A recent survey commissioned by the Menzies Research Centre (MRC) has shown that 75 per cent of Australians believe that parties other than the claimants are the ones who benefit from class actions. Only 25 per cent said they believed that claimants benefited the most from class action settlements, with 29 per cent thinking that litigation funders benefit the most and 46 per cent stating that lawyers come out on top in class action matters.

Menzies Research Centre executive director David Hughes told The Daily Telegraph that the country’s class action regime should “deliver justice to people, not to funnel mega-profits to lawyers and litigation funders” and that capping payouts to BigLaw firms and litigation funders was a “no-brainer” for the government.

“Far too often, claimants are forced to wait years for class actions to settle or be resolved in court, only to watch lawyers and funders walk away with half the payout,” he said.

“This is an old-fashioned rip-off.”

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Firms and litigation funders criticised by courts

Several plaintiff law firms have faced criticism in recent court judgments, with judges warning against excessive legal fees that take a significant portion of settlements. Courts have also cautioned lawyers about inefficiencies that waste both judicial resources and complainants’ funds.

Following the approval of a $165 million West Australian stolen wages class action settlement in November last year, Shine Lawyers was criticised by Justice Bernard Murphy for the “enormous costs” during the action, particularly the “excessive” hourly rates charged for unqualified law clerks.

Earlier that same month, within a similar class action in the Northern Territory, Shine’s costs came to an estimated $25 million – a figure that Chief Justice Debra Mortimer called “eye-watering”.

Levitt Robinson has also been heavily criticised after it settled an $11 million class action and claimed the entire figure on legal costs. Justice Bernard Murphy of the Federal Court cut more than $1.3 million off that figure, taking away a further $1,141,078 for legal costs that were found to be avoidable.

In February last year, eight years after the Federal Court approved a $250 million settlement agreement, Maurice Blackburn asked the court to approve a total administrator’s cost of $15,882,822.74 for distributing a settlement reached between DePuy International and Johnson & Johnson Medical. Despite originally estimating that the administration costs would be $5.85 million, the firm asked for an additional $10 million – and despite the administrators “properly and reasonably carried out the work” related to the class action, Justice Michael Wigney said the new figure was “troubling”.

Parties on both sides of a 7-Eleven class action also came under fire last year, when lawyers and a contradictor spent six hearing days, 49 affidavits, and $2.54 million in arguing whether litigation funder Galactic should be paid more than $24 million out of the $98 million class action settlement.

“Putting to one side the impost on a busy court, in a case such as this, the approval application should not have been permitted to cost the group members $2.54 million,” the judgment said.

Litigation funders, law firms driving class actions

Particularly as the number of class action filings continues to grow and the landscape in Australia evolves, certain funding models work better for certain class action matters.

“The number of class actions in Australia has grown significantly in the past decade, particularly in the areas of consumer law and shareholder claims. While future growth in class actions in those areas is not guaranteed – particularly as corporate governance and disclosure improve, and regulatory and judicial scrutiny evolves – class actions are expected to remain a prominent feature of the Australian litigation landscape,” Clayton Utz litigation partner Vincent Giang said.

“Litigation funders and plaintiff law firms continue to be key drivers of class actions in Australia, and their role and funding structures are expected to continue evolving in response to market dynamics and public sentiment.”

According to the MRC survey, 74 per cent of the 1,600 Australians surveyed said that a no-win, no-fee model would be the most “appropriate” in terms of funding models for class actions. Forty-three per cent supported crowdfunding via campaigns, and 31 per cent were in favour of claimants’ self-funding actions where possible. Only 24 per cent said litigations funded class actions – where funders cover legal fees for a percentage of a final settlement – were appropriate in an Australian context.

However, while no-win, no-fee models have been used for numerous class actions in Australia, lawyers maintain that many class actions could not run without litigation funding.

“Shine Lawyers has been running no-win, no-fee class actions for more than a decade. However, the reality is that the costs of any litigation, let alone major litigation like class actions, are very high, and many class actions could not be run without litigation funding,” Shine Lawyers joint head of class actions Craig Allsopp said.

