The Case For Scrutiny

The Federal Opposition is resisting parliamentary scrutiny of the ‘stratospheric’ profits being made by companies funding class actions. By Christian Porter.

Speech to the House of Representatives, 13 May 2020, by Attorney-General Christian Porter   

Many times Opposition members have spoken about the importance of parliamentary scrutiny, and we're about to find out how real that commitment to parliamentary scrutiny is.

The subject of the scrutiny with respect to this motion is the class-action litigation funding industry. This isn't a matter of marginal importance or slightly unusual or unorthodox practices going on that can be simply explained. The things that are happening in the class-action industry with respect to litigation funding are remarkable, and require a high degree of scrutiny by this parliament.

First and foremost amongst those things that require scrutiny are the absolutely jaw-dropping financial returns that are routinely being reported in the class-action industry fuelled by litigation funding. Those returns are inexplicable in terms of normal returns on any sort of regularised or institutional investment, and they are totally without any precedent in the Australian legal sector. It's the case right now that this industry is demonstrating outcomes that cannot be said to be consistent with the interest of justice of the litigants whose interests are supposed to be represented by the actions in question. In fact, so remarkable are the happenings in the class-action industry fuelled by litigation funding that it is unfathomable, I think, that any person who professes a commitment to parliamentary scrutiny could vote against holding a multiparty parliamentary inquiry into it.

The central argument of the shadow Attorney-General appears to be that the parliamentary inquiry by the joint standing committee would be an attack on people seeking to access justice. Leaving aside that that is not, nor would it ever be, the purpose of seeking further and better understanding through parliament of the remarkable occurrences in this industry, we simply want the committee to consider whether the outcomes that we are routinely seeing in the class-action litigation funding fuelled industry are in the interests of the people that are meant to be represented. Are the operation of the class-action industry and its outcomes consistent with principles of justice, and are they in the best interests of individual litigants? They are the questions that we are seeking to answer by virtue of this parliamentary committee.

There are three broad issues that require scrutiny here. The first is that the class-action industry is growing at an utterly remarkable and unprecedented rate. Federal Court data shows that the class action industry filings have increased by 325 per cent in the past decade. Other reports have indicated that class actions have tripled in the past seven years across Australia. Why is this happening, and why at such a rapid rate? What are the policy settings and changes might be contributing to this growth? And what is the link between that growth and litigation funding?

Secondly, is Australia's class action framework actually working for everyday Australians? Is it operating in the best interests of the plaintiffs, whose interests it is supposed to advance? On this question, it's critical to note that much of the growth appears to have been driven by the prevalence of litigation funders in the class-action industry. They now financially underwrite a massive amount of class actions in Australia. They essentially operate as equity investment vehicles where the majority of class action is fuelled.

Between 2008 and 2012, 40 per cent of finalised Federal Court class actions received third-party funding. Between 2017 and 2018, 77 per cent of class actions finalised in the Federal Court were backed by litigation funding. The previous Labor government’s decision to exempt all litigation funders from any form of meaningful regulatory oversight in 2013 appears to have coincided with that rapid increase.

In 2009 the Federal Court determined that litigation funders were in fact offering a managed investment scheme. As a consequence, such schemes would have attracted sensible regulatory oversight under Australia's Corporations Law, but for that 2013 exemption. So it seems legitimate to inquire into the link between that exemption as a policy document and the growth in litigation funding in the class action industry. To deny parliament the opportunity to better understand that link would not be in the best interests of the parliamentary scrutiny to which the Opposition says it so dearly and closely adheres.

Thirdly, litigation funders are earning eye-wateringly high returns. This raises the question: are these staggering returns for litigation funders coming at the expense of plaintiffs? There is just more and more undeniable evidence of the profits that are being returned to litigation funders that requires parliamentary scrutiny. It actually means that less money ends up with the mums and the dads and the ordinary Australians who might be plaintiffs in a class action. We cannot deny this parliament, through its committee, the opportunity to inquire into that remarkable feature of litigation funding in the class-action industry.

