A Law Commission review into class actions has exposed the battle between supporters of third party litigation funding, and the corporates (and their insurance companies) which would really prefer it if class actions just went away. The risk is the big end of town may win.
This month the Law Commission, having digested more than 50 submissions, will release its latest thoughts as part of an ongoing review into class actions and litigation funding. It sounds a dry topic, but it’s important. At the heart of the commission’s deliberations is a core democratic principle: access to justice, for poorer as well as for richer.
At present, the situation is an unregulated mess - a small but growing body of case law, a bunch of outdated English rules, and a lot of uncertainty, potential for stalling and legal fees.
There’s also big money at stake, and some impassioned arguments flying as competing interests push for the commissioners’ ears.
On one side, are consumer interests, plaintiff lawyers and litigation funders – third party companies that organise and pay for a group of hard-done-by claimants to take a case to court, in return for a share in any compensation. This side talks about the critical part funded class actions play in allowing people who wouldn’t otherwise be able to afford to go to court; a chance to right a wrong.
There’s the added benefit of keeping the big boys honest. And of course the chance for funders and lawyers to make money.
Meanwhile, there’s the defendants’ camp - company owners and directors and the lawyers and insurance companies which act for them.
They argue the Law Commission’s efforts to improve the affordability and efficiency of litigation might release floodgates of meritless and vexatious class actions, impacting on the profitability of businesses and making it riskier to be a director.
They also say class actions are putting up directors and officers (D&O) insurance premiums, and putting otherwise good directors off going onto boards.
And they talk about a risk that some litigation funders might take more of the money from any settlement than they should, leaving less for the plaintiffs. They want to see any new regulation limit the amount of money litigation funders can make from a successful case.
It might be a cap on the percentage litigation funders can take. Thirty percent is being mooted in Australia. Or for judges to settle the allocation of funding during a case.
To which litigation funders reply that what they do is already risky and the economics shaky. If the Law Commission was to add regulation around what fees they can charge, many actions wouldn’t make financial sense, they say.
That would mean funders not taking on otherwise meritorious cases, and plaintiffs not getting their day (or more realistically their months or years) in court.
So who’s right? And the answer is, as always, it’s complicated.
'Deliberate misinformation'
The temperature of the debate is heating up. Last week the country’s biggest litigation funder LPF (the acronym stands for ‘level playing field’) sent a letter to the Law Commission responding to defendant concerns in their submissions.
“We are alarmed by the volume and shrillness in much of the recent negative commentary,” LPF executive director Jonathan Woodhams wrote.
“Unsubstantiated assertions of particular concern include that funders are making excessive profits at the expense of funded plaintiffs, and that there has been an explosion of unmeritorious funded cases in New Zealand, amounting to a ‘trafficking’ in litigation.”
LPF has crunched the numbers around New Zealand litigation funded class actions and other cases, Woodhams says, and has found 37 over the last 10 years, including eight that are still ongoing.
Of the 29 settled cases, around $183 million has been awarded or paid in settlement, LPF research found. Of that figure, plaintiffs received $89 million (just under 50 percent), legal fees and project costs took up $82 million (45 percent) and the profit for litigation funders was $12 million, or 6 percent.
“Regulation that suppresses even this level of profitability will essentially drive out litigation funding altogether” – Jonathan Woodhams, LPF
“What this demonstrates is funder profits are far from ‘excessive’ and, once overheads are taken into account, they are almost non-existent,” Woodhams says.
This in part reflects the immaturity of the market and funders will expect better returns over time, he says.
“But what is certain is any regulation that suppresses even this level of profitability will essentially drive out litigation funding altogether – a prospect we think the various vested interests know only too well in calling for such measures based on fear, rumour and assertion, not facts.”
Of course, litigation funders have their own vested interests. However, consumer protection organisation Consumer NZ told Newsroom it was worried about any measure which made taking class actions more difficult than it already is.
“Claims there will be a rush of meritless cases don’t wash with us,” says head of research Jessica Wilson . “Courts already have the ability to strike out these cases.”
Wilson says there are basic consumer safeguards under the Fair Trading Act which should prevent litigation funders “going rogue”, particularly provisions around unfair contract terms.
Access to justice
She says every year Consumer NZ comes across situations where consumers have been wronged but companies get away with it because the regulators don’t act and individuals or consumer groups don’t have the money to put a claim together.
“There are significant barriers to class actions at the moment,” Wilson says. “Reform is long overdue because there are too many instances where companies breach the law and know they won’t face their day in court.”
For example, when Consumer investigated practices at retirement villages recently, it found contracts where residents were liable for repair charges on their appliances and other fixtures in their apartment, when they didn’t even own them. This was potentially in breach of consumer legislation.
“We consider village operators’ obligations to provide services with reasonable care and skill extends to ensuring chattels provided in residents’ units are of an acceptable quality,” Consumer said in its submission to the Law Commission review. A class action could give people their money back, clarify the rules, and make retirement village owners look carefully at their small print.
