Legal Briefing

Class actions in Israel – a cautionary tale for international corporations

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Disputes | 15 October 2019

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Class actions are a widely-used litigation practice in Israel and have been so for years. Illustratively, in each of the last three years, over 1,200 new motions to certify class actions were filed. Many of these claims were filed against multinational and foreign corporations concerning their operations in Israel. In fact, one might struggle to name a major entity operating in Israel that has not been the target of a class action at some point.

Therefore, any entity operating or contemplating operating in Israel would do well to acquaint itself with the institute of class actions under Israeli law.

The prominence of class actions

Several factors contribute to the prominence of class action in Israel.

First, Israel is renowned as a ‘start-up nation’, and many local lawyers treat class actions as a form of legal start-up. In many cases, the driving force behind the action is not the representative claimant, but rather their counsel. Often, the attorney recognises a potential cause-of-action and only then traces a suitable, representative claimant.

The class representatives’ compensation process incentivises lawyers to initiate class action litigation since their remuneration is calculated as a percentage of the recovery, often amounting to millions of NIS, and there are quite a few lawyers to incentivise; Israel is a highly litigious country, boasting the highest number of active lawyers per capita in the world (approximately 1:128 (lawyers: citizens)).

This trend is further facilitated by the receptive perception of class actions by the Israeli legislator and the judiciary, who regard these actions as an important tool for enhancing the enforcement of individual rights, in particular where there is insufficient private enforcement or administrative supervision. Thus, class actions are construed as having an important deterrent effect, which serves not only the private interest of the injured parties, but also the broader public interest. This positive perception, in turn, results in somewhat lenient conditions for the submission and approval of class actions, as further explored below.

An expansive list of qualified causes-of-action

Israeli law allows for class actions to be submitted in a wide array of circumstances. The prominent cause-of-action (some 70% of all cases) concerns ‘matters’ (an open-ended term) between a ‘dealer’ (defined broadly as, ‘any person who sells assets or provides services, including a producer’) and a consumer, including ‘matters’ that precede the contractual engagement, even if the engagement has not materialised and irrespective of consideration. What follows is that a cause-of-action can potentially arise from any allegedly unlawful act in so far as damage was inflicted upon a large group of customers. This proposition affects foreign corporations.

The jurisdiction of Israeli courts over foreign entities

Israeli courts assume jurisdiction in civil actions (including class actions) by virtue of the successful service of process on the defendant. Where the defendant is a foreign entity, the Israeli Civil Procedure Regulations (the regulations) require that the plaintiff obtains leave to serve process outside the Israeli jurisdiction (leave).

However, leave is not required when the foreign entity has an authorised representative in Israel. The question of when a party who maintains a business relationship with a foreign entity is considered a representative who manages or is authorised to manage the business of this entity on its behalf, is complex and of a separate order.

In practice, it may be challenging to ascertain whether an Israeli subsidiary owned by a foreign company or an Israeli company managing joint ventures with a foreign entity, are cases where a party ‘manages business on behalf’ of the foreign defendant in the sense of the regulations. Recently, Israeli courts have espoused a rather broad approach, whereby suffice it to demonstrate that an entity appears, prima facie, to be a representative of the foreign defendant in the same business to be able to serve process through it. In all other cases, leave is required.

A motion to serve process outside Israel must show, inter alia, that the subject-matter of the claim comes within the ambit of the grounds listed in the regulations, which focus mostly on the existence of an affinity between the claim and the state of Israel. In the context of class actions against foreign entities, the most commonly-used ground concerns claims based on an act or omission that occurred within Israel.

With respect to e-commerce and online services, the courts have granted leave when a foreign entity has targeted the Israeli public (eg, by operating a Hebrew version of its website). The courts held that an allegedly unlawful act that takes place as part of an online transaction constitutes an ‘act that occurred in Israel’, irrespective of the physical location of the operator of the website, or its servers. This proposition has direct effect on the potential exposure of multinationals to liability.

Another recent trend concerns class actions where plaintiffs sought to recover, in Israel, damages that arose from alleged overcharges by international cartels. In some cases, the allegedly-cartelised products were not directly sold in Israel but only as a component in end products that were sold to importers who then sold them to Israeli consumers. In some claims the defendant did not even have activities in Israel.

Most of these claims were triggered by the decisions of regulators and judicial instances abroad concerning international cartels. One such claim followed a class action to the LCD-panel antitrust litigation. While both the plaintiffs and the defendants agreed that the cartel itself existed outside of Israel and that the LCD-panels (the cartelised ingredients) were not targeted to, nor sold in, Israel and that the final products containing the LCD-panels were not sold in Israel, the court of first instance granted leave on grounds that the cartelised ingredients had significant influence on the price of end products in Israel. This decision was reversed on appeal by the district court and the Supreme Court upheld the latter’s decision, stating that the regulations do not allow service abroad when damage alone occurred in Israel, but not an act or omission.

That said, the Supreme Court expressed a ‘certain discomfort’ with this outcome, noting that the regulations’ limitations on the ability of Israeli consumers to retrieve damages from entities that allegedly colluded in an international cartel, which harmed them is an ‘undesirable situation’ that does not fit with ‘globalisation and technological development trends’.

Following suit, a recent amendment to the regulations may further strengthen the ability of Israeli courts to acquire jurisdiction over foreign entities, including in class action litigation. Under the amendment, it will be sufficient to demonstrate that the damage of the claimant was sustained in Israel to obtain leave subject to two conditions: if the defendant could foresee that the damage could occur in Israel; and, the defendant engages in international trade or provides international services of significant scope. The explanatory notes to the amendment elucidate that foreign suppliers can be assumed to foresee the possibility of causing damage in Israel.

Jurisdiction and governing law clauses

Many user agreements of international entities contain dispute resolution clauses that confer exclusive jurisdiction upon the courts of foreign states, often accompanied by governing law clauses that mandate disputes be governed by foreign law.

While under the Israeli Standard Form Contract Law such provisions are principally regarded as unduly disadvantageous conditions and are thus susceptible to annulment in a civil court (in the framework of a dispute between the individual) or by the Standard Contracts Tribunal (which deals with the general wording of the contract and examines its terms), for many years it remained unclear whether a foreign entity could successfully invoke such jurisdiction and governing law clauses in defence against a class action filed in Israeli courts.

Recently, the Israeli Supreme Court addressed the issue in the framework of a class action against Facebook. In an attempt to have the class action dismissed, Facebook invoked the jurisdiction clause in its user agreement, which granted sole jurisdiction to the US courts in California, and the governing law clause, which required disputes be resolved under California law.

The Supreme Court found that the jurisdiction clause was oppressive and void, holding that such provisions may unreasonably deter plaintiffs from pursuing their rights. The court held, however, that the governing law clause was not unreasonably disadvantageous, since the California class action law is advanced, and shares many commonalities with Israeli law. Moreover, the court noted that the application of California law is not likely to deter plaintiffs who seek to conduct multimillion-dollar litigation from pressing claims.

Overall, Israel is, and is likely to continue to be, a class-action-friendly jurisdiction, with an increasing volume of motions for approval of class actions, which foster the development of judicial and doctrinal jurisprudence. As this review demonstrates, several such developments affect multinationals and foreign entities and the extent of their exposure to litigation and liability. Accordingly, multinational corporations operating in the Israeli market should be attentive and follow the developments in Israeli jurisprudence vigilantly.

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