Kuterba v Sirtex Medical Limited

MURPHY J: 1 This proceeding is a shareholder class action brought by the applicants, Mr Pawel Kuterba and Mr Todd Hayward, on their own behalf and on behalf of all persons who acquired an interest in Sirtex shares on the ASX during the relevant period, against the respondent, Sirtex Medical Limited. Before the Court are competing interlocutory applications dated 20 August 2018 and 23 August 2018 in which the applicants and Sirtex seek different orders for opt out and class member registration. 2 It is common ground between the parties that a regime for class member registration should be implemented prior to a mediation which is scheduled in mid-December 2018. There is no dispute in relation to the form of the class member registration notice once the appropriate registration order is decided. 3 The principal difference between the parties' positions is that: (a) Sirtex seeks orders that class members who neither opt out of the proceeding nor register by 23 October 2018 (the Class Deadline) shall be bound in any settlement which the parties are able to reach prior to commencement of the trial of the common issues and thus have their rights to damages extinguished, but will be precluded from sharing in the proceeds of the settlement. The class will be "closed" in that only persons who register will be entitled to a share of the settlement and it is appropriate to describe the orders as class closure orders; and (b) the applicants seek registration orders that do not involve class closure. The class will remain "open" for the present, and class members who do not register by the Class Deadline will not be precluded from sharing in the proceeds of any settlement which the parties are able to reach, whenever that occurs. Neither party seeks orders precluding class members who neither opt out nor register from sharing in the benefit of any judgment that is obtained, if settlement is not reached. 4 The central issue in the applications is what class member registration orders should be made in the circumstances of the present case.

RELEVANT PRINCIPLES 5 The power to make orders for class member registration and/or class closure is found in 33ZF(1) of the Federal Court of Australia Act 1976 (Cth) (the Act). That power is conditioned on the Court's satisfaction that any such orders are "appropriate or necessary to ensure that justice is done in the proceeding." A class closure order may meet this condition where it operates to facilitate the desirable end of settlement: Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited [2017] FCAFC 98; (2017) 355 ALR 392 (MCI v TWE) at [74]-[75] (Jagot, Yates and Murphy JJ). 6 It is common ground between the parties that class member registration orders are appropriate to facilitate settlement of the proceeding, and there is no dispute as to the Court's power to make such orders in the circumstances of the case. 7 The principles relevant to the making of class closure orders were set out in MCI v TWE, where the Full Court said (at [72]-[75]): The Commonwealth Parliament, in implementing a core recommendation of the Australian Law Reform Commission in its report Grouped Proceedings in the Federal Court, Report No 46 (Canberra, 1988) at [127], expressed a legislative intention to adopt an opt out rather than an opt in procedure: Second Reading Speech, Federal Court of Australia Amendment Bill 1991 (Cth), House of Representatives Parliamentary Debates, Hansard, 14 November 1991 p 3,175. It must be accepted that the requirement for class members to take active steps to "register" in order to share in a settlement of a class action undercuts to some extent the opt out rationale underpinning the Part IVA regime. In Mobil Oil Australia Pty Ltd v Victoria (2002) 211 CLR 1; [2002] HCA 27 at [40] (Gaudron, Gummow and Hayne JJ) their Honours said: Group members, however, need take no positive step in the prosecution of the proceeding to judgment to gain whatever benefit its prosecution may bring. Class proceedings are intended to require little or no active involvement by class members and class members participate principally for the limited purpose of taking the benefit or suffering the burden of the findings made on the common questions: P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 2) [2010] FCA 176 at [16] (P Dawson No 2) (Finkelstein J). As J Forrest J said in Thomas v Powercor Australia Ltd (Ruling No 1) [2010] VSC 489 (Thomas v Powercor No 1) at [30], "one of the consequences of the opt out model, as was clearly intended by the legislature, is the ability of group members to "sit back" and watch the proceeding unfold". There must be a good reason to exercise the discretion to make a class closure order which may operate to deny the benefits of a settlement to class members who do not opt out and who do not take the active step of registering: P Dawson No 2 at [17]. Having said this, if a class closure order operates to facilitate the desirable end of settlement, it may be reasonably adapted to the purpose of seeking or obtaining justice in the proceeding and therefore appropriate under s 33ZF of the Act. The courts have accepted on numerous occasions that, in order to facilitate settlement, it is appropriate to make orders to require class members to come forward and register in order to indicate a willingness to participate in a future settlement, and to make orders that class members be bound into the settlement but barred from sharing in its proceeds unless they register: see for example, Matthews v SPI Electricity & SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No 13) (2013) 39 VR 255; [2013] VSC 17 at [22]-[80] (Matthews v SPI No 13) (J Forrest J) and the authorities there referred to; Farey v National Australia Bank [2014] FCA 1242 at [11]-[16] (Jacobson J); Inabu Pty Ltd v Leighton Holdings Pty Ltd [2014] FCA 622 at [17]-[22] (Jacobson J); Newstart 123 Pty Ltd v Billabong International Ltd [2016] FCA 1194 at [67]-[68] (Beach J). An important aspect of the utility of a class proceeding is that they may achieve finality not only for class members but also for the respondent. The rationale behind such class closure orders is that a requirement for class members to register their claims will facilitate settlement, because it allows both sides to have a better understanding of the total quantum of class members' claims, permits the settlement amount to be capped by reference to the number of class members, and assists in achieving finality (to the extent the Part IVA regime permits): see Grave D, Adams K and Betts J, Class Actions in Australia (2nd ed, Lawbook Co, 2012) at [14.410]. A class closure order that precludes class members, who neither opt out nor register, from sharing in a subsequent settlement may facilitate settlement, and therefore be reasonably adapted to the purpose of seeking or obtaining justice in the proceeding.

