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Firm’s poor commercial decisions, potential breach of legal duties flagged in class action matter

The Federal Court shut down a law firm’s request for more than a third of a $300 million class action settlement after it found group members who were already left with a “borderline” amount should not have to bear the consequences of the firm’s poor commercial decisions.

user iconNaomi Neilson 09 August 2023 Big Law
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In refusing to grant Shine Lawyers a further $32 million cut from the landmark $300 million pelvic mesh class action settlement against Johnson & Johnson, Justice Michael Lee said it would not be just or reasonable to expect this money to be taken from vulnerable women.

The decision was especially critical in light of Justice Lee’s finding that the $300 million was “borderline” and at the “low end of a fair and reasonable outcome” for group members, even if it was conceded that Shine had accepted the settlement “was the only one they could get”.

“The settlement cannot be characterised as a good one from the perspective of group members, whatever belated attempts are made to put lipstick on a pig (or, perhaps more fairly, on a passably attractive sow),” Justice Lee said in last weeks’ written reasons.

 
 

“I am not satisfied that the net sum left over for group members will be sufficient if the deduction [that is] sought is made. This is fatal to characterising the deduction now sought as ‘just’.”

Justice Lee said there were a number of options for Shine to run the litigation other than external funding, including an uplift, conducting the case on a speculative basis, and entering into a “variety of forms of more orthodox funding arrangements”. The one it did enter has now put it in the position of seeking the $32 million for interest paid by Shine.

The law firm was already paid $82 million and has paid $45 million in dividends to its shareholders since 2016 rather than keep it as a “buffer” that could be used for additional expenses.

“If those commercial decisions [made by a public company] have turned out, with the benefit of hindsight, to be suboptimal, this does not mean it is just that women, including a number who have suffered profound personal loss, should ameliorate the consequences,” Justice Lee said.

Justice Lee said it was also “difficult to understand” how Shine walked away from the class action without a “handsome profit”, given it obtained a costs order in favour of its clients and won at every turn.

“If that is not the case, such a result is the fault of commercial decisions for which it is responsible,” Justice Lee concluded.

“Given my findings Shine did not act prudently or reasonably in entering into the disbursements facilities in a manner which best protected the interests of group members, and did not maximise the prospect of recovery of the relevant amount against the respondents, how can it be just for me to allow any deduction?”

The commercial decisions and their potentially ‘significant consequences’ to group members

Shine submitted it incurred a “very significant personal risk” by borrowing under relevant loan facilities to conduct the class action and claimed that without this risk on behalf of the women affected by the pelvic mesh implants, “it is very doubtful whether the proceedings would have been able to run to their conclusion”.

The firm said it would be “crucial” for the court to consider the decision not to impose a recovery on the interest components, as it would leave them “without a fair commercial return for the enormous work it has undertaken to obtain a very significant benefit” for the women.

Shine added that “if it is not entitled to the amount of interest, the annual reports demonstrate it will have prosecuted the proceedings at a loss”.

In light of this, the court pressed that none of the clients had a contractual liability to pay interest under their costs agreements or pay any amount by which the relevant sum was calculated.

The court added that the fees did not include or contemplate “uplift” components and the termination of costs agreements is provided for only in limited circumstances for “just cause”.

Justice Lee said that while he does not want to diminish the work done by the solicitors involved in this class action, there was “deep scepticism” as to whether it was necessary to “spend anything like $82 million to conduct this admittedly hard-fought litigation to this point”.

“What is also tellingly and worryingly absent in the evidence is any involvement of any individual solicitors in considering alternative solutions and in the decision making and, in particular, of any input being sought by management from the solicitors as to Shine’s professional obligations and duties to group members in circumstances where commercial decisions could have highly significant consequences for the class,” Justice Lee added.

During the proceedings for the $32 million, Shine “repeatedly stressed” there came a point prior to the trial where it had to decide whether to enter into the disbursement funding facility or refuse to act.

However, this proposition that they could simply “cease acting” was doubted, and the “implicit suggestion” they could walk away for commercial reasons was one Justice Lee found “difficult to accept”.

“Moreover, there are plenty of plaintiff law firms and funders hungry for work,” Justice Lee noted.

“I am far more convinced that if Shine said to group members and the court, in a timely way, that it would no longer act unless it exposed group members to the terms of the disbursement funding facility it negotiated, another proposal for conducting the litigation could not have been struck. We only know for sure what happened.

“And this gives rise to significant concerns.”

Justice Lee said Shine paid itself an amount “representing past disbursements”, which exposed group members to “unserious interest charges”. At no point before this did Shine tell group members and its clients the proposed impost constituted interest costs.

“It must be stressed that the evidence now reveals this was the context in which settlement discussions took place,” Justice Lee said.

“One would be naïve to think that significant commercial incentives did not exist for Shine to settle the litigation.

“These commercial incentives relating to past costs and expenses were exacerbated by the fact that the settlement was predicted to secure a short-term and material revenue stream.”

Conflicts in professional obligations and duties to group members

Justice Lee emphasised in his judgment that there was an “apparent unwillingness” from Shine to accept there were “real and unusually acute conflicts of interest that needed to be managed”. He added they were different “in type and scale” than those that usually arise.

In reaching this conclusion, the court explored the code of conduct that applies to a solicitor’s relationship with clients and found it is “silent as to duties owed to group members of representative class actions”.

“This might be thought as to be less ideal in circumstances where it is apparent a large and important part of Shine’s practice is class action litigation involving the claims of thousands of group members across many facets of commercial and everyday life,” Justice Lee said.

Nevertheless, the court did not find Shine acted inconsistently with its obligations. It did find the case exposed an imperative for firms in Shine’s place to “keep at the forefront of their mind the paramount duty to the court, and to other professional duties”.

“This need for vigilance is acute when decisions are or can be made by non-lawyer offices of a corporation, which can affect the interests of clients and group members,” Justice Lee said.

Justice Lee did not find it necessary to reach a conclusion as to whether Shine acted contrary to its legal duties, but he flagged that an alternative application could potentially be made to consider the issue further.

“Despite my concerns … I wish to emphasise that nothing about this decision should be seen as an implied criticism of any individual solicitors. To the contrary, I have no doubt the individual solicitors for the applicants were committed to the case,” Justice Lee added.

While Justice Lee’s decision struck out the present application, his order does not prevent Shine from making a further application for a lower amount of interest. However, it will still have to contend with the issue of whether that amount would be “just” for group members.

“Marriages and lives have been irreparably damaged and some ruined.

“The pain and anguish of the women who made representations opposing the settlement was palpable and moving. The legislative scheme for recovery of personal injury damages in this country limits significantly the ability of these women to obtain sufficient compensation to help them get on with the rest of their lives.

“The evaluation as to whether any further deduction from the settlement sum requires consideration of all the circumstances, including the modest recovery of these women,” Justice Lee said.

In an ASX statement shortly after the judgment, Shine said the $32 million was a “necessary cost”, and it is preparing further submissions to recover some of its interest.

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