What adopting US-style class-action litigation would mean for this country

As South Africans we grew up on a diet of US legal television shows that detailed the drama of class-action lawsuits in which hundreds of “the little guys” take on the proverbial Goliath.

While this may be a fair depiction of the US legal system in some instances, the reality is that in many cases, litigation of this kind is driven by the financial interests of the lawyers and other stakeholders such as financial intermediaries, often at the expense of the pursuit of justice.

Plaintiffs’ lawyers, whether financed from home or abroad, are now seeking to bring class-action lawsuits to SA’s courts, and we need to be wary of the contagion effect.

SA law recognises the class-action device only in certain limited circumstances. The constitution of 1996 introduced this kind of case for limited use to address alleged violations of a person’s basic rights, such as to education, food and racial equality. There is nothing in our law that supports the radical expansion of class actions that are now sought by certain plaintiffs’ attorneys.

SA courts have, and should, exercise the latitude to ensure that USstyle abuses of the legal system do not find a foothold here. Our courts should act with caution, as according to an empirical analysis conducted by Theo Broodryk in 2020: “[Fifteen] cases were identified where [an SA] superior court, sitting as a court of first instance, made a definitive pronouncement on whether the matter could proceed as a class action, and where it is clear from the judgment or order that the applicant(s) intended to frame the matter as a class action.”

One factor that has traditionally stood in the way of SA adopting retaliatory and unpredictable litigation practices similar to those seen in the US has been that there is no precedent in law for punitive damages. Even in the landmark silicosis case, which secured the country’s largest yet settlement of R5bn for gold miners who suffered due to years of exposure to asbestos, the damages awarded were only compensatory.

Even without the punitive damages that define some American mass tort cases, important lessons have emerged from the silicosis matter. As Jason Brickhill points out in his paper, “River of Disease: Silicosis and the future of class actions in SA”, “there are limited opportunities in the SA legal system for the worst forms of profiteering. However, the possibility of profitmaking from class actions still presents threats to the administration of justice.”

By expanding class actions outside the basic rights areas laid down by the constitution into new areas involving product liability, regulated drugs and medical devices, banking and investments, and consumer goods, the threat to the administration of justice will unjustifiably threaten businesses, jobs and investment. This is a step in the wrong direction for SA.

LEGAL FEES

Another threat is in the case of legal fees. According to Brickhill, the Legal Resources Centre, which pursued the silicosis case for more than a decade, committed to only ever recovering ordinary costs from the defendants if successful — never from the clients’ awards. Its claim totalled R12m.

However, the fees from four private law firms totalled more than R350m. This included R163m in fees claimed by attorneys Abrahams Kiewitz and Hausefield. Spoor Attorneys, with American legal firm Motley Rice, claimed R191.7m in fees.

Two concerns emerge. Do these fee structures encourage attorneys to seek out and work on these cases not in the interests of justice but in the interests of profit? And do they open up SA’s legal system to profiteering by international firms seeking to finance class actions on the basis of handsome returns?

In the US and Australia we have seen how this has played out in cases brought against manufacturers of medically prescribed devices and regulated drugs. In the US, claimants themselves sued some of the lawyers that represented them for enriching themselves or handling their cases badly in their pursuit of profits.

Australian courts ordered the replacement of the plaintiffs’ attorneys with others that would offer a better deal after settlement was reached.

Even US courts have consistently rejected efforts to bring claims for personal injuries on a class basis. These kinds of class action are fundamentally unsuited to dealing with medical claims, which require an individual assessment of each claimant’s case, medical history and personal circumstances.

This then raises the question: is the motivation to help those being actively recruited into the class action or to use the class-action device as leverage to force manufacturers into large settlements?

FEWER INNOVATIONS

The impact goes beyond just the plaintiffs. In their paper, “Attracting the Sharks: Corporate innovation & securities class-action lawsuits”, Elisabeth Kempf and Oliver Splat found that in the US “the class-action litigation system imposes disproportionate costs on firms with valuable innovation output, by making these successful innovators particularly vulnerable to low-quality class-action litigation”.

They found that companies working in innovation are more likely to be the targets of mass tort action, affecting their stock prices and decreasing their appetite to invest in further innovation.

The impact of this on an economy such as SA’s would be significant. And that’s not even considering the effect of fewer innovations in critical areas such as technology, investment and financial services, and healthcare, to name a few.

There is a place for class-action lawsuits in SA, otherwise the constitution would never have made provision for them. But like the guiding principles of the constitution this kind of action needs to be undertaken in the interests of fairness, justice and equity, and in the intended focused scope of protecting basic rights. Unfortunately, there are early warning signs that point to certain plaintiff lawyers seeking to broaden the scope of such actions.

It is important that these signs not be ignored. The private sector must get actively involved to increase awareness of the risks posed by expanded class actions. And there are many — from creating a risk of disproportionate liability, to being used to extract blackmail settlements from businesses, to promoting outsize attorneys’ fees and third-party funding of lawsuits, to threatening the financial stability of SA businesses.

It is in SA’s interest to resist the unwarranted expansion of class-action law, preserve the fairness expected of the judicial system and maintain a legal system that fosters a strong economy.

EXPANDING SUCH ACTIONS BEYOND THE AREA OF BASIC RIGHTS WILL THREATEN BUSINESSES, JOBS AND INVESTMENT