Lawyers, litigation funders grade class action reform proposals
Feature June 25, 2018 11:10 pm By Christine Caulfield | Melbourne

Regulating third-party litigation funders gets a resounding yes, but experts are divided on removing the ban on contingency fees and other recommendations for reforming the class action regime. Lawyerly spoke to defence and plaintiff-side lawyers, as well as funders, for their take on the recent proposals, and five major talking points emerged.

Removing the ban on contingency fees

Both the Victorian Law Reform Commission and the Australian Law Reform Commission propose lifting the current prohibition on lawyers charging contingency fees as a way to encourage competition with litigation funders and to spur firms to take on smaller matters that funders see as unprofitable.

The VLRC suggested any move by the state legislature to remove the ban be made in conjunction with the Commonwealth to avoid litigation forum shopping, a recommendation Quinn Emanuel partner Damian Scattini and IMF Bentham investment manager Matt Kennedy supported.

“It has to be national otherwise, cynically, you’ll find everyone filing in the Victorian Supreme Court,” said Scattini.

“Without a national approach, greater complexity will arise with respect to multiplicity of and competing class actions,” Kennedy said.

But Slater & Gordon head of class actions Ben Hardwick said the firm was “somewhat disappointed” the VLRC had suggested the more cautious approach.

“It’s time to take the next step,” Hardwick said. “Victoria was the first state to introduce class actions and there is no reason why it can’t be the first state to introduce contingency fees. There’s no reason other states wouldn’t follow and Victoria could take the lead.”

Both reports also suggested the removal be limited to certain class actions and under the supervision of the court. Shine Lawyers special counsel Vicky Antzoulatos questioned the rationale for excluding personal injury class actions.

Antzoulatos, whose firm is leading the massive vaginal mesh class action against Johnson & Johnson on a no-win, no-fee basis, said litigation funders mostly steer clear of personal injury claims.

“These class actions are very expensive to bring. The quantum is generally lower and there are statutory caps on damages,” she said.

Lifting the ban on contingency fees for cases relating to defective products would “really ensure access to justice, especially on a mass scale, where people have been injured by the one product”, she said.

King & Wood Mallesons corporate lawyer Matt Egerton-Warburton said the proposal would likely lower the costs to bring a claim, as the costs of litigation funding would not be included.

“This may make previously ‘uncommercial’ claims, marginally commercial” he said. “The net result will likely be an increase in claims, but the overall quality of claims may deteriorate without the vetting that litigation funders provide.” For his ASX-listed clients “this will likely have a detrimental effect as the increased litigation costs will lower shareholders returns.”

Matt Egerton-Warburton said he also worried about conflicts, “At present, lawyers are obliged to act in the best interests of their client in service of the court. With the introduction of contingency fees, lawyers will be primarily concerned with protecting their own fee position – possibly to the detriment of their client or the court process. What if a client wants to settle but their lawyer sees more value in continuing to pursue an action?”

IMF Bentham’s Kennedy said the case for introducing contingency fees “remains elusive”.

“The current model, with lawyers acting for their clients, funders overseeing the lawyers’ costs, and the court overseeing all, offers the best set of checks and balances,” he said.

Increasing transparency and strengthening court oversight 

Both reports make proposals to increase transparency with respect to funding arrangements and legal fees in class actions to improve accountability, and the lawyers and funders Lawyerly spoke with say they generally supported the recommendations, with some conditions.

Antzoulatos said the proposal to increase oversight of the lead applicant’s legal costs with the appointment of cost referees, already a power more and more judges are keen to use, was not something her firm opposed, but that the defendants’ costs should also be scrutinised.

“Oversight could disadvantage applicants if defendants’ costs are also not reviewed,” she said. “Without review, defendants can put enormous pressure on applicants if they know their costs will later be looked at”.

Quinn Emanuel’s Scattini said his firm also welcomed transparency, but he too said it should be a two-way street.

“When the terms of the funding agreement are shown to the defence, the defence should have to show their insurance arrangements to the plaintiffs. That’s a good bit of transparency.”

More transparency and disclosure are fine, Slater’s Hardwick said, provided confidentiality and privilege were protected. And there was no need to codify or legislate the court’s existing powers to order the release of information, he said.

“Our preference is for courts to continue to exercise its powers. I think it has to be a case-by-case analysis. There will be situations when it is preferable to preserve confidentiality, but that power rests with the court already.”

Strengthening, or codifying, the court’s powers to set funding rates should also be considered with extreme caution, Antzoulatos said.

“The courts need to allow market forces to set the funding rates,” she said, adding that judges are not apprised of the commercial considerations that go into calculating a litigation funder’s commission.

