Piece Of The Action

The Victorian Government wants to allow lawyers to take a bigger cut of the damages in class-action cases. But the profits in this low-risk sector are already high. By James Mathias.

What’s the difference between lawyers and real estate agents in Victoria? When the hammer comes down on a property auction, at least know what commission you’re paying the real estate agent. That won’t be the case for class action lawyers under proposed new laws of the Andrews Government.

Victoria’s Legislative Council will next week debate a Bill to allow law firms to charge US-style commissions for class actions, a practice that is currently banned throughout Australia. The history of this type of commission dates back to the “maintenance and champerty” prohibitions under the Statute of Westminster of 1275, which prohibited agreements to “intermeddle with litigation in which the intermeddler has no concern.” 

According to the Victorian Government, the best way to give greater access to justice in class actions is to allow big law firms to take a cut of the damages.

Far from providing greater access to justice, this Bill risks doing the opposite. It risks diminishing the percentage of the settlement paid to plaintiffs for such life-altering setbacks as the loss of a home or serious personal injury.

One of the biggest winners from this bill, if passed, will likely be Maurice Blackburn (the third largest donor to the ALP and affiliates last year). Maurice Blackburn has a 17.8 per cent share of the class action market in Australia, and its “receipts from customers” last financial year were almost $250 million. This Bill will almost certainly allow it to make more money from conducting class actions.

In its submission to the Victorian Law Reform Access to Justice report in 2017, Maurice Blackburn advocated being able to charge up to 35 per cent commission on class actions. Slater and Gordon advocated for an even larger cut of up to 40 per cent.

Talking on Nightlife, on ABC Radio, in January this year, Andrew Watson, head of class actions at Maurice Blackburn, went head-to-head with Stuart Clark AM, former President of the Law Council of Australia on the issue of being able to charge these commissions. When pressed by Clarke on the Black Saturday bushfire class action and whether Maurice Blackburn would have charged an additional percentage, Watson gave up the game.

Clarke: One question I would ask Andrew is if you had the right to run a contingency fee basis, would you have run the bushfire case on a contingency fee basis?
Watson: Yes. But I’d run it on the basis that the contingency fee basis was probably no different to what we took anyway. I mean, that’s the point.
Clarke: But what you have asked the Victorian Law Reform Commission is – you and Slater and Gordon have asked for the right to charge up to a 40% commission.
Watson: No we haven’t.
Clarke: Yes you have. It’s in the VLRC report…
Watson: What we have asked for is the right to charge an amount that’s set by the court as a fair amount…
Clarke: …and you’ve suggested up to 40%.
Watson: Well. I mean… what I…
Clarke: …it’s in your submission. You wrote it.

In practice, if Maurice Blackburn had been allowed to charge a 35 per cent commission this would have meant a total of $170 million went into the pockets of lawyers instead of into the hands of victims, many of who had lost everything in the fires.

Plaintiff firms already seem to be positioning themselves for the change. Maurice Blackburn has almost always filed banking and superannuation class actions in the Federal Court. However, the most recent class action lodged against NAB has curiously been filed in the Victorian Supreme Court.

Noting that the Victorian Parliament is about to debate a Bill allowing law firms to take a percentage of damages, Maurice Blackburn has on its website FAQs for the case that “in the event that the Supreme Court of Victoria has power to make a group costs order in relation to these proceedings, the Representative may at a future time apply to the Court for such an order”. In other words, if the Bill passes, they may very well apply for their cut.

To see where this legislation is heading you need look no further than the foreign litigation funders who already take on average 30 per cent of the proceeds recovered from Australian class actions.

Litigation funding works to underwrite the legal fees of plaintiffs and operates like private equity – earning returns on investments made. However, and bizarrely in a post-Hayne world, they operate without being subject to customary financial regulatory oversight. That’s because in 2010 the then minister for financial services, Labor’s Chris Bowen, exempted litigation funders from regulations that usually applies to financial services providers. Funded class actions boomed as a result.

“The profit margins and low risk are just too irresistible for these companies to pass up.”

The impact that funding has on class action participants is significant. Figures from the Australian Law Reform Commission show that cases run without a litigation funder result in a median rate of return to class members of 85 per cent. This figure decreases to just 51 per cent in cases where a litigation funder takes their cut. Members of class actions who are seeking to be compensated for being wronged are losing millions of dollars of their compensation paying the cut to these litigation funders.

The profit margins and low risk are just too irresistible for these companies to pass this up as an investment opportunity. IMF Bentham, one of the largest funders, has a success rate of almost nine out of 10 actions funded and has made a cumulative return on invested capital (ROIC) of 134 per cent. With almost the same success rate, Litigation Capital Management has made an ROIC of 135 per cent.

But these returns seem to be ticking up. In a recent action involving a forestry scheme of SEAS Sapfor, IMF Bentham disclosed a profit of $28.1 million on just $2.4 million paid in legal fees and disclosed ROIC of 1,370 per cent. Some of the larger cases in the last year disclose ROICs of between 300 per cent and 500 per cent. All this in an era of almost 0 per cent interest rates.

In an investor presentation last week IMF Bentham also revealed that it made 3.7 times more on Australian (non-US) cases compared to those backed in the United States, and that its deployed investments have increased from around $100 million in FY15 to around $650 million in HFY2020.

The standout of the presentation though is the revelation that if this bill passes, IMF Bentham is considering going head-to-head with the likes of Maurice Blackburn and Slater & Gordon for contingency fees by “establishing its own law firm, and seeking contingency fee returns”.

What is most troubling about this bill is that it is being promoted as something to enable greater access to justice for those that need it most. On this, one only needs to know that the number of class actions commenced has increased from one every three weeks in FY14 to more than one per week in FY19 – hardly numbers that reveal a great difficulty in obtaining access to class actions.

Allowing law firms to charge legal fees and to take a commission on the settlement could also allow for serious conflict-of-interest issues that may incentivise firms to settle actions quickly at the expense of the very people they are representing.

This bill, if passed, won’t give greater access to justice for those wronged. Rather, it would allow lawyers to gouge a higher percentage of the damages owed to the people they represent.