Record-breaking class action settlements are coming thick and fast in Australia at the moment, but behind the scenes tensions are mounting between the major players about who is getting what. Andrew Jennings reports.

In June, the Federal Court in Melbourne formally approved Australia’s biggest-ever settlement in a class action, a $200 million deal for Centro shareholders, bringing to an end more than four years of complex and expensive litigation.

The Centro settlement summoned all the heavy hitters on the Australian class action scene and provided an absorbing insight into the complexities of this multi-faceted brand of litigation.

To recap, two separate class actions were brought against the failed property developer and its former auditor by Maurice Blackburn and Slater & Gordon.

In the settlement, which was notable for the massive number of law firms and partners involved, Maurice Blackburn class action members received $150 million and Slaters’ members $50 million.

IMF Australia, the third party litigation funder (TPLF) that backed the Maurice Blackburn claim, took home a cool $60 million cut (40%) of that claim.

In addition to Maurice Blackburn and Slater & Gordon, Freehills, Middletons, King & Wood Mallesons and Lander & Rogers were all involved in the negotiations.

Not forgetting the curious tale of Melbourne-based Arnold Bloch Leibler partner Leon Zwier, who only became involved in the settlement negotiations on a pro bono basis very late in the day, yet ended up being the peacemaker that brought the feuding parties to a settlement.

The Centro saga presented more evidence, if it was needed, that there is often gold for law firms and TPLFs at the end of the class action litigation rainbow.

And where there’s gold to be hoarded, bickering and differences of opinion about how exactly it should be divided will surely follow.

Noble pursuits?

The Centro settlement, along with the $115 million NAB settlement earlier this month - paid to investors who lost money during the GFC after purchasing toxic financial products, has thrown fuel on the debate surrounding the apparent “noble pursuit” of class actions, casting a questioning eye on the bona fide motives of the numerous parties involved.

In August, Justice Ronald Sackville said the fundamental problem with litigation funding is that it provides a very large income stream for precisely the kind of litigation that does not need support.

“With the business model that IMF has, which is perfectly legitimate, they’re entitled to follow that, their actions and those of the lawyers who participate in the representative proceedings funded by [them], all that has little to do with access to justice,” said Sackville.

He added that the Government “justified the lack of regulation on funders because it improves access to justice, but access to justice is not really advanced when you have a business model that says ‘we will only provide assistance for those cases that are going to win’.”

IMF, which has lost just five out of 123 completed cases and charges commission that varies from 20 to 35 per cent, doesn’t seem to be losing too much sleep over such barbed comments.  

“We fund access to justice, that’s the model we have,” says John Walker, IMF executive director.

“We have all the continuous disclosure obligations that a market has, so people can look at us and decide whether they want to do business with us.

“We have the relevant disclosures for a financial services licence, we have a complaints mechanism; thankfully we’ve only had one [complaint] in excess of 2000 clients and that went to our relevant financial ombudsman and he found in our favour, so at least we’re keeping records. Regulation hasn’t been a problem yet but it only becomes a problem when you’re not looking after it.”

Regulation roulette

Earlier this year, the Federal Government made it clear it doesn’t intend to introduce detailed regulations for funders when it excluded litigation funding schemes from the definition of managed investment schemes (MIS) in the Corporations Act 2001.

Jason Betts, a partner and class action litigation specialist at Herbert Smith Freehills, says that this Government inaction means the litigation funding space remains “effectively unregulated”.

“It’s not properly regulated … there’s no direct regulation of third party funding,” says Betts.

“What this means, therefore, is that funding is regulated by the ordinary consumer protection provisions that apply to all kinds of commercial conduct. It’s wholly unspecific to the very unique issues that pertain to litigation funding, so really, it’s ineffective.”

Betts adds that for parties wishing to fund class action litigation in Australia, and have the capital to do so, there are no minimum standards of conduct, no threshold (transparent or otherwise), no capital requirements and no control regulations.

“So effectively, it’s unregulated,” he says.

Walker admits there should be regulations considered in respect to capital adequacy, but feels it’s a tad rich for defendant law firms to be carping on about what funders are doing in the class action market.

“Look, the Government doesn’t wish to regulate litigation funders,” says Walker. “It’s difficult for the interests of the ‘big end of town’ to look people in the eye and be critical of litigation funding activity. In a broad sense, it’s good for the market and market participants.

He adds that the IMF is either “criticised for wanting regulation or not wanting regulation”.

Walker doesn’t feel it’s very onerous for people who can afford to fund litigation to be regulated.

“We don’t see it [regulation] as a competition barrier, we see it as an appropriate, reasonably easy activity for people who want to stand in the market and offer funds to both retail and wholesale clients. We don’t see it as anti-competitive, in fact we see it as a stimulus for the long-term benefit of the market.” he adds.

Batts argues that there at least needs to be a minimum standard of conduct, stating that the main problem is a lack of transparency.

“How can we understand and monitor the conduct of litigation funders when there’s no obligation to maintain any sort of minimum standard of conduct vis-a-vis what information should be provided to group members and what level of control should be exercised by the funder over the litigation.”

He also says the question should be asked about whether there should there be limits on the size of the commission that can be charged by the funder.

“The thing I find peculiar about this debate is that these matters would be easy to address if the Government decided there was enough political will for creating a minimum standard licensing regime,’ says Batts.

