Gilbert + Tobin’s Crispian Lynch, Partner and Alice Pailthorpe, Lawyer, discuss how class actions and litigation funders are “squarely in the sights” of both the Victorian Law Reform Commission and the Australian Law Reform Commission.
The economic levers for class actions and litigation funding reform
Class actions and litigation funding are ripe for legislative reform. Shareholder class actions are rising. So too the incidence of competing class actions against the same defendant. D&O insurance premiums are rising steeply. More class actions are funded than before and more costs are expended on them than before.
There are a growing number of examples of class actions where group members – those whose interests are supposed to be served through funded class actions – are receiving little returns for their claims.
The courts are, case by case, doing what they can, with class actions being one of the more prevalent areas of judicial law reform in recent years. Last month, Federal Court’s Justice Lee concluded that only one of three competing class actions against GetSwift should proceed to trial, deciding which should proceed having regard to funders’ funding models and commission rates.
It’s no surprise that class actions and litigation funders are squarely in the sights of the Victorian Law Reform Commission (VLRC) and the Australian Law Reform Commission (ALRC), with the VLRC tabling its Litigation Funding and Group Proceedings Report in Parliament on 19 June 2018 and the ALRC calling for submissions by 30 July 2018 in response to its Class Action Proceedings and Third-Party Litigation Funders Discussion Paper.
Both the Commonwealth Attorney-General Christian Porter and the VLRC have flagged support for the regulation of litigation funders, following the Full Federal Court’s call for the legislature to do so in Tamaya Resources Limited (in liq) in 2016.
It’s a legislative and regulatory no-brainer. Litigation funders – often offshore companies – are running claims before our courts running into the billions of dollars, generating costs in the hundreds of millions of dollars, and operating in relatively unregulated space.
However, imposing long-overdue regulatory and capital adequacy requirements on litigation funders won’t materially alter the status quo, save to remove risk from those claims funded by litigation funders at the fringes: the first movers in this space are publicly-listed and sophisticated companies that are well funded and ready to meet any new regulatory requirements.
Reform must go further and, accepting that class actions have as their base a sound policy in allowing greater access to justice, tackle some of the economic levers behind class actions and litigation funding that are thrown up by the following questions:
- how do we reduce the cost of class actions for all stakeholders?
- how do we maximise class action returns to those wronged but not others?
Reducing class action costs: allowing for earlier settlements
The data and anecdotal experience is simple and compelling. It tells us that the longer it takes to settle a class action:
- the more a defendant has to pay to settle it;
- the higher the lawyers’ fees;
- the higher the funder’s commission and costs; and
- the lower a group member’s return relative to the cost of obtaining it
The economics are obvious: it’s in the interests of all parties for class actions to resolve earlier wherever possible, and for barriers to that outcome to be removed.
Currently, mediations in open class proceedings occur after the opt out and class closure process. This makes sense. To settle a group’s claim, one must understand the size of the group and the approximate value of its claims. But the opt out and class closure process can take several months and in some cases several years. Significant costs are incurred before mediations occur. Positions become entrenched. Settlement opportunities are lost at a time early in a proceeding when a group member stands to recover perhaps the highest return relative to cost.
The courts have made progress in closing classes quickly in some cases. How can legislative reform improve the position? The laws should prescribe a short period of time within which any opt out or class closure process must occur following the commencement of proceedings, just as the legislature has identified how a class action may be commenced. And courts should thereafter require class action representatives promptly to explain the value of the group’s damages claim.
Parties can’t be forced to settle, but they can be required to take steps which remove barriers to, and facilitate earlier, settlements. Understanding the bounds and scope of the claim is essential to that process.
Maximising group member returns: unlocking contingency fees
Three groups draw from class action settlement recoveries: group members, litigation funders and lawyers. Historically, they have done so on average in the following splits:
- group members – 50% to 60%
- litigation funders – 30% to 40%
- plaintiff lawyers – 10% to 15%
But there’s a number of examples where litigation funders and lawyers have successfully claimed over 50% of settlement recoveries.
The VLRC Report has recommended that plaintiff lawyers acting in class actions be allowed to charge fees on a contingency basis, so they can charge fees on the basis they receive a percentage share of any proceeds recovered. Its recommendation, if accepted, is intended to:
- allow (but not compel) class actions to be commenced without litigation funders at all, and thereby reduce the “mouths to feed” from any settlement recovery;
- provide competitive tension between litigation funders and plaintiff lawyers which is likely to see a reduction in the overall deduction on settlement recoveries away from group members, and thus an increase in returns to them; and
- improve access to justice by allowing claims to proceed without funding agreements
The ALRC has called for submissions on the contingency fee proposal, subject to a number of provisos, including that where the court grants leave for a class action to proceed on a contingency basis, the action cannot also be directly funded by a litigation funder.
The experience in England, Wales and Canada – jurisdictions where a ban on lawyers charging contingency fees has been lifted – tells us that lifting the ban on Australian lawyers charging contingency fees will not see an explosion in class actions, or an increase in spurious class actions. That’s so because, like in those jurisdictions but unlike in the US, we have an adverse costs jurisdiction where the losing party usually pays the victor’s costs.
Contingency fees, if introduced, are likely to be a mixed blessing for class actions in Australia. On the one hand, there are concerns that allowing contingency fees charges will not stem the continued rise of shareholders class actions.
On the other, effectively allowing additional competition in the funding market should see a reduction in the overall costs of class actions and an increase in returns to group members. Whatever the outcome of the ALRC review on contingency fees, reforms addressing early class closure to facilitate earlier settlement of proceedings are key.
Crispian Lynch is a leading dispute resolution lawyer and a partner in Gilbert + Tobin’s Litigation group. He resolves significant and complex disputes and applies a commercial and strategic approach to doing so. Crispian has worked on some of Australia’s largest commercial disputes. He has also worked on a wide range of commercial litigation, arbitrations, mediations and contentious insolvency matters in Australia and around the world. Contact Crispian at [email protected]