Conference Issue 2018


Class actions exposed

Securities class actions predominantly settle because defendants are likely to lose if the cases proceed to judgement, executive director of litigation funder IMF Bentham Hugh McLernon told the AILA conference.

He said defendants and insurers suggested they wanted to settle to put litigation behind them, "get on with business", and avoid reputation loss but "that's not the real reason".

If a funder was going to risk $20 million-$30 million, "you don't pick cases with any serious problems".

He said the argument there was no point taking class actions because all the money went to lawyers and funders "started about three years ago when a US entity followed the US tradition that it's better to have a war in someone else's territory and tried to stop litigation funding for class actions" in Australia.

IMF Bentham had its figures audited to show 62% of all funds went to clients in class actions; 26% to the funder and 12% to professional service providers, including lawyers and experts.
He suggested 62% for a "virtually risk free" action was good for clients. The only risk was funder failure.

"That's why IMF supports regulation, because funders make long-term promises to pay in a few years' time. Clients are liable if a third party funder doesn't pay.

"We wanted ASIC to regulate us and had a licence for three years, but the High Court disagreed and said we didn't need one."

Mr McLernon said insurers were heavily involved in class actions, sometimes as defendants (or defendants' insurers) and in others as members of securities class actions. They were sometimes adverse costs insurers and increasingly, through subrogation rights, parties to class actions, although not in their own names.

While there was "an apparent increase" in securities class actions in Australia, IMF Bentham had funded a range of other types, including the Queensland floods, bank fees, cladding, franchisees, bushfires, air cargo cartels, and the New Zealand earthquakes, but those were rarer events that "hardly ever happen".

Mr McLernon said shareholder class actions were common because more people were adversely affected and all listed companies were required to comply with continuous disclosure obligations and avoid misleading and deceptive conduct.

"Listed companies have the unusual ability to impact on a large number of people with a single act. There is a sea of potential investors in those companies who depend on information a company has provided to determine if they will or won't invest."

Consequently those corporations were in prime positions for class actions.

Although Part IVA of the Federal Court Act that enabled representative proceedings was introduced in 1992, the Aristocrat action in 2003 was the only "serious shareholder class action in the decade" that followed.

Mr McLernon anticipated shareholder class actions would continue "for a period and level out but then drop away as more companies realise how easy it is to avoid them". "It's simple, but it's counter intuitive. If a corporation comes across a price of information that, if it nurtures and encourages it, will make a profit in the future, they don't want to tell the world, although the law may require it."

Until disclosure laws were introduced, the only remedy was for individuals to take their own action, pay for it and suffering the consequences if their claim was unsuccessful. That would have "clogged the courts", led to the possibility of different decisions in different courts, and put enormous pressure on defendants facing a sea of individual claims. That was the major reason no individual claims occurred against listed companies for continuous disclosure breaches, Mr McLernon said.

A group action was possible, with joined plaintiffs, which was used in the WA ‘finance broking scandal', where nearly 2,000 individuals took action against various parties. But it would have been "an almighty mess in the court system" had it not settled, he said.

‘In 2003, we began preparation for Aristocrat as a group action, but walked away from it until six months or so later when it went forward as a class action. After that experience, we were not super keen to go on with securities class actions. We don't look for them specifically," Mr McLernon said.

Until the concept of open classes arose, third party funders needed contractual funding agreements with each class action member. Funders tried to access share registers but couldn't. Mr McLernon said IMF Bentham unsuccessfully went to the High Court because it wanted to fund everyone in a particular action, but couldn't, so it was a closed class action, ie only some of the class was included. One problem with closed class actions was "the free riders came in at the end and didn't have to pay funding commission, just an equalisation amount".

[In October 2016 the Full Federal Court's decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd [2016] FCAFC 148 addressed the tension between class members who agreed to pay a commission and those who received a portion of damages without contributing to litigation funders' fees. Closed class actions require litigants to 'opt in' to the proceedings and agree to a funding agreement with the financier before the litigation starts. Open class actions are brought on behalf of everyone affected without requiring them to 'opt in'.]

Mr McLernon said not all securities class actions settled. "We have paid $20 million each in two class actions we have lost."

However, "things have changed". "Funders have evolved to stay in the game.

"Now, with the concept of an open class, funders and lawyers get together and agree, then find a single representative and issue proceedings for the whole of the class. Plaintiffs are joined even if they're unaware; there's no act of will to join.

"But there has been a drive to the bottom, each funder or law firm wants to be in first. That cannot be good and there will be blood," Mr McLernon said.

"That's given rise to multiple open classes, with four or five lawyer-funder representative groups advising the court of the basis on which they will proceed. It's a Dutch auction and will result in some ill-prepared cases going forward because they are the lowest bid."

Mr McLernon said funding class actions was "all very difficult". "Litigation funding has always throw up problems and more will come as we move on."

Paul Evans, a WA partner with Quinn Emmanuel Urquart & Sullivan, told the conference class actions were almost unknown in WA because there was no regime.

Litigation funding pre-dated class actions. "The risk factor dictates the proximate reward, so it's not surprising litigation funders don't have a flat fee or a mark up [but operate] on a percentage basis because of the uncertainty.

"Litigation funders appraise the possibility of success; every litigant should do that."

Mr Evans said funders took a clinical approach to risk-reward analysis and played an important role in the justice system.

However, he agreed the multiplicity of claims against the same defendants was a problem. More "speculative" money was coming into third-party funding, so competition was "driving the market down".

He called for funder regulation and hoped that would be included in the forthcoming Australian Law Reform Commission (ALRC) report.

"Regulation shouldn't preclude market entry by competent litigation funders who work with competent lawyers to get the best outcomes for claimants."

In an earlier presentation at the AILA conference, ALRC president Justice Sarah Derrington outlined the questions ALRC's forthcoming report aimed to answer. She gave a similar presentation to the Qld Insurance Law Intensive, which will feature in the December 2018 issue of Resolve.

She said there was no evidence of a class action "explosion", with actions increasing steadily not exponentially. Since Part IVA's 1992 introduction there was an average of 17 a year; 32 were filed in the Federal Court in 2017-18; and 92 actions were currently "on foot".

The review would address the D&O insurance market, which many suggested was seriously underpriced. It would consider why so many actions settled at insurance limits; jurisdictional wars and multiple class actions; whether funders should be regulated; conflicts between funders and law firms; and how interventionist courts should be.

She said commission rates had dropped with courts becoming more interventionist, but ALRC would not recommend hard caps.

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Resolve is the official publication of the Australian Insurance Law Association and
the New Zealand Insurance Law Association.