On contingency fees, just follow Labor’s money

06 Mar On contingency fees, just follow Labor’s money

Chris Merritt – The Australian – Friday 06 March 2020

Just days ago, the class action law firms were riding high, counting the hours until their pals in the Victorian government handed them what amounts to a bucketful of other people’s money.

US-style contingency fees have been pitched in Victoria as a benevolent mechanism by which saintly lawyers will increase ­access to justice for the downtrodden masses. If that happens, great. But don’t bet on it.

The most certain outcome is that contingency fees will trigger a rational response from class ­action law firms that stand to make millions by taking a percentage of their clients’ payouts.

Increased access to justice? Give me a break. This is all about increased access to the latest BMW.

Everything else is marketing.

Christian Porter, however, might be about to spoil the party. The class actions inquiry that has been initiated by the federal ­Attorney-General is broad enough to deal with all the big ­issues. It could also lay the groundwork for the emasculation of contingency fees in Victoria.

James Paterson, whose parliamentary committee will run the inquiry, has been given terms of reference that require him to examine contingency fees from a client’s perspective.

Even before the first hearing of Paterson’s committee, Porter made it clear that “the government is concerned that allowing contingency fees will create conflicts of interest”.

Edward O’Donohue, who is shadow attorney-general in Victoria, has been concerned about his state’s unilateral move to contingency fees and has urged the government to delay the change until Paterson’s committee reports.

Tim Piper, who is state head of Ai Group, a national employer ­association, has also urged the Andrews government to delay the bill that would introduce contingency fees until after the federal inquiry.

“The changes in the bill would lead to many more class actions being filed in Victoria. Law firms are likely to pursue far more speculative claims, given the super profits that they will be able to ­potentially earn,” Piper says.

“Many more class actions are likely to be filed in Victoria rather than federally or in other states. The clogging of the Victorian courts that will undoubtedly result will reduce access to justice, not improve it.”

If Paterson’s committee finds that it is not in clients’ interests for lawyers to take a proportion of their payouts, Sarah Derrington of the Australian Law Reform Commission has an idea that could enable Porter to step in.

Recommendation seven from Derrington’s 2018 report on class actions urged the federal government to give the Federal Court exclusive jurisdiction over class actions based on provisions of two federal laws: the Corporations Act and the Australian Securities & Investments Commission Act.

If that were accompanied by an amendment to the Federal Court Act banning contingency fees, the big-money claims against corporate Australia would no longer be subject to contingency fees.

That would weaken the incentive to run anti-business class ­actions in Victoria, thereby preventing a possible backlog in the Supreme Court while protecting the business community from a beefed-up litigation risk while the economy is at risk of tanking.

The only downside is the collateral impact on other states.

Jason Betts of Herbert Smith Freehills says the Paterson inquiry is incredibly important.

“The government is recognising that it’s time to take a hard look at the enormous amount of money moving from Australian companies to class action promoters,” says Betts, who is co-author of Class Actions in Australia.

“It’s long overdue that we examine whether Australia’s corporate governance laws are really just a launching pad for class ­action litigation, and scrutinise what proportion of class action settlement funds go to plaintiffs’ law firms and funders, as opposed to group members.

“The parliamentary committee’s wide mandate will place these critical class action issues firmly on the agenda.

“As a country we’ve never stopped to evaluate whether the enormous growth in class actions is actually good for our economy.

“Instead, under the heading of ‘access to justice’, we’ve allowed a burgeoning class action industry to grow without clear regulation, invited American-style contingency fees for plaintiffs, and created the world’s leading class action funding market at the expense of the Australian business and insurance sectors.”

The proceedings of Paterson’s committee promise to be particularly informative.

Someone inside the government has assembled data on the donations to Labor — federally and in Victoria — by the nation’s two largest class action law firms: Maurice Blackburn and Slater & Gordon.

The significance of those donations becomes apparent only when they are considered against the timing of certain decisions that are in the interests of class ­action lawyers.

Example one: right now, Victoria’s Labor government is pushing on with contingency fees.

Last financial year Maurice Blackburn made 65 donations to Labor with 39 going to Labor in Victoria, according to the government’s research. The firm’s donations amounted to $354,805, which was more than twice the size of its next biggest year for ­donations: $163,300 in 2009-10.

Half of Slater & Gordon’s ­donations last financial year went to Labor in Victoria.

Example two: in 2009, the Federal Court decided in a case known as Multiplex that litigation funding — which pays for class ­actions — was, in fact, a “managed investment scheme”. In 2010, the former federal Labor government decided there was no need to impose a “significant regulatory burden” on litigation funders.

In the decade after the Multiplex decision, Maurice Blackburn’s donations to Labor increased five-fold — from $200,073 in the previous decade to just over $1m in the 10 years after the decision, the government’s research shows.

Slater & Gordon’s donations to Labor more than tripled after Multiplex — from $143,389 in the 10 years before the decision to $467,280 in the 10 years after the decision, the research shows.

After the Hayne royal commission, some might find it surprising that this part of the financial services industry remains unregulated and unlicensed.

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