Class war: Weighing changes to Australia’s class action regime

Almost three years ago, a development in a long-running case in the Victorian Supreme Court would set Australian legal circles aflutter and have dramatic, if unintended, consequences for the country’s class action scheme.

The Banksia Securities class action, it would emerge through reports in The Age and Sydney Morning Herald in 2019 and 2020, was beset with claims of deeply serious impropriety by the lawyers bringing the case and the not-so-arm’s-length litigation funder bankrolling the action.

A 699-page judgment by Justice John Dixon in October 2021 would lay bare a legal horror show of most egregious conduct, and find that lawyers for the Banksia Securities noteholders bringing the claim against the company, including high-profile barrister Norman O’Bryan, had drastically inflated their legal fees and their cut of any settlement by using fake invoices.

The case would become a lightning rod for critics of Australia’s class action regime who had long complained that the sector had become overrun by “sharks and gamblers” – particularly litigation funders who were seen to be raking in big fees at the expense of affected consumers and shareholders.

It would help to open the floodgates for legislative reform by the Morrison government between 2019 and 2022 to clamp down on the sector – including attempts to cap fees charged by legal teams running these cases, and the requirement that all class actions be registered as managed investment schemes and be overseen by the corporate regulator.

The Morrison government’s treasurer, Josh Frydenberg, would also bring in changes to Australia’s rules about when a company has to tell its shareholders about material information. The new scope of those rules, known as continous disclosure, would only hold companies and directors liable if they had “knowledge, recklessness or negligence” that the information they shared was wrong – a change that instantly made it much harder to prove a shareholder class action claim.

In his first comments on the case and its political ramifications, Dixon says he was disappointed when the case and his findings were used by proponents of class action reform to demonstrate the so-called “broken” state of Australia’s class action regime – notably by Liberal Senator James Paterson who oversaw the parliamentary inquiry into class action funding as well as by other members of the government.

“Banksia was very atypical because the nature of the conduct engaged in by the leading players, which I’ve set out clearly in the judgment, is not the way that lawyers or their funders normally behave,” Dixon said this week.

“I think that Banksia was misunderstood in Canberra. It shows what might go wrong in a litigation funded class action, but it also shows that the legal system is pretty robust and protects itself from rogue operators. That’s ultimately what happened. The victims were awarded a massive judgment.”

(Legal sources who have represented defendant companies in class actions who declined to comment on the record for professional reasons, agreed it was a stretch for critics of class actions to rely on the Banksia case for their arguments. But others, including sources within the Coalition, still believe the case provided a salutatory example of the excesses in the unregulated class action market and point to the fact that the misconduct in the case was uncovered only by the persistence of the family of a member of the class action concerned about the handling of the case and the fee and funding arrangement.)

Dixon, who is one of the state’s most prominent judges and has presided over some of Victoria’s biggest class actions including the Black Saturday bush fire claims, agreed to an interview ahead of speaking at the Maurice Blackburn class action symposium in Melbourne later this month.

That conference will bring together plaintiff and defendant law firms, funders, barristers, academics and institutional investors to discuss the changes brought in by the Morrison government and prospects for reform by the Albanese government.

The symposium will host Attorney-General Mark Dreyfus as its keynote speaker, and it is expected that many of those present will be keen to bend his ear to push for new laws and the reversal of laws brought in by the previous government that relate to class actions.

Dreyfus has already flagged that the Albanese government will undo legislation requiring class actions to be registered as managed investment schemes, which he and Financial Services Minister Stephen Jones have described as “plainly wrong”. (A move which shadow attorney-general Julian Leeser told this masthead was a move to “reduce accountability and transparency” and an example of how “Labor has no integrity on integrity”.) Dreyfus declined to comment ahead of the symposium.

Attendees will also be looking to talk about two other topics with the Attorney-General – changes to continuous disclosure laws and new federal laws for funding class actions that mirror Victoria put in place in June 2020.

Andrew Watson, Maurice Blackburn principal class actions lawyer, is looking forward to the government’s statutory review next year of the continuous disclosure law changes, changes which had such a dramatic impact on the sector.

Loading

“I’m hoping that the review of those laws can be done without the hyperbole that accompanies some of the commentary from the business community about shareholder actions, and that we can restore the continuous disclosure laws to the position that they were, which everybody including ASIC as the regulator, regarded as world-class,” Watson says.

