Omni Bridgeway calls for sophisticated debate on litigation funding fees

Omni Bridgeway calls for sophisticated debate on litigation funding fees

SYDNEY, 17 June 2020:  Omni Bridgeway Limited has used a submission to the federal parliamentary inquiry into litigation funding and class actions to recommend legislative changes to enhance the integrity of the class action system and to call for more sophisticated analysis of the returns to litigation funders.

In its detailed submission to the Parliamentary Joint Committee on Corporations and Financial Services inquiry, Omni Bridgeway said it supported the statement by Attorney-General Christian Porter that “nothing in this parliamentary process of scrutiny proposes an end to class actions or litigation funding” but that the company agreed with him there were opportunities to improve the system.

In line with its announcements to the ASX on 14 May and 22 May 2020, Omni Bridgeway has made six key recommendations in its submission:

• Support the Federal Government’s proposed licensing regime for litigation funders operating in Australia
• Support the Federal Government’s proposed application of the managed investment scheme regime to future funded class actions in Australia, with appropriate modifications
• Introduce legislation to require a minimum return to group members in a funded Australian class action of no less than 50 per cent of the gross proceeds from the action
• Introduce legislation to end the use of common fund orders and prevent the introduction of contingency fees for lawyers in Australia
• Introduce legislation to give the Federal Court exclusive jurisdiction over securities class actions and any other class actions involving Federal law
• Introduce from May 2020 a six-month moratorium on new Australian class actions that are associated with COVID-19-related disclosures

Omni Bridgeway has long supported additional regulation of litigation funding and believes this would increase transparency and confidence in the class action system.

However, the submission cautions that “increased regulation must be carefully designed to avoid jeopardising the availability of litigation funding for the people it protects – ordinary Australians seeking access to justice – and other unintended consequences, such as undermining the continuous disclosure regime and increasing the cost of capital for Australian listed companies”.

In particular, the submission cautions against applying the MIS regime to class actions retrospectively, warning this would create significant disruption and uncertainty for ongoing matters involving thousands of individual claimants. It says many of the concepts of an MIS do not apply well to funded class actions and any modifications would require careful consideration and consultation.

Omni Bridgeway has also called for more sophisticated assessment of litigation funding fees, saying they cannot be analysed “by cherry-picking cases, by ignoring the risks of losing assumed by the funder, or the costs of running the funding business, or by comparing funded cases with non-funded cases or other different types of investments”.

“Omni Bridgeway believes there needs to be a balanced discussion about the adequacy of returns to allow the litigation funding industry to exist and the considerable risks that litigation funders assume,” the submission says. “Too often, superficial commentary about litigation funders’ returns is based on isolated cases – in some cases, such as the oft-cited Huon Corporation matter, entirely inaccurately¹.

“More sophisticated analysis considers returns across a portfolio of cases and recognises that returns calculated for the risk of funding litigation are not comparable with the returns, for example, on a government bond, as the risks are not comparable. With litigation, the outcomes are binary. The case is either won (judgment or settlement) or lost.  The funder only gets paid if the case is won.  If the case is lost, the funder loses its investment and typically has to pay approximately 70 per cent of the costs of the other side. At the time of funding, the funder cannot know with certainty the quantum of these costs or if the case will be won.

“Most importantly, the financial risks assumed by litigation funders – running to tens of millions of dollars in many cases – cannot be examined with the benefit of hindsight once the outcome of a case is known.

“Litigation funders are required to evaluate and then assume these risks upfront, before the first court hearing, when there are material uncertainties in terms of the time it will take to resolve the matter, the legal and other costs of the case and, of course, the outcome.”

The submission notes that since listing on the ASX in 2001, Omni Bridgeway has been involved with 83 class actions, generating more than $1.6 billion in recoveries, of which approximately $1.0 billion – 62.1 per cent² – has been returned to claimants.

Of the balance of the recoveries, $217 million covered the legal and other ‘project costs’ of preparing and prosecuting the actions paid by Omni Bridgeway, and Omni Bridgeway earned a commission of approximately $395 million – or 24.5 per cent of the recoveries after covering legal and other project costs.

The submission also notes the many checks and balances that already exist in the legal system to regulate and, in some cases, moderate litigation funders’ commissions. Most importantly, all class actions settlements must be approved by the court, and the court will only grant approval if it considers the settlement to be fair and reasonable and in the best interests of group members.

“There are opportunities to improve these (checks and balances), which we support, but taken individually and together they already provide a significant degree of protection for claimants in class actions from unreasonable litigation funding fees,” the submission says. “As such, the accusation that litigation funders are unfettered price-setters is patently false.”

The submission is available here.

1. The Huon Corporation case was not a class action but a claim brought by two trustees against an insurance company. The Victorian Law Reform Commission subsequently noted that the “safeguards that exist in insolvency proceedings and class actions did not apply in this case”.

2. This statistic is based on 71 actions won, settled or lost. The balance was withdrawn. This statistic is based on the amount of project costs paid by Omni Bridgeway. In some circumstances the lawyers may have been paid additional amounts out of the settlement monies and the settlement amount may have earned interest before distribution to group members.