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‘Class actions are increasingly seen as lucrative profit-making opportunities’

Defendant firms have welcomed the parliamentary inquiry into litigation funders, countering the scepticism espoused by plaintiff firms and funders.

user iconJerome Doraisamy 20 May 2020 Big Law
Jaime McKenzie and Jason Betts
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Last week, Attorney-General Christian Porter announced his intention to proceed with the parliamentary inquiry into the impact of litigation funding on justice outcomes, exploring whether or not Australians “are receiving their fair share” from class action settlements and look at the “extraordinary profits being made by the booming litigation funding industry”.

Global litigation funder Omni Bridgeway welcomed the inquiry, but noted that only some of the criticism being levelled against funders is valid, with some such commentary being based on “misinformation”. The inquiry will, other funders noted, impact upon the future of such class action financing.

Plaintiff firms were even more scathing, with one calling the parliamentary examination a “pointless, partisan inquiry which will be used by the government to further the agenda of big business and reduce accountability”.


On the other side of the spectrum, however, defendant firms are welcoming the new inquiry.

Defendant firm responses to the inquiry

Norton Rose Fulbright head of disputes Cameron Harvey welcomed the parliamentary committee inquiry, saying that Australia has been a “fertile hunting ground” for plaintiff law firms and litigation funders for many years.

“The whole concept of class actions was to provide a mechanism for ordinary Australians to join together and seek redress in a common claim. But it’s important that there is a fair and equitable distribution of any proceeds of settlement or judgment, and that the plaintiffs’ interests are equitably addressed,” he argued.

Allens partner Jaime McKenzie went further saying that “class actions are increasingly seen as lucrative profit-making opportunities for plaintiff lawyers and third-party funders”.

The class actions regime was introduced to promote access to justice, finality for defendants and efficient use of judicial resources. We welcome the opportunity this inquiry brings to consider further some of these important issues, including the need for a bespoke licensing regime for litigation funders and the need for careful control and court supervision of any lifting of the ban on contingency fees,” she told Lawyers Weekly.

Herbert Smith Freehills partner Jason Betts said that while this is not the first inquiry into class actions in recent years, it is by no means redundant.

“The class action environment in Australia is experiencing enormous change – competing class actions continue to create inefficiencies, delay and expense; at least one jurisdiction is introducing contingency fees for class actions; and the question of whether funders should be subject to bespoke regulation continues to be raised by practitioners and the broader community,” he explained.

Perceived impact of the inquiry

Ultimately the impact will depend on the outcome of the review and whether it precipitates legislative change, Mr Betts surmised.

“One realistic outcome is a recommendation for bespoke additional regulation for litigation funders, such as the introduction of a licensing regime and either a cap on the return to funders or a prescribed minimum proportion of any recovery that must be returned to group members. Responsibly, large funders such as Omni Bridgeway have supported those kinds of changes for some time,” he said.

“In addition, a further debate over contingency fees is necessary. The access to justice justifications for contingency fees are weak and the debate to date has proceeded on the assumption that contingency fees will diversify the range of class actions brought in Australia without detailed evidentiary support.”

Changes like these would not radically alter the Australian class action environment, Mr Betts continued, but could deliver better outcomes for all participants and prevent opportunistic or duplicative litigation.

Mr Harvey said that NRF hopes to see a “more regulated environment” following the inquiry.

“It will also be interesting to see if temporary safe harbour protection from class actions is granted to provide corporate Australia some breathing space during the pandemic,” he said.

How defendant firms should proceed

The role of class action practitioners moving forward will be to support an educated debate and to ensure that the significant burden that class actions placed on corporate Australia is given appropriate weight, Mr Betts outlined.

“At the moment, the profitability of the class action industry is financed by a combination of the insurance industry, the impact of which is unprecedented increases in premium (assuming coverage can even be obtained); and corporate Australia, who are ultimately owned by the shareholders who are suing them,” he said.

Defendant firms must also be prepared for a “spike in claims” to arise as a result of the economic stress caused by the global coronavirus pandemic, Mr Harvey said.

“There are already signs of this happening in the US, with business continuity, employee work and health safety, and customer refund claims increasing. Because Australia is seen as an active class action market, we’re bound to experience these and other trends here.”

Moreover, Mr Betts stressed that defendant firms need to help make sure that “the correct balance is struck between a class action procedure being used for third party profit, and the burden it is placing on the wealth-generating part of our economy”.

This is crucial, as Ms McKenzie noted that the class actions regime is “intended to be run for the benefit of litigants, not plaintiff firms and litigation funders”.

“Litigants in this context means both plaintiffs and defendants and it is important that the interests of both parties be given fair and balanced consideration,” she submitted.

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