Class actions in Australia face arbitrary price cap

Class actions in Australia have received significant political, judicial and media attention of late. Most recently, this has come through a Parliamentary Joint Committee on Corporations and Financial Services inquiry; the licensing and regulation of third-party funders of Australian class actions; interim amendments and proposed permanent changes to continuous disclosure obligations; and proposals to impose a 30% cap on the amount group members are charged by law firms and funders in class actions.

Much of the impetus for these changes has been the supposed greater prevalence of class actions. But it is worth shifting the debate from rhetoric to real world data to test this premise. Below, I examine recent data on Australian class actions published in May 2021 by Professor Vince Morabito in the context of how Australian courts have been overseeing class actions.[1]  

What the data is showing, and obscuring

Professor Morabito’s study shows that there was an increase in class actions with 69 actions filed between 4 March 2020 and 3 March 2021, compared to 54 between 4 March 2019 to 3 March 2020 and 64 from 4 March 2018 to 3 March 2019.

So that shows a trend for increasing numbers of class actions, right? Not so fast…

It is clear that the spike is because of a rush to the courthouse in August 2020 to file actions before regulations came into effect requiring funders of a “litigation funding scheme”  entered into on or after 22 August 2020 to possess an Australian Financial Services License and register it as a Managed Investment Scheme. Eleven class actions were filed in the 48 hours leading up to the 22 August deadline. If there were no artificial regulatory impact on the timing of class actions, removing 11 from the figure makes the number very close to 2019/2020 and below that in 2018/2019.

The other factor that raises doubt even about the significance of the adjusted figure is the phenomenon of multiple (often duplicative) class actions being commenced against one defendant concerning the same underlying allegations. In such cases, Australian courts oversee a “carriage” process to ensure that the defendant(s) do not have to defend themselves against duplicative actions and claims. Carriage fights have inflated the number of class actions beyond what they really are after a “winner” is chosen.

One other development that requires scrutiny more than rushing to judgment is the filing of class actions in the Victorian Supreme Court which now represents a greater proportion of the class actions filed across Australia than they have in prior years. Legislative reforms in Victoria permitting law firms to charge contingency fees and permitting courts to make Group Cost Orders appear to have had the effect of an immediate uptick in the number of class actions filed in Victoria (22 actions were filed between 4 March 2020 and 3 March 2021 up from 7 the year before). Having said that, 42 of the 69 class actions commenced in the past year were filed in the Federal Court. So it remains to be seen whether the trend will continue. 

One thing is very clear: Contrary to the assertions from some quarters about an apparent proliferation of shareholder class actions, there has been a decline in shareholder class actions filed since 2017. In fact, shareholder class actions have halved over the past two years and preliminary data published recently by King, Wood & Mallesons[2] indicates that whilst there were 23 new shareholder class action filings three years ago, only seven of 60 cases in the last financial year were shareholder class actions. It seems that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry resulted in a spike in the filing of such class actions that has been receding in recent years.  

The data also shows that the number of funded class actions in Australia is declining. Professor Morabito’s data indicates that funded class actions have decreased from 75% of all class actions in 2017 to 46% in 2021. The data published by King, Wood & Mallesons is very similar, showing that 30% of new class actions filed in the past 10 months were financed by third-party funders, down from 70% in 2017/2018. This trend begs the question of why the Government’s focus and regulatory efforts have focused so much on the supposed proliferation of funding in Australia.

A wrong-headed proposal for price controls

As we see so regularly today, misconstrued data is often the basis for missteps in public policy—none more so than the extraordinary suggestions being made for price controls in this space. In June 2021, a one-month consultation period commenced for the Government’s proposal to impose a 30% cap on law firm and funders fees in class actions.

Like most forms of arbitrary price controls, the proposal of a cap is a wrong-headed way of trying to achieve the goals claimed, and indeed will have unintended adverse consequences for Australians. First, the 30% cap has no data or empirical backing to explain how it was arrived at and why it is appropriate—across different types of class actions—given the evolving risks associated with prosecuting class actions in Australia. Second, the economic impact of any such cap will be to place downward pressure on settlement offers made by defendants and make many class actions uneconomic to fund. Third, no evidence has been provided to suggest that Australian courts have had any issue exercising their current powers to scrutinize, review and approve proposed settlements in Australian class actions, including the fees claimed by law firms and funders, and make nuanced assessments on a case-by-case basis.

Ultimately, the proposal to set a cap at 30% and then potentially ratchet that percentage down via a “graduated approach” in purportedly less risky cases to “take into account the risk, complexity, length and likely damages award of settlement to flow from a case” invites the exact same arguments that will no doubt be made against this proposal for why any cap is inappropriate and fails to account for the risks specific to each case.[3] Furthermore, there is no basis for regulating from an assumption that the funding of class actions has become less risky in an environment where more class actions are now being prosecuted through trial and more costs and risks accompany the prosecution of class actions, including but not limited to the substantial additional costs and risks that flow from the Government’s new funder regulations and other proposed reforms.

It remains to be seen what consideration, if any, the Government will place on the many submissions that will be made on this proposal at the end of June by the various stakeholders involved in Australian class actions. One can only hope that they will, in particular, scrutinise the data about what is actually happening with shareholder class actions in Australia. Regardless of where one stands on the broader policy debate about the utility of class actions, the approach adopted last year of jamming through new regulations, that have been acknowledged as not being fit for purpose, prior to any submissions being made to the PJC should not be repeated.

[1] Vince Morabito, ‘Courts see record number of class actions as shareholder proceedings drop in significance’, Lawyerly (20 May 2021).

[2] Christine Caulfield, “Consumer class actions on the rise, as group proceedings hit financial year record”, Lawyerly, (25 May 2021).

[3] Australian Government, The Treasury, Attorney-General’s Department, “Guaranteeing a minimum return of class action proceeds to class members”, Consultation Paper, (June 2021).