Appropriate returns to group members in Australian class actions

Class actions can run for many years and the legal and other costs required to finance an action are significant. In addition, litigation invariably involves uncertain outcomes. In Australia, as a ‘loser pays’ jurisdiction, there is also a risk of having to pay the other side’s costs, in addition to the party’s own costs, if a case is unsuccessful.

During the current federal parliamentary inquiry into Australia’s class action regime and the role of litigation funding, there has been a lot of discussion, particularly by pro-business groups, about litigation funding fees and the level of returns to group members in funded class actions. Clive and Jason discussed the issues.

Jason said that, at a negotiation, the recovery of fees and the funder’s commission is an important factor to a defendant as it affects the overall settlement amount.  He said, as a practitioner, he thought it was important to have a discussion, thirty years into the class actions regime in Australia, to make sure it is achieving the results that were hoped it would.

Clive agreed it was important to have a review. Litigation funding didn’t exist thirty years ago when the class action regime was introduced, so it was not taken into consideration.  However, it was important to have a review without cherry-picking cases and outcomes. Often, the fee earned by a funder at the end of a case is looked at with the benefit of hindsight and commentators don’t take into account what the case looked like from the start, at the time the funding fee was set and the risks of the case were assumed. All litigation is inherently risky. There is also a significant cost of running a funding business, – so any analysis needs to take into account metrics such as net profit and return on equity when determining if the fee was appropriate.

Jason agreed it is a complicated economic equation and he was not entirely comfortable that the courts, in an unregulated environment, are necessarily the best vehicle to assess the underlying economic considerations for determining the appropriate amount of a funding fee. He thought many would feel more comfortable if there were some regulatory guidelines to recovery – perhaps minimum recoveries for group members or caps on recoveries for funders or plaintiff law firms.

Clive disagreed with Jason and said he considered the court to be an appropriate body to assess the fees when assessing the fairness of a recovery, as the risks the funder takes on are intimately and solely concerned with the litigation itself. He said issues could arise if another expert other than the court, such as an economist, were to assess the fees. They might compare the returns in litigation against another industry where the dynamics and risk profile are completely different. For example, it is not possible to compare funded litigation with Treasury bonds or unfunded litigation which do not have the same risks.

Clive said Omni Bridgeway had come up with a proposal for group members to be guaranteed a minimum of 50 per cent of any recoveries. He said he thought that will go a long way to ensure funders and lawyers are careful when they start an action to make sure that the metrics of a case are sufficient for there to be a return of at least 50 per cent to group members and that the focus of the case is on the group members.

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