Proposed reforms to class action regime revealed

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Last week, the President of the Australian Law Reform Commission (ALRC) identified a suite of measures under consideration with the potential to radically reform Australia's federal class action regime.

The measures include permitting lawyers to charge contingency fees in class action proceedings, establishing a licensing regime for litigation funders, and implementing a procedure to manage competing class actions.

In this update, we explore the measures that the ALRC is publicly considering.

Measures under consideration

In December 2017, the Federal Government announced an inquiry into class actions and litigation funding, to be conducted by the ALRC.

On 9 April 2018, the Federal Court and Monash University jointly hosted a seminar on potential reforms to litigation funding in respect of class actions, at which the President of the ALRC and Justice of the Federal Court, Sarah Derrington, was a keynote speaker. As part of her address, she identified a series of measures presently under consideration by the ALRC.

While preliminary, the measures provide an insight into the potential reforms that the ALRC may recommend in its final report, due in December 2018.

The major proposals that are being considered include:

  • changes to the management of competing class actions;
  • the introduction of contingency fees;
  • a licensing regime for litigation funders; and
  • an accreditation regime for class actions lawyers.

Management of competing class actions

Many insurers are familiar with the increased cost and delay caused by competing class actions against the same insured respondent in respect of the same (or similar) causes of action. To date, the court has sought to manage these issues on a case by case basis — for example, the decision of Justice Beach in the Bellamy's class actions, the decision by Justice Black in the Dick Smith class actions, and the recent orders of Justice Lee in the GetSwift class actions.

Justice Derrington suggested the introduction of a case management protocol to manage competing class actions at an early stage of the timetable. This may involve the following:

  • All class actions would be required to be commenced with open classes, rather than as closed class proceedings, which require a class member to enter into an agreement with a litigation funder.
  • At the first case management conference of a class action, the court would set down a deadline for any competing class actions to be filed.
  • If a competing class action is filed in this deadline window, the court would then hold a "consolidation hearing" at which the Judge would determine which class action should proceed and which should be stayed. This decision would be made by reference to the expertise of the class action lawyers, anticipated legal costs, and the funding/contingency fee arrangement on offer.

The introduction of contingency fees

In some jurisdictions (including the United States), law firms are able to charge a "contingency fee" - representing a contractually agreed percentage of any settlement or judgment if their client is successful. These fees are currently prohibited in Australia, which is one reason that third party litigation funding is so prevalent in class actions.

One of the ALRC's proposals under consideration is to allow contingency fees to be charged by class action lawyers.

If introduced, it is suggested that contingency fees could be subject to the following limitations:

  • leave of the court would be required in order to enter a contingency fee arrangement;
  • a litigation funder would not be able to be involved in the proceeding if contingency fees were being charged by the plaintiff law firm;
  • the lawyers would not be able to charge any professional costs (being their hourly rates normally charged) in addition to contingency fees;
  • the lawyers must advance disbursements in the proceeding; and
  • the lawyers must take on any adverse costs risk (in other words - the plaintiff cannot bear the risk of paying adverse costs to the defendant if they lose the case).

The initial proposal does not yet include a cap on the amount that would be able to be charged as a contingency fee. The ALRC commented that this could either take the form of a sliding scale percentage dependent upon the settlement or judgment amount (so that, a plaintiff firm would be entitled to less fees if the settlement sum is lower), or a set percentage irrespective of any amount recovered from a defendant.

Licensing regime for litigation funders

A further proposal was to require litigation funders to be licensed and overseen by a regulatory body. Justice Derrington described this proposed license as a "bespoke" version of the Australian Financial Services License that is currently required for financial institutions and advisors. This proposal is consistent with a similar recommendation made by the Productivity Commission's 2014 report into access to justice arrangements.

The license could require litigation funders to:

  • do all things necessary to ensure that their services are provided efficiently, honestly, and fairly;
  • communicate with class members clearly, honestly, and accurately;
  • have adequate arrangements in place to manage conflicts of interests between class action lawyers, class members, and funders;
  • have sufficient financial and technological resources to manage the funding of class actions proceedings;
  • implement compliant dispute resolution processes for dealing with disagreements between class action lawyers, class members, and funders; and
  • be audited annually.

A key issue that the ALRC has identified (but not yet made any suggested proposal regarding) is whether litigation funders should be subject to any capital requirements. This would require litigation funders to demonstrate that they have sufficient cash reserves to fund proceedings and meet any adverse costs orders that they have indemnified class members for. It is expected that the discussion paper will invite submissions specifically on this question.

Accreditation regime for class actions lawyers

The ALRC has made a preliminary proposal for the Law Council of Australia to implement an accreditation scheme for class action lawyers. This is so that class action lawyers remain aware of their various obligations when acting for a class, particularly managing conflicts of interest between lawyer, funder, and class member.

Other potential areas of reform

Justice Derrington identified a number of potential further reforms that would be considered by the ALRC during their review, including:

  • A statutory cap on the total fees incurred by class action lawyers and the commission that is charged by a litigation funder in a proceeding, so that the total return to group members is not lower than a certain percentage.
  • A limited form of depositions could be introduced in the Federal Court for the purpose of clarifying the relevance of discovery (which is often voluminous), and to narrow the issues in dispute between the parties to a class action proceeding.
  • The appointment by the court of an independent cost consultant to consider the reasonableness of a plaintiff firm's fees, rather than allowing the parties to appoint their own expert for this purpose.
  • Enshrining the right for litigation funders to apply for common fund orders, rather than relying on recent judicial decisions permitting such orders as a precedent.
  • Prohibiting a plaintiff firm with carriage of a class action from administering the distribution of a settlement or judgment of that proceeding, and appointing a third party to undertake that process instead.

Next steps for the ALRC

Justice Derrington indicated that the ALRC was expected to publish a discussion paper incorporating the initial proposals and questions for areas of reform by the end of May.

This would commence the formal consultation and submission stage of the inquiry, with the ALRC required by its terms of reference to deliver its report of finalised recommendations to the Attorney-General by 21 December 2018.

What will happen if the reforms are implemented by the ALRC?

If one or more of the above reforms are ultimately adopted by the ALRC, they will result in significant changes to the class actions industry.

First, any introduction on contingency fees could see the relationship between plaintiff firms and litigation funders change, as the commercial benefits of law firms financially supporting their own matters would radically improve.

Second, a timetable for managing competing class actions would be well received by corporate defendants, whose costs have been estimated at being 30% higher when more than one class action is on foot.

We await the publication of the ALRC discussion paper at the end of May and will provide a further update then.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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Julie Smith

Partner & Practice Group Leader