Class actions and litigation funding: the new state of play in Australia

The Victorian government drew praise and scorn in June, but this time it was not about COVID-19 efforts. The state has lifted the prohibition on contingency fees for class actions on the back of recommendations from three separate inquiries over the past six years, becoming the first jurisdiction in Australia to let law firms take a percentage cut of a payout.

On one reading, it levels the playing field with funders and boosts access to justice. On another, it encourages forum shopping and could fuel unmeritorious claims.

Either way, it comes at a time of broader flux in the space and has divided lawyers, business groups, stakeholders – even governments. In May, the federal government launched a parliamentary inquiry into class actions and litigation funding citing among key concerns the possible “conflicts of interest” from Victoria’s pending shift.

“It takes my breath away that they’re spending any time on a system which is largely working, when we have really big societal problems,” says Maurice Blackburn partner Rebecca Gilsenan.

Many lawyers expect Victoria’s popularity to increase as a jurisdiction of choice.

“A tiny proportion of cases – particularly in industrial relations – have to happen in NSW, most will go elsewhere,” warns Gilsenan.

“It would be a shame for NSW to not bring itself into line and offer that choice.”

At this stage, there is nothing to indicate NSW and Queensland – states with regimes mimicking the Federal Court’s – will follow suit, despite recent reviews promoting the change to enhance access to justice in terms of consumer choice.

As far back as 2008, the Victorian Law Reform Commission flagged a need to reconsider the prohibition against contingency fees. Six years later, the Productivity Commission went further, advising in favour of contingency fees with a sliding scale of limits. In 2018, the VLRC revisited the topic and recommended lifting the prohibition albeit preferring a national approach; so too did the Australian Law Reform Commission.

In Victoria’s model, legal costs must be shared among all group members and the court will have full discretion over fee arrangements.

Gilsenan says it removes incentives for over-servicing and gives certainty and clarity over charges in a way which is easy to understand.

Others fear the conflicts of interest it brings.

King & Wood Mallesons partner Moira Saville says her own view is that a potential economic return is not the right basis on which to bring an action; particularly given the existing option to bring a case on a no-win no-fee basis, charging an uplift on fees of up to 25 per cent.

“If they were not prepared to back an action on a no-win no-fee arrangement, what is it that makes it possible for them to back it on a group costs order?  It seems that is not a decision being made on the merits.”

Saville says it is unclear it will bring down legal costs, and questions how courts can decide on what an appropriate level of return is given they are not price regulators.

Saville is also concerned it will result in more pressure to settle – to cover the risks to plaintiff law firms, rather than meet the best interests of group members.

“There’s debate about whether hourly rates are the best way to cost legal advice, but that’s measurable.  If you remove the connection between the legal work and the amount people pay for that work, it’s potentially problematic.”

On broader concerns, KWM’s submission to the inquiry proposes judicial scrutiny at an early stage to deter “fdetermine whether matters are appropriate to proceed as a class action – this would deter unmeritorious or speculative claims.

Herbert Smith Freehills partner Jason Betts says Victoria charging ahead with the change brings an “unsatisfying” difference between jurisdictions.

He calls the access to justice reasoning “objectively weak”. “If we thought contingency fees would lead to more litigation in social justice areas where there are access issues – like deaths in custody, wrongful detention, low value toxic torts – the argument would be stronger,” he says. “But I don’t think it will.”

Review fatigue is understandable, but Betts says the area of law is undergoing rapid change, including since the 2018 ALRC review.

Among the most controversial aspects of the existing regime is the phenomenon of competing class actions – the same matters being pursued by different firms and funders, sometimes in different jurisdictions. Betts has advised the inquiry that one idea could be to have an immediate moratorium on progressing a claim once it is filed, until the court invites and resolves competing actions.

He hopes the new inquiry will generate real debate beyond political limitations, including in the broader community.

“We’ve never stepped back and said, ‘have we got the balance right?’ The way it’s being used is pretty significantly different to the reasons class actions were created 28 years ago.

“The number of players is growing and the market’s becoming more granular.”

The pool of plaintiff lawyers in the Australian market has grown from the nation’s two traditionally dominant players Maurice Blackburn and Slater and Gordon. Up until 2018, Maurice Blackburn was involved in half of federal class actions. Its share fell to 27 per centthe next year. Large commercial firms which have traditionally acted for defendants are now also entering the space including Johnson Winter & Slattery and Corrs Chambers Westgarth.

Australia’s biggest litigation funder, Omni Bridgeway – known as IMF Bentham before acquiring a Dutch entity November and adopting its name– was one of a handful of companies in the space when it listed on the ASX in 2001. There are now about 30.

Some argue this increasingly competitive arena is pushing down costs.

Slater and Gordon say its cases over the past decade have returned 75.3 cents on the dollar to group members from settlements, compared to an industry average of 68.5.

