Allens' submission to ALRC Class Actions Inquiry - time to revisit the checks and balances

In brief

The Australian Law Reform Commission's Inquiry into Class Actions and Third Party Litigation Funders provides an important (and timely) opportunity to reflect on the operation of our class actions regime. We have made a detailed submission to the ALRC's Inquiry, in which we advocated for a renewed focus on balancing the interests of claimants and defendants and more robust processes for ensuring that the class actions regime is not compromised by unfettered commercialisation. Partners Jenny Campbell and Kate Austin report.

Background

In December 2017, against a background of increasing class action filings accompanied by growing entrepreneurialism, the Attorney-General asked the ALRC to consider whether further regulation of class actions and/or litigation funders was required.

The ALRC issued a Discussion Paper in June 2018 in which it sought to grapple with the nature and drivers of the class action regime, and proposed some significant reforms with a view to realigning the modern class actions regime with its original objectives. Some of the ALRC's more notable proposals for reform include:

• a review of the legal and economic impact of continuous disclosure obligations in light of the evolving shareholder class action landscape;
• the introduction of a licensing scheme for litigation funders;
• permitting solicitors to enter into contingency fee agreements in class action proceedings;
• giving the court power to choose a single claim to proceed when competing class actions are filed; and
• introducing a Federal collective redress scheme to provide for compensation to a group without the need for litigation.

The ALRC called for submissions in response to its proposals for reform by interested parties.

Our response to the ALRC's Inquiry

We have seen the nature of the class actions landscape fundamentally change over the course of the past 15 years. While we haven't seen the ‘proliferation’ of class actions many have feared, class action filings have steadily increased, and there can be no doubt that class actions practice has become increasingly entrepreneurial. Indeed, as we see it, the defining feature of today's class actions environment is plaintiff lawyer and funder entrepreneurialism. Put simply, more than ever before, class actions are seen as lucrative profit-making opportunities for plaintiff lawyers and third-party funders.

Against this background, the ALRC's Inquiry presents an important (and timely) opportunity to take a step back and assess whether reform is required to ensure that the class action regime continues to serve the purposes for which it was enacted – access to justice, finality for defendants and the efficient use of judicial resources. As the Chief Justice of the Federal Court has recognised, it is important that class actions continue to provide social utility and are run for the benefit of litigants – not funders and lawyers.¹ Importantly, litigants in this context means both plaintiffs and defendants.

Given our long history of representing class action defendants, we are particularly concerned to see that the interests of defendants are given due consideration in this process. In our experience, defendant interests are often overlooked in the quest for the more popular (and arguably easier) objective of access to justice. However, faithfulness to the objectives of the regime requires that the interests of both sides be given fair and balanced consideration.

With those themes in mind, we made the following submissions in response to the ALRC's key proposals:

