On 21 June 2013, the Federal Court delivered judgment on the application for approval of the class action commenced by Modtech Engineering against GPT Management Holdings. Justice Gordon approved the overall settlement amount, but refused to approve the sum of over $9 million claimed for Slater & Gordon’s fees and reduced the total premium payable to the litigation funder on the basis that the proposed sum exceeded the amount to which the funder was contractually entitled.

This article summarises the main features of her Honour’s decision and then discusses the increased scrutiny to which class action settlements have been exposed both in the GPT decision and also the Full Federal Court’s rejection of the settlement of the Storm Financial class action against Macquarie (for a summary of the Storm decision see our Alert).

The GPT judgment

On 20 June 2013, Justice Gordon heard an application for approval of the settlement of the class action commenced by Modtech Engineering against GPT Management Holdings. The following day, her Honour delivered judgment indicating that she would:

  • approve the settlement sum of $75 million as fair and reasonable to all group members;
  • approve the distribution scheme only if it was amended to eliminate any payment of premium to the litigation funder in respect of settlement amounts to be recovered by group members who had not entered into funding agreements (the funder having no contractual entitlement to any such payment);
  • not approve the sum of $9,338,865 claimed in respect of Slater & Gordon’s fees and disbursements, but would instead set aside that sum and refer the costs claim to a registrar for assessment of its reasonableness; and
  • not approve the sum of $53,530.85 claimed in respect of Modtech’s expenses in prosecuting the claim on its own behalf and that of group members, but would again set aside that sum and refer the expense claim to a registrar for assessment.

Orders approving the settlement on the basis of the amended distribution scheme were made on 26 June 2013 and the proceedings are relisted before Justice Gordon on 19 September 2013 in respect of the claims for legal costs and expenses, following a lengthy process of assessment of the claims by a Registrar and submissions by the parties.

Court scrutiny of class action lawyers

In approaching the question of Slater & Gordon’s costs, Justice Gordon noted that, while approval of legal costs in a class action settlement should not be approached as though it were a taxation of costs, it was nevertheless a unique application. Slater & Gordon was effectively acting for itself, in its own interest, in circumstances where group members, whose interests would be directly (and adversely) affected by the application, were not in a position to oppose the application and where no other contradictor was present. Justice Gordon identified a number of deficiencies in the costs consultant’s report relied upon and was ultimately not satisfied that it provided the Court with proper basis for approving Slater & Gordon’s fees. Those deficiencies included:

  • that the report did not recognise or explain the fact that the amount claimed by Slater & Gordon was almost three times its original estimate of $3,500,000.
  • a suggestion that Slater & Gordon’s charge-out rates had been increased by 5% with no evidence that group members had been notified of this as was required under the terms of their costs agreements; and
  • the global nature of the review undertaken by the costs consultant and, in particular, the failure to make any allowance for work which was conducted by an excessive number of employees or which was beyond the scope of work covered by the costs agreements.

Justice Gordon stated that a Court ought not to rubber stamp a settlement and emphasised the onerous task faced by a judge asked to approve a settlement binding on persons not before the Court (her Honour referring to the comments of Justice Finkelstein in Lopez v Star World Enterprises Pty [1999] FCA 104 in this regard).

In Lopez, Justice Finkelstein had noted that the representative applicant’s lawyers may sometimes be placed in a “difficult position” on a settlement application as the “interests of their client will not always be coincident with the interests of the members of the group”. In the Storm class action, the way in which this difficult position was managed (or not managed) by the representative applicant’s lawyers was one of the factors which caused the Full Federal Court to overturn the first instance judgment approving the settlement. There, the Court was evidently quite troubled by the fact that, after settlement had been reached, 14 group members who had not previously contributed funds to the class action but who were clients of Levitt Robinson (the representative applicant’s lawyers) were given an opportunity to contribute funds and become entitled to a substantially increased distribution from the settlement sum. This opportunity was not afforded to non-client group members who were otherwise in an identical position. The Court likened the situation to allowing Levitt Robinson’s clients “to place a bet on a horse race after the race had run and knowing the result of the race”. The “difficult position” of class counsel was also a factor in the rejection of the Vioxx class action settlement, Jessup J expressing some concern that the representative applicant’s solicitors, Slater & Gordon, “themselves have a very real interest in securing the settlement to which he has, and they have, agreed”.

The level of scrutiny shown in these three judgments is indicative of the challenging and quite unusual position held by the lawyers of representative applicants, who not only represent their own client’s interests but who also must have regard to the interests of absent non-parties (many or most of whom will not be their clients). Those difficulties are exacerbated in the circumstance, quite typical in class actions, where it is not the client who chooses the lawyer, but it is the lawyer who chooses the client, all the more in cases where the representative applicant is deliberately chosen because they are a ‘person of straw’ or where a funder is involved and their interests loom large. In such circumstances, it would be unreal to suggest that representative applicants (let alone group members) can or do exercise the degree of control and scrutiny over their lawyers’ behaviour as exists in conventional lawyer/client relationships. It is these unusual factors which both demand and justify the additional level of scrutiny displayed by the Court in the judgments referred to above.

