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Client Update: Class action and litigation funding review – ALRC grapples with thorny issues

6 June 2018

In brief: As part of its current inquiry into class actions and litigation funders, the Australian Law Reform Commission has released a discussion paper that is a timely contribution to the long-running debate on the appropriate regulation of class action proceedings and litigation funding. In general, it supports the 'hands on' approach to case management increasingly being adopted in the Federal Court. We have now had more than 25 years' experience with class actions in Australia, so it is a good time for a thorough review, and the ALRC's discussion paper makes thoughtful suggestions on some thorny issues. Partner Ross Drinnan (view CV), Senior Associate Jerome Entwisle and Lawyer Harrison Cross report.

Report highlights

The discussion paper is the first output of the Australian Law Reform Commission's (the ALRC) inquiry into class action proceedings and third-party litigation funding that commenced on 11 December 2017.

The ALRC has put forward the following proposals:

  • a review of the legal and economic impact of continuous disclosure obligations;
  • the introduction of a 'litigation funding licence' with obligations modelled on those imposed on Australian Financial Services Licence (AFSL) holders by section 912A of the Corporations Act 2001 (Cth);
  • the development of specialist accreditation for solicitors in class action law and practices;
  • permitting solicitors to enter into contingency fee agreements in class action proceedings (subject to certain qualifications);
  • giving the Federal Court express statutory power to reject, vary or set the commission rate in third-party litigation funding agreements or contingency fee agreements;
  • developing a 'carriage motion' procedure to resolve competing class actions, whereby the Federal Court will permanently stay all but one of the competing claims after an initial hearing; and
  • consideration of the introduction of a federal collective redress scheme to provide for compensation to a group without the need for litigation.

Submissions in response to the discussion paper are requested by 30 July 2018. The final report is due to be published by 21 December 2018.

Consideration of root causes and solutions

One of the most interesting aspects of the paper is the ALRC's willingness to grapple with the 'root cause' of the increasing number of shareholder class actions and to consider whether there are more efficient means to resolve these claims outside the courtroom.

Recognising that some of the problems often identified with the class action regime are most evident in shareholder class actions, the very first recommendation advanced by the ALRC is that the Federal Government should commission a review of the legal and economic impact of continuous disclosure obligations, and the misleading or deceptive conduct provisions, on Australian listed entities. In particular, the ALRC has identified the counterproductive impact of shareholder claims on shareholder value in listed companies (with one group of shareholders effectively transferring capital to another) and the adverse impact of these claims on the availability and cost of directors and officers insurance.

These are real issues that our clients are increasingly raising and it is encouraging that the ALRC is fostering this important discussion, rather than focusing solely on procedural questions. Not surprisingly, this proposal has already met opposition from the plaintiff firms that promote shareholder class actions. We, however, strongly support a review of the type the ALRC is proposing.

On a similar note, the ALRC is proposing that there be consideration of an alternative 'federal collective redress' scheme whereby companies could seek to resolve group claims by means of a regulator-approved compensation scheme (not dissimilar to what now occurs under enforceable undertakings). No doubt the 'devil is in the detail' with regard to this proposal – including whether the collective redress scheme would provide any protection from later class actions – but it is a proposal worth considering in light of the impact of litigation funding and legal fees on the amounts paid by defendants, and the amount ultimately received by group members, in class actions proceedings.

Regulation of litigation funders

In response to concerns about the position of third-party litigation funders, the ALRC has proposed a funder licensing regime that would:

  • include general obligations similar to those imposed on AFSL holders under section 912A;
  • only be available to those who can adequately demonstrate financial and litigation skills; and
  • impose capital adequacy requirements.

Importantly, the ALRC is further recommending that litigation funders be subject to annual audits to ensure compliance with these licences.

This licensing proposal, which had previously been put forward by the Productivity Commission in 2014, would provide more effective regulation of what is currently a largely unregulated industry, and aligns that regulation (to some extent) with that of other financial service providers. We support this proposal as a means of protecting the position of defendants (in relation to adverse costs) and group members, by ensuring that litigation funders are 'of substance', do not inappropriately interfere in the conduct of the litigation, and are able to fulfil their obligations under funding agreements.

Commission rates and legal fees

Perhaps the reform that has been attracting the most attention since the release of the discussion paper is the ALRC's proposal that solicitors be permitted to charge on a contingency fee basis. The ALRC proposal is confined to class actions where no third-party litigation funder is involved, and the plaintiff firm must undertake to advance disbursements and provide an indemnity for adverse costs. As a result, these arrangements would likely be attractive to more established plaintiff firms that have sufficient resources to fund these costs, and only for proceedings where the exposure to significant (potentially unrecoverable) disbursements is limited.

In line with the approach already being adopted by the Federal Court, the ALRC has also proposed that the court have an express statutory power to reject, vary or set aside litigation funding agreements or contingency fee arrangements. The ALRC is still considering whether this power should be accompanied by a statutory cap on the amount of any resolution sum that can go towards legal fees and funding commission, with their current thinking being that a rebuttable presumption of 49.9 per cent may be appropriate.

Conflicts of interest

The ALRC has carefully considered the various conflicts of interest that arise in class actions, particularly as a result of the 'tripartite' arrangements that often exist between group members, solicitors and litigation funders. The main proposal to better manage these conflicts is to develop specialised accreditation for solicitors in class action law and practice, including ongoing education in identifying and managing actual or perceived conflicts of interest. The current proposal is that this accreditation would be available for both plaintiff and defendant solicitors.

The ALRC is also proposing additional disclosure requirements in relation to conflicts of interest, including that any conflicts be disclosed to group members as part of the first mail-out in the class action.

Competing class actions

To deal with the challenging issue of competing class actions, the ALRC is proposing a 'carriage motion' procedure whereby there is a limited amount of time to bring any competing claims, and then a hearing to determine which claim should proceed. This is, in effect, what the Federal Court has already done in the recent GetSwift decision (see our Client Update: Competing class actions – the court takes control ), although the ALRC proposal would adopt a more formal procedure that would be set out in the Federal Court Act 1976 (Cth) and relevant practice note.

The ALRC is also seeking specific feedback on a possible legislative amendment that would require all securities class actions to commence in the Federal Court (securities class actions being the vast majority of competing claims). This would arguably prevent any 'forum shopping' to avoid the proposed 'carriage motion'.

Next steps

We will continue to work with the ALRC on this inquiry and will be making a detailed submission in relation to the proposals put forward. We acknowledge that there is a spectrum of views on what changes, if any, should be made, but we believe it is important that all people and organisations possibly affected participate in the discussion.

 

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