Is It Necessary to Send a Demand Letter a Defendant Prior to Filing a Class Action Suit?

It is not every day a judgment on class action suits is handed down by an extended panel of Supreme Court justices. And yet, in December 2019, an expanded panel of seven Supreme Court justices, headed by the Honorable chief justice Esther Hayut, published a precedential and important decision considering the issue of whether a party seeking to file a class action suit against a government agency must send a demand letter to the agency in advance of filing. The answer to this question carries much weight in all aspects of the conditions for filing class action suits against private businesses as well, such as class action suits in consumer matters, causes of action flowing from possession of securities, and a variety of other issues.

In its judgement, the Supreme Court offered a surprising answer, which, when correctly raised and argued before legal tribunals, may present real change for businesses wishing to defend themselves against class action suits.

Recent years have seen a dramatic increase in the number of class action suits filed in Israel, with about 1500 applications for certifications of such suits filed annually. In comparison, in the entire United States, about 3000 class actions suits are filed a year.

Studies reveal that about 60% of the class action suits filed in Israel end with the plaintiff Voluntary dismissal from or abandoning the suit. Thus, it can be concluded that many frivolous class action suits are filed in Israel, and the cost of handling them is high for businesses. In effect, these suits usually reflect an attempt by plaintiffs to unlawfully enrich themselves, without effort or cause.

Against this background, in the absence of any explicit provision on the matter in Israeli law, the courts have deliberated the issue of whether it is proper and appropriate to impose a positive duty on a party seeking to file a class action suit to reach out to the business before filing the suit in order to present its claims and receive a response.

Such a procedure of advanced communication may render a signification portion of class action suits moot, mostly those where the plaintiff lacks information and where there is no real cause for filing. This procedure may even facilitate negotiations between the parties in a way that leads to conserving judicial resources.

The case law on this issue developed out of a class action suit filed against the water and sewer corporation “Mei HaGalil” over unlawful interest charges. Once the class action suit was filed, the water corporation stopped the unlawful charges (in a process called “ceasing,” which is particular to government authorities) and the parties remained in dispute over the amount of recovery and attorneys’ fees to be granted to the lead plaintiff and his attorneys.

The dispute focused on the fact that the lead plaintiff did not first reach out to the water corporation prior to filing the class action suit.

A district court held that failure to reach out in advance should not bar a class action suit. The decision was challenged in appeal. The Supreme Court ruled (by a panel of three justices) that when a class action suit is filed against a government agency, there is a duty to reach out in advance to the agency. The decision did not explicitly address class action suits against private businesses, but it did note that it is possible, under certain circumstances, that failure to send a demand letter in advance will be considered a violation of the duties imposed upon a lead plaintiff and his attorneys.

Since the decision was related to a breadth of issues in Israeli law, the Supreme Court held a rare additional hearing on the matter with an extended panel of seven justices. Its judgement, which as noted above was published on December 17, 2019, determines that there is no duty to reach out to the administrative agency in advance.

That being said, and here is our main point, Honorable President Esther Hayut’s judgment did expand the potential implications of the failure to contact in advance in all class action proceedings. It was held that though there is no duty to make a prior communication, courts possess wide discretion on the issue of whether there should have been prior communication under the circumstances of the case before them, and that in appropriate cases the plaintiff or its attorney may have bad faith attributed to it for failure to reach out in advance.

We believe this statement, which was noted in the judgement’s operative section as well, may be used as the basis for an argument by class action defendants, including businesses and state agencies, that in appropriate cases the class action suit must be dismissed because there was no prior communication, if only for the bad faith on the part of the lead plaintiff or the plaintiff’s attorney and their inability to fairly represent the class.

Of course, such determination as to the bad faith of the initiators of the proceeding may have implications on the lowering of the attorneys’ fees and the recovery granted them, even in proceedings later found to be justified.

Therefore, even if there is no categorical duty of advanced communication, in appropriate cases, businesses may have an additional meaningful defense to defeat meritless and extortionist class action suits filed rashly and without prior communication to the defendant corporation.

As for cases where there was prior communication, the judgement offered several guideposts on private corporations’ ability to negotiate with potential lead plaintiffs even before a suit is filed.