As discussed in this space before, Australia is quickly becoming a key venue for securities class action litigation. With the release of its decision in Money Max Int. Pty. Ltd. (Trustee) v. QBE Insurance Group Limited, the Federal Court of Australia took another step toward making Australia a class-friendly location. One issue with the current Australian “open-class” collective action scheme is that it permits some investors a free ride while others agree to reimburse a litigation funder out of any proceeds recovered as a result of the suit. Yet, without this second group of investors agreeing to the litigation funding arrangement, the suit would likely never be initiated. As a result, many class actions in Australia proceed as “closed-class” collective actions where only plaintiffs who agree to the funding arrangement are named in the suit and able to recover. In Money Max, the Federal Court of Australia – for the first time – approved a common fund application sought by the applicant. The Court ruled that, in the event the case settles or the plaintiffs obtain a favorable judgment, all class members, regardless of whether they agreed to a litigation funding arrangement, would reimburse the litigation funder out of their recovery. While the long-term implications of this decision remain to be seen, whether or not the common fund class action model catches on in Australia bears watching.
The fact pattern before the court will be familiar to those who follow securities litigation. Money Max Int. Pty. Ltd. (“Money Max”), the applicant, brought a shareholder class action suit on behalf of itself and an open class against QBE Insurance Group Ltd. (“QBE”) pursuant to Part IVA of the Federal Court of Australia Act of 1976 (the “Act”). The applicant essentially alleged that QBE engaged in misleading or deceptive conduct in breach of Australian securities law. It claimed that the QBE share price during the relevant class period was wrongfully inflated by QBE’s conduct, and that it dropped by $4.63 per share immediately after the release of a corrective disclosure by QBE in December of 2013. As a result, the applicant argued that potentially every person who acquired QBE shares in the relevant period was a class member.
On December 3, 2015, at an early stage in the litigation, counsel for the applicant filed an interlocutory application for a common fund order. On April 6, 2016, the Chief Justice directed the application to the full Federal Court for hearing and determination.
At the date of hearing before the Federal Court, the applicant and approximately 1,290 other class members (the “funded class members”) had all entered into a litigation funding agreement with International Litigation Funding Partners Pre. Ltd. (the “Funder”). Pursuant to those funding agreements, the Funder agreed to meet the funded members’ legal costs, adverse costs, and security for any other costs. In exchange, the funded class members would reimburse the legal costs and pay the Funder a percentage commission of either 32.5% of 35% (depending on how many QBE shares each member acquired) from any settlement or judgment money they received. In other words, the Funders put up the money required to bring the lawsuit up-front, in exchange for a promise of repayment and a percentage of any recovery.
Despite what may appear to be a high number of funded class members, the majority of the class members (the “unfunded class members”) had not entered into any sort of funding agreement. As a result, the funded class members were faced with a situation where they collectively bore the cost of the action against QBE on behalf of the unfunded class members. The unfunded class members could thus enjoy all the benefits of the funding agreements (i.e., allow the Funder to front the cost of litigation) without being required to repay the Funder.
Because of this inequity, the applicant asked the court to, essentially, apply litigation funding terms to all class members, not just the funded class members. The applicant’s proposed order would require all class members to pay the Funder a pro rata share of the legal costs incurred and a funding commission at the rate of 30% from the common fund of any settlement or positive judgment. QBE, for its part, opposed the order sought, arguing that it would leave class members with a significantly lower proportion of any winnings.
The court disagreed with both QBE and the terms of the proposed order, and instead crafted its own remedy. It rejected the applicant’s proposed order requiring all class members to pay a funding commission at the rate of 30%. Instead, it ordered that, upon notice of an undertaking by the Funder, all class members would be bound by litigation funding terms to be later set by the court, likely after settlement or judgment. Those terms would be set to ensure that all class members pay the same pro rata share of legal costs and the funding commission, likely at a rate lower than 30%. This remedy ensured that the best interests of all parties would be served. The Funder would secure payment for its services, and the applicant and all class members would equally share the burden of the costs required to engage in litigation.
The court’s decision is an important one, largely because it introduces the concept of a common fund litigation agreement to the courts of Australia. Funding agreements are often vital to ensuring that a class can meet the high costs required to bring an action as large and expansive as a class action securities suit. It makes good sense for the court to do away with a scenario where a comparatively small segment of the class bears the cost of the litigation for the larger group of unfunded class members. The court’s remedy here creates a fair system where all class members are required to share those costs. While its full impact remains to be seen, the court’s decision removes any financial disincentives to entering into a funding agreement, which may open the door for more and larger class action litigation in Australia. The decision also opens the door to investors that are not named plaintiffs, but who wish to be included in any class settlement. Since they will have to participate in the funding going forward, class counsel has less incentive to confine the “class” to named plaintiffs.