Court takes an expansive view of threshold requirement for class actions against multiple respondents

In brief

A representative proceeding can only be commenced where seven or more group members have claims against the same person. In proceedings with multiple respondents, there has been conflicting authority as to whether each group member is required to have a claim against each respondent. Last week, in Cash Converters International Limited v Gray, the Full Federal Court appears to have resolved this uncertainty, by confirming that no such requirement exists. Partners Peter O'Donahoo and Jenny Campbell and Associate Thomas Bagley report.

Threshold requirements for class actions

The Federal Court of Australia Act 1976 (Cth) (the Act) imposes several threshold requirements on representative proceedings. These criteria, contained in section 33C(1) of the Act, require that:

• seven or more persons have claims against the same person;
• the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances; and
• the claims of all those persons give rise to at least one substantial common issue of law or fact.

The requirement that 'seven or more persons have claims against the same person' is easily interpreted where there is one respondent. Seven or more persons must have a claim against that respondent. However, representative proceedings are often commenced against multiple respondents. In those circumstances, the first threshold criterion had been the subject of conflicting interpretations in two Full Federal Court decisions:

• In Philip Morris (Australia) Ltd v Nixon:¹ the criterion was interpreted as requiring the applicant and each group member to have a claim against each respondent.
• In Bray v F Hoffman-La Roche Ltd:² the criterion was said to be satisfied where there were seven or more persons with a claim against one respondent (although the claims against the other respondents still needed to satisfy the other two threshold criteria).

The uncertainty created by this divergence in authorities is significant. If each group member is required to have a claim against all respondents, it would not be possible to bring a single proceeding against multiple respondents unless they were all, in some way, responsible for each group member's loss. The alternative path, commencing separate proceedings against each respondent, may not be economically viable.

The previous authorities

Philip Morris concerned claims against tobacco companies, including an allegation that the 'collective conduct' of six tobacco companies caused all group members to 'not quit smoking' after 1 October 1974. In that context, the parties before the Full Court agreed that every member of the represented class had to have a claim against every respondent for the proceedings to continue. The Full Court (Justices Sackville, Spender and Hill agreeing) embraced that position on the basis that it was consistent with both the legislative text and the intention of the Australian Law Reform Commission report³ that had preceded the introduction of the representative proceedings regime.⁴

Bray was a decision arising from the 'vitamin cartel' proceedings. The majority of the Full Court (Justices Finkelstein and Carr agreeing) declined to follow Philip Morris on the basis that it was wrongly decided. In particular, the majority considered that:

• the issue had not been fully argued before the court in Philip Morris, having been the subject of consent between the parties;
• a plain reading of the language of the provision did not require the additional hurdle; and
• imposing an additional threshold requirement was not consistent with the purpose of Part IVA of the Act.⁵

In reaching this conclusion, the majority observed that the concerns identified in earlier authorities could be resolved by the procedural mechanisms in Part IVA of the Act (such as the creation of sub-groups or the joinder of additional applicants with personal claims against each respondent).

Justice Branson dissented. Her Honour was not persuaded that Philip Morris was clearly wrong.

The conflict between these two decisions created real uncertainty for first instance courts considering the issue post-Bray, and produced a number of conflicting decisions.

The conflict is resolved

The class action against Cash Converters alleges that various arms of the Cash Converters business, including one of its franchisees, breached the National Credit Code and statutory unconscionability provisions by charging administrative fees without a contractual entitlement.

Cash Converters submitted that the vast majority of group members did not have a claim against the particular franchisee (Ja-Ke Holdings) that was a respondent. On the basis of the authority in Philip Morris, Cash Converters applied to strike-out the applicants' claim in so far as it made allegations against Ja-Ke Holdings. The issue was important because the parent companies in the Cash Converters network were only alleged to be 'involved' as accessories to certain breaches by Ja-Ke Holdings. If each group member was required to have a claim against all respondents, this aspect of the applicants' case would probably have been unable to proceed, because:

• the applicants needed Ja-Ke Holdings to be a respondent to allege that the other Cash Converters entities were accessories to its breaches; and
• joining the other franchisees would not have resolved the issue, as group members would only have claims against the particular franchisees that they dealt with.

If the Cash Converters' strike-out arguments had been accepted, the applicants would have been confronted with the choice of withdrawing this aspect of the claim or only continuing on behalf of the Ja-Ke Holdings customers.

At first instance, Justice Farrell rejected the application to strike out this aspect of the applicants' case.⁶ Her Honour concluded that she was not bound to follow Philip Morris, and chose to follow Bray. Cash Converters appealed.

The Full Federal Court (Justices Jacobson, Middleton and Gordon) upheld her Honour's decision.⁷ The court reviewed the earlier decisions, with a particular focus on Philip Morris and Bray. The court considered that it was not bound to follow Philip Morris in relation to this point, because the issue was not actually in dispute in that case and, if a point is not in dispute in a case, then a decision on that point is not binding.⁸

After considering the issue afresh, the Full Court agreed with Justice Finkelstein's analysis in Bray: the additional hurdle was not found in the legislative text and was inconsistent with the provisions of Part IVA.

The end result

The result is that it appears to now be unnecessary for each group member to have a claim against each respondent for a class action to be validly constituted.

A further implication of the Full Court's reasoning would appear to be that it is not necessary for seven or more group members to have a claim against each respondent, so long as:

• seven group members have a claim against one respondent;
• the representative applicant(s) has a claim against each respondent; and
• the proceedings satisfy the other threshold requirements in s33C of the Act (in relation to the circumstances in which the claims arise and the existence of a substantial common issue).

Such proceedings may, however, be vulnerable to an application that the proceedings not continue as a class action on the basis that it is not an efficient and effective means of dealing with the claims (under s33N of the Act).

However, the question of whether it is necessary for seven or more group members to have a claim against each respondent did not directly arise in Cash Converters or Bray because, in both cases, there were seven or more group members with a claim against each respondent. As such, the Full Court's reasoning on this implication will not be binding on subsequent courts and, as a result, the issue may be the subject of further challenge.