SIRTEX'S CONTENTIONS 8 Sirtex contends that its proposed class member registration orders properly balance the interest of class members in maximising the prospect of the proceeding settling at or following the pending mediation, against their competing interest in not being compelled to take any active step in the proceeding prior to resolution of the common issues at pain of being shut out from sharing in the benefits of any such settlement. It says that its orders achieve this end by requiring (rather than requesting) class members to take the step of registering their interest in participating in any settlement that can be achieved, which it says will best enable the parties to reach a settlement. 9 Sirtex relies on the affidavit of Mr John Biggs, a director of the solicitors for the respondent, Watson Mangioni Lawyers Pty Ltd, and an experienced litigation lawyer. Mr Biggs' evidence is based upon his experience and, although much of it can properly be described as submissions, it was admitted without objection. Mr Biggs says that it is highly unusual for a respondent to agree to a settlement without having certainty as to its liability in absolute dollar terms, and that he cannot envisage circumstances in which Sirtex would agree to settle this proceeding without such certainty. He says that irrespective of the stage of the proceeding at which registration is ordered to take place there is likely to be a substantial yet unknown number of group members who, for whatever reason, do not register. In his opinion, unless the registration orders proposed by Sirtex are made, the uncertainty surrounding Sirtex's liability in absolute dollar terms means it will be difficult if not practically impossible for it to negotiate on a cents per share basis at the pending mediation. He says that, absent the orders Sirtex seeks, it will be unable to determine whether a proposed settlement is in its best interests. 10 Sirtex describes its proposed registration orders as "mandatory" and says that such orders are likely to generate a higher level of class member registration than what it describes as the "voluntary" registration process proposed by the applicants. It argues that it is likely that substantially more class members will register if the requirement to do so is backed up by a preclusion from sharing in the proceeds of any settlement for those class members who do not. It also contends that common sense and experience suggest that the prospect of settlement being achieved at or following the mediation will be greatly enhanced by a mandatory registration process that precludes unregistered class members from sharing in any settlement. It says that the applicants have not articulated reasons or pointed to anything unusual about the case that might justify departure from what has become a common practice of making class closure orders, and that as the applicants wanted different orders they should be required to put on evidence in support of that proposition. 11 A mediation is scheduled to take place in mid-December 2018 and the trial of the common issues is listed for April 2019. In those circumstances Sirtex submits that there is no force in the applicants' contention that it is too early for class closure orders, and argues that class closure should occur now rather than later. It contends that requiring (as opposed to merely requesting) class members to register by 23 October 2018 does not impose a substantial additional burden on them in circumstances where a class closure process must occur at some point in the proceeding.

