Common Class Action and Litigation Myths, Debunked

Some legal matters like class action and litigation debate capture significant media attention, but they are riddled by misinformation. Terms like US excess and litigation floodgates create an impression that claims by shareholders are proliferating. Data tells another story. Some of the common misconceptions about law include:

GreenMail claims
This class action and litigation myth suggest class action promoters get incentives to commence actions. The merits and ability of the litigation funder to meet adverse cost orders do not matter.

The argument is unsustainable because a court orders a loser to pay legal costs to the winner. Courts also have power payment for those costs by lawyers if there is evidence of serious neglect of lawyer’s duty.

Second, lawyers are in breach of primary duty if they advance litigation just to generate fees.

Third, defendants can apply orders for a ‘security of costs,’ and many do it during all stages of litigation. A litigation funder or claimant should lodge funds with a court as security. The funds cater for likely legal costs that a defendant may be to receive if a claim fails.

Conflicts of interest
The myth suggests the presence of a litigation fund puts the lawyer in conflict. It ignores the fact that lawyers owe their fiduciary duties to:

  • Clients
  • Statutory duties under state or territorial legal profession acts
  • Ethical duties to the court
  • Professional codes of conduct
  • Lawyers owe a ‘paramount’ duty to courts and administration of justice even when clients give contrary opinions.

Another contradiction is that lawyers must act in their clients’ best interests. The interests of an attorney rank a far third behind the first two primary duties. A good demonstration is when lawyers agree to a “no win, no fee” representation.

Claims outside shareholders’ interests argument
This popular class action and litigation myth suggest actions by shareholders are futile because the result is a transfer of money from a shareholder group to another.

The proposition is flawed since listed companies commonly have insurance to cater to such claims. An insurer will pay a part or entire settlement or judgment if there is a responding insurance policy.

Second, many victims are not shareholders anymore. Immunity of unlawful conduct from scrutiny because some victims are still shareholders becomes unfair to other victims. The third point is that this myth ignores the importance of shareholders’ deterrent effect in improving corporate governance standards and the desire to ensure holding law violators into account. Recent evidence from the US suggests shareholder class actions serve as a management disciplining path. It also suggests an association between poor disclosures before a securities class action.

Amid myths, Australian class action procedures have evolved to be an efficient way to aggregate and resolve numerous claims arising out of similar circumstances. However, the Australian system differs from that in the United States. The difference includes a cost deterrent against bringing claims without merit to ensure determination on meritocracy instead of attrition strategies.

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