Caps on class action fees ‘threaten access to justice’, say advocates

Caps on class action fees ‘threaten access to justice’, say advocates

05 October 2021 By Jerome Doraisamy

Plaintiff lawyers and litigation funders have responded furiously to the federal government’s draft laws to cap class action proceeds, with one senior lawyer saying the proposed legislation “isn’t reform, it’s sabotage”.

Draft legislation

In a joint statement issued on Thursday, 30 September, Attorney-General Michaelia Cash and Treasurer Josh Frydenberg released for consultation the exposure draft legislation, which they said will “promote a fair and reasonable distribution” of class action proceeds in proceedings involving a litigation funder.

“The draft legislation would enhance court oversight of the distribution of class action proceeds between the litigation funder and plaintiffs who are members of a class action litigation funding scheme,” the pair outlined.

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“Courts would be empowered to approve or vary the share of proceeds to which members of the scheme are entitled to ensure the distribution is fair and reasonable. In making this determination, courts would be supported by independent experts at the funder’s expense.”

To further protect plaintiffs, Attorney-General Cash and Treasurer Frydenberg continued, the draft legislation would “establish a rebuttable presumption that a return to the general members of a class action litigation funding scheme of less than 70 per cent of their gross proceeds is not fair and reasonable”.

“Finally, the draft legislation would require plaintiffs to consent to become members to a class action litigation funding scheme before funders can impose their fees or commission on them. This will encourage ‘book building’ and ensure that actions involving litigation funders are commenced with the genuine support of plaintiffs,” they said.

The consultation reflects, the pair concluded, the Morrison government’s pledge to ensure that successful class action plaintiffs are adequately compensated, “as well as preventing litigation funders and law firms from taking disproportionate fees in the process”.

If progressed, the legislation would implement key recommendations of the Parliamentary Joint Committee on Corporations and Financial Services in its report on litigation funding and the regulation of the class action industry, including recommendations 7, 11, 12, 13, and 16.

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The federal government is now moving forward with consultations with relevant stakeholders on the proposed reforms.

A ‘sound’ principle?

Reflecting on the proposed reforms, Herbert Smith Freehills partners Jason Betts and Christine Tran said that the draft laws respond to an “increasing problem in class action litigation”, where the quantum of legal costs and funding charges are “disproportionate” to the recoveries by class members.

“This often occurs where damages are less than $30 million, settlement is not achieved until late in the case and the claim has been strenuously defended. Our class action system has struggled to get the balance right in these cases, with class actions generating more costs or commission than recovery for group members,” they explained.

The principle that the majority of settlement proceeds should actually go to group members rather than class-action promoters, the pair mused, is “sound”.

However, they added, there is a risk that the capping proposal “may be too rigid” as it embeds an assumption that the costs incurred are proportionate to group member recoveries.

“Each class action has a different risk profile, case trajectory and complexities, and to date, the court has been able to balance those considerations in assessing what is fair. Any reform will need to have careful regard to the discretion of the court to be exercised on the facts of the case,” they noted.

There are also concerns, Mr Betts and Ms Tran continued, that the cap could operate as a floor for settlement.

“An alternative might be to regulate the funder’s return on investment as a percentage of costs, rather than overall caps on a settlement distribution, which in any event is a harder commercial matter for a court to assess and we could perhaps benefit from legislative guidance. The government could make a value judgment on how much profit funders should extract from our legal system,” they suggested.

“Another question is whether the reforms will impact lawyers charging contingency fees in Victorian class actions, and how the proposed Federal legislation would apply to State Court class actions.”

A ‘preposterous’ proposal?

Others have responded more forcefully.

According to Class Actions Australia spokesperson and Maurice Blackburn national head of class actions Andrew Watson (pictured) – who last year appeared on a two-part podcast series detailing a plaintiff’s perspective on class actions (here and here) – the proposed laws will “cripple the capacity of everyday Australians to take legal action against corporations and governments”.

This, he posited, “is precisely their intent”.

It is “preposterous”, Mr Watson submitted, for Attorney-General Cash and Treasurer Frydenberg to claim that the proposed legislation is being introduced to help everyday Australians participate in class actions.

“This isn’t reform, it’s sabotage,” he argued.

“The Morrison government wants class actions de-clawed and de-fanged so corporations can use their power and size to get away with hurting people.”

Class actions are hugely expensive, he detailed, “because you are invariably taking on a giant with deep pockets and a lot to lose”.

“They need funding options to survive.”