• Continuous disclosure review: we welcome and support the ALRC's proposal that the Australian Government should commission a review of the legal and economic impact of the continuous disclosure obligations on listed companies in light of the evolving shareholder class action environment. Indeed, it is difficult to see how, after almost 20 years of shareholder class action experience, it could be suggested that these issues are not of sufficient importance to the conduct of business in this country to warrant an informed and balanced review of whether the continuous disclosure regime, and the private right of action arising from a possible breach, are serving the interests of shareholders and the broader business community.
• Regulation of litigation funders: we support the ALRC's recommendation that a bespoke licensing regime be introduced for the litigation funding industry. We support modelling that regime on the Australian Financial Services Licence scheme, supplemented by specific requirements as to capital adequacy and conflict management. Licensees should also be subject to a regular audit program to ensure that the regime is not a 'dead letter'. We also propose that litigation funders should be subject to a duty of good faith.
• Conflicts of interest: the conflicts that arise in the class actions context are significant and pervading, and pose the biggest challenge to the integrity of the class actions regime. The issue that looms largest for us in this respect is the fact that third-party funders are much more likely to be the 'repeat clients' of plaintiff law firms than are the group members they represent. In our observation, this has given rise to the prospect of the commercial interests of funders being preferred over the interests of group members – to the detriment of group members, defendants and the regime. Accordingly, we support the ALRC's attempts to address these issues but are concerned that its proposals do not go far enough to facilitate real change. In our opinion, this can only be achieved by the court taking an active and inquisitive role in supervising the management of the conflicts in the matters before it.
• Contingency fees: the ALRC's proposal to lift the ban on contingency fees in class actions would be a very significant development for the legal system as a whole. In our opinion, it is a step that should not be taken lightly given the potential for it to further exacerbate the conflicts of interest issues discussed above. This is particularly the case in circumstances in which there is no evidence (and, in our view, no reason to think) that doing so would improve access to justice. We recognise, however, that there is momentum in favour of permitting contingency fee arrangements for plaintiff lawyers in certain contexts. If contingency fee arrangements are to be allowed in class actions, then we agree with the ALRC that this must be in a controlled manner and subject to approval (and close supervision) by the court. It is also imperative that the 'loser pays' rule remains in place as a key disincentive to the bringing of purely speculative claims.
• Court's powers re fees and commissions: we support the ALRC's recommendation that the court be given the power to reject, vary or set the commission rate in third-party funding arrangements and, if they are permitted, contingency fees arrangements.
• Competing class actions: competing class actions have a number of undesirable consequences. In most cases, there is little justification for paying multiple sets of lawyers to run multiple claims when class members could be effectively represented in a single claim by a single legal team. Aside from the additional prosecution costs, competing class actions also significantly increase the defence cost burden, give rise to confusion (and in some cases significant stress) for group members, and impose an additional burden on the court. For those reasons, there is a pressing need for the court to take a proactive approach to managing competing class actions. Accordingly, we strongly support the ALRC's recommendations to implement a procedure that would (in the majority of circumstances) result in a single class action proceeding when competing class actions are filed.
• Costs referees: we support the ALRC's proposal in respect of the appointment of costs referees to assess the reasonableness of costs charged in a class action prior to settlement approval, but say that, to be effective, the costs referees should also perform that role throughout the matter.
• Confidentiality: there is no reason for the terms of class action settlements to be made public any more than is necessary for the purposes of the settlement approval process, which can be considered by the court on a case-by-case basis. As the court has acknowledged, class action litigation is private litigation between a defendant and group of individuals or entities. So long as the terms can be made available to the group members, there is no broader public interest served by the publication of settlement terms.
• Federal collective redress: we agree with the ALRC's observation that the time and expense associated with class action litigation warrants consideration of alternative means of collective redress that may achieve swifter and more effective outcomes for both claimants and potential defendants. It is, however, important that the potential defendants' interests be given appropriate consideration in the design of any such scheme. In particular, a scheme must provide certainty and finality for the potential defendant by addressing all potential claims on a 'once and for all' basis. Other key criteria for any such scheme include: that it be voluntary for the potential defendant; not require the potential defendant to make an admission of liability; allow communications with the regulator to remain confidential; and give rise to the potential for lower regulatory penalties in recognition of the potential defendant's willingness to voluntarily provide redress.

Our objective in making these submissions is to advocate for appropriate checks and balances to ensure that the regime continues to deliver those results and is not compromised by unfettered commercialisation. To be clear, we do not see commercialisation (or entrepreneurialism) as problematic per se. It is, however, only a means to an end, and should only be permitted to the extent that it facilitates, rather than undermines, the objectives of the class actions regime.

Next steps

The ALRC has its work cut out for it in sifting through and analysing the 50+ submissions it has received to date which, not surprisingly, express a broad range of strongly-held views in relation to the health of the current class action environment and the proposals for reform.

The ALRC is due to produce its final report by 21 December 2018. We will provide further comment on various issues under consideration over the coming months.