Ensuring fairness in Australian class actions – appropriate returns to group members
- Andrew Saker
- Managing Director & CEO and Chief Strategy Officer - US - United States
Critical issues relating to Australian class actions and litigation funding are being debated in the context of the federal parliamentary inquiry currently underway. One of these issues relates to the level of returns that are received by group members in successful class actions.
Omni Bridgeway is actively participating in the inquiry as it provides an opportunity to improve the class action system for the benefit of all participants, particularly group members. One of the recommendations Omni Bridgeway has made is for the introduction of a minimum return to group members of 50 per cent of the damages or settlement sum in a successful class action.
Omni Bridgeway’s returns to group members from all of its funded class actions that have resolved since we listed on the ASX in 2001 is on average 62.3 per cent of successful recoveries. We have recovered more than $1.8 billion, from which we have returned approximately $1.1 billion to group members. The balance of the proceeds covered the legal fees and other costs to run the cases and approximately 24.5 per cent was paid to Omni Bridgeway as its funding fee.
We are proud of this track record. However, it is important to note that this percentage returned to group members is an average across all our successful class actions. In some cases, the returns to group members represented a higher proportion of the recovery and, in other cases, a lower proportion – due to the unpredictable nature of litigation and the range of recoveries and costs to bring each individual class action (explained in more detail below). Consequently, our proposal is for a minimum return to group members of 50 per cent.
Expensive and unpredictable
Some of those who oppose litigation funding say that the returns that funders earn in successful cases are too large and, consequently, the proportion returned to group members is too small. However, the returns to funders must be balanced against the significant risks taken by litigation funders.
Litigation is expensive and unpredictable. And class actions brought on behalf of hundreds, sometimes thousands, of group members against large corporates or government with deep pockets are complex and particularly costly to run. When an action is funded, the funder assumes the risks, manages the complexity and pays the bills.
If a class action is successful, then the funder is reimbursed its capital investment in the case - on legal fees and other costs - and is paid a commission or fee. The balance of the proceeds is then paid to the group members.
As litigation funding is usually provided on a non-recourse basis, this means that, if the case is lost, the funder loses the capital invested in the case – often amounting to tens of millions of dollars. In Australia, the losing party is required to pay the successful party’s costs, in addition to their own costs. Therefore, the funder also faces paying these ‘adverse costs’, representing up to an additional estimated 70 per cent of the total costs invested. The funder also has the cost of running its business.
When it agrees to fund a case, the funder does not know with any certainty the investment required (the legal fees and other costs to bring the case), if the case will be won or how much will be recovered. Most importantly, the financial risks assumed by a litigation funder cannot be examined with the benefit of hindsight, once the outcome of a case is known. Litigation funders are required to evaluate and assume these risks upfront, when there are material uncertainties in terms of the time it will take to resolve the matter, the total costs that will be incurred and, of course, the outcome.
Consequently, funders price their fees so that they can earn enough returns on successful cases to offset the losses on unsuccessful cases. The Federal Court of Australia has recognised this portfolio approach to managing risk.
In approving the settlement in the funded class action against Murray Goulburn, Justice Murphy said:
“Litigation is inherently risky, as is the funding of it. Even more so when the funded case is a large, complex, commercial class action in which it is difficult to accurately assess the liability and quantum risks at the stage when the funding commitment is made. One way a well-run litigation funder will address the inherent uncertainties in such a business is by having a portfolio of cases so as to spread the risk.” 
Returns to group members
The return to group members in a successful class action is only able to be calculated towards the end of a case. That is, once a judgment is given by the court or, more commonly, a settlement is being agreed between the parties and then considered by the court at a settlement approval hearing. (Notably, the court will only approve the settlement if it considers it to be fair and reasonable and in the interests of group members.) The amount returned to group members will be the amount of the recovery, less the legal and other costs to bring the action and, where the action is funded, the funder’s fee.
Cases may be less successful than anticipated at the outset of the litigation for a variety of reasons. For example, new evidence is sometimes uncovered, or an expert opinion is received, that changes the prospects of a case during the litigation. In those cases, although a successful recovery is achieved, it may be significantly lower than originally estimated. Unexpected events can also cause legal costs to be significantly higher than estimated, for example, due to unexpected interlocutory arguments during the litigation.
Consequently, in some funded class actions, the returns to group members have been less than 50 per cent of the proceeds after payment of the legal and other costs and the funder’s fee.