Watson is not alone in his view, but it’s an opinion that can be contentious.

Alexander Morris is a partner at King & Wood Mallesons and has worked on the defendant side on many of the country’s biggest shareholder class actions. Morris says tying the continuous disclosure law change to class actions is “disingenuous”.

“It is important to understand the anomaly those changes addressed. Originally, a company breached the continuous disclosure legislation if it intentionally, recklessly or negligently failed to disclose information as required by the listing rules,” Morris says.

“Long before securities class actions took off in Australia, these intention, recklessness and negligence elements were taken out of the legislation.”

Morris says that plaintiff law firms and litigation funders in the past have been able to take advantage of this change and launch large-scale class actions against listed companies based on this notion of strict liability – a system he says was unique to Australia.

Louise Petschler, who manages the Australian Institute of Company Director’s governance and policy leadership, says the changes to continuous disclosure laws were a sensible reform that should not be undone.

“We feel that those reforms were an important rebalancing of the way that the continuous disclosure laws had been framed in Australia since that fault provision was removed,” says Petschler.

“Those changes bring Australia more into line with overseas jurisdictions that incorporate an element of fault or culpability, and often that’s at a higher level than negligence, which is what the changes brought in.”

Watson and Morris also believe the Albanese government will, in time, look to implement some of the recommendations of the Australian Law Reform Commission inquiry into class action proceedings in 2019.

Top of the list is considering new federal laws to allow a new way of funding class actions by law firms, known as contingency fees, or group costs orders. This system allows law firms to take a cut of the settlement, instead of charging by the hour, plus an uplift on their fee if they win. It is hoped the rules will, in effect, cap funding agreements which have led to litigation funders taking as much as 50 per cent of settlement proceeds.

Loading

Watson says the group costs order regime in Victoria has already pushed down the costs associated with the case claimed by lawyers under the system.

“It is clear that the group cost order mechanism is likely to be a much cheaper mechanism for those who are in the class than what you might describe as the traditional funding model,” says Watson.

For Morris, a federal response on contingency fees would be expected to create uniformity between state and federal courts with jurisdiction in federal law class actions.

“I think we would have seen a response from the federal parliament regardless of who won the last election, because the Victorians have created a unique contingency fee system for class action lawyers that only operates in their Supreme Court for claims under federal law,” says Morris.

Given that contingency fees will be a substantial financial boon for plaintiff law firms, Morris hopes that discussion about these changes can be done without the culture war arguments that too often paint plaintiff law firms and their funders as altruistic warriors against the “big end of town”.

Dixon says the court is still working its way through how to implement the new legislation in a way that is fair, true to the intent of the legislation, and timely.

“As a sitting judge, I don’t express a view one way or the other about the utility of contingency fees because it’s a matter of policy to be decided by others. It is my job to cope with whatever task they set and to make it work, and sometimes the parliament does that very clearly in specific language and other times they give you a fairly open-ended task, which is what happened here,” Dixon says.

Dixon says the section indicates that parliament’s intention is that these cost orders should be made at a fairly early stage of a class action, the challenge being that every relevant consideration must be estimated, particularly the likely cost, timing, and outcome in the case.

“It is something that we have to work through and we need parties to put the right information before us so that there’s a proper basis to exercise judicial discretion to make an order rather than just educated guesswork,” Dixon says.

“This is leading in the direction where the court may need to specify that more specific detail be required for these applications. Plaintiffs may have to go through some kind of gatekeeper system to enable the court to efficiently deal with these applications on the right basis.”

Dixon’s coal-face experience on making group costs orders should help shape the debate around how any federal legislation is drafted.

In fact, there’s real hope that any debate about the issue can focus on real-life impacts of these changes to fee structures and continuous disclosure laws rather than the discussion descending into long-held grievances.

“It’s really great to see, even just as they formed government, the Attorney-General committing to that kind of policy evidence-based process because certainly, there are vested interests all around the table,” says the Australian Institute of Company Director’s Petschler.

Maurice Blackburn’s Watson is also keen for the debate to be based on actuality rather than politics – though after three years of his industry feeling under attack, he’s not putting his sword back in his sheath just yet.

“All we expect from a Labor government is that it’ll return to an evidence-based approach to class actions and litigation funding, as opposed to what was in the end just an ideologically driven kind of jihad against access to justice, which seemed to be the approach of the former government,” he says.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.