“There isn’t an amazing stretch from the current status quo in order to change the situation, but I feel it’s a concern that regulation might stifle the growth of the funding industry; as a result, it seems the political decision is that there should be no regulation to allow it to grow.”

Fair share

With class action settlements regularly running into the many millions, it’s little wonder that, for those involved, seeking the largest piece of the pie becomes a ravenous enterprise.

Although eyebrows are repeatedly raised about the large portion funders receive, Walker says the IMF doesn’t need to justify its cut, the market does that.  

“If it wasn’t justifiable people wouldn’t buy,” he says. “For me, commentators outside the market, not involved in the supply or demand, can double guess the market and say that it should be cheaper.”

Walker points the finger at the civil justice system for keeping prices at a premium.

“If the participants in the civil justice system got together to decrease the costs, delays and risk associated with access to, and involvement in, the civil justice system, then that price would come down,” he says.

Forensic focus

One group that frequently gets called in during the early stage of a class action are forensic advisory firms, either to act as an independent accounting or consulting expert, to help either the plaintiff or defendant quantify the value of their claim.

John Rowell, head of McGrathNicol’s forensic practice in Australia, says the firm has worked alongside Allens, King & Wood Mallesons and Corrs Chamber Westgarth in class actions recently.

“We act for both sides,” says Rowell. “In the last three years we’ve worked six different class actions, including Centro, Timbercorp and Storm Financial, four were on the defendant side and two for the plaintiff.”

When working for the defendant, the firm forensically examines the financial claims being made by the plaintiff, checking every calculation and the supporting documentation for logical accuracy, while ensuring the methodology employed to calculate the loss and damage is appropriate.

“We worked the Amcor-Visy packaging class action last year,” says Rowell. “We were engaged by one of the defendants to advise on the value of the claim being made against it.

“The plaintiffs had quantified the many hundreds of millions it thought it had lost, so we were asked to cast an eye over that to determine whether we thought those values were appropriate.”

The $95 million payout in the Amcor-Visy packaging class action, settled in March 2011, was the biggest settlement for victims of a price-fixing cartel in Australian history.

Under pressure

The workload for lawyers involved in class actions can be extraordinary, bringing with it acute pressures.

Martin Hyde, class actions principal at Maurice Blackburn, is a man that thrives in such circumstances.

“Taking a big matter to trial, there’s always a certain amount of pressure,” he says.

“Our job is to put the pressure back over on the other mob. I think during the course of the Centro action we largely succeeded in doing that. We always have to be better prepared then everyone else and try to minimise the amount of times we get caught unawares.”

Hyde reveals that in the lead up to a big class action he could be answering anything up to 200 emails a day.

“Being in large scale, multi-party litigation has its own unique pressures,” he says, adding that working on the Centro trial was “actually fun”.

“It’s the reason we do what we do. I like whole thing: taking a matter to trial, being in court, seeing the way things unfold … I think it’s the reason lawyers do what they do, to get into the most sharp focus, looking at all the strength and weaknesses of your case, all the tactical issues,” says Hyde.  

Maurice Blackburn is currently acting in a series of other class actions for shareholders, victims of bushfires, floods, faulty products and price-fixing cartels.  

Class actions such as Centro and NAB have made front page headlines in recent months. So does the media scrutiny have any impact on lawyers working the litigation?

Hyde doesn’t think so, saying the media brings pressures to bare on defendants more so than plaintiffs, while Walker adds the IMF considers its clients’ interests to address the public interest.

“I think it’s just part of our day-to-day activities, putting spotlight on what we do,” he says.

Insurer insight

In any class action the client’s insurer holds plenty of weight with regard to the decision to settle or fight litigation.

“The relationship with the insurer is critical,” says Batts, who puts it in the top three relationships that need to be managed in a class action.

He says that where there are available insurance funds the insurer has various rights to have an input into decisions being made and collaborate with the defendant in relation to those decisions.

“Where insurance money becomes available, it’s in our clients’ interests to manage that relationship extremely pro-actively. This means the provision of timely information about the case and really opening up the strategy around major decisions so that the insurer has input,” says Batts.

Steady growth

Contrary to popular belief, there has not been an explosion in class actions in recent years, according to research by Professor Vince Morabito from Monash University's business law and taxation group.

He believes the problem of "interlocutory warfare" is worse than anticipated, stating that the increase in litigation funders has had a major impact on class actions.

Hyde says the rate of class actions is increasing, but increasing at a steady rate.

“I think people think there has been an explosion of class actions because several have gained media attention,” he says.

Walker adds that there’s an opinion that there was a “desirable increase”, but research shows that there hasn’t been.

“There has been an increase in the size rather then the number of class actions, mainly because of funding, which enables larger claims to be conducted. That’s probably the only trend”.

Despite this seemingly steady trend in class actions, Batts believes Australia is fast becoming a more litigious society.

“There has been a growth in litigation, which is evident by the growth in shareholder class actions,” he says.

“Australia has one of the highest levels of share ownership in the world. As a result, a lot of people, both individual and institutions, have entitlements, and are increasingly seeking to litigate to recover perceived losses.

“As a general proposition, we’re moving into a higher degree of litigation and the class action mechanism is a facilitator of that. It’s an avenue for greater levels of claims being brought.

“It’s a profitable mechanism for funders; therefore, as long as there are funders, we’ll have a steady growth of class action litigation.”