How much can litigation funders take in class action wins or settlements?
In a recent Lawyers Weekly live webcast, an expert panel explained the contributing factors in determining a quantum of pie allocated to funders who have made the litigation possible.
During our recent Lawyers Weekly live: Everything you need to know about class actions in Australia livestreamed webcast, FTI Consulting senior managing director Dawna Wright said – when asked to what extent damages for claimants will be limited by apportioning a cut to litigation funders that helped bring the class action – that circumstances vary with each calculation and model factoring in multiple scenarios.
What is taken into account
“They do need to take into account many different funding scenarios, as well as the allocation of damages to different group members. Sometimes different proceedings, where we’re seeing multiple proceedings at the same time,” she explained.
“We need to be able to allocate damages to different proceedings, sometimes allocate to different defendants, and then also take into account different funding arrangements, both in what group members might have already agreed to plus what a judge might award or decide in terms of equalisation or a common funding order.
“So, it does get fairly complex, needs to factor in a lot of different scenarios. We have models that do that, but it does need to take into account many different options, in terms of the ultimate amount that gets distributed to a group member.”
Augusta Ventures managing director Neill Brennan added that the funder doesn’t control the litigation – that is done by the representative firm.
“At the outset, if a funder’s involved – and a funder is often necessary, because you’ve got a disparate group of people, many of which don’t have the capacity to actually pay for litigation themselves – then you’ve got adverse costs risk, because of cost shifting, so that needs to be covered,” he outlined.
“The funder’s role is to try and generate access to justice by covering those costs, covering disbursements, covering the adverse costs situation, either directly or through indemnity or insurance, that enables that class to bring the litigation and the plaintiff lawyer to run the litigation.”
On the question of a transfer of wealth, Mr Brennan noted that “there is an element of righting wrongs”, with the funder being a function of market forces.
“Governments or large corporates that cause a wrong have deep pockets and power. Individual claimants have very little power. When you group those individuals into a single entity, and you have a funder behind them, it corrects the power imbalance and allows that access to justice to occur,” he said.
“As has occurred in Australia, particularly in the last three years or so, with the influx of foreign and more domestic established funders, the competition is creating a situation where funding commissions have collapsed in the last two or three years.
“The multiplicity arguments with the AMP and BHP more recently, and GetSwift is another example, that show competition is driving down prices. Do you need to regulate? I query whether regulation is a sensible idea. When market forces are operating effectively, you don't generally require a regulation to intervene, and it’s apparent that that’s happening at the moment.”
Another element to this, Mr Brennan continued, is the funder itself “is in a high-risk position”, because it walks into a situation “where legal merit is judged but not obviously absolutely clear”.
“Funding often takes place prior to disclosure, prior to witness statements, prior to a lot of information, so you’re making a call with limited information. There are big questions over quantum as to how it’s being calculated either economically or in terms of the book of quantum available, because of the size of the class of the claimants,” he said.
Then, he added, there are question marks over whether or not the case will actually be run, because of multiplicity hearings.
“And then, when it comes to a resolution, the court can decide whether the funding commission should be X instead of Y’, which is a hindsight decision. So, the risks that a funder faces are large, and if it all goes wrong, the money’s non-recourse, so the funder is not paid anything,” he said.
“[As a result], the risks a funder faces need to be commensurate with the rewards that they’re going to achieve in a competitive environment.”
Herbert Smith Freehills partner Jason Betts chimed in, noting that the class actions market is “interesting” at present given how many “hundreds of millions of dollars [are being] transferred within our economy through the class actions regime, largely by settlements”.
“When you look at Australian funders – by that I mean international and domestic funders funding cases here – by claim value their portfolio is into the billions. It creates some interesting dynamics in Australian law and economics. We’re seeing great transfer of wealth. We’re seeing some of the agents of that transfer of wealth, like litigation funders, not subject to bespoke regulation. They’re subject to the same consumer protection legislation that we all are,” he said.
This, he posited, creates an impact on corporate Australia in different ways.
“One significant way is the insurance industry is under enormous pressure to finance the costs of the settlements associated with class action litigation in Australia. We are looking at something like an average settlement value in the corporate governance space of $50 million, which by Australian standards is large. By international standards, even US standards, that is relatively large,” he said.