DETERMINATION 12 I do not accept the thrust of Sirtex's contentions. It is plain that closed class actions provide a reduced level of access to justice from that which Parliament intended by choice of an opt out regime. Empirical studies conducted in the United States demonstrate that implementation of an opt in requirement dramatically reduces the size of the class, as does the available empirical evidence in Australia: see Morabito V and Hatcher N, "Security for Costs in Unfunded Federal Class Actions: Back to the Future" (2017) 92 Australian Law Journal 105 at 114-115 and the references cited. While facilitation of settlement may be a good reason for a class closure order, if settlement will be facilitated through registration orders without class closure then ordinarily the Court would prefer such orders. 13 In the circumstances of the present case I am not persuaded that class closure orders are reasonably adapted to the purpose of seeking or obtaining justice in the proceeding, though I do not rule out the possibility that they may later be shown to be so. For example, if a settlement is reached, a class closure regime that requires that any class member that wishes to share in the settlement must register to do so, may be appropriate. A class closure order at that point would have the advantage that class members have been provided information about the proposed settlement before they are called on to decide whether they wish to participate in it. 14 With some changes I consider the class member registration orders and notice proposed by the applicants should be made. 15 First, it is inapt to describe the class member registration orders I have made as a "voluntary" registration process. While the applicants' proposed orders and registration notice said only that class members were "encouraged" to register, the orders and notice made provide that class members who have not opted out "should" register. Although the orders do not include any sanction for failure to register, the direction to class members is clear. This goes some way to addressing Sirtex's concern in relation to what it called "voluntary" registration regimes. 16 Second, there is little in the evidence to support Sirtex's contention that the sanction of preclusion from sharing in a settlement will be more effective in getting class members to register than the direction in the notice and orders made. I doubt that orders that exclude class members who fail to register would make a substantial difference to the level of registration. 17 For its argument that a class closure order is likely to be more effective in getting class members to register Sirtex relies on events in Blairgowrie Trading Ltd v Allco Finance where: (a) there were more than 30,000 persons who acquired Allco shares in the relevant period and were therefore potentially class members; (b) on 6 September 2016 the Court made orders for a notice regime in relation to opt out and class member registration. The orders did not preclude those class members who neither opted out nor registered from sharing in any settlement that the parties were later able to reach. Except for those class members who had already provided their contact details to the applicant's solicitors the notification regime was by advertisements in two national newspapers and on the solicitor's website; (c) the number of registrations achieved to this regime is not clear on the materials, but there were only approximately 1,350 registered class members at the point of settlement. That indicates that only a low proportion of class members took up the opportunity to register; and (d) the parties reached an in-principle settlement on the eve of trial. On 29 November 2016 the Court made orders for a notice regime using the information on Allco's share register to directly send notice of the proposed settlement and the requirement to register to more than 30,000 class members; and (e) following that notification regime approximately 4,000 further class members registered: see Blairgowrie Trading Ltd v Allco Finance and Another [2017] FCA 330; (2017) 343 ALR 476 (Blairgowrie) at [21]-[22], [55], [59], [70] and [75] per Beach J. 18 In essence Sirtex argues that the registration orders made on 6 September 2016 generated a low level of registration because they did not include a class closure order, and that if the orders made in the present case do not include class closure they will be similarly ineffective. 19 Sirtex's reliance on the events in the Blairgowrie is, however, misplaced. In Blairgowrie, except for persons who had already provided their contact details to the applicant's solicitors, the notice ordered on 6 September 2016 was only published by way of an advertisement in two national newspapers and on the applicant's solicitor's website. The notification regime did not provide for class members to be personally sent class member registration notices. In my view it is likely that many class members remained unaware of the request to register, which goes some way towards explaining the low level of registration achieved. 20 Relatedly, Sirtex gives insufficient weight to the different methods of notification used under the 6 September and 29 November 2016 orders. The notice provided under the 6 September 2016 regime was, as I have said, by way of advertisements in two newspapers and on the solicitor's website. The notices provided under the 29 November 2016 regime were directly mailed to more than 30,000 class members. The fact that this notice was sent personally to class members is more likely to explain the disparity in the level of registration achieved under the two notices than the fact that the 6 September 2016 orders did not include a sanction. The registration orders in the present case provide for the notice to be directly sent to class members by use of Sirtex's share register. 21 Further, the circumstances in which the two Blairgowrie notices were published, and their contents, were quite different. The notice under the 29 November 2016 orders said that the case had settled and class members could share in a settlement of up to $40 million if they took the step of registering in the proceeding. That notice was much more likely to attract class members to register than a notice published before any settlement was reached and before the details of any settlement could be known. Professor Morabito has noted that where a notice merely advises of the possibility that, if the class action is successful, the class member will be able to collect a share of the settlement, the incentive to register is weak: see Morabito V, "Class Actions: The Right to Opt Out under Part IVA of the Federal Court of Australia Act 1976 (Cth)" (1994) 19 Melbourne University Law Review 615 at 632. The fact that the later notice informed class members that there was "money on the table" also goes a long way towards explaining the high level of class member registration post settlement. 