“In relation to a proposed cap, in any class action, a judge ultimately decides on what is a fair and reasonable to deduct from a settlement. Judges have the power to cap any amount deemed unreasonable or excessive or to refuse to allow them at all. Such power exists in the court to protect the interests of group members, and in my experience, courts take this duty very seriously and rigorously scrutinise all deductions. In particular, judges have the detailed knowledge of the specific circumstances of each class action needed to properly determine what deductions are fair and just.”

If all class actions were forced to be run on a “no-win, no-fee” basis, many wouldn’t exist at all, Slater & Gordon head of class actions and land rights Emma Pelka-Caven agreed.

“The only organisations that want to see fewer class actions are the big banks, insurers, and ASX companies that have rightly been forced to pay millions in compensation to affected Australians. As the firm that brought ‘no-win, no-fee’ litigation to Australia, Slater & Gordon is proud to be able to run some of our class actions on a ‘no-win, no-fee’ basis, but only a handful of firms have the ability to run this type of class action litigation,” she said.

“If all class actions had to be run that way, they would almost cease to exist, hurting working Australians while letting corporate Australia off the hook for their behaviour. Class actions serve a unique purpose in Australia – providing access to justice to thousands of Australians whose claims might otherwise never be brought.”

Contingency fee billing and getting the majority of class action settlements ‘back on the table’

In August last year, the Victorian Supreme Court awarded a group costs order to Slater & Gordon, where members in a class action against childcare centre operator G8 Education had the benefit of having litigation funding from Slater & Gordon at “one-third the rate” of a litigation funder. An Australia-first for the class actions landscape, this decision meant that 7.9 per cent of the $46.5 million settlement sum was used to pay expenses, to the 24 to 25 per cent commission that third-party litigation funders tend to make.

“If conservatives support free markets, smaller government, less burdensome regulation settings, and increased client recoveries, it’s axiomatic that they would support increased competition (in litigation funding) and contingency fee billing – both of which are proven to reduce legal costs and return more to clients,” a spokesperson from Maurice Blackburn said.

“However, if conservative think tanks are really only interested in stifling access to justice for Australians that have suffered from large-scale misconduct, then expect to see more corporate lobbying such as this being done by the likes of the MRC.”

While any cap on a percentage of a class action settlement that can go towards legal fees is “fairly arbitrary”, Herbert Smith Freehills global co-head of class actions Jason Betts said more no-win, no-fee arrangements could be filed if more jurisdictions made contingency fees available.

“I cannot see why many plaintiffs’ firms would pursue those if contingency fees are available, as they are in Victoria. It is highly unsatisfactory that the majority of shareholder class actions – almost all of them – are now filed in the Victorian Supreme Court because of the availability of contingency fees in that jurisdiction,” he said.

“The court is a perfectly fine jurisdiction for any class action, but it feels procedurally and doctrinally askew that a procedure designed to benefit a national and international group of claimants is essentially only brought in one Australian jurisdiction irrespective of the connections of the case to that place.

“In any class action that settles, the majority, and I say the overwhelming majority, of returns should go to shareholders as opposed to class action promoters. A guideline for a loose presumptive level of recovery, as opposed to a cap, may be of assistance. But a legislative cap could prove counter-productive and may have the perverse effect that fewer class actions settle.”

In terms of potential change moving forward, a parliamentary joint committee on corporations and financial services recommended in December 2020 that the federal government investigate legislative change that would promote procedural proportionality in class actions, which never gained any traction – but is something that could be interesting with a looming election, Allens partner Alex Tolliday explained.

“With a federal election on this horizon this year, it will be interesting to see if there are further calls to introduce some form of procedural proportionality standard, and whether the previously proposed minimum returns reform – that was poised to introduce a rebuttable presumption that returns to group members in class actions must account for at least 70 per cent of the proceeds of a claim – are back on the table,” he said.

“It is clear from the survey that there remain concerns regarding who stands to benefit from class actions, and we anticipate that the calls for reform may grow louder (and gain some momentum) over the year ahead.”