NRW Consulting
Looking at the trends in corporate governance, ESG regulations, and jurisdictional legislative variations, Noah Wortman, founder and CEO of NRW Consulting, talks to Justin Lawson about group claim lawsuits
What role do third-party litigation funders play in the evolution and expansion of global class actions?
Litigation finance, in its modern form, originated in Australia in the 1990s following legislative reform which recognised legal claims as corporate assets and funding companies emerged to service this market. The rise of litigation funding in Australia also followed the legalisation of class actions in 1992 as an efficient way to deal with group claims.
Litigation funding has since become an integral part of mainstream civil justice systems to facilitate access to justice. Litigation funders finance the cost of proceedings in exchange for a portion of the recovery, and frequently coordinate investor-claimants, provide access to legal resources, and (in some cases) underwrite the risk of ‘adverse costs’. While litigation funding is now an international phenomenon, financing activity has concentrated in common law jurisdictions which contend with high costs of litigation that impede access to justice. Litigation funding has the potential to equalise the power of litigants and provide new risk reallocation products to corporations and institutional investors.
Historically, well-resourced parties had advantages in litigation — they could afford the best lawyers and experts and overwhelm less resourced parties. Institutional investors realise third-party funding can be a sensible way of managing risk. Sharing some equity in a successful outcome provides certainty instead of exposure, and partnering with specialists can save internal resources, while increasing the prospects of a favourable outcome. As the English Court of Appeal held in its 2016 decision in Excalibur Ventures LLC v Texas Keystone Inc & Ors: “Litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest.”
In July 2023, the litigation funding industry faced significant upheaval following the UK Supreme Court’s ruling in PACCAR. The Supreme Court decided that litigation funding agreements (LFA), under which funders are entitled to recover a percentage of damages, amount to damage based agreements (DBAs) within section 58AA of the Courts and Legal Services Act 1990 (CLSA). This classification arises from the Court’s interpretation of litigation funders as providers of ‘claims management services’ within the context of that section. Consequently, litigation funding agreements of this nature must adhere to the Damages Based Regulations 2013, and a failure to comply with those regulations renders them unenforceable.
Earlier this year, during the spotlight on the Post Office’s Horizon scandal, Alan Bates, the former sub-postmaster leading the Justice for Subpostmasters Alliance, emphasised the significance of litigation funding in his battle against the Post Office. Following this, Justice Secretary Alex Chalk MP pledged to prioritise addressing the funding issue, aiming to reverse the ‘damaging effects’ of the UK Supreme Court ruling in PACCAR at the earliest legislative opportunity. Chalk mentioned that the new legislation would simplify the process for individuals to obtain funding for their legal battles against influential corporations, such as those implicated in the Horizon scandal, a case that underscored the importance of litigation funding in levelling the legal playing field.
The Litigation Funding Agreements (Enforceability) Bill aims to rectify the fallout from the PACCAR case by clarifying that litigation funding agreements are not damage based agreements, thus making them enforceable. It proposes amendments to the definition of damages based agreements in the Courts and Legal Services Act 1990, specifically in Section 58AA(3)(a). With two clauses, Clause 1 modifies the damages based agreement definition, while Clause 2 outlines the bill’s scope, commencement, and title. The bill retroactively ensures litigation funding agreements’ enforceability, as pre-PACCAR, safeguarding contractual rights and reducing uncertainty. Additionally, it initiates a review of the third-party litigation funding market by the Civil Justice Council, focusing on regulation, claimant protections, and potential funder return caps.
At the end of the day, legal finance comes in many forms as the industry continues to grow and evolve, but ultimately, by promoting and safeguarding access to justice, and helping to uphold the rule of law, litigation funding plays an often crucial role in supporting the functioning of our legal systems.
How have recent trends in corporate governance influenced the frequency and outcomes of global class actions?
The past few years have shown that the current social justice zeitgeist has increased market and shareholder attention to company environmental, social and governance (ESG) policies. Indeed, global class actions, ESG and investor stewardship principles have been developing on parallel tracks, but in the months and years to come, they are likely to intersect with increasing frequency. Empowered by evolving collective redress regimes, classes of claimants may bring a wide range of new cases against defendants who have acted unlawfully in matters related to environmental, social and corporate governance issues.
