New changes may be coming to the operation of class actions in Australia. Australia’s class action regime is technically an opt-out system but in practice the system more frequently operates as an opt-in system. An opt-out system is that in which all individuals and institutions will be bound by the outcome of a pending case unless they take action to remove themselves from the action and it is perhaps the best known type of system because it is utilized in both the United States and Canada. Conversely, an opt-in system is that in which interested claimants need to take action and register at the beginning of a case in order to participate in any judgment or settlement.
The reason for the discrepancy between the principle and the practice of Australia’s class actions is the fact that Australian attorneys are prohibited from representing clients on a contingency fee basis and so most class actions require third party funding in order to proceed. In order to allow third party funders to collect a portion of the settlement or judgment in exchange for their bearing the risk of the litigation and covering all of the attorney fees and other costs associated with the litigation, classes are usually defined in such a way that limits participants to those individuals or institutions that have signed a litigation funding agreement by a particular deadline. Without a funding agreement in place, third party funders would not be able to recoup their investment and would likely be uninterested in funding litigation. The result is that the representative plaintiff would be responsible for bearing all the risk and paying all costs and fees.
The discrepancy between the principle and the practice of Australia’s class action system may be about to change. Australian courts are currently considering a petition that, if approved, would allow for the creation of a common fund and would allow litigation funders to directly claim a part of any settlement or judgment. The petition was filed on behalf of Canada’s International Litigation Funding Partners in conjunction with the recently announced securities fraud litigation being pursued by Australian law firm Maurice Blackburn against Allco Finance Group. If the petition is successful, the result would be both that Canada’s International Litigation Funding Partners would be allowed to recover up to 35% of any settlement or judgment and that a precedent would be set for future class actions to proceed as open-class class actions. There would no longer be a requirement for claimants to register in advance and sign a third party funding agreement in order to potentially recover from any loss. Instead, claimants would automatically be included as part of any class unless they removed themselves, or opted-out, by a stated deadline. A common fund would be created out of any settlement or judgment and the litigation funder could claim a portion of the proceeds before the proceeds are distributed amongst the claimants.
Many commentators believe that allowing for a common fund would be a positive development for both claimants and defendants alike. A common fund would improve access to justice, increase class size, and leave defendants with greater certainty that they were resolving all particular claims that could arise against them from a particular factual incident. A hearing was held in Australia on August 22, 2014, but no decision in the matter has yet been issued.
Australia Imposes Limits on For-Profit Class Actions
Another major development to the Australian class action system concerns the Australian Federal Court’s imposition of new restrictions on certain litigation funders and for-profit class actions. Australia is now vying with Canada to be the second most active securities litigation market. With the increase in securities litigation, there has been an increase in third party litigation funders entering the market and Australia is now faced with growing concerns over potential abuse and potential conflicts of interest.
Perhaps the most egregious example of abuse of the class action process concerns lawsuits filed by Melbourne City Investments Pty Ltd (“MCI”). Between October and December of 2013, MCI, acting as the representative party, filed lawsuits through its lawyer, Mr. Elliott, against Leighton Holdings Ltd, Treasury Wine Estates Ltd, and Worley Parsons Ltd.1 In addition to serving as the attorney for MCI, Mr. Elliott was the sole director and shareholder of MCI and he purchased a small number of shares in Leighton Holdings, Treasury Wines, and Worley Parsons on the same day that MCI was incorporated.
Treasury Wines and Leighton both filed motions against MCI seeking to have the litigation stayed or to have Mr. Elliott removed as counsel for the class. Both Treasury and Leighton contended that the legal actions were brought against the companies for the sole purpose of generating legal fees for Mr. Elliott and not to benefit a class of shareholders. The Court agreed, finding that it was probable that the proceeding was brought for the sole purpose of generating legal fees for Mr. Elliott and it ordered that Mr. Elliott could not serve as counsel for the class. In reaching its conclusion, the Court noted that, “the [hypothetical fair-minded independent observer] would consider Mr. Elliott is compromised in his role as a solicitor such that there would be a real risk that he could not give detached, independent and impartial advice taking into account not only the interests of MCI (and its potential exposure to an adverse costs order), but also the interests of group members.” Despite holding that Mr. Elliott could not continue as class counsel, the court declined to stay or dismiss the proceedings against either Leighton Holdings or Treasury Wines because there was otherwise nothing irregular about the proceedings.
Worley Parsons actually sought to have the case MCI filed against it dismissed, not on the basis of a conflict, but on the basis that MCI lacked standing. Worley Parsons argued that MCI lacked standing because MCI’s purchase of shares in Worley Parsons pre-dated any of the alleged fraudulent and misleading activity that led to its filing the lawsuit and seeking to represent a class of shareholders. The Court ultimately agreed that MCI was not a member of the group of shareholders that it sought to represent and it dismissed the case. These cases against MCI demonstrate Australia’s commitment to preventing disreputable litigation funders and attorneys from filing class actions that are not for the benefit of the shareholders.
Kessler Topaz will continue to monitor these events in Australia along with all developments associated with class action and securities fraud litigation in non-U.S. jurisdictions.
1Note: Kessler Topaz notified its affected clients about pending actions against these three companies. The pending litigation that Kessler Topaz alerted clients to were cases that were filed by other firms and not the cases filed by MCI.