In February 2018, all 132 clients of Coincheck, a Tokyo-based cryptocurrency exchange which was hacked and robbed of almost $530 million worth of NEM tokens in late January 2018, filed a lawsuit with the Tokyo District Court seeking the return of entrusted NEM tokens and damages.
Despite the large number of plaintiffs, the lawsuit is not considered a class action lawsuit. Japan does not have a class action lawsuit framework like the United States. Instead, lawmakers created a unique two-stage legal framework for consumer protection in 2013, which was put into effect in October 2016. Here, I would like to discuss the framework and the arguments made toward the legislation.
The law1 provides that “Specially Assigned Qualified Consumer Organizations” (SAQCOs) may file an “Action for a Declaratory Judgment on Common Obligations” (Article 3, Paragraph 1).
The SAQCOs are consumer organizations certified by the Prime Minister, empowered to demand injunctions and monetary damages on behalf of consumers under this Act and the Consumer Contract Act. Previously, a Qualified Consumer Organization could not pursue monetary damages but only an injunction. However, the Act allows certain SAQCOs to claim damages on behalf of consumers.
The unique thing about this lawsuit is that plaintiffs is limited to SAQCOs. Consumers are not allowed to join the proceedings. If the court decides that the company owes a common obligation to the consumers, the judgment will have res judicata (precluding further legal proceedings on the same issue among the parties) against the other non-party SAQCOs and consumers who file claims in the second stage, as well as the parties, the company, and the SAQCO. The purpose is to avoid unnecessary litigation. If the court decides that there is no common obligation, the judgment will not have res judicata against any of the consumers (Article 9).
If the court issues a declaratory judgment which ascertains that the company has a certain common obligation toward its consumers, the court, the SAQCO, and the company will make a public announcement and give the consumers notice of the proceedings. Subsequently, the SAQCO will file proofs of claims on behalf of consumers under the power delegated to them. If the company disagrees with the claims, the SAQCO may file for a Simplified Determination Proceeding for the court to determine the contents and amounts of the claims (Article 14). If a consumer is not satisfied with the court decision in this proceeding, he or she can file an objection with the court within a month from the date of the decision (Article 46). If the company agrees with the claims or the SAQCO does not file for a Simplified Determination Proceeding, the contents and amounts (in Japanese Yen) of the claims will be determined final and binding when they are filed.
Differences from the U.S. Class Action System
The above framework is called a Japanese-style class action. It is, however, quite different in some important aspects from the class action lawsuits in the United States.
Opt-In or Opt-Out:
First and foremost, the Japanese version is an opt-in type while the U.S. class actions are an opt-out type. That is to say, in Japan, each consumer has to take a certain action to participate and receive the benefits (or bear the risks) of the proceedings while the process is on-going. In the US, on the other hand, there is no need for a consumer to do anything during the process. They are regarded as being represented in the proceedings. Consequently, the court decisions in the Japanese proceedings do not legally preclude any claims on the same issues by consumers who did not participate in the proceedings or who filed an objection to a court decision of the Simplified Determination Proceedings. In the U.S., in principle, the individuals regarded as class members cannot file an objection or a new lawsuit after the decision becomes final and binding even if they did not participate in the previous proceedings.
This was the most disputed issue in the process of legislation in Japan. There was an agreement among legislators to have some form of a class action lawsuit to correct the gaps regarding information and negotiation power between companies and consumers, to protect consumers from giving up lawsuits due to excessive demands of time, money and effort, and to prevent similar damages to future consumers. However, lawyers and legislators resisted the idea of an individual’s rights being disposed of by someone without his or her knowledge. Their logic is that an individual should be guaranteed participation in the proceedings if his or her rights are at stake. Hence, the unique two-stage opt-in framework was structured.
Types of Cases and Parties:
Second, the parties and the types of cases are narrowly restricted in the Japanese legal system while there are principally no restrictions on U.S. class action lawsuits. This is to limit frivolous and burdensome lawsuits against businesses.
As mentioned before, the plaintiff in the first proceedings is limited to SAQCOs. The idea is to make sure that consumers are not bereft of their benefits without due representation. The SAQCO is supervised by the authorities and whenever there is an inappropriate action by a SAQCO, it can be disqualified.
The only claims that can be filed in these proceedings are:
(i) claims for performance of a contractual obligation;
(ii) claims for the return of unjust enrichment;
(iii) claims for damages based on nonperformance of a contractual obligation;
(iv) claims for damages based on a warranty against defects; or
(v) claims for damages based on a tort stipulated in the Civil Code. (Article 3, Paragraph 1)
Hence, consumers cannot make a claim for damages against manufacturers based on the Product Liability Act even though the law makes it easier for the consumers to prove a tort claim.
All claims should be for monetary payment and, therefore, there is no way to claim for a return of certain objects (e.g., virtual tokens like in the Coincheck case). Further, the claim must be related to a consumer contract. Thus, if there is no contractual relationship between consumers represented by a SAQCO and a defendant (for example, in certain product liability cases and environmental cases), the case cannot be handled as a Japanese class action lawsuit.
Types of Damages
While punitive damages are given in U.S. class action cases, Japanese law does not allow punitive damages. Additionally, the law prohibits claims for certain types of damages. Such damages are: consequential damages, lost profits, personal injury damages, and damages for emotional distres (Article 3, Paragraph 2).
At present, there are only two organizations that qualify as SAQCOs2. According to the public record, there seems to have been no actions filed using these proceedings as of yet, despite the fact that over a year has passed since the effectuation of the new law. This might be because of the complexity and difficulty in usage of the framework or because the certified organizations are taking time to select a proper case to start with.
At the very least, B2C companies doing business or considering business in Japan should be aware of the class action framework in Japan. However, there is no need to be hyper-vigilant since the burden of the proceedings and the potential damages are similar to usual legal proceedings as far as defendants are concerned.