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Parliament must protect class action customers

Chris Merritt                 11 March 2021

Published in the Australian Newspaper

In the best of all possible worlds, Friday’s public hearing on the government’s overhaul of litigation funding would address one question: will this scheme ensure a better deal for clients who participate in class actions?

Consumer protection should be above the usual ideological fray.

So if cool heads prevail, this hearing will serve a useful purpose by identifying any parts of the government’s plan that could be changed to ensure that goal is achieved.

But there should be no deviating from the main goal: federal parliament has a responsibility to ensure consumers of legal services are not treated like milch cows by their lawyers and litigation funders.

In too many cases that is exactly what is happening.

Friday’s hearing is being conducted by the parliamentary joint committee on corporations and financial services and will hear from the main players in the class action industry, lawyers, litigation funders, peak business groups as well as your humble columnist.

So what can we expect from this exercise?

In the past, class action law firms and litigation funders have successfully portrayed themselves as the champions of access to justice who were standing up for consumers against the rap­acious tendencies of government and business.

The same tactic is in play this time. The phrase “access to justice” appears six times in the 28-page submission by law firm Maurice Blackburn, seven times in the eight-page submission by Shine Lawyers and twice in the two-page submission by Phi Finney McDonald.

Access to justice is a wonderful thing. But how much justice is there in having half of class action settlements taken by lawyers and litigation funders before they reach the clients?

At the moment, clients are forced to accept whatever is left after their lawyers, funder and other service providers have taken their cut.

A recent study by the Australian Law Reform Commission found that the median return to clients from Federal Court class actions in which litigation funders were involved was just 51 per cent of the settlement.

When funders were not involved, the median return to ­clients was 85 per cent.

The government’s plan is outlined in the Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill, which has triggered an impassioned debate.

Nobody should be surprised that funders and plaintiff law firms object to its core provision. This scheme would introduce a presumption – rebuttable in court – that clients will receive 70 per cent of settlements in which funders are involved.

This would shift some of the risk in class actions away from ­clients while providing a strong incentive for funders and lawyers to control their costs.

Under the government’s plan, those who provide services during class actions would generally be at risk if their combined costs exceeded what is left after clients received their 70 per cent.

The presumption that service providers will be limited to 30 per cent of settlements can be challenged in court, but the discretion of judges to alter that formula will itself be limited.

And it will require them to consider the funder’s profit compared to the actual costs incurred.

At the moment, clients in class actions have little capacity to control the costs of their lawyers and other service providers and this has given rise to a series of settlements in which the interests of consumers have come last.

The worst example was the 2015 settlement in a class action that had been run on behalf of 336 former employees of Huon Corporation against CBL Insurance. The details are outlined in the submission of the Australian Industry Group.

In a remarkable move, AiG – a peak business group – has reproduced an extensive extract from the submission of the National Union of Workers to an inquiry run by the Victorian Law Reform Commission.

The union told that inquiry the original settlement for its displaced members was $5.1m. But once the funder and law firms took their cut, the former employees were left with nothing.

Here’s where the money went: litigation funder LCM received $1.8m, law firm Piper Alderman received $1.8m, barristers received $885,000, law firm Holding Redlich received $235,000, accountants Grant Thornton received $211,000, liquidator PPB received $50,000 while others ­received $86,000.

According to the union: “It is clear to us that some form of market regulation needs to occur to prevent this result from occurring again.”

The main argument against the proposed 70-30 split is that it would be too inflexible and takes no account of the fact that judges already oversee class action settlements to ensure they are fair. That needs to be seen in context.

One of the most significant ­aspects of the government’s Bill would require funders to pay for independent fee assessors and “contradictors” to report to the court on the reasonableness and fairness of the distribution of ­settlements.

This should address a problem identified by solicitor Stuart Clark, a former president of the Law Council. He has told the inquiry that judges making these decisions do not have the training, experience or, in most cases, sufficient information to properly assess the return to funders let alone the fairness of that return.

It should be kept in mind that during the recent scandal over the Banksia Securities class action it was only after a contradictor was appointed that the Victorian Supreme Court found that barristers Norman O’Bryan and Michael Symonds, solicitor Anthony Zita and litigation funder Australian Funding Partners had engaged in “egregious conduct in connection with a fraudulent scheme”. They have been ordered to pay $11.7m to about 16,000 class ­action ­clients as well as $10m in costs.