When America's meat is Russia's poison


-- 26 October 2009 --
TEXT: J. Vermin

 

Amendments to the Code of Arbitration Procedure that came into effect this Wednesday introduce class actions, the legal technique controversial even in the United States, the country of its origin.

The changes were supposed to give a sword to the small and weak. Instead, they handed a shield to the strong and powerful. Yet, the peculiarities of the law - so paradoxical to be anything but a typing error - may trigger massive abuses and turn the resolution of corporate disputes into a mess.

 

Gulliver and Liliputs

In the old tale by Jonathan Swift, Lemuel Gulliver, washed ashore after a shipwreck, found himself in the country inhabited by Liliputs, people of one-twelfth size of a normal human being. Although Gulliver was a mighty giant there, he needed a flock of cattle for dinner, well-organised dwarfs kept him a prisoner.

If orchestrated properly, a class action can bring a big corporation to its knees. In Anderson v. Pacific Gas & Electric, depicted in the major Hollywood movie starring Julia Roberts, the company had been dumping cancer-causing chemicals into unlined ponds in Hinkley, California. When uncovered by Erin Brockovich, a formerly unemployed single mother of three, working as a clerk in a law firm, the energy giant faced a law suit eventually settled for $333m divided among 600 claimants.

In an ordinary suit each litigant is a party in his own right. In a class action, one person, a representative plaintiff, starts a legal battle on behalf of other persons, those who have - or might have - a claim for the same or similar wrong. In the eyes of law only the representative plaintiff is a party. The others are the members of a ‘class’: they are bound by the outcome of the litigation even though they do not, strictly speaking, participate in the proceedings.

The peculiarities of the law are too paradoxical to be anything but a typing error.
 

By allowing one person to sue for an entire group, sometimes thousands of people, the law - it is often argued - opens the door to the actions that otherwise would have been too small and uneconomical to pursue by individual claimants. Thus, one of the most contentious legal techniques is favoured for lowering barriers to justice, and for the simple and efficient mechanism of dealing with a large number of similar claims. For the government, on the other hand, the class action laws are a way to dump the load of regulation from its shoulders onto the maze of private litigations.

Yet, on the Russian soil the perceived benefits are being paid for by stretching the conventional view of a fair trial. The law appears to substitute the murky waters of defining who and how may decide other people’s rights for the rules of procedure.

 

Do it the Russian way

What a representative plaintiff does affects the members of a class. An important question, then, is how a claimant can get into the class, or stay out and proceed with their personal battle.

International practice revolves around two basic choices, ‘opt in’ or ‘opt out’: should potential class members be automatically included in the class but given an opportunity to leave the proceeding, or should they be required to take a positive step in order to be included in the litigation?

The choices vary from country to country. The ‘opt out’ solution, for instance, can be selected for it reduces social barriers to justice for vulnerable class members: they are automatically included but can leave and bring in their own actions. The ‘opt in’ approach can be justified if the intention is that only those to be bound who want to be and to this effect have shown some minimal interest.

Whatever choice is adopted by the national legislation, the fundamental right of an individual claimant to stay out and pursue his or her own action is recognised and respected.

It appears that Russian law follows the ‘opt in’ way. A closer look, however, suggests that an individual plaintiff does not have a choice: once a class action started an individual claimant is not allowed to file a separate claim relating to the same defendant but has to join the class action and throw himself on mercy of a representative plaintiff.

Moreover, article 225.16 of the Сode of Arbitration Procedure, as in force from October 21, does not allow an individual claimant ‘who did not use his or her right to join the class’ to pursue a legal action if a similar claim to the same defendant had been resolved as a class action. This is so incredible, so against the Constitution and the common sense, that it can not be true. But it is.

 

Blind trade

In the heart of a class action lies the delegation of rights by multiple claimants to a representative plaintiff; class members typically play a small role in the litigation. This ‘clientless’ litigation may lead to open or discrete abuses of law.

The representative plaintiff is self-proposed and, in essence, self-appointed. It falls to the class members, who usually get involved in the proceeding at a later stage when the action has started and the representative has taken his post, to prove that he cannot represent their interests adequately and fairly.

It is not that class members can’t dispose of the representative they don’t like but doing so is not easy. The law is remarkably brusque on the grounds for dismissal. The plaintiff, it says, can be discharged by court on the application of the majority of class members if it is proven that ‘he or she grossly neglects his or her duties or is not capable to represent the interests of the class’.

Essentially, the law has traded good old rules of court representation for a wishy-washy jabber that might work - complemented by the mass of precedents - in the USA but in Russia it would mean an unbridled discretion of a judge.

So far, the laws that left too much to a judge to decide have not worked. Where judges have a wide discretion, in appointing a receiver or corporate governance disputes for example, the level of corruption is somewhat too high.

It is remarkable that conflict of interest does not appear as a reason for discharge of a representative plaintiff. Perhaps, it has something to do with a certain weakness of Russian law on affiliation.

The law has traded good old rules of court representation for a wishy-washy jabber
 

For instance, in 2004 a group of minor shareholders sued Surgutneftegaz, one of the largest Russian oil companies, demanding that 62% of its stocks be considered as treasury shares on the grounds that they were owned by the company’s subsidiaries and, for this reason, cancelled. The suit was lost and the leader of the rebellion, William Browder, was banned from entering Russia ever again.

In the famous case Alfa v Tenelor, enigmatic Farimex Ltd., the company none knew anything about, represented the interests of the banking group. Success of the derivative suit partially depended on whether the company was affiliated with Alfa. The connection was not proven. Telenor lost the case worth $1.7bn.

In 2004 BaikalFinansGrup sprang from nowhere to pay $9.3bn for Yukos’s assets.

 

Why

Class actions in Russia have limited scope: disputes from commercial relations, including those on corporate governance or those that originate from capital market transactions, can be heard under the new regime. The claims of general public, on the other hand, cannot. Social justice, therefore, is hardly the real beneficiary of the law.

It is not possible to say how many class actions will be considered in Russia. Yet, keeping in mind international statistics and underdevelopment of the national stock market, there won’t be many. The effect from the judicial economy, therefore, will be minimal and cannot excuse the door the law opens to abuse.

Although the adoption of western legal institutions is usually enriching, sometimes what is good for Americans, is not so for Russians.

 

 

Law on class actions: too paradoxical to be true
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Comments

Class actions in a country with underdeveloped stock market is not a good idea. Agree on that.