Indeed, Justice Gordon noted that, in light of the increasing number of class actions being filed, it might now be appropriate that a requirement be imposed on plaintiffs’ solicitors to have any legal costs agreement approved by the Court before it is binding on group members. Time will tell whether this suggestion finds any favour either by judicial application under section 33ZF of the Federal Court Act 1976(Cth) or with the new Federal parliament.

Reduction of litigation funder’s premium

The GPT class action was funded by Comprehensive Legal Funding LLC (CLF) with 92% of registered group members having entered into funding agreements with CLF. Under the funding agreements, CLF stood to receive a commission of between 25% and 30% of the net recoveries of each group member party to such an agreement (the percentage varying depending upon the number of GPT shares acquired by the group member during the relevant period). The proposed settlement distribution scheme would have paid the 25-30% commission not just from the settlement amounts attributable to the 92% of group members who had entered funding agreements with CLF, but also from amounts attributable to the 8% who had not. As a result, the proposed scheme would have seen the funder receiving an amount greater than the sum to which it was contractually entitled.

In rejecting this scheme, Justice Gordon noted that CLF had made a commercial decision to fund the proceeding by entering agreements with 92% of group members, that it was no part of that bargain that they would be able to extract commission from all group members, and that there was no good reason why a funding agreement should be foisted upon a group member who had not agreed to it. Justice Gordon distinguished Justice Pagone’s earlier approval of a similar provision in Pathway Investments Pty Ltd & Anor v National Australia Bank Ltd (No 3) [2012] VSC 625, but nevertheless said that “it is difficult to conceive of a circumstance in which [such a provision] would be appropriate”.

The 8% of group members who were unfunded did not, however, get off scot free. Justice Gordon proposed that the amount which would, under the original distribution scheme, have been deducted from their distributions and paid to CLF should instead be pooled and distributed pro rata as between all group members. This distribution was said to be necessary to avoid the 8% receiving a “windfall” and it is broadly consistent with the “equalisation factor” approved in the settlement of the Multiplex class actioni. A revised distribution scheme to this effect was approved by the Court on 26 June 2013, the upshot being that each group member will receive more than was originally proposed and that CLF will receive less.

Equalisation payments (or distributions of the kind ultimately approved by Justice Gordon in GPT) are in some ways akin to, and may be justifiable as, the reimbursement of the expenses of the action.  They reallocate the burden of the litigation funder’s premium so that it is shared by all group members and not just those who have entered into agreements with the funder.  That being the case, such payments ought not to be approved as a matter of course.  Funding premiums should instead be subject to the same scrutiny as other expenses if it is proposed that their burden be shared by group members who have not otherwise agreed to them.  There is no reason in principle why a non-funded group member (who is represented in the class action only by virtue of it being an “open class”) should share the cost of a representative applicant’s (or a funded group member’s) voluntary commercial decision to enter into a funding agreement if that agreement was not reasonably necessary to the pursuit of the action.  While in most cases it would no doubt be argued that proceedings would not or could not have been brought without the assistance of a funder, that argument only goes so far. If, for example, the representative applicant and funded group members have agreed to pay their funder an uncommercial and exorbitant level of premium, there is no reason why their imprudence should be inflicted on non-funded group members in the name of avoiding a “windfall”.

Admittedly, such considerations would carry less force if the non-funded group members were clearly on notice of the fact that an equalisation payment would be sought at the time when they elected not to opt out of the proceeding. However, it is not clear whether there have been any proceedings in which the prospect of an equalisation payment has been made known to non-funded group members at the opt-out stage. Additional complications and questions about intra-group conflict may arise in class actions where, for example, institutional investors are able to negotiate to pay a lower rate of premium to a funder than is extracted by that funder from ”mum and dad” investors.

Conclusion

The rejection by the Full Federal Court of the Storm settlement (and its premium to the group members who directly funded the class action in the absence of a funder) has been interpreted in some quarters as a boon to third-party litigation funders and as indicating a tacit acceptance of the reasonableness of the premiums they charge. The reasonableness of a third-party funder’s premium, however, was not at issue in that case, the Court saying no more than that the analogy which had been drawn between group members who directly fund an action and a third-party funder was inapt. Indeed, if, instead, the Storm judgment (as well as the GPT and Vioxx judgments) is reflective of an increased level of scrutiny being given to class action settlements and, in particular, the conduct of representative applicants’ lawyers and the treatment of non-client or unfunded group members, it is by no means clear that this is in third party litigation funders’ interests, though, for the reasons above, it would certainly be a development to be welcomed.