Litigation funding commissions once comprised up to 40 per cent of damages, but pending cases are now promising group members between 85 and 90 per cent of proceeds, according to relatively new plaintiff firm Phi Finney McDonald.

Victoria’s move to contingency fees could reduce cases for funders.

Omni Bridgeway chief investment officer for Australia Tania Sulan says the funder is considering its options; including financing portfolios of cases for law firms (which would include a firm’s own contingency fee matters) and setting up its own contingency fee law firm (which Sulan emphasises the company is yet to act on).

The funder has had more than 100 conversations with corporate Australia about the possibility of turning “meritorious litigation assets into cash”, Sulan says, using litigation finance.

“It’s not a spike in class actions applications we’re seeing, it’s general commercial single party disputes,” she says.

For Omni Bridgeway, the merger and a focus on diversification, both in terms of types of cases within the portfolio and geographies, will help soften any blow. Only a third of its portfolio is now in Australia and projects are more diversified. A recent investor presentation cites a “significant increase in the volume of funding applications since the onset of the COVID-19 pandemic, across all markets”; although few are class action related.

“We’ve been through many episodes of flux and adapted to respond – we just have to wait and see how it plays out,” says Sulan.

State of flux

The area’s turbulence has other moving parts. In October, the Federal Court endorsed market-based causation in the nation’s first judgment in a shareholder class action. In December, the High Court delivered a shock ruling against common fund orders – frequently used to ensure everyone who benefits from a win or a settlement pays a cut of the fees, encouraging “open” class actions and discouraging “freeloaders”. The Federal Court has already noted how this limits its options in ruling.

And in May, alongside its inquiry, the federal government announced funders would need to get an Australian Financial Services Licence and comply with managed investment scheme requirements. Despite arguments in favour of regulation – including from big funders like Omni Bridgeway – the question is from whom. Both the ALRC and VLRC called for strengthening the courts’ role rather than licensing funders; the Productivity Commission called for new licensing for the area. 

Regulatory watchdog ASIC even argued against having funders within its purview. Perhaps unsurprisingly, then, ASIC has since told the inquiry it was given just one day warning of the government’s announcement and was not consulted. 

The federal inquiry will report to government by 9 December. By mid July there were almost 100 submissions. Perspectives vary starkly, including among those at the proverbial coalface.

For three dentists, lead plaintiffs in an action against franchiser Smiles Inclusive, class actions help to “keep the buggers honest” and the profit-motive behind funding leads to “effective / efficient access to the law”.

“What would plaintiffs receive if litigation funding were not available? In our case, nothing,” they write. 

Rod Gibson, the lead applicant among investors who successfully sued Murray Goulburn over misleading profit forecasts, writes of the “little recourse” they would have otherwise had to pursue their rights. Just under 70 per cent of the settlement amount went to members; none of whom objected. 

But for elderly victims in the Petersen Superannuation Fund matter, which concluded in 2018 after a breakdown in relationship between the original law firm and funder, the journey was “horrendous”. 

Announcing the inquiry, Attorney-General Christian Porter said there was clear evidence the system was not “delivering fair and equitable outcomes”, pointing to a median return of 51 per cent to members when funders are involved and 85 per cent when they are not. Yet Professor Vince Morabito notes the median funding rate in recent years was 26 per cent and two in three concluded class actions were resolved through judicially-approved settlements.

Loud justice for ‘quiet Australians’

Despite the clear growth trajectory, class actions still comprise relatively few cases overall: in the Federal Court, they make up 0.68 per cent of cases filed.

Astutely using the government’s own language in its submission, Phi Finney McDonald says many class action group members are “the quiet Australians this government says ‘have a go’ and who ‘deserve a go’.” 

“They have suffered loss and damage from often egregious conduct by some of the most powerful institutions in the country, and class actions are their only avenue for redress,” they write.

Farmers, small businesses and franchisees, ‘mum and dad’ investors, self-managed superannuants, policy holders: all have sought redress through class actions.

“The reforms being proposed are disproportionate, would increase costs for class action claimants, and would have a detrimental effect on our financial markets,” it writes.

The inquiry’s hearings were held in July; first up was Menzies Research Centre chief of staff James Mathias, preselected to run for the Liberal party in 2016 as a 21 year old.

One voice missing from the inquiry to date is possibly the most important: the courts. As recently as June, Federal Court Justice Michael Lee noted the case settled before him would not have been brought without a funder and presented a “good example of the system working and working well”.

In a 2015 speech entitled “Buttered Parsnips and a Damp Squib”, NSW Supreme Court chief justice Tom Bathurst questioned the benefits of contingency fees. Either way, he stressed the importance of ensuring any reforms actually serve the access to justice purpose. “The idea of achieving the optimal access to justice will be not achieved through a lavish supply of words,” he quipped.

“I could talk about access to justice for as long as it takes to read the Corporations Act. At the end of the day however, words of commitment must be converted into action.”

The question, yet again, is what those actions could – and should – look like.