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Freeze on contingency fees in Senate crackdown led by James Paterson

Chris Merritt                 31 December 2020

Published in the Australian Newspaper

It’s almost possible to feel a twinge of sympathy for the titans of Melbourne’s class action industry. For one glorious year it must have looked as though all their Christmases had come at once. At the end of 2019, the Victorian government unveiled plans to lift the ban on American-style contingency fees. Untold riches beckoned.

But as 2020 drew to a close, James Paterson spoiled their party. Channelling the Grinch who stole Christmas, this Victorian senator has just smashed their dream of grabbing a percentage of everything they win for their class action clients. This time, the Grinch is the good guy.

Paterson leads federal parliament’s joint committee on corporations and financial services, which has just come up with a plan that would drive a stake through the heart of contingency fees.

Politically, this is quite an achievement. Paterson and his committee have gone to bat for consumers of legal services while simultaneously giving effect to the overwhelming consensus of the nation’s lawyers.

Outside Victoria, the peak organisations of the legal profession consider contingency fees an abomination. They undermine the ethical rules of the profession by enabling lawyers to give priority to their own financial welfare above that of their clients.

Paterson’s plan is outlined in his committee’s 454-page report on litigation funding and the regulation of class actions. It drew this response from the Law Council of Australia: “The Law Council fully supports the committee’s view that the potential benefits of permitting contingency fee arrangements do not outweigh the risks.”

When Victoria gave the green light to contingency fees, it put that policy into effect by making changes to the Supreme Court Act that mean contingency fees can be used in class actions that are run in that court.

Those changes, which came into effect in July, mean class action law firms have an incentive to lodge the most lucrative claims in Victoria’s Supreme Court instead of the Federal Court. This has the potential to disrupt the case loads of both courts.

Figures provided to Paterson’s committee by the Australian Securities & Investments Commission show that in May this year there was not one shareholder class action in the Supreme Court while the Federal Court had 23. The Supreme Court did have seven non-shareholder class actions, but the Federal Court had 90.

Paterson’s plan has two stages. Because most class actions against companies concern the Corporations Act or the ASIC Act, the federal government has an interest in preventing the inconsistency that would arise if claims lodged under federal law in the Victorian Supreme Court involved contingency fees while those lodged elsewhere did not.

This is the basis for the Paterson committee’s recommendation that the Federal Court should be given exclusive jurisdiction over class actions arising under the Corporations Act and the ASIC Act. Because the Victorian changes only relate to class actions lodged in the Supreme Court, those lodged in the Federal Court are unaffected.

In theory, it would still be possible for contingency fees to be charged in non-corporate class actions in the Supreme Court. But if the second stage of the plan is implemented, as it should be, that would become an unattractive proposition.

The committee has recommended that the federal government should review the feasibility of requiring lawyers who use contingency fees to hold an Australian Financial Services Licence and be subject to the managed investment scheme rules. That would mean an unprecedented level of intrusive federal regulation.

The logic, however, is impeccable. The committee has found that contingency fee lawyers offer the same service as litigation funders: financing class actions for a share of the proceeds. So if litigation funders are to be licensed and subjected to the MIS regime, so should contingency fee lawyers.

From a consumer protection perspective that makes sense. But for law firms it could mean accepting the possibility of ASIC investigations and subjecting themselves to the jurisdiction of the Australian Financial Complaints Authority.

ASIC also has a “product intervention power” that allows it to temporarily ban the products of litigation funders when satisfied they would result in consumer detriment.

The big class action law firms are run by clever people. But they must have forgotten the lessons from the era of crony capitalism in The Philippines under the late dictator, Ferdinand Marcos. While his reign lasted, favours from the presidential palace underpinned the business empires of friends and family. It came crashing down with the fall of their benefactor.

In Victoria, Premier Daniel Andrews is no Ferdinand Marcos. But one of the biggest potential winners from contingency fees is law firm Maurice Blackburn, a class action powerhouse. The firm might not consider itself a crony, but it certainly is a friend and financial backer of the Labor Party.

Its links to Labor are part of its DNA. The socialist who founded this firm, Maurice McCrae Blackburn, joined the Labor Party in 1908 and served in state and federal parliaments.

The current chief executive, Jacob Varghese, joined the firm in 2002 and spent a short time in Canberra working for a fellow Maurice Blackburn alumni, Nicola Roxon. By 2011, when Roxon became Julia Gillard’s attorney-general, Varghese was back at the firm working on class actions.

The contingency fee changes were introduced when the state attorney-general was Jill Hennessy, who had once been an adviser to former premier Steve Bracks. In June Bracks became joint administrator of the Victorian Labor Party. He is chairman of Maurice Blackburn.

The Paterson report deserves to be implemented.