Another example involves a brand of baby wipes claiming to be 100 percent biodegradable - and costing double the normal price - which Consumer found to be 17 percent polyester, which is made from plastic.
After Consumer NZ’s investigation, the importer pulled the product, but the company was never prosecuted. Again, a class action could serve a number of purposes - giving people some money back, sanctioning the company for misleading customers, and acting as a deterrent to other business owners.
The trouble is, the sums in these two cases are relatively small even cumulatively. A court might find wet wipes importers and retirement village operators were taking money illegally from customers, but under the class action system as it stands, it’s unlikely a liquidation funder would take on a claim of this size.
Recent class actions have tended to involve much bigger sums - subbies owed millions (collectively) after Mainzeal directors mismanaged the company’s finances, kiwifruit growers who lost millions when government officials screwed up and let the kiwifruit vine disease PSA into the country; and owners of leaky buildings who ended up with huge repair bills when water came through supposedly watertight cladding.
One ongoing class action involves victims of the Ross Asset Management Ponzi scheme looking for reparation from the ANZ Bank which, they say, should have known their money was not safely tucked away in a trust account, when it should have been.
The downsides for litigation funders
LPF argues class actions are complicated and risky for litigation funders. Of the 29 cases over the past 10 years, the average length of a case worth $5 million or more has been 4.5 years, and five cases have lasted seven years or more.
Approximately 28 percent of cases have resulted in losses to the litigation funders, LPF’s Jonathan Woodhams says in his letter to the Law Commission. These losses totalled $39 million across the cases, and were borne by the litigation funders not the plaintiffs. That $39 million mostly went to lawyers and other experts “who were not required to refund fees or bear the losses suffered by the funder”, Woodhams says.
In the 72 percent of cases where the court awarded compensation, total funder profits were $51 million over 10 years, after an investment of $80 million, the LPF figures show.
Taking into account the losses “this represents a profit of just 15 percent on total capital invested throughout the life of the case, and on an annualised basis well under 10 percent per annum.
As Andrew Saker, chief executive of global litigation funding company Omni Bridgeway wrote recently: “Class actions are very expensive and very complex to run. They are not launched frivolously; they are launched only after careful consideration and when there is clear evidence of negligence or wrongdoing. In any event, the courts simply do not tolerate being misused by unscrupulous lawyers and vexatious litigants.”
A report by PwC for Omni Bridgeway released in March found mandating a 30 percent cap on the amount of a class action settlement which litigation funders could take in fees – as is being proposed by some in Australia – would have made 36 percent of recent class actions uneconomic for funders.
“What we see is a tradeoff,” the report says. “By providing higher returns to some plaintiffs, there will be fewer supported actions, and hence zero returns to other potential plaintiffs.”
But then they would say that, say litigation funder sceptics.
'Plaintiffs need protection'
Andrew Barker QC is an experienced commercial lawyer. He acted for one of the banks in a class action between 2013 and 2017 where thousands of bank customers claimed they were being charged unjustifiably large fees for issues such as late payment of credit cards, unarranged overdrafts, and dishonoured payments.
He has strong views about the risks of not regulating litigation funder profits. “Plaintiffs need protection [against litigation funders],” he says in his submission.
“Courts are providing a significant and substantial business opportunity for [litigation funders]. They provide that because it promotes access to justice. But that is not the motivation for litigation funders. Their motive is ultimately commercial profit, in the context of a commercial negotiation that is heavily one-sided.”
"There is the risk of unmeritorious claims, and of litigation funders and plaintiff lawyers pursuing their own commercial interests over the interests of the claimants" – Bell Gully
The submission from law firm Bell Gully raises similar concerns. Bell Gully has also acted for big defendants in class actions, including against Feltex directors after the carpet maker’s collapse, and in the Southern Response earthquake and unfair bank fees cases.
It argues protection is needed against “the risk of unmeritorious claims, and of litigation funders and plaintiff lawyers pursuing their own commercial interests over the interests of the claimants who they purport to represent.”
Defendants also need protection, the Bell Gully submission says.
“Access to justice must be looked on from all angles, including from the perspective of defendants, who should be protected from meritless claims which may be costly to defend, or protected from being forced into settlement of claims they consider defensible.”
The submission talks about pressure on directors.
“There is evidence that shareholder class actions in Australia have led to a significant increase in D&O insurance premiums, and an inability to attract directors and senior managers due to the class action risk.”
Bell Gully “strongly recommends” the New Zealand Law Commission look to the stricter regulations that have recently been imposed in Australia, or are being considered.
Tightening rules in Australia
Across the ditch, a parliamentary inquiry into litigation funding released its final report on December 21 last year - not without fireworks.
An article in the Australian Financial Review had the headline "Litigation funding report a 'Christmas present for corporate criminals'."