22 There is little in the evidence to show that a registration order and notice which state that class members should register and which do not include a sanction for failure to do so are likely to be less effective in getting class members to register than class closure orders of the type Sirtex seeks. I note that earlier this year in TPT Patrol Pty Ltd v Myer Holdings Ltd Beach J ordered a registration notice which stated that class members who have not opted out should register, but declined to make a class closure order. I am not persuaded that Sirtex's proposed orders will be materially more effective in getting class members to register than the applicants' proposed orders. 23 Third, I accept that most class member registration orders made over the last five years have provided that class members who failed to register be precluded from sharing in any settlement that is able to be reached. However, as Wigney J said in Bradgate (Trustee) v Ashley Services Group Ltd [2017] FCA 1591 (Bradgate) at [34], all or at least most of those orders were made by consent or not opposed and they are of little assistance in determining whether a class closure orders should be made in the present case, particularly over the objection of the applicants. 24 Fourth, the relevant considerations in deciding whether it is appropriate to order class closure include (a) the attitude of the parties and (b) the particular facts and circumstances of the case: MCI v TWE at [79]. 25 In relation to the first of those considerations, it is the applicants' obligation to protect class members' interests, while Sirtex's interests in the litigation are opposed. It is appropriate to treat with caution Sirtex's contention that its orders better promote class members' interests. I respectfully agree with Wigney J's remarks in Bradgate at [38] where his Honour said: …The Court should generally exercise some caution before making a class closure order over the objection of the applicant….It is difficult to see how class closure orders could be seen to be conducive to settlement if they are vigorously opposed by the applicant. Counsel for Sirtex could not point to any case in which the Court has made class closure orders over the opposition of the applicant. The opposition of the applicants to Sirtex's proposed orders is significant to my decision. 26 In relation to the second of those considerations, the applicants submit that in the circumstances of the present case class closure orders are not currently appropriate. The applicants note that the present proceeding is a consolidation of two shareholder class actions, and submit that: (a) in the proceeding commenced by Mr Hayward in February 2017, the applicant's lawyers and the relevant litigation funder considered it unnecessary to undertake "book building" activities to encourage class members to enter into litigation funding agreements. They did not communicate with class members seeking that they register and, at the point the proceeding was consolidated with the Kuterba proceeding on 30 April 2018, no class members had registered an interest in participating in the case. Such an approach is consistent with several decisions of this Court since the advent of common fund orders, which have discouraged "book building" because it can be conducive of wasted costs: see McKay Super Solutions Pty Ltd (Trustee) v Bellamy's Australia Ltd [2017] FCA 947 at [97] (Beach J), Perera v GetSwift Limited [2018] FCA 732; (2018) 127 ACSR 1 at [239], [246], [248] and [317] (Lee J); and (b) in the proceeding commenced by Mr Kuterba in December 2017, the funder undertook book building activities and entered into funding agreements with 415 class members. However, the proceeding was filed before the funder had engaged in as much book building as it would have preferred, essentially out of a concern to reduce the chance of it being stayed in favour of Mr Hayward's competing class action which was already on foot. 27 The applicants did not go into evidence about these matters but the thrust of their contention is that if class closure orders are now made, because of the limited book building that has occurred the closed class may be small in terms of aggregate claim value. They also say that if class members are required to register now, in circumstances where the possibility of a future distribution from the settlement is uncertain and unquantified, many group members may be disinclined to register. The applicants say that if only a low level of class member registration is achieved that may reduce the applicants' ability to negotiate a fair settlement. In those circumstances the applicants say that they are unlikely to settle at the pending mediation and are likely to wait until after the trial of the common issues. This too points away from making class closure orders now. 28 Fifth, Sirtex's contention that its proposed orders are to be preferred is largely based in the proposition that its orders will maximise the number of class members who register and thereby maximise the parties' certainty in relation to aggregate claim value. The essential rationale underpinning class closure orders is to allow both sides to obtain a better understanding of the quantum of participating class members' claims so as to facilitate settlement. It is, however, a common if not inevitable feature of class actions that the defendant will be faced with uncertainty regarding the quantum of potential class member claims: P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 2) [2010] FCA 176 at [31] (Finkelstein J); Thomas v Powercor Australia Ltd (No 1) [2010] VSC 489 (Thomas) at [38] (J Forrest J); Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199 at [7] (Bromberg J). 29 In my view it is likely that the registration orders made will result in sufficient registrations for the parties to understand the parameters of aggregate claim value and to facilitate settlement. It is not necessary for the parties to achieve absolute certainty as to aggregate claim value and in various cases the Courts have crafted orders for class member discovery and/or registration which provide for the respondent to obtain, in a general sense, a sufficient understanding of the overall quantum of the claims: see for example Thomas at [54]-[55]. 30 I give little weight to Sirtex's contention that unless its proposed class closure orders are made, it is unlikely to settle the case. I say this because: (a) the Court "should usually not exercise the discretion to make a class closure order based merely on a respondent's assertion that it is unwilling to discuss settlement unless such an order is made": MCI v TWE at [77]. Parliament enacted an opt out regime and to allow a respondent to, in effect, dictate a different regime by such an assertion would turn the opt out nature of the regime on its head; (b) since the first shareholder class action was commenced in 1998 every such case has settled, unless discontinued or struck out. Many of the settled cases involved significant uncertainty as to aggregate claim value; and Blairgowrie was settled without a class closure order. There are also various mechanisms available for structuring settlements which can overcome hurdles arising from an imperfect understanding of aggregate claim value, many of which are regularly used in the settlement of shareholder class actions in the Canadian and American opt out regimes. 31 I have made orders accordingly. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.