English securities litigation considers appropriateness of representative action

Wirral Council, as administering authority of Merseyside Pension Fund, looked to bring a representative claim on behalf of itself and other retail and institutional investors, against companies Indivior and Reckitt. The claims alleged that these defendant companies had been involved in a scheme in relation to Suboxone-branded products which led to enforcement action and settlements. They alleged that the defendants had omitted required information, made misleading statements or delayed in publishing required information, giving rise to claims under the ‘securities litigation’ provisions in sections 90 and 90A of the 2000 Financial Services and Markets Act (FSMA).

Set out in rule 19.8 of the Civil Procedure Rules, the ‘representative action’ procedure allows one party to represent others who have the ‘same interest’ in the case. Some claimants have sought to use this procedure as a form of ‘opt-out’ class action, potentially allowing very large claims to be brought without the need for extra time or expense spent on things such as collecting together large numbers of claimants or preparing individual statements of case, disclosure or witness evidence.

The recent decision (26 pages/342 KB) highlights some of the limitations of the procedure, with the court granting the defendants’ application to ‘strike out’ the proceedings. Commercial litigation expert Emilie Jones of Pinsent Masons described the decision as a “powerful and well-reasoned contribution” to the case law on when it may or may not be appropriate to use the representative action procedure when pursuing mass claims.

Jones said: “The decision makes clear that while parties and courts cannot ignore the Supreme Court’s comments in the 2021 case of Lloyd v Google that it may be appropriate in some circumstances for claimants to initially proceed by way of representative proceedings and for some issues to later be determined in a second-stage process, there remains much uncertainty about how such a process would actually work in practice.”

In this case, Wirral Council argued for the use of a ‘bifurcated’ process whereby certain “common issues” could first be dealt with by way of representative proceedings. These representative proceedings were described as ‘opt-in’, as investors had to take certain steps to be represented in the action. Wirral Council proposed that other, more claimant-specific, issues be left for subsequent ‘follow-on’ proceedings. 

The defendants argued that the use of the representative action procedure was inappropriate and that it should be for the court to decide how to case manage proceedings. For example, the court should decide the order in which issues are resolved and be in control of case management tools such as split trials. The defendants also argued that not having details of the individual claimant issues at an early stage would make settlement more difficult in terms of assessing and valuing claims.

Mr Justice Michael Green refused to allow Wirral Council to continue to use the representative action procedure and struck out the representative proceedings on the grounds that it was for the court, not Wirral Council or any other party, to dictate how matters should be case managed. Courts must manage cases by applying the overriding objective, and by reference to all relevant factors, including the respective positions of the parties involved, the appropriate use of the court’s resources and the administration of justice.

The judge said that Wirral had been entitled to start the proceedings using the representative action procedure, noting that the defendants accepted that the ‘same interest’ requirement was satisfied. However, the court still retained a discretion as to whether to allow the proceedings to continue.

The court said that the representative proceedings were brought to minimise costs to investors during the early stages of proceedings, and to divide the court’s consideration of the issues in a way dictated by Wirral.

The court found that there was an ‘element of manipulation’ in the way the representative proceedings had been framed. The fact that the investors would prefer not to expend cost and effort in preparing and putting forward their cases until after the first trial had been completed was contrary to the way litigation is normally conducted. Instead, parties are required to properly plead and particularise their cases from the beginning.

Jones added: “Parties cannot use the representative action procedure to oust the power and responsibility of the courts to case manage mass claims in the way they consider most appropriate, applying the overriding objective – as the English courts have done in many group and other mass proceedings over the years.”

Mr Justice Green added that, in addition to the representative proceedings, many of the institutional investor class members had also issued their own claims, described as the “multi-party proceedings”. The court was told, however, that the litigation funders funding the multi-party proceedings would not let retail investors join those proceedings. The judge said that “where there are perfectly feasible non-representative proceedings, the Court should be able to weigh whether those are preferable to representative proceedings…”.  He described it as “inexplicabl[e]” that the retail investors had been excluded from the multi-party proceedings.

Jones said:“Following this decision, claimants and funders are likely to think even more carefully before using the representative action procedure, particularly in circumstances where they have already conducted, begun to conduct or could feasibly conduct a book-building exercise to sign up claimants, so that they cannot genuinely say that representative proceedings would be the only way of providing access to justice.”

Mr Justice Green also said that Wirral had been “very reticent about how the follow-on claims would work – whether they would be fresh claims, or part of the Representative Proceedings or the Multi-Party Proceedings…”.  He commented that it was “surprising that there [was] no clear strategy for taking these claims through to a conclusion, by which I mean the investors actually receiving some compensation”.

Litigation expert Andrew Herring of Pinsent Masons said: “The court has in this judgment surveyed the current state of securities litigation in the UK and concluded that the process proposed by the claimant is not suitable for these securities claims given the court’s ability to deal with them under current procedure.  

“Claimants might take heart that the court has recognised that securities claims can be dealt with under normal court procedure and are not out of the ordinary or controversial.”

Herring added that this “normalisation” represents a change from the position when equity holders in UK companies first obtained a statutory right to sue for losses due to the publication of untrue or misleading market statements. When these measures were first introduced under FSMA, “commentators feared they represented a break with English litigation practice”, Herring added.