Reviewing continuous disclosure rules

The ALRC proposed a review of continuous disclosure obligations of listed companies and the propensity for corporate entities to be the target of funded shareholder class actions. A review would also examine the availability and cost of directors and officers liability cover in Australia, the commission said.

King and Wood Mallesons’ Egerton-Warburton said a review was welcome.

“At present continuous disclosure is operating as a strict liability offence. There needs to be consideration of reasonable reforms that protect shareholders while also limiting penalties on companies for non-material breaches of their continuous disclosure requirements,” he said.

Egerton-Warburton said the “explosion” in class actions against listed companies was having unintended consequences, one of which was a substantial increase in the cost of directors and officers insurance. In at least one case, he said, a distressed company facing multiple class actions could not get D&O insurance at all.

In a recent interview with Lawyerly, VLRC chair Justice Philip Cummins disputed the idea that there had been an explosion in class actions in Australia.

IMF Bentham’s Kennedy said weakening the continuous disclosure rules would be a “retrograde step”.

“A better approach would be to improve directors’ understanding of their legal obligations, reducing the risk of misconduct in the first place,” he said. “In any event proposals to water down the impact of the continuous disclosure regime are well outside the terms of reference and, for that reason alone,  should not be pursued by the Commission.”

Continuous disclosure obligations serve as a check and balance, Shine’s Antzoulatos said.

“If we weaken those we could see more of the misconduct we’ve been seeing coming out of the Royal Commission,” she said.

The heart of the continuous disclosure obligations under the Corporations Act and ASX’s listing rules was that investors have a right to information on a company’s performance, Slater’s Hardwick said.

“It’s very surprising that there is consideration of modifying those laws, particularly given the findings of the Royal Commission,” he said.  “The community would be very concerned if there were any move to roll back continuous disclosure rules.”

Craig Arnott, managing director of global litigation funder Burford Capital, said weakening the law would be a “great mistake”.

“The evidence about AMP at the Hayne Royal commission demonstrates that rules for proper corporate governance are needed now more than ever, and shows the destruction of value in corporations when they are not followed,” Arnott said.

Establishing a regulatory regime for litigation funders

The ALRC proposed that litigation funders be subject to licensing requirements and regulation by the Australian Investments and Securities Commission. The VLRC said the Victorian Government should advocate for stronger, national regulation of funders.

“Burford welcomes [ALRC chair] Justice Derrington’s fair and considered report. We strongly agree with the recommendations that adequate capitalisation and transparency of funds should be important requirements in a licensing regime,” Arnott said.

IMF Betham’s Kennnedy said his ASX-listed firm, which is already subject to ASIC oversight, welcomed regulation, especially of overseas funders. The funder would be making “detailed submissions” to ALRC before its final report is due in December, he said.

“Overseas funders often hold very few assets in Australia and, for those who are private entities, their financial position is opaque.  They have arguably fuelled the rise of “competing” class actions, which the courts are addressing,” he said.

Slater’s Hardwick said a licensing regime “made sense”. His firm would only engage a funder if it had adequate capital behind it, he said.

Quinn’s Scattini said regulation for funders was “long overdue”.

Introducing a collective redress scheme

The ALRC proposed a federal collective redress scheme as an alternative to litigation, saying that in addition to a fine against a wrongdoing company a redress scheme, “would likely achieve greater access to justice and at a fraction of the cost of a class action”.

Egerton-Warburton said a redress scheme was potentially an efficient tool for companies to avoid the costs and diversion of litigation. For aggrieved shareholders, it means not losing a substantial percentage of any recovery to a third-party funder. 

“Collective redress schemes allow the corporate client to be proactive and to talk to a regulator early,” he said. “If structured properly a scheme could provide companies with an avenue to offer redress efficiently for errors and aggrieved persons can be compensated.”

Burford’s Arnott said the ALRC’s discussion paper “overemphasised” the role a redress scheme could have, and noted that the UK’s Consumer Rights Act, which allows a business to submit a voluntary redress scheme to the competition regulator, was a cautionary tale.

“There can certainly be a role for such schemes, but we don’t expect them to substitute for a ‘day in court’ and judicial scrutiny of claims,” Arnott said. “The UK experience shows that they are slow moving, lead to dissatisfaction and often end up in litigation anyway.”

A redress scheme was a perplexing proposal, Quinn’s Scattini said.

“That seems to be not a solution to anything,” he said. “I don’t understand how that would be a better. There is a need for justice to be seen to be done, not just done. If you make it like a speeding ticket, if it becomes a transaction costs for businesses, I don’t think that sends a good message at all.”

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Christine Caulfield

Christine Caulfield has been a journalist for 18 years. She was most recently the Co-Managing Editor at US legal news publication Law360. Prior to that she worked as the County Court reporter for The Herald Sun. She is Co-Founder and Editor of Lawyerly.