A growing number of lawsuits on the basis of ESG statements in securities filings, including bond offering documents, have been filed against corporations and governments. A stakeholder’s right to pursue civil remedies varies depending on jurisdiction, but the scope of information that can form the basis of a lawsuit is expanding with greater inclusion of ESG. ESG disclosures have historically been governed mostly by voluntary frameworks. But the voluntary nature of ESG reporting is on the wane, as evidenced for example, by the requirement (since March 2021) for banks, private equity firms, pension funds, hedge funds and other asset managers to comply with sweeping new European rules set forth in Regulation 2019/2088 on sustainability-related disclosures in the financial services sector — EU Sustainable Finance Disclosure Regulation (SFDR). As ESG standards and disclosure become not just best practice, but mandated by various cross-cutting regulations, the opportunity for claims based on alleged negligent misstatement, misrepresentation or omissions in these disclosures has opened. Such claims have built on an existing body of case law establishing the clear liability of businesses for providing misleading information about their business practices.
As countries increasingly mandate disclosures through legislation such as the SFDR, the Modern Slavery Act 2015 (UK), Transparency in Supply Chains Act 2010 (California), and the Duty of Vigilance Act (France), the publicly available information about companies’ ESG practices is likely to only increase. Investor stewardship principles and practices are being adopted in many markets around the world, as the development of stewardship codes for investors complements the similar development of codes of corporate governance that have been established for companies. Indeed, the International Corporate Governance Network (ICGN) defines stewardship as: “the responsible management of something entrusted to one’s care. This suggests a fiduciary duty of care on the part of those agents entrusted with management responsibility to act on behalf of the end beneficiaries.” The growing importance of social factors within corporate sustainability frameworks may continue to create new areas where investors or consumers identify gaps between disclosures and practices.
Nicolai Tangen, CEO of Norges Bank Investment Management which manages Norway’s Government Pension Fund Global, was quoted in The Wall Street Journal in a 27 February 2024 article as saying, “not everyone can just be passive” and investors should not “free ride on a well-functioning market”. Mr. Tangen explained that taking an active approach in corporate governance is not based on trying to be a “global policeman”, but rather a “shrewd capitalist” investor that aims to “enhance future long-term returns”.
Moreover, the same article also discusses the philosophy held by Nick Moakes, chief investment officer (CIO) of the UK’s Wellcome Trust, one of the world’s largest charity endowments. He said: “If you’re going to own things for the long term you want to be in companies that are going to be around for the long term. That means both selecting stocks and engaging with management.”
How has the rise of technology and data analytics impacted the management and resolution of global class actions?
Global class action litigation poses distinct challenges and opportunities. These legal proceedings typically encompass numerous individuals or entities, substantial financial interests, and intricate legal complexities. While conventional legal methods are invaluable, incorporating data-driven insights can significantly enhance their effectiveness. This is where litigation analytics becomes crucial, providing a fresh perspective on navigating the legal terrain.
Additionally, massive consumer, environmental, human rights and product liability group claims have been increasing in recent years. Effectively handling and engaging with sizable client groups is crucial for group claims firms, and artificial intelligence (AI) is propelling law firms forward in this endeavour.
It is essential that the automation of legal tasks does not compromise the accuracy, fairness, and integrity of the justice system. While AI holds immense potential to streamline class action lawsuits, its implementation must be carefully managed to prevent undermining the very principles it aims to uphold.
The future of global class actions appears to be closely intertwined with technological advancements. As artificial intelligence continues to evolve, so too will the strategies and tools employed in litigation processes. The challenge lies in responsibly harnessing this potential, maintaining a delicate balance between efficiency and ethical standards.
What are the implications of recent landmark settlements in global class actions for corporate compliance and risk management?
One of the prime examples in recent years of major corporate compliance and risk management failures to be subject to shareholder derivative actions and securities class action litigation in the US stemmed from the #MeToo movement. The significance of addressing sexual harassment and advancing board diversity has markedly increased for both investors and regulators. Over the past several years, since #MeToo gained widespread attention, investors have effectively utilised securities litigation to drive essential corporate governance reforms multiple times.
In one of the first successful cases of its kind, investors brought a shareholder derivative lawsuit against the board of directors of Twenty-First Century Fox in the Delaware Court of Chancery to address allegations of sexual harassment perpetrated by Fox News’ long-time CEO, Roger Ailes. Following a year of legal proceedings, shareholders settled the case for US$90 million and collaborated with the company to implement governance reforms aimed directly at addressing the culture of sexual harassment at Fox News. A significant initiative was the establishment of the Fox News Workplace Professionalism and Inclusion Council, comprising industry experts alongside company insiders, tasked with identifying and resolving internal issues. Notably, the council issues biannual reports that Fox must publish on its website for investors and the public, including minority reports if necessary. With its extensive authority and mandate, the council ensures that reforms at the company are substantive and minimise the risk of regression. It has since become a benchmark for other corporate boards grappling with similar challenges and striving for meaningful change.
