Does a remediation program reduce consumer class action risk?
29 October 2024
What you need to know
- Where appropriate, remediating customers/others impacted by an issue is an important tool for managing class action risks, as well as other legal risks.
- Remediation reduces the incentive for class actions.
- If a class action is commenced, the courts are typically reluctant to prevent class actions from proceeding on the basis that a remediation program has dealt or will deal with the issue. In our view, there may however be circumstances where following a comprehensive remediation, a class action does not advance the interests of group members and ought not proceed.
What you need to do
- Regardless, the design of a remediation program is critical to mitigating class action risk. We raise below factors you should focus on in designing remediation programs where there is a substantial class action risk.
Remediation and class actions
Consumer class actions continue to be common, including in the financial services context. Sometimes, those class actions concern issues where the respondent has already conducted or committed to conducting a remediation program involving payments to group members. In this update, we consider:
- What does a remediation program mean for class action risk?
- How should you design a remediation program to reduce the risk of a parallel class action, as far as possible?
In our view, a well-designed and comprehensive remediation program can be an effective way of reducing class action risk.
This article is focused on financial services and similar consumer class actions and employment class actions. Different considerations may arise in the context of product liability issues.
How have courts dealt with remediation in class actions?
Remediation programs are common where a business has identified a breach or arguable breach of its legal obligations, particularly in the financial services sector. This may reflect a range of considerations including regulatory obligations, social licence, customer relations and reducing the risk of class actions. It is not necessarily an admission of legal liability, though it may serve to highlight a potential issue to regulators and class action plaintiffs/funders.
There is an increasing regulatory emphasis on timely and efficient remediation: see, for example, ASIC's guidance on consumer remediation programs, Regulatory Guide 277.19. In some instances, businesses may adopt beneficial assumptions in favour of the customer/recipient, resulting in over-compensation, in the interests of delivering remediation payments to customers more quickly and efficiently.
A comprehensive remediation program reduces the incentive for a class action, given the lower returns available and lesser public interest, and if one is commenced the scope of the claim will be reduced to the extent that group members have been remediated already. Accordingly, remediation design is an important tool to mitigate class action risk.
Nonetheless, we continue to see cases where class actions are commenced notwithstanding the existence of remediation programs. Particularly where beneficial assumptions have been adopted in the remediation program, this may result, in aggregate, in substantial over-compensation to the impacted group (if some group members have been over-remediated but others retain substantial claims which go to settlement or judgment). The prospect may be heightened given the increased focus of class action plaintiffs on claims for aggregate damages.
To date, the approach of the courts has generally been to allow class actions to proceed, notwithstanding the existence of a remediation program. It is accepted that an effective remediation program will typically reduce the quantum of group members' claims (see the cases discussed below and, in a slightly different context, the replacement of airbags in Dwyer v Volkswagen [2023] NSWCA 211). However, the courts have been sceptical of contentions that they avoid the need for the class action altogether.
In Stack v AMP Financial Planning Pty Limited (No 2) [2021] FCA 1479, the respondent applied for an order that the proceeding not continue as a representative proceeding. AMP submitted that it would be in the interests of justice to make that order including because AMP was running a remediation program which would deal more effectively with the group members' claims.
Justice Beach rejected the application, principally based on an analysis of the scope of the common and individual issues on the pleadings. On the interests of justice, his Honour observed that the remediation program did not assist because it did not cover all the claims in the proceeding and covered only part of the claim period.
Similarly, in Baker v Woolworths Group Limited (No 2) [2022] FCA 534, Murphy J was asked to approve a settlement reached on the basis that Woolworths had already conducted a remediation program and would, as required, apply the principles established in a parallel Fair Work Ombudsman proceeding, in making further remediation payments to customers. Murphy J refused to approve the settlement for a range of reasons not specific to remediation, but doubted that the remediation program assisted where there was a possible claim for non-compensatory penalties (which the remediation did not cover) and there was a dispute about the accuracy of the time records which had been used in calculating remediation payments.
It is unsurprising that the court has been unwilling to foreclose claims where, in the court's view, there is a real prospect that the remediation will not address a substantial part of the claimed loss.
However, in many cases where there has been a substantial remediation, the prospect of substantial further recovery by the group members may be remote:
- The remediation may address clearer or more obvious claims, leaving the class action to pursue claims which were "complex and risky", as noted in Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd (No 3) (2020) 385 ALR 625.
- Given the beneficial assumptions which are frequently adopted, the prospect of proving loss above and beyond the payments actually made to group members may be limited.
Even where a class action is commenced, there is a real prospect that the proceeding ends up generating only a very modest, if any, return to group members, after the deduction of funding commission/group costs orders and/or costs.
There is also no certainty that the class action will result in additional payments reaching any group members with strong claims to additional sums: given the need for registration as part of the distribution process, the costs and risks associated with uncertain and complex proceedings and the high cost of distributing settlement funds based on an assessment of individual claims (which reduces the funds available for settlement), there is a real prospect that such moneys as are distributed substantially go to group members whose claims have already been fully remediated.