Experienced Federal Court judge considered a 50 per cent minimum return to group members
In the settlement approval decision in the class action against Sirtex Medical Limited, Justice Beach considered an assertion that had been made that “in every class action, group members should get at least 50% of the gross settlement sum”. He referred to a hypothetical situation in which a funder and external lawyers take on a very complex and high-risk case. Evidence emerges which results in the prospects of success deteriorating significantly. Nevertheless, the action settles for a “modest amount”. The costs and funding fee would have amounted to approximately 90 per cent of the settlement amount.
The judge queried whether the group members in this case should receive 50 per cent of the proceeds - leaving the funder out of pocket - when the costs and risk were taken on by the funder. Justice Beach said:
“…to so artificially allocate is economically distortive and unnecessarily disincentivises the reasonable investment of time and expense in investigating, funding and prosecuting class actions.”
Notwithstanding Justice Beach’s view, in considering appropriate reform measures to improve confidence and fairness in the Australian class action system, Omni Bridgeway has recommended the introduction of legislation for a minimum return to group members of no less than 50 per cent of the proceeds from a successful action.
Why 50 per cent?
It is important to ensure that a fair proportion of the proceeds in any successful class action is returned to the group members. Class actions are brought on their behalf, in order to compensate group members for losses they have suffered. And, while litigation funding is a commercial endeavour, providing access to justice is also at the core of what funders like Omni Bridgeway strive to do.
We believe that setting a minimum of 50 per cent return to group members will ensure that funders and claimant lawyers only back claims where the recoveries and costs appear likely to enable this metric to be met. It will also ensure that class actions are run for the benefit of the group members.
However, it is also important to ensure that if a minimum return is introduced, it does not have the consequence - unintended or otherwise - of pricing funders out of the market. The returns received by funders need to allow for fluctuations in a funder’s portfolio – some cases will be lost and others will achieve a lower recovery than anticipated.
Therefore, any minimum level of return needs to be set at a level that, in most cases, will allow sufficient proceeds left for funders to cover their costs and to receive a fee for the significant capital investment and risks taken. If not, funders will leave the market and many class actions will not be pursued – leaving group members with no means to access the legal system.
In his recent submission to the parliamentary inquiry, Mr Rod Gibson, the representative claimant in the funded class action against Murray Goulburn brought on behalf of 1,230 investor group members said:
“Without this case, and the many others like it, investors such as myself would have received no compensation for their losses, and would have very little recourse to efficiently and effectively pursue their rights in the context of corporate misconduct.”
In his evidence to the parliamentary inquiry, Mr Gibson also said:
“If the class action had not been launched, the investors would have lost everything. They would have had 100 per cent of nothing. That was the point. So …30, 40 or 50 per cent of something is better than 100 per cent of nothing.”
The class action system must deliver fair and equitable outcomes for all participants, particularly group members. Using Justice Beach’s words, any reform that “unnecessarily disincentivises the reasonable investment of time and expense in investigating, funding and prosecuting class actions” will not be in group members’ best interests.
At Omni Bridgeway, we believe that requiring a minimum of 50 per cent of the proceeds to be returned to group members strikes the right balance.
- 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.
- These statistics are based on 74 actions won, settled or lost. The balance were withdrawn.
- Omni Bridgeway’s fee is just slightly lower than the median percentage funding fee in funded federal class actions, and also in all funded class actions, that settled during a review period studied by Professor Vince Morabito of Monash University’s Monash Business School (see “Common Fund Orders, Funding Fees and Reimbursement Payments”, January 2019).
- In some circumstances, the lawyers are paid additional amounts out of the settlement monies and the settlement amount may have earned interest before distribution to group members.
- Endeavour River Pty Ltd v MG Responsible Entity Limited  FCA 1968 at . The claimants and group members were funded by Omni Bridgeway.
- Omni Bridgeway always aims to ensure a minimum of 50 per cent to group members. From time to time, it has reduced its fees to ensure a fair return to clients.
- Kuterba v Sirtex Medical Limited (No 3)  FCA 1374 at .
- A few law firms bring cases on a ‘no win, no fee basis’ and Victoria now permits contingency fees for class actions. However, these alternative funding options are not widely available (see our recent blog).
- Mr Rod Gibson, Submission to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into litigation funding and the regulation of the class action industry, June 2020.
- Parliamentary Joint Committee on Corporations and Financial Services, Litigation funding and the regulation of the class action industry, (Hansard), 3 August 2020, page 6.