“The government and the big business lobby knows if they take away the viability of those funding options, they take away most class actions. That’s the point of these proposed changes,” he surmised.

Mr Watson said that the way to drive down costs for class members is to adopt market-based solutions which promote competition, such as contingency fees and common fund orders, as has been recommended by the Australian Law Reform Commission.

“The idea that these laws are designed to help class-action members is laughable. The point of these law changes isn’t to make class actions better, it’s to throw so much sand in their gears they don’t get off the ground,” he said.

Reduced access to justice

Elsewhere, Association of Litigation Funders of Australia (ALFA) chair John Walker said that while the federal government is saying that the proposed legislation will increase returns to claimants, the opposite may instead be the eventual outcome.

“To be clear, this bill is about making life easier for company directors and executives by shielding them from the legal consequences of negligence or wrongdoing resulting in financial or physical harm to Australians,” he argued.

“From a funders’ and lawyers’ perspective, class actions are expensive and risky. For claimants, they are usually the only legal recourse available, and many claimants come from highly disadvantaged groups.”

“The effect of this legislation will be to make many class actions unviable and therefore to limit the number of actions filed. That suits the business lobby but leaves consumers and retail shareholders defenceless in the face of corporate wrongdoing.”

In research conducted by PricewaterhouseCoopers, cited in ALFA’s submission to the government ahead of the draft laws, it was found that, in recent class actions settlements, Mr Walker continued, that “a cap of 30 per cent on total costs would have had implications for 91 per cent of cases, where total costs (both the litigation and funding costs) exceeded 30 per cent of gross proceeds, and in 36 per cent of cases, litigation costs alone exceeded 30 per cent of gross proceeds, which would make these claims unviable if the proposed bill takes effect”.

ALFA said in its submission that the bill could “diminish access to justice and, therefore, enforcement of our laws”.

Moreover, it went on, it could “diminish the deterrent effect created by the laws, increase unlawful corporate and government behaviour; and increase the damage caused to millions of Australians by this behaviour”.

If a cap on payouts is to be introduced, ALFA determined, “it should only be set by reference to net proceeds – that is, after the deduction of all litigation costs – rather than on the basis of gross returns”.

“It should also not apply to wholesale or sophisticated claimants or in closed class actions commenced on behalf of people who have entered into funding agreements on an informed basis,” the association said.

“Fees attached to class actions are reducing naturally as a result of heightened competition among funders and law firms in class actions. This competition is serving the market and bringing about the outcome the government says it wants, but without undermining the viability of the industry overall,” Mr Walker added.

“There are significant consequences – intended or otherwise – for ordinary Australians and access to justice arising from this proposed bill. The government should shelve the bill and start again,” he said.

Who could lose out?

Shine Lawyers head of class actions Jan Saddler said the proposed laws would mean that everyday Australians will be “left without the right to justice and will lose the opportunity to hold government and businesses to account”.

The government “should be protecting the little guys, not diminishing their rights”, she said.

“By limiting funding options for class actions, the government is telling the average person who can’t fund their way through every level of court, that their claim and their rights don’t matter,” she said.

Ms Saddler said that Australians “should be outraged by this injustice”.

“I feel the government is completely out of touch with what everyday Australians want. If they could hear from my clients whose lives have been changed by being a part of a class action, they would never take the action they are taking now,” she noted.

The suggestion that a funder should not receive a commission from any group member until a funding agreement from each group member is in place will cause, she continued, “significant delays to launching class actions and will mean that cases will cost more and take a longer time to resolve, which is exactly what the government is trying to avoid”.

“And cases worth tens of millions of dollars, with modest individual claims run the real risk of not being run at all, resulting in a windfall for the wrongdoer and injustice for the victims. It is a smack in the face for all Australians who believe in the right to justice for all, rather than just supporting the big end of town,” Ms Saddler concluded.

In a statement issued by Shine, Kristy and Anthony Bartlett – lead applicants and beneficiaries of a class action settlement against the Commonwealth for Katherine residents living on land contaminated by PFAS, near RAAF Base Tindal in the Northern Territory – said that “for us, there would have been no avenue to seek justice any other way than through a class action”.

“We understand that funders can take a lot, but they also give a lot in order for us to have our day in court,” they highlighted.

“In introducing these laws, the Morrison government will leave average Australians behind, and it will mean that big business and larger corporations can get away with doing the wrong thing,” Ms Bartlett said. 

Caps on class action fees ‘threaten access to justice’, say advocates
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