Changes to funding of open class actions

Class actions in Australia can be brought by a representative either on behalf of:

  • a very broad class of people without their consent or even knowledge (each of whom can opt out), ie an ‘open class’; or
  • –a discrete group, a ‘closed class’, who have expressly opted into a proceeding.

In a closed class action, opting in usually involves signing a funding agreement with a litigation funder who agrees to bank roll the proceeding in return for a commission.  Class members who do not opt into the class action cannot get a ‘free ride’ at the funder’s expense.  The funder’s potential up-side is, however, capped in a closed class proceeding by the number of class members who have opted in. 

In 2016 the Full Federal Court handed down a decision that provides a framework for litigation funders to charge a reasonable percentage funding commission to the whole class, including to unfunded class members who have not contracted with the litigation funder, in an open class action.  The decision was Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148.

  • + What did the court decide?

    The Full Court determined that all members of the class in that class action suit were required to contribute to a common fund in favour of the litigation funder, irrespective of whether they each signed a funding agreement with that funder. The Money Max action is being funded by litigation funder International Litigation Funding Partners Pte Ltd (the Funder). The applicant brought the class action on behalf of an “open class” comprising all persons who acquired an interest in QBE shares and who claim to have suffered loss as a result of QBE’s allegedly misleading and deceptive conduct. As at the date of the hearing of the application, the applicant and approximately 1,290 class members (funded class members) had each entered into a litigation funding agreement with the Funder. The balance of class members had not (unfunded class members). The Court’s order had the effect of applying the terms of the Funder’s funding agreement to both funded class members and unfunded class members.

  • + Court's analysis

    QBE objected to the application, arguing that a common fund order: would lead to substantial and unjustified increases in the aggregate funding commission paid to the Funder; would leave class members with significantly lower proportions of any settlement or judgment moneys “in hand” and that this would be to the detriment of both funded and unfunded members; would create an unnecessary financial hurdle to the resolution of the substantive proceedings; and is not an order the Court had the power to make. In coming to its decision, the Court cited the potential advantages of a common fund order as being: the common fund order removes the contractual obligation for funded class members to pay a funding commission at the rate of 32.5% or 35% of the settlement of judgment amount. The common fund order contains the protection inherent in judicial oversight and approval of a potentially lower funding commission rate as the Court considers reasonable; the common fund order seeks to prevent the funder from becoming entitled to an excessive or disproportionate amount; the Court’s new approach contains a floor condition that no class action member can be worse off than he or she would be if the common fund order was not made; prior to class members being required to opt in or out of the class action, the Court’s new approach will ensure that class members will be informed of the funding commission rate. If class members are concerned with the obligation to pay the funding commission, they will be entitled to opt out of the proceeding and commence their own case; the Court’s new approach enhances access to justice by encouraging open class proceedings as a practical alternative to closed class proceedings which are particularly prevalent in funded shareholder class actions; and encouraging open class proceedings is more consistent with the opt-out procedure and may reduce the prospect of multiple, overlapping or competing actions

  • + G+T observations

    This decision represents a significant change in class action procedure as: all class members will from now on be required to pay to the funder of a class action the same funding commission from the common fund of any settlement or judgment awarded in the class members’ favour; and the funding commission rate will no longer be imposed by the funder – it will now be determined by the Court at an appropriate time, which is likely to be the time of settlement approval or the distribution of damages (although the Federal Court was not proscriptive as to when this needed to occur). Historically, litigation funders have been prepared to fund shareholder class actions where the class is closed or limited to those persons who enter into a litigation funding agreement. That is because, if funded proceedings were commenced on an open basis, then unfunded class members have been able to enjoy a “free ride” at the funder’s expense. The Full Court’s decision will shift litigation funders’ attitudes in favour of commencing open class, rather than closed class, proceedings. This will likely have an effect on: the speed in which class actions are commenced because: there is no longer a need for funders to engage in the often lengthy process of signing class members up to a funding agreement prior to the commencement of a claim; and if the distinction between open and closed class actions falls away, funders will have greater competition amongst themselves to be the first to commence a class action in relation to a potential claim; defendants’ assessments of the risks associated with a class action being brought against them on the basis that: it will be much more difficult for defendants to quantify their potential exposure to an open class actions; and the quantum of damages sought in larger, open class proceedings may well be greater than the quantum of damages sought in closed class proceedings.