The Australian Law Reform Commission found that the median return to members of litigation-funding backed class actions was 51 per cent. When the litigation funders weren't involved, the median return was 85 per cent. So litigation funders get involved and the median return is much lower, and the people who are actually the plaintiffs in these matters are worse off. There is a growing body of evidence that litigation-funded class-actions is, effectively, transferring enormous amounts of money from the pockets of everyday Australians and providing huge returns to litigation funders. Why would we not inquire into that phenomenon?

In fact, just look at what the courts have said. Completely independent assessments by our completely independent Australian courts have been increasingly critical of these returns to litigation funders. A settlement was reached last year in the case of Tredrea v KPMG Financial Advisory Services. It concerned advice KPMG gave to shareholders during a takeover. It was brought by Piper Alderman and funded by Litigation Capital Management in the NSW Supreme Court. The judge questioned the legal bill and fee. He said the funder's 30 per cent cut was stratospheric, and provided a return of tens of thousands of per cent when compared to the funds that were actually expended in the case.

“The entire $5 million settlement went to lawyers, administrators and the litigation funders”

There are now just too many cases where the returns to plaintiffs would leave ordinary Australians scratching their heads. Why would we not scrutinise this? In the Murray Goulburn case, the class action was brought by Slater and Gordon in the Federal Court against Murray Goulburn regarding financial forecasts. The judge said the funder's 32 per cent commission was “not fair and reasonable”. The court eventually approved a 25 per cent commission. That 25 per cent commission netted a 390 per cent return to the litigation funders, which was explained in their own half-yearly results. So that was a decreased return that still provided a 390 per cent return on the invested capital. In the CIMIC case, approved in April last year, a foreign funder and Maurice Blackburn took approximately 60 per cent of the settlement, leaving their clients to fight over the remainder. Unbelievably, the funder in that case originally proposed a commission payment of double what they actually got.

In 2014, in Fitzgerald v CLBL Insurance, 300 former employees of Huon Corporation sued for unpaid workers' entitlements. They received absolutely nothing from the final settlement. The entire $5 million settlement went to lawyers, administrators and the litigation funders. So bad was the injustice in that case, it prompted the National Union of Workers to make a submission to the Victorian inquiry into litigation funding. The National Union of Workers said in their submission: “It is clear to us that some form of market regulation needs to occur to prevent this result from occurring again.”

Why would we not have these questions asked and answered by a parliamentary committee? What possible reason could there be for not asking and answering those questions?

There's a matter recently where a settlement has been proposed around PFAS and Defence bases in Australia, a settlement which many members of this government have worked very hard to ensure occurs. The proposal is to take more than $50 million in commissions, and the lawyers propose to recap $30 million in fees. So an astonishing 40 per cent of the settlement would be swallowed up in legal fees and commissions, leaving the class members to fight over what is left. One class member in that proposed PFAS settlement said, “We're looking at a pittance. But the funder has made a fortune.”

So what possible reason could there be for opposing this type of scrutiny? In the shadow Attorney-General's press release, he says:

“Litigation funding and class actions provide a vital path to justice for ordinary Australians.” He then goes on in the next paragraph to say: “Just last November the Federal Court ruled in favour of the three lead applicants in a class action of more than 1,350 women who sued Johnson & Johnson for negligence.”

That's correct. The only problem is: it wasn't a litigation-funded matter. Now, that does seem to be something of a weak argument as to why you wouldn't have parliamentary scrutiny into litigation funders.

This has to be looked into. One foreign funder is reported to have raised $100 million recently, with a substantial portion of that capital earmarked to be deployed inside our class-action system in Australia against vulnerable Australian businesses arising out of the COVID-19 pandemic. Can you believe that?

Another litigation funder has recently pointed out to shareholders that, during a previous pandemic, the SARS outbreak in 2003, its share price actually grew by 164 per cent.

So we have a massive amount of evidence of excessive returns because of litigation funders' explosive growth in funding class actions. We see the warning signs of that equity investment vehicle being used here to drive litigation arising out of the COVID-19 pandemic. We've got a Government that simply wants a parliamentary committee to ask questions on this issue, and we have an Opposition that opposes that motion for parliamentary committee scrutiny.