Last year saw a string of momentous developments, including big wins in the Queensland floods and transvaginal mesh trials as well as “probably the most significant class action decision in over a decade” in the Myer judgment on continuous disclosure obligations.

The new year was supposed to see those in the class actions space responding to shifts in the regime, including a new parliamentary inquiry into the profits made by litigation funders, which one funder deemed a boondoggle.

In COVID-19, however, class actions face a new and unforeseen challenge. In conversation with Lawyers Weekly, Herbert Smith Freehills partner Jason Betts outlined five predictions for how the class actions could unfold in 2020.

1.   COVID-19 will trigger more class actions

“Earnings revisions and the disclosure of cost and provisioning consequences caused by COVID-19 will also impact companies’ share prices. This is all fertile territory for those that promote shareholder class actions in Australia,” he said.

“While no one could have predicted the severity of this crisis, I expect entrepreneurial plaintiffs’ firms and funders to explore shareholder class action litigation in respect of guidance and forecast revisions that are not solely attributable to COVID-19, or which exploit the disclosure pressures now faced by listed entities in industries at the front lines of the crisis – hospitality, transport, tourism, aged care, medical supplies and pharmaceuticals.

“History suggests that every major financial industry crisis, however sparked, has caused a spike in in class action filings in this country, and prominent funder Omni Bridgeway reminded the market this month that its share price increased substantially during the SARS and swine flu epidemics.”

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2.   Calls for safe harbour protections

“Listed entities and their directors have recently been granted some reprieve in the form of the federal government’s relaxation of insolvent trading proscriptions. But, at a time when corporate Australia is being asked to step forward to support a devastated economy, it makes sense to introduce a clear and definitive legislative ban on class actions against listed disclosing entities for failing to give guidance regarding the impact of COVID-19,” he posited.

“Proper guidance is almost impossible in a market this dislocated – sensible legislative protections are necessary to provide basic protections from class action entrepreneurialism. These kinds of protections should hopefully be an entrée for more lasting and meaningful reforms to the class action regime flowing from the parliamentary committee established by Attorney-General Christian Porter this year, which will examine the extraordinary profits being made by the ‘booming litigation funding industry’ to determine whether group members or funders are receiving the lion’s share of class action settlements.”

3.   Rise in contingency fees

This, Mr Betts said, will have two “critical” impacts.

“First, we will see a spike of class action claims filed in Victoria, as plaintiffs’ law firms, driven by the new cost incentives, forum shop to launch their claims in the most profitable jurisdiction they can find,” he said.

“Second, it may have a contagion effect, which puts some pressure on other states to follow suit and allow contingency fees for class actions in other jurisdictions. The position at the federal level is less clear, although the Australian Law Reform Commission has already recommended contingency fees at that level also.

There is a poor access to justice rationale for contingency fees in this country, Mr Betts added – “and little prospect that the financial incentives of contingency fees will attract lawyers to presently ignored claims”.

“It is currently perfectly legal for third-party litigation funders to charge contingency fees, and they rarely support low-value claims on behalf of disadvantaged Australia (outside some notable pro bono exceptions),” he said.

“Rather, they generally pursue high-value shareholder class actions against corporate Australia. Why would contingency fees cause lawyers to behave any differently?”

4.   More growth for funders

“The High Court’s decision to restrict common fund orders (CFOs) in December 2019 caused some temporary dislocation amongst the funding industry but, contrary to the opinion of most pundits, has not resulted in a wholesale change in the funding industry’s appetite to pursue class actions in Australia.

“It may be that the absence of CFOs has a greater impact on smaller funders in the medium term, but the unregulated funding market is so attractive that I expect major growth in the market in 2020.”

Funders will also look to alternatives to CFOs, Mr Betts continued, such as funding plaintiffs’ law firms on a “portfolio” basis or even establishing their own law firms in Australia and seeking to jump on the “contingency fee bandwagon as it gathers momentum.

“In recent years, class action claims against corporate defendants are commonly pursued by not one, but multiple class action plaintiffs’ firms and funders. These copycat claims show the extraordinary growth in the Australian market. The majority of class actions settle, and the average shareholder class action settles for [$50 million]. That is an attractive equation for a class action funder,” he said.

5.   Class action insurance to become an endangered (or extinct) species

“Many Australian corporations are finding it almost impossible to source adequate coverage or are facing prohibitive premiums and retention increases that raise questions about whether self-insurance is preferable,” he said.

“Unprecedented increases in premiums (in some case rises north of 200 per cent annually) are a direct response to the continued rise of shareholder class action claims.”

In light of this, Mr Betts pondered whether contingency fees will be the straw that breaks the insurance camel’s back.

“The evacuation of some or all of the shareholder class action insurance market in Australia will only increase the pressure on Australian corporations in an environment already skewed in favour of class action promoters,” he said.