From: S Ketharaman
To: The Editor of The Economic Times
Subject: Class Action Suits
Dear Editor:
Apropos the article “Class Action Suits will Help” published on 21 January 2012 in the Pune edition of The Economic Times, the author makes a strong case for how introduction of class action suits in The Companies Bill 2011 will help improve the quality of financial reporting and corporate governance in India Inc.
However, while drawing a comparison with the American justice system, I’m surprised that the article completely misses the concept of punitive damages. For the uninitiated, punitive damages are set well in excess of simple compensation arising from the offence. They serve as a strong deterrent against repetition of the crime not only by the given defendant but also by others in future. It is by awarding punitive damages regularly that litigation in general and class action in particular have proved so effective in the USA. India not only lacks punitive damages but, even damages are awarded, they’re very measly and take ages to materialize. Under the circumstance, it’s questionable if class actions suits will be so effective in India.
The author claims that the costs of class action “dominate the benefits” in the USA. He implicitly attributes this state of affairs to lack of certain practices which he offers up as a list of prerequisites that must be established before such lawsuits are introduced in India. Maybe I’m missing something but, in drawing up this list, the author seems to have totally ignored due American legal process. Almost everything he suggests has been around in America for a long time. Let me take them one after the other:
- Whether it is class action or any form of lawsuit filed in a civilian (i.e. non military) court, the defendant is always innocent until proven guilty and the burden of proof always lies with the plaintiff.
- Before lawsuits come to trial, they go through arraignments and grand jury hearings, the express purpose of which is to dismiss lawsuits that lack merit and stop them from going to trial and wasting the court’s time and the taxpayers’ money. Therefore, frivolous lawsuits won’t go to trial in the first place. The defendant’s legal costs in such situations are not so high that telling the plaintiff to bear them will make any difference.
- Forward looking disclosures accompanied by caveats are already immune to lawsuits, which perhaps explains the copious use of footnotes in most regulatory filings in the USA. As an aside, Footnoted, now part of Morningstar, was actually founded as an independent blog in 2003 to flesh out the fine print that is rife in companies’ SEC filings.
- Unless otherwise agreed to between the parties to the trial, damages are anyway attached proportionately to each defendant’s culpability.
- Finally, to boost damages – and hence their own legal fees, no doubt – it’s a common practice for plaintiff lawyers to advertise class actions on TV and actively solicit as many alleged victims to sign up for the action. Since large shareholders aren’t kept in the dark during this process, there’s no separate need for the court to empower them to join the class action.
Therefore, even if the author’s conclusion about the American situation – costs of class action dominate the benefits – is right, his diagnosis of the root causes is not. Maybe he’ll dig deeper and come up with more valid suggestions the implementation of which can truly ensure that class action lawsuits have a net positive effect for India?
Thanks and Regards.
Ketharaman Swaminathan