And litigation funders accused government MPs of giving corporations “a green light to rip off customers and lie to investors”.
Of particular concern for litigation funders are Australian government moves to regulate how much of any settlement or award in a class action is given to the people who are part of that class action.
The figure of 70 percent has been much bandied around. One lawyer, Jones Day's Australian head of litigation John Emmerig, said “there is a strong argument it should be higher in more straightforward cases."
Which seems like a totally worthy goal - for the plaintiffs to get as much money as possible.
The trouble is, litigation funders argue, that caps will make many potential class actions financially unviable.
If litigation funders can’t cover their costs in a legal battle, they won’t take on a case, and that means fewer people will get the chance for their day in court - access to justice will, in theory, be denied.
In its submission to Australia’s own Law Reform Commission inquiry into class actions and litigation funders in 2018, Australia's corporate and financial services regulator ASIC warned against unwarranted regulation of litigation funding.
“Without clear evidence of harm, additional regulation of litigation funders should only be considered where it is supported by evidence-based analysis of deficiencies in the current regime and is likely to result in a net benefit.”
"There are many factors that may drive an increase in the number of class actions, including the incidence of misconduct by firms." – Australian Securities and Investments Commission
Class actions “help to democratise access to justice by addressing the power imbalance that exists between shareholders and defendants,” ASIC said, adding funded shareholder class actions are “often the only practical means for shareholders to enforce their rights, as individual losses are too small to justify pursuing individually”.
While the number of shareholder class actions in Australia was increasing, ASIC said, it was still tiny, impacting only a handful of the thousands of listed companies every year.
Moreover, “an increase in the frequency of class actions is not of itself indicative of a problem with the regime. There are many factors that may drive an increase in the number of class actions, including the incidence of misconduct by firms. We see no evidence that the existing regime is failing to protect shareholders, harming Australia’s market integrity or the reputation of Australia’s markets.”
Class Actions Australia spokesman Ben Hardwick went further talking to the Australian Financial Review late last year when he claimed Australia's current strict continuous disclosure regime and the threat of class actions were "the only thing keeping corporations vaguely honest".
The lesser of two evils
Otago University associate law professor Barry Allan says he told the New Zealand Law Commission that access to justice is the critical goal.
“In my submission I said sometimes [access to justice] has to be at the risk of things we don’t like - for example overpaid funders. But of the two evils, which can we tolerate more?
“If you restrict funders being involved, there’s a risk of losing genuine cases coming to court,” Allan says.
He says New Zealand shouldn’t be blindly following what’s happening in Australia.
“I’ve been looking at class actions for some time. I wanted to make sure we didn’t over-regulate, so legitimate tools weren’t banned.
He says each class action should be looked at separately.
“Getting really prescriptive, like saying litigation funders can get only x percent profit, would be counterproductive.”
'You don’t want unreputable funders'
Nikki Chamberlain is a senior lecturer at the University of Auckland Law School and before that spent eight years as a commercial litigator at an Auckland law firm. She has published research on class actions and is one of seven lawyers on the Law Commission's Expert Advisory Panel for the current review.
She says regulation of the sector is critical, including of litigation funders’ capital adequacy - the amount of money they have in reserve to meet any costs awarded against them.
“You don’t want unreputable funders.”
But she is also in favour of making sure class action plaintiffs aren’t ripped off by unscrupulous litigation funders.
Not necessarily using blanket caps - like the 30 percent being proposed in Australia - but she does support introducing a process by which a judge in a particular case can check or approve contractual arrangements between funder and plaintiff and/or look at final settlement agreements.
“Having an upper limit to what funders can recover is not fair on the funder because the optics will be different for different cases - litigation risks can increase or decrease as a case progresses and settlements can be big or small.”
Still, it’s important to have a lever to stop funders being oppressive, Chamberlain says.
And legislation could also provide guidance for judges about what they should be looking for when it comes to checking any potentially bad behaviour from litigation funders.
“It could be very liberal, quite hands-off, unless there are signs of funder-plaintiff arrangements being oppressive.”
'Robust debate'
Chamberlain says there has been some “robust debate” on the advisory panel, with seven lawyers, most of whom have been litigators in the past, involved, and strong views on both sides.
For example, two lawyers from the recent, abandoned James Hardie class actions are on the panel: Jack Hodder from the defendants’ side, and Adina Thorn for the plaintiffs.
Jack Hodder is an influential litigator - a “power commercial silk”, according to his entry in the LawFuel 2020 power list.
And Hodder tends to stay where the big money is - protecting corporate (or in some cases Government) interests. He’s not a fan of litigation funding, and he has fought it hard in court in the past.
Still, Chamberlain says debate on the advisory committee hasn’t been controlled by one side or the other.
“I know there has been a lot of fear from litigation funders, but the reality is there were robust discussions and I think all sides were comfortable putting their views across. No one person dominated.”
The Law Commission releases its final report and recommendations to the Government in May next year.
