [2003] VSC 212, [65]; Thomas v Powercor Australia Limited [2011] VSC 614, [34]; Perry v Powercor Australia Limited [2012] VSC 113, [32]; Johnstone v HIH Insurance Limited [2004] FCA 190, [103] – [104].
  4. See eg McMullin v ICI Australia Operations Pty Ltd (1998) 84 FCR 1; Courtney v Medtel Pty Ltd (No. 4) [2004] FCA 1233; Lopez v Star World Enterprises Pty Ltd (1999) ATPR 41-678; Scott and Taws v Oz Minerals Limited (Federal Court of Australia, Proceeding No. (P)NSD1433/2010, Order 22 October 2010 and 23 November 2010); Vlachos v Centro Properties Limited (Federal Court of Australia, Proceeding No. (P)VID366/2008, Order 17 December 2008); Watson v AWB Limited (Federal Court of Australia, Proceeding No. (P)NSD2020/2007, Order 26 March 2009).
  5. Vlachos v Centro Properties Limited (Federal Court of Australia, Proceeding No. (P)VID366/2008, Order 17 December 2008).
  6. See eg Pathway Investments Pty Ltd v National Australia Bank Limited (Supreme Court of Victoria, Proceeding No. SCI2010/6249, Order 24 August 2012); Rowe v Grunenthal GMBH (Supreme Court of Victoria, Proceeding No. SCI2011/3527, Order 18 July 2012); Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No. 2) [2003] VSC 212.
  7. Winterford v Pfizer Australia Pty Ltd (Proceeding No. VID 4/2010) (the Cabaser/Dostinex class action).
  8. Collin v Aspen Pharmacare Australia Pty Ltd and Eli Lilly Australia Pty Ltd (Proceeding No. VID5/2010) (the Permax class action).
  9. Citing McMullin v ICI Australia Operations Pty Ltd (1998) 84 FCR 1, 4, Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No.2) [2003] VSC 212, [65]; cf King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) [2002] FCA 1560, [9].
  10. Citing Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No. 2) [2003] VSC 212, King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) [2002] FCA 1560, McMullin v ICI Australia Operations Pty Ltd (1998) 84 FCR 1, Thomas v Powercor Australia Limited [2011] VSC 614 and Perry v Powercor Australia Limited [2012] VSC 113.
  11. Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199, [3].
  12. Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199, [4]-[5] citing P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No.2 ) [2010] FCA 176, [16]-[17]. See also Mobil Oil Australia Pty Ltd v Victoria (2002) 211 CLR 1, [40].
  13. Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199, [6], citing McMullin v ICI Australia Operations Pty Ltd (1998) 84 FCR 1, 5 as an example.
  14. Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199, [9].
  15. Citing P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No.2 ) [2010] FCA 176, [31].
  16. Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199, [7]- [8].
  17. Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199, [10].
  18. Ibid.
  19. Winterford v Pfizer Australia Pty Ltd (Federal Court of Australia, Proceeding No. VID4/2010, Order 25 October 2012).

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