“Perfect storm”: SMEs in firing line as class actions soar to almost $1 billion

The amount of class action settlements in Australia has soared in the last year and SMEs are at risk, according to data published today by King & Wood Mallesons.

The Review: Class Actions in Australia 2014-15, recorded Australia’s largest total for class action settlements to date, with a combined payout of $950 million in 2015.

The report found class actions, including a trend towards mass consumer claims, are becoming more commonplace with 33 new class actions filed in the year to June compared to 18 for the previous period.

Securities, financial product and investment claims made up just under half of new class action filings, with 16 such new class actions filed in the year to June.

Of the remaining class actions filed in the period, the largest single group were consumer claims relating to household business names including Cash Converters and Pizza Hut.

Report co-author, KWM partner Moira Saville, said class actions are becoming an increasing risk for Australian businesses across a range of sectors.

She said class actions now “one of the first responses to unexpected events across a wide range of industries”.

“The combination of increasing numbers of cases and increasingly large settlements is creating a perfect storm for corporate Australia,” Saville said.

Fellow report co-author Peta Stevenson today told SmartCompany that class actions are increasingly attractive and part of a “mature market” comfortable with the idea of such litigation.

She says SMEs are most likely to be impacted by the increase in class actions in areas of consumer protections and product liability.

“It’s not so much about the size of an entity but the entity’s ability to respond to a claim,” she says.

“For all companies, what is more important is that they need to develop strategies for responding to unexpected events.

“Be up front so you’re best placed to deal with mediating a situation.

“Also put yourself in the best position to be proactive and have a strategy.”

Professor of commercial law at Melbourne University, Ian Ramsay, today told SmartCompany the report highlights the growing importance of class actions in Australia.

 “Not only in terms of a significant increase in the number of class actions filed in the courts in the past year, but also in terms of the large sums that are being paid by defendants to settle these claims,” he says.

“One reason why class actions are increasing is the role of litigation funders – who are prepared to shoulder the financial risk of bringing these legal claims on the basis that if a claim is successful, the funder will receive a significant percentage of the compensation.”

Ramsay says for small companies, one notable feature of the study is the number of class actions based on alleged breaches of consumer protection laws. 

“They cover a broad range of industries – including tourism, financial services and food retail,” he says.

“We are therefore in a challenging environment for small business where we are seeing regulators focus on enforcement of the laws but also increasing private litigation.

“And where this private litigation is a class action rather than an individual action brought by one plaintiff, the costs to the company, including the payment of legal fees where the class action is either successful in court or settled, can be very high.”