The corporate boardroom is not the only place where recent landmark class action settlements have a lasting impact on compliance and risk management. For example, in 2022 thirteen children and teens took the State of Hawaii to court over the threat posed by climate change. It was alleged the Hawaii Department of Transportation (HDOT) operation of a transportation system resulting in high levels of greenhouse gas emissions violates their state constitutional rights, impacting their ability to “live healthful lives in Hawaii now and into the future”.
The case was settled in June 2024. A key term of the settlement requires Hawaii to achieve zero greenhouse gas emissions across all transportation modes, including ground transportation and sea and air interisland transportation, no later than 2045. Additionally, the state must also come up with a greenhouse gas reduction plan within a year. Moreover, HDOT must complete pedestrian, bicycle and transit networks in coordination with Hawaii counties within five years, while dedicating at least US$40 million to expanding the public electric vehicle charging network by 2030.
How do differences in discovery processes across jurisdictions affect the strategy and outcome of global class action litigations?
There are wide varying rules of discovery, or sometimes known as disclosure, across global jurisdictions. On one end of the spectrum, you have the US, where the trial courts have considerable discretion over whether to bifurcate discovery between class discovery and merits discovery. Most courts set a schedule that provides for both an initial period of discovery leading up to briefing and a decision on class certification, and a subsequent period of discovery following the class certification decision and prior to trial. The initial period of discovery may or may not be expressly limited to class certification issues, but certification issues are usually the parties’ focus during this initial period regardless.
On the opposite end of the spectrum, you have a jurisdiction like Germany where discovery proceedings do not exist. In Germany, parties are generally not required to disclose evidence. While a few statutory provisions allow courts to order the production of documents, they are often interpreted narrowly and rarely used in practice. Another example is Japan where pre-trial discovery is limited, and it is not a signatory to the Hague Evidence Convention.
Considering the fundamental purpose of plaintiffs or claimants obtaining discovery is to aid in the investigative phase of obtaining evidence to substantiate their claims and determining what defendants knew, who knew it, when they knew it, and how far up the corporate ladder the knowledge of the alleged wrongdoing was known. When faced with hurdles in jurisdictions such as Germany, where there is a lack of discovery, then that will impact litigation strategy. Claimants may be able to make use of tools such as 28 US Code § 1782 (Section 1782). Section 1782 is a US federal statute that allows US district courts to compel a person or entity “found” in the US to produce discovery in connection with a foreign proceeding.
The procedure for making a Section 1782 application is relatively simple. There is no need to commence a separate lawsuit in the US. Instead, a foreign litigant may make an immediate application to a US federal court. Further, the application may be made ex parte, which means that prior notice does not have to be given to the person from whom the discovery is sought.
Once the application is filed, the US court decides whether to grant, deny or limit the requested discovery based on certain factors. A court analyses a Section 1782 application in two phases:
First, the applicant must meet three statutory prerequisites: (i) the discovery must be sought from a person or entity that resides in the district where the application is made; (ii) the discovery must be “for use” in a foreign litigation; and (iii) the applicant needs to be an “interested party” to the foreign case.
Next, the court weighs four discretionary factors: (i) whether the discovery is sought from a “nonparticipant in the matter arising abroad”; (ii) whether the foreign court is likely to be receptive to US judicial assistance; (iii) whether the request attempts to “circumvent foreign proof-gathering restrictions”; and (iv) whether the request is “unduly intrusive or burdensome”.
Once the US court grants the application, the foreign litigant may then proceed to seek the requested discovery — for example, by serving document requests or deposition notices on the person from whom the discovery is sought.
Section 1782 has been widely used in class and group litigation across the world to aid in securities, consumer and intellectual property/patent litigation, and also has been used extensively in international arbitration proceedings, as well.
In what ways have global economic conditions and geopolitical events shaped the landscape of class action litigation in recent years?
Regulatory and consumer conflicts have surged due to the uptick in cybersecurity breaches and privacy regulations. Climate-related litigation, including cases of greenwashing, is intensifying under mounting investor and regulatory scrutiny of environmental, social responsibility, and corporate governance practices. Geopolitical turmoil and supply chain challenges heighten the likelihood of disputes. The use of various collective redress regimes across the world has become instrumental in pursuing these claims.
