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12 Sep 2024
Insight
Presenting the Australian Class Action Risk Report
This report examines the changing environment of class actions in Australia and provides practical steps on how to reduce risk and plan strategically.
To understand the experiences and concerns of corporate Australia, we conducted a survey of the country’s leading organisations for their views on class action risk and mitigation plans.
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The Australian class action environment continues to evolve. This transformation is driven by a combination of case developments, legislative reforms and the increasing avenues of litigation funding. Class actions continue to be firmly entrenched in the legal landscape, now encompassing a broader range of subjects. These include a variety of employment-related issues, cyber security and privacy claims, and Environmental, Social, and Governance (ESG) matters, all of which are gaining prominence.
Against this backdrop, corporations are confronted with the challenges of navigating the changing terrain and evaluating the effectiveness of their risk mitigation strategies.
In this report we delve into a variety of perspectives on the current state of class actions and how the risks have evolved.
Our survey included participants from a diverse range of sectors, including finance, energy, technology, traditional manufacturing, consumer markets, transportation, healthcare, pharmaceuticals, infrastructure and construction, resources, aged care, government and agriculture.
Our survey leaves no doubt: class actions rank high among the concerns of corporate Australia. But what specifically about class action risk dominates the discussion? And is the perception of this risk evolving?
Over the last 12 months to 31 December 2023, at least 50 class actions were commenced nationally, filed across the three major jurisdictions (Federal, Victoria and New South Wales) – approximately one new case each week.
While class actions maintain a consistent filing rate, with some fluctuations year to year, there has been a shift in the nature of those claims. Notably, there is a reduced emphasis on financial products and institutions in the post-Royal Commission era, accompanied by a rise in claims relating to government liability, employment and consumer issues.
Later in this report we explore whether this trend is expected to continue.
Participants articulated a heightened concern about facing a class action, a worry that has intensified over the last five years. Although this is our inaugural survey, participants were asked to retrospectively evaluate their level of concern regarding class action risk five years ago compared to the present day.
The survey results are clear – companies are increasingly concerned about class actions.
The concern is understandable considering the potential for reputational impact, financial risk and the time, cost and uncertainty potentially arising from a class action. However, what might come as a surprise is the heightened level of concern, despite data indicating that the overall number of filings remains steady. This increased concern could be attributed to the anticipated surge of class actions in areas such as privacy, data, employment, ESG and consumer claims, which potentially impact a wide range of sectors.
What are the main concerns for participants regarding class actions?
Our survey participants provided insightful perspectives into the hierarchy of concerns regarding class actions and proceedings. They identified a variety of concerns, including financial impact, effects on employees, uncertainty about potential issues that might surface during litigation and, for publicly traded companies, impacts on the company’s share price.
Surprisingly, concerns surrounding the time, uncertainty and cost of class actions were not as pronounced as expected given the duration of class actions (commonly running for over three years) and the inherent unpredictability of large scale litigation. The lower ranking of these concerns may not indicate “unimportance” but may point to companies being well versed in the realities of defending litigation.
Companies can also take positive steps to be prepared and mitigate some uncertainty by planning ahead and understanding what to do should they be faced with a class action. Concerns also focus on the high reputational impact of defending class action litigation.
We asked participants about the major risks impacting their organisations. This allowed us to consider how class action risk fits into the broader corporate risk assessment.
- Cyber: Risks relating to cyber security and data integrity including the risk of data leaks or breach, malware attack, and data espionage.
- Financial: Risk of financial loss including credit and liquidity risk, cash flow issues, sovereign risk, accuracy of forecasts and financial reporting.
- Social and governance: Broad spectrum of risks including customer and employee relations, diversity, occupational health and safety, ethical standards and supply chains, regulatory compliance, and corporate governance.
Assessing risk: Where does the risk lie?
We asked participants to evaluate various risks from two distinct angles: the operational risk posed to their corporations and the potential for these risks to trigger class action lawsuits.
The findings revealed a unanimous consensus regarding the prominence of cyber, governance and environmental risks.
Existing privacy class actions (including against Optus, Medibank and the investigation into Latitude Financial Services) under the current legislative scheme validate participants’ concerns about cyber risk.
The consensus aligns with the increasing focus on these risks given the Government’s May 2024 indication of legislating changes to the Privacy Act 1988 (Cth) imminent. The Government has previously expressed support for significant changes, including a direct right of action for privacy breaches and a statutory tort for serious privacy invasions, both of which could lead to class actions.
While cyber risk was the leading concern, participants were also alive to other business risks that may trigger class action risk.
Data breaches dominate and the potential for cyber class actions looms large.
Cyber risk emerged as the top concern among class action risk areas. The survey respondents had valid reasons for feeling this way.
As data breaches continue to dominate news coverage, including related issues of investigation privilege and the overlap between the class action proceedings and the Office of the Australian Information Commissioner’s (OAIC) role, it is not surprising that a dominant and recurring theme was the risk of cyber class actions.
Whilst Australia is a developing market when it comes to experience with data class actions, it has the hallmarks of many of the features which drive claims in the UK and the US.
Companies are now at a material risk of claims arising from cyber incidents. This is because plaintiff law firms and funders have turned their attention to these incidents, seeking ways to support those affected. There are certain sectors where this will be particularly acute, including the healthcare and insurance industries and government, given the level of personal data held.
Corporations have a limited window to enhance their capabilities before stricter enforcement measures are implemented. The Attorney-General has indicated plans to introduce legislation for some proposed reforms to the Privacy Act 1988 (Cth) in late 2024. However, it is uncertain whether this draft will include a direct right of action for privacy breaches and a statutory tort for serious privacy invasions, which would create a clearer pathway to defining group member loss and increase the viability of these types of consumer class actions. These changes received ‘in-principle’ support from the Australian Federal Government in its September 2023 response to the Privacy Act Review.
Given that the Government has confirmed ‘agreed’ reform proposals will be included in the upcoming legislation, it’s wise to anticipate the inclusion of direct rights of action, but this remains to be confirmed.
We asked participants about the steps companies take to mitigate class action risk.
The responses revealed that companies are taking a variety of actions aimed at addressing the underlying ‘causes’ of class action exposure, eg avoiding cyber incidents or employment issues, having strong corporate governance.
However, our survey findings on this issue indicate that a significant portion of participants either did not conduct a dedicated class actions risk assessment or only briefly discussed it within broader risk conversations.
We recommend that organisations look to whether, based on their specific business and sector risks, a more holistic class action risk assessment is appropriate. A holistic risk assessment should consider factors such as regulator focus, litigation and funding landscape, and business-specific issues such as customer complaints or other ‘adverse event’ reporting. Litigation preparedness helps an organisation to be in the best position to defend any class action.
We asked participants whether the risk of a class action is periodically assessed at senior levels within their oganisation?
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The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2024