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The growth and growth of litigation funding and “open class” shareholder class actions
Last week’s Federal Court decision marks an important change to the process of litigation funding for class actions. It is significant because it will have the effect of increasing the proportion of open class actions and may well lead to class actions being commenced more quickly and an overall increase in damages amounts sought by class members.
The business case for litigation funding and the commencement of open, rather than closed, class shareholder class actions in Australia has been bolstered by the recent decision of the Full Court of the Federal Court in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited  FCAFC 148.
The Full Court determined that all members of the class in that class action suit were required to contribute to a common fund in favour of the litigation funder, irrespective of whether they each signed a funding agreement with that funder.
The Money Max action is being funded by litigation funder International Litigation Funding Partners Pte Ltd (the Funder). The applicant brought the class action on behalf of an “open class” comprising all persons who acquired an interest in QBE shares and who claim to have suffered loss as a result of QBE’s allegedly misleading and deceptive conduct.
As at the date of the hearing of the application, the applicant and approximately 1,290 class members (funded class members) had each entered into a litigation funding agreement with the Funder. The balance of class members had not (unfunded class members).
Last week, the applicant sought and obtained an order from the Full Court which had the effect of applying the terms of the Funder’s funding agreement to both funded class members and unfunded class members.
This has led to a significant change in class action procedure as:
- all class members will from now on be required to pay to the funder of a class action:
- the same pro rata share of the legal costs incurred by the funder; and
- the same funding commission from the common fund of any settlement or judgment awarded in the class members’ favour (common fund order); and
- the funding commission rate will no longer be imposed by the funder – it will now be determined by the Court at an appropriate time, which is likely to be the time of settlement approval or the distribution of damages (although the Federal Court was not proscriptive as to when this needed to occur).
QBE objected to the application, arguing that a common fund order:
- would lead to substantial and unjustified increases in the aggregate funding commission paid to the Funder;
- would leave class members with significantly lower proportions of any settlement or judgment moneys “in hand” and that this would be to the detriment of both funded and unfunded members;
- would create an unnecessary financial hurdle to the resolution of the substantive proceedings; and
- is not an order the Court had the power to make.
Advantages of a common fund order
The Court cited the potential advantages of a common fund order as being:
- the common fund order removes the contractual obligation for funded class members to pay a funding commission at the rate of 32.5% or 35% of the settlement of judgment amount. The common fund order contains the protection inherent in judicial oversight and approval of a potentially lower funding commission rate as the Court considers reasonable;
- the common fund order seeks to prevent the funder from becoming entitled to an excessive or disproportionate amount;
- the Court’s new approach contains a floor condition that no class action member can be worse off than he or she would be if the common fund order was not made;
- prior to class members being required to opt in or out of the class action, the Court’s new approach will ensure that class members will be informed of the funding commission rate. If class members are concerned with the obligation to pay the funding commission, they will be entitled to opt out of the proceeding and commence their own case;
- the Court’s new approach enhances access to justice by encouraging open class proceedings as a practical alternative to closed class proceedings which are particularly prevalent in funded shareholder class actions; and
- encouraging open class proceedings is more consistent with the opt-out procedure and may reduce the prospect of multiple, overlapping or competing actions.
Shift to open class shareholder class actions
Historically, litigation funders have been prepared to fund shareholder class actions where the class is closed or limited to those persons who enter into a litigation funding agreement. That is because, if funded proceedings were commenced on an open basis, then unfunded class members have been able to enjoy a “free ride” at the funder’s expense.
The Full Court’s decision will shift litigation funders’ attitudes in favour of commencing open class, rather than closed class, proceedings. This will likely have an effect on:
- the speed in which class actions are commenced because:
- there is no longer a need for funders to engage in the often lengthy process of signing class members up to a funding agreement prior to the commencement of a claim; and
- if the distinction between open and closed class actions falls away, funders will have greater competition amongst themselves to be the first to commence a class action in relation to a potential claim;
- the quantum of damages sought in the larger, open class, and will therefore increase the stakes arising for defendants in class actions.
The decision provides a framework for litigation funders to charge a reasonable percentage funding commission to the whole class, including to unfunded class members.