Suggested legislative amendments to the Israeli class action law
A Governmental Interdepartmental Committee was commissioned to examine the challenges facing class actions in Israel since the Israeli Class Action Law (“the Law“) came into effect in 2006, and to recommend legislation amendments to remedy those challenges (“the Committee”). The committee has recently published its report for public commentary (“the Report“).
Since the enactment of the Law in 2006, there has been a drastic increase in the number of class actions filed in Israel (for example:162 class actions were filed in 2010, 1245 were filed in 2015 and 1669 in 2022). It seems that this is the inevitable result of the fact that the Law expanded the matters and causes-of-actions for which class actions can be submitted. In recent years a broad framework of class action case-law and common practices has developed, and various challenges and shortcomings have surfaced.
The Committee was tasked with identifying these issues and the possible legislation amendments that could fix them. The conclusions are presented in the Report, which focuses on six main issues identified by the Committee: (1) Frivolous Claims; (2) the Principal – Agent Problem; (3) the Challenges in the relationship between the Petitioner and his/her Counsel; (4) Broadening the Possibility to File Class Actions; (5) Class Actions Based on Matters Overseen by Regulators; and (6) Class Actions Filed Against Government Entities.
In a nutshell, the committee’s main conclusions and recommendations regarding the issues relevant to corporations operating in Israel are as follows:
Frivolous Claims
The Committee identifies the filling of class actions with no legal or factual basis, in an attempt to earn a “quick buck”, as one of the main challenges needing remedy. Amazingly, the Report points out that of the 811 class actions that ended in 2020, only approximately 15% were certified or accepted (either by court ruling or settlement agreement). The rest ended with the dismissal of the action (either with or without prejudice), or by its withdrawal by the Petitioner. The Committee also found that between the years 2016-2021, only 22% of all class actions ended in a way that benefitted the class – meaning that almost 80% of class actions should not have been filed! Either because there was no basis for the action, or because the action could have been resolved in a more efficient way rather than burdening the already overcrowded court system.
The Committee also found that the costs of frivolous claims, even if not adjudicated de facto, are incurred by the Defendants (excessive legal costs), the Public (prices of products and services increased due to defendants’ excessive costs) and the Court System, which class actions were found to be a significant contributor to its workload.
While the Law originally attempted to prevent the filing of baseless claims by providing certain tools for fighting them, the Committee points out that de facto, Defendants prefer settling frivolous claims rather than fighting them.
The Committee also addressed the phenomenon of filing class actions for excessive amounts that sometimes reach hundreds of millions of ILS (!) and that often do not reflect the actual damages incurred by members of the class. Often, this is a strategy to exert unfair pressure on the Defendants in order to reach a quick settlement. It was found that there is a huge gap between the amount claimed at the beginning of the proceeding and the final amounts executed at the end of the day in settlement agreements or in judgments – which range, on average, between tens of thousands and a few million ILS. The Committee referred to another phenomenon – the race to be the first to file the class action which leads to attorneys compromising the quality and supportive framework of the actions.
To combat this challenge, the Committee recommends establishing: (1) a requirement for Petitioners to approach the Defendants directly before filing a class action regarding specific “light-weight” causes-of-action (for example: “Spam” related class actions); and (2) a unique voluntary procedure for class actions seeking an injunction or declaratory relief without compensation, which will also include a requirement for a preliminary approach (as well as incentives for the Petitioner and his/her attorney to use this procedure when appropriate). The purpose of the suggested mechanism is to bring about effective law enforcement without the need for judicial intervention.
The Committee recommends, inter alia, the following additional measures to help combat this issue:
- Revoking the exemption from court fees provided for class actions filed under the accessibility cause-of-action, as this has been significantly exploited in recent years, as well as revoking the exemption from the second half of court fees, currently provided when a settlement or withdrawal agreement is reached.
- In his action, the Petitioner will state only his personal compensation sum (and not the estimated amount of the entire class). Alternatively, non-monetary damages will not be quantified initially.
- The Court will be required to impose realistic and fair court expenses on the Petitioner’s attorney when a Certification Motion is rejected.
- Disclosing the number of class actions submitted by the Petitioner.
- To consider changing the “race to submit first” concept. The Court will have discretion to determine that when several class actions are submitted regarding the same cause-of-action, the best action \ attorney will prevail – and the significance of being the first class action submitted will be reduced.
The Principal – Agent Problem
The Committee found that another main issue is the concern that the Petitioner’s interests (as well as his/her attorney’s) do not necessarily align with those of the class, and they might ultimately prefer personal gain over benefitting the class. This issue is especially prevalent when settlement agreements are reached, and even more so when the agreed upon relief for the class is in the form of coupons or other cy pres methods that are not monetary compensation paid directly to each class member.
The Committee recommends imposing an obligation to give an expense award against the Petitioner’s attorney when class actions are rejected, that will take into account the uniqueness of the class action proceeding. The Committee believed that the dominant role of the attorneys in the field of class actions should not be ignored, as well as the fact that in the event of a successful claim, the attorney is expected to receive, in many cases, a significant fee, and therefore, it makes sense that in the event that the Motion for Certification is dismissed, it is the attorney who will bear the costs and not the Petitioner. This is also since an obligation to impose costs on Petitioners may discourage potential proper class action Petitioners. In exceptional cases, it will still be possible to impose expenses also on the Petitioner and not only on the attorney.
The Committee’s additional recommendations are to regulate the total awards and legal fees awarded to the Petitioner and his/her attorney. This issues is currently not regulated by legislation, which causes the parties to influence these amounts in settlement agreements thus allowing for attempts to increase the fees regardless of the benefit of the class. The Committee suggests a method based on predetermined percentages of the compensation to the class, which will vary in different circumstances. The Committee also suggests limiting the possibility to compensate the class in the form of coupons, since the benefit to the public is uncertain and dependent on whether the class members use the coupons, while the Petitioner will still be entitled to compensation for the alleged benefit awarded to the class. The committee also recommends prohibiting compensation by donation of products.
The Committee points out that an indication of the potential problematic nature of settlement agreements can be learned from the following finding: Between the years 2014-2021, in approximately 48% of settlements submitted for approval of the Court, the Attorney General submitted an opinion that the agreement should be amended because it does not sufficiently promote the interests of the class or the public.
The Committee refers to the common mediation practices in class action, and suggests imposing two new obligations on the mediator: (1) The mediator will disclose to the court data and facts, if the mediator and the parties were exposed to said information and they were the basis for the agreed upon compensation; (2) the mediator will only approve a settlement if it is fair for the class members.
Broadening the Possibility to File Class Actions
Finally, the Committee recommends to remove barriers so that organizations promoting social and public interests can more easily file class actions, with the hope that this will bring about proper actions with social and public benefits.