There is a policy question about whether, in such cases, a class action is appropriate or necessary to vindicate individual rights. It might be argued that, where a business has conducted a good faith and apparently comprehensive remediation, a court ought not permit claims to proceed as a class action to enable risky or speculative claims to be ventilated, where they are unlikely to generate a substantial return to group members sufficient to justify the legal costs and commission that will be sought.
Vicki Waye notes in 'Class Action Wars' (2023) 11 Journal of Civil Litigation and Practice 34 that a class action brought predominantly for the purpose of generating profit constitutes an abuse of process and/or may be liable to be de-classed under s 33N of the Federal Court Act or equivalent provisions. There may be cases where, in light of a remediation program, that is a real issue. It will be interesting to see whether, in future cases, the courts require additional evidence or analysis from the applicant to establish a basis for concluding that the action may substantially advance the interests of group members.
To establish a foundation for such an argument, businesses would need to be able to demonstrate that a relatively comprehensive remediation program had been undertaken and provide some evidence about the quantum of the potential claims, which may be challenging in the early stages of a proceeding.
How can remediation programs be designed to reduce class action risk?
Where you face class action risk it may be useful to consider the following issues in designing a remediation program:
1. What are the potential claims which could be made and how might those claims be quantified?
Class actions frequently involve more legally uncertain and factual complex claims (for example, claims of breach of fiduciary duty) in addition to the issues which form the basis of the remediation program. Where there is class action risk, it may be useful to map potential claims and remedies as part of seeking legal advice on remediation design, and consider whether they ought to be addressed in whole or in part through the remediation program. There is obviously a balance to be struck here because you may not admit all the claims or the potential alleged quantum of the losses.
2. Should beneficial assumptions be used to reduce risk?
Remediation programs frequently adopt beneficial assumptions or apply uplifts in favour of the customer which may reduce the risk of inadvertent under-compensation while avoiding a resource-intensive inquiry into each customer's position. These assumptions or uplifts may reduce the ability of a class action plaintiff to contend that the remediation did not fully compensate impacted customers, or all impacted customers, and therefore mitigate class action risk. That said, the particular customer cohorts involved need to be considered – see below.
3. What sub-groups potentially exist within the claimant group?
It may be useful to test whether particular sub-groups or cohorts might allege distinct claims, which might justify different treatment in the remediation. As noted above, beneficial assumptions are often helpful, but there is a risk if they apply a "one size fits all" approach that they miss particular customer cohorts which warrant different treatment. If that inadvertently leads to substantial claims / losses being missed in scoping the remediation, the class action risk is heightened.
4. What time period could the claims cover?
It is important that the remediation program covers the whole of the group members' claims – the failure to do so was remarked upon in the Stack case, discussed above. Consumer class actions now frequently involve allegations that the limitation period should be extended due to mistake. While that can be contentious, it is likely to be difficult to persuade a court to accept the adequacy of a remediation program where it does not cover the full claim period. In a financial services context, this is consistent with ASIC's regulatory guidance which emphasises the importance of comprehensive remediation where records are available to enable payments to be made.
5. Efficiency and timeliness of payment.
The impact of remediation on funder and law firm decisions, and any court consideration of the issue, is much more powerful if customers have already been substantially compensated. Where the remediation program is something that will occur in the future, funders/law firms may be uncertain about the extent to which it will compensate group members, and the Court may be concerned that it cannot be sure the program will operate in a way which effectively compensates group members. Moreover, once a class action has been commenced, there can be complexities around communicating with and dealing with the class in relation to the claim, which may complicate any remediation.
6. Extent to which customers cannot be repaid.
It is fairly common in remediation programs for an amount to be paid to charity where the business has no means of making payment back to customers (particularly former customers) or in some cases for low value amounts. Those charity payments may be important from a regulatory perspective but do not reduce the potential liability in a class action. Accordingly, if a substantial portion of customers cannot be reached, there may be less utility in designing other aspects of the remediation program to reduce class action risk.
7. Seeking a release from customers as part of the remediation.
Settlement deeds and releases are generally disfavoured by ASIC: see RG 277.198-202. There is also a practical difficulty with getting customers to sign and return releases or agree to conditions, and consent to conditions cannot necessarily be inferred from conduct particularly when payment is made directly to a customer's bank account. Accordingly, it is likely difficult, from a regulatory perspective or practically, to use the remediation program to directly foreclose class action liability.
In considering these matters, it is important to also consider regulatory obligations including reporting to ASIC or other regulators about the remediation, and how to explain to them any customer-favourable decisions taken to mitigate class action risk (but where the business does not accept liability).
Overall, these tools provide some levers by which a business can reduce class action risk when conducting a large-scale remediation, and it is worth giving careful thought to class action risk at the remediation design stage and in prioritising remediation activity, in appropriate cases.
Authors: Mark Bradley, Partner; John Pavlakis, Partner; Ian Bolster, Partner; Angela Pearsall, Partner; Jessica White, Associate and Caitlin Terrey, Associate.
