Under normal circumstances the ASX-listed company Omni Bridgeway might be hailed as an Australian success story: a homegrown company which pioneered a new product and expanded to become the biggest international player in its segment, with a market capitalisation of more than $1 billion, predicted earnings growth of over 60% and offices in half-a-dozen countries, including the tax haven of Guernsey.
But the success of Omni Bridgeway and others which have flocked to the business of litigation funding is no cause for celebration in Canberra, where litigation funding is to be the subject of a parliamentary inquiry to examine what Attorney-General Christian Porter has called “extraordinary profits” from a “booming” industry.
When it comes to these mega profits, it seems, Australia’s free marketeers aren’t happy.
The rap sheet includes that litigation funders have turned justice into another investment market, that they use investor money without being subject to Australian Securities and Investments Commission (ASIC) rules, and that the sector opportunistically looks for actions where it can get maximum return, thereby distorting the kind of class actions that take up precious court time.
The Australian Institute of Company Directors claims that shareholder class actions based on a company’s failure to disclose negative information when they are aware of it represents a risk to company directors and is having an impact on Australian business.
Yet what of Porter’s claims that litigation funders are, in effect, profiteering from class action settlements?
As we reported in our first Inq story this week, Porter framed the government’s move on litigation funders around a case which settled for $5 million with all funds going to lawyers and litigation funders, with nothing left for claimants. But Porter’s example is hardly representative. The case was not a class action and it settled in 2016 after dragging on for a decade.
A year-long study by the Australian Law Reform Commission which reported at the end of 2018 found class action claimants typically receive just on 50% of a settlement when the case is backed by a litigation funder. Applied to Porter’s example it would mean his “mums and dads” would have received $2.5 million rather than nothing at all.
The study found that the return to class action claimants varied from 29% on a $6.6 million settlement up to 69% on a $75 million settlement.
Discovering exactly how much litigation funders take is difficult because many settlements are confidential. On limited data the commission found litigation funders take an average of 30% of settlements.
In the contentious area of shareholder class actions, Omni Bridgeway (then IMF Bentham) funded an action against engineering firm UGL alleging the company breached continuous disclosure rules by failing to inform the ASX and shareholders of cost blowouts for a major gas project.
The case alleged that because of this, UGL’s shares were artificially inflated for several months and that those who bought shares in that time suffered a loss. When UGL finally disclosed its $170 million problem the share price immediately fell by 15%.
The case settled last year for $18 million divided as $6 million for court-approved legal costs, $4 million for the litigation funder and $8 million for shareholders.
While the government moves to restrict the activities of litigation funders, what alternative is there for the Davids who are taking on the Goliaths of the government or big business?
In a case which the defence department has now agreed to settle for $86 million involving contaminated land around Williamtown NSW, local residents turned to a litigation funder because, according to local federal MP Meryl Swanson, they could not go up against “the might of the Defence Force and the Australian government”.
“They needed help, they looked seriously for that help and they got that help. It has taken four long years, but just in the last few months, under a mediation, they have been able to negotiate a settlement,” Swanson told parliament. The lawyers and funders, Swanson said, spent “months, weeks and hours in the homes of our class action members. They worked absolutely tirelessly for my community and they continued to prosecute the case”.
The settlement, yet to be approved by a federal court judge, divides the funds as:
- $21.5 million to litigation funder Omni Bridgeway
- $9 million in legal costs
- $1.3 million in sundry expenses
- $54 million to class members, numbering around 500 claimants.
So what is the impact of the government’s moves on corporate accountability?
The banking royal commission revealed the failure of ASIC and other oversight bodies to detect corrupt behaviour by the banks.
Professor Brian Fitzpatrick of Vanderbilt Law School in the United States told Inq that class action lawsuits have “wrongly become the target of partisan attacks” not supported by the data and that they may be “susceptible to extinction”. A self-described political conservative who represented corporate clients in private practice, Fitzpatrick argues that “there is nothing conservative about getting rid of class actions”.
“Despite conservatives opposing class action in recent years, they should see such litigation not as a danger to the economy, but as a form of private enforcement of the law.” Fitzpatrick says the evidence is that “as companies gain more exposure to class action liability, their misconduct declines”.
The US Chamber Institute for Legal Reform which has worked to erode the role of litigation funders in Australia — as revealed in our first story — has failed to respond to Inq‘s request for comment.
The Australian Law Reform Commission’s comprehensive 2018 report recommended a series of measures to address the ills of litigation funding including to protect plaintiffs and group members when it comes to fees.
The government is now set to repeat the exercise — in a short time and via a political lens — with a parliamentary inquiry due to report in November this year.