Three decades ago, the only exposure Australians had to class action lawsuits was in Hollywood movies. Then, key court rulings and regulatory reform underpinned an extraordinary boom for the legal manoeuvre and the industry that has sprung up around it.
The rise of class actions has resulted in billions of dollars in payouts for people affected by catastrophic fires, faulty medical goods and dud financial services products. It has also given boards and executive teams at major companies a massive headache.
There have been 634 class actions of all kinds in Australia since they were first allowed 27 years ago, which have produced about $5 billion in payments, according to data from Monash University Professor Vince Morabito.
It has been a boon for the growing litigation funding industry.
“We’ve had a lot of overseas litigation funders come in here. We’ve had Maurice Blackburn, Slater + Gordon, and Shine Lawyers set up their own or invest in litigation funders of their own,” says federal Liberal MP Jason Falinski who has been raising concerns about funding returns in Parliament.
Since 2016, litigation funders have had a new tool in their arsenal. Called a “common fund order”, it allows litigation funders to take a cut of any payment that results from the claim to anyone in the class action, even if there is no contract between the two.
With some cases, like those arising out of the potentially deadly airbags provided by Takata, swelling to about 200,000 potential plaintiffs, common fund orders are worth a lot of money.
But last week the High Court delivered a critical ruling that could put them at serious risk. In the BMW-Westpac case, it ruled common fund orders were outside the power of the NSW Supreme Court and the Federal Court, at least early in litigation.
Already companies are using the ruling to try and thwart class actions they’re facing.
BSA, a telecommunications company facing an unfiled class action from Shine Lawyers alleging it used sham contracts to avoid classifying thousands of technicians as employees, made a statement to the ASX on Monday saying: “In the light of the High Court decision… the broad interests of contractors will not be served by costly and time-consuming litigation”.
Jan Saddler, Shine Lawyers’ head of litigation, disputes that, saying the company has either made a “misunderstanding as to the effect of the High Court decision or frankly it’s designed to scare potential group members away from the action, but that won’t occur.”
The dispute underscores just how everything about class actions is contested. It’s a field defined by two tribes of well-resourced law firms populated by people who argue for a living.
The biggest debate, though, is about money.
Saddler sees the High Court’s ruling as a technical decision that does not affect the merits of the case Shine is running or any other.
In one sense, she is right. But legal formalities have always been critical to class actions.
For decades, class actions and litigation funding were not allowed in Australia. The Federal Court began accepting class actions in the 1990s and the High Court only ruled in favour of litigation funding for those claims in 2006.
The arrival of funded class actions posed a problem, University of NSW Professor Michael Legg says.
Some people would sign up with a litigation funder, agreeing to a hand over a share of any money they received to get the class action going, but then other victims would opt in later, collect their compensation, but sidestep the costs of funding the case in a situation known as a “free-rider problem”.
“To avoid the free riders, [litigation funders] came up with the idea of the closed class, [they said] ‘we’re only going to bring it on behalf of some people’,” Legg says.
That had its own problems. It meant potentially multiple lawsuits for the same claim, clogging the court and frittering away money on legal fees; or else locked out people who didn’t sign up to the litigation funder out of the legal claim.
A common funder order, first granted in the 2016 “Money Max” case, was one solution. It gives the litigation funder a cut of payments to anyone who joins the class action, but at a rate overseen by the judge.
“The court gets for itself the ability to protect group members from litigation funders that would charge exorbitant costs,” Legg says.
Just how well the courts have been doing that is a multibillion-dollar question as the industry looks towards state and federal governments to figure out what happens next.
Stuart Clark, an adjunct professor at Macquarie University who was a top class action defence partner with Clayton Utz, says litigation funders are making “obscene profits”.
He says in some cases, funders have made returns of 400 per cent on their invested capital or 80 per cent, year on year.
“Macquarie Bank gets slammed for making returns that are nowhere near that but nobody seems to realise what the litigation funders are doing,” Clark says. He argues judicial oversight is not working.
“Judges aren’t well equipped to do this analysis because it’s very hard. They just look at it and they say, ‘Oh, well, you’re on taking 30 per cent of the judgment. That’s alright.’ It’s just pulling numbers out of the air.”
The litigation funders disagree. Tom McDonald, litigation funder Vannin Capital’s regional managing director, says judges carefully weigh the returns litigation funders receive for risking their capital on expensive, complex litigation that is not guaranteed to succeed and in many cases could not otherwise be run.
If fewer cases were run, that would please many in Australia’s boardrooms. The Australian Institute of Company Directors (AICD) has been lobbying for reform.
“Research conducted by the AICD suggests the increase in class actions is leading to a risk-averse culture in Australian boardrooms which is bad for investment and the broader economy,” the AICD’s general manager of advocacy, Louise Petschler, says.
But shareholder claims are unlikely to be hit hard by the common fund changes.
Shareholders with big investments are often eager to recoup their losses if a company’s stock has dipped, so they tend to be fairly easy to sign up to class actions, even without common fund orders.
“People who were charged excessive fees in superannuation accounts or claims about insurance products where the claims are a few thousand dollars” are more likely to miss out on class actions without common fund orders, McDonald says.
Monash’s Morabito also argues that the boom in class actions has been overstated relative to jurisdictions like Israel and some Canadian provinces. Andrew Watson, who heads Maurice Blackburn’s class action division, says common fund orders have increased competition and helped bring down prices.
“Before common fund orders, a retail shareholder… could be charged a 40 per cent commission rate in some funding agreements. After common fund orders, no one was charging more than 25 per cent and in some instances we were seeing funders charging 10, 12 per cent.”
“We always contended that what common fund orders would do is place downwards pressure on funding commissions and the proof was in the pudding – they did so,” Watson says.
But Legg views the drop in fees another way: as evidence that litigation funders were receiving super profits before and may still be earning too much.
“I think that has caused quite a few judges to go ‘hang on, if you can now run this class action at 10 or 15 per cent, what is happening here?’,” he says. “I think frankly, [judges] are starting to question what they were told previously and wondering whether people were actually being completely honest with them as to the returns of the funders.”
Calls for fresh inquiry
Falinski would like to see the Parliament to launch an inquiry into the sector.
“I think all of us need to go into it with an open mind,” he says. “We’ve got to be very careful not to find ourselves in a blue and red corner, where litigation funders are all bad or corporations are all bad.”
He is not alone in calling for reform. The Australian Law Reform Commission, Victorian Law Reform Commission and Productivity Commission have all looked at the issue of litigation funding in recent years.
In Victoria, legislation is before Parliament recommended by the Victorian Law Reform Commission that would allow law firms to charge plaintiffs a percentage on any payment, letting them like as litigation funders do now. It could transform the legal landscape and make Victoria a hugely attractive destination for class action lawyers.
If that bill passes in Victoria, then the question of whether other states and territories follow suit or turn the screws in the opposite direction will be a key battleground for the industry in years to come.
It is a sector that does not shy away from a fight.
Source: Thanks smh.com