A booming class action industry is anxiously awaiting a High Court judgment due Wednesday. It will help determine terms and conditions for the highly lucrative business model used by lawyers and litigation funders involved in Australia’s accelerating number of class actions.
The judgment features what are known as “common fund orders” – which basically require all members of a class action group to pay a shared commission on litigation financing from the proceeds of the claim.
Class actions in Australia operate on the basis all members of a class are automatically included unless they opt out. Due to the numbers involved, that can translate into huge returns – on average around 30 per cent of the total payout – for litigation funders.
This is leading to increasing concern in corporate Australia about a surge in class action claims targeting businesses.
That level of financial return has made Australia particularly appealing to a flood of litigation funders, many international. The ability to make use of common fund orders over the last several years has also turbocharged the number of class actions being filed to more than one a week on average – compared to 18 in all of the 2013 financial year.
The High Court judgment comes from appeals in two class action cases – one from BMW about the recall of Takata airbags and one from Westpac related to sales of insurance products. The judgment won’t go to the rights and wrongs of either case – merely the use of common fund orders.
After a rare joint sitting of both the full Federal Court and the NSW Court of Appeal confirmed the legality and constitutionality of common fund orders, the High Court granted leave for the companies to appeal.
The rationale for class actions is unarguable in providing a group of wronged people the ability to seek justice or compensation that they would never be able to afford or likely to pursue as individuals.
That is demonstrated yet again in the payout of up to $1 billion for nearly 7000 Queensland victims of the 2011 floods after they used a class action to sue the Queensland government and others for failure to manage the Wivenhoe and Somerset dams.
But litigation funder IMF Bentham will take between $100 million and $130 million of that money, a massive return of over 400 per cent on its $25 million in costs.
Stuart Clark, a former president of the Law Council of Australia and adjunct professor of law at Macquarie, supports class actions. But he is a vehement critic of the way the class action industry has developed in Australia including “excessive amounts extracted” by lawyers and litigation funders.
“Taking this amount of money from people who have lost their homes is inexcusable,” he says.
The Queensland case was actually started in 2014 before common fund orders were permitted. The class action was still able to use the agreement and information gathered by insurers to sign up a relatively high number of individuals.
But filing a class action lawsuit needs only one identified claimant and a belief there are six more, even if the funder’s commission can be paid by thousands. This is leading to increasing concern in corporate Australia about a surge in claims targeting businesses.
Adero Law has just filed a class action on behalf of thousands of Woolworths employees despite the company undertaking to pay any workers it has underpaid their full pay, plus interest.
The increasing popularity of class actions over share price falls also reflects particular vulnerabilities such as Australia’s continuous disclosure obligations. The recent Myer judgment found Myer misled the market but shareholders were not hurt because they didn’t believe projected earnings. The application of that principle will no doubt be tested by other class action suits.
Yet proceeding to judgment as the Myer case did is a rarity. Most companies (and their insurers) prefer to settle rather than take the risk of going to court, given the protracted prospect of share price declines, the distraction of management and the possibility of an even bigger payout.
In contrast, that translates into a relatively low risk for lawyers and funders in many cases, due to the scale of likely returns funnelled through common fund orders.
The Australian Industry Group argues, for example, overseas litigation funders have moved into Australia in a big way because class actions here are subject to much less regulation than in the US or the UK. Chief executive Innes Willox points to the huge increase in business insurance costs and says litigation funding should be regulated like other financial products given their “unconscionable” returns.
Common fund orders issued by courts have allowed judges more control over the percentage of returns for litigation funders and lawyers because several are now refusing to just rubber stamp agreements if they consider the percentage taken from claimants to be too high.
But even a share of less than 30 per cent of the total adds up to a lot of money if the class is sufficiently large, particularly given the return on investment.
The Victorian government has actually pre-empted any High Court finding by introducing legislation last week that would enshrine common fund orders as a statutory right and – in an Australian first – allows law firms to charge US-style contingency fees as well.
This may reduce the reach and returns for litigation funders in the state but it will inevitably mean more lawyers keen to take on high-return risks themselves – even in highly speculative cases.
Stuart Clark has no doubt this will create another huge spike in class actions in Victoria, home of prominent class action law firms like Slater and Gordon and Maurice Blackburn.
“This will be like pouring a bucket of fuel on to a bonfire,” he says.