How class actions went from David v Goliath to big business

The key to understanding what any public policy argument is really about is to look at whose money is at stake on each side of it.

So it is with the vicious fight over class action litigation. The Morrison government has come out swinging, announcing that it’s going to force third party litigation funders into the financial services and managed investments regime under the Corporations Act 2001 and Australian Securities and Investment Commission (ASIC) oversight (up to now it’s been an unregulated industry).

Attorney-General Christian Porter has declared class actions to be the work of the devil; the Coalition is increasingly parroting the line of big corporates, to the effect that these cases are confected assaults on the efficient functioning of business, turning minor legal issues into rivers of money.

The critical point the corporate lobby wants us to understand is that that river flows into the bank accounts of the funders and class action law firms, not the punters they represent.

On the other side are the “We Fight For Fair” (trade marked) angels of Maurice Blackburn, the “We’re Working Hard for Groups that Have Been Wronged” warriors at Slater and Gordon (formerly a listed company, now 95% owned by its principal lender) and an increasing number of other law firms dedicated to finding and running class actions.

Behind these firms are the funders, mostly representing offshore money, and very big buckets of that indeed. Not all class actions are funded; but these days most are. 

It’s important to also note that most litigation funding doesn’t go to class actions at all, but to conventional commercial litigation cases; a distinction the government has chosen to ignore.

The Labor Party has aligned itself just as strongly as the Coalition, but on the opposite side. Perhaps that’s a purely principled stance, but the party’s deep links to certain plaintiff law firms makes it difficult to be sure.

In reality, the motivations of the politicians are a distraction from the main game, which is a fight to the death between two massively well-funded lobby groups, over a huge and ever-growing prize.

Litigation, we used to say, was a mug’s game. Taking your case to court, no matter how strong you thought your legal arguments were and no matter how credentialled your lawyers, carried no better odds of success than going red or black at the roulette table. The court system, in civil litigation, is designed to produce outcomes, not perfect justice.

The genesis of both class actions and litigation funding is that uncertainty. In concept, the class action overcomes the problem faced by a large group of people who have been (more or less) identically hurt by the one wrong: the prohibitive cost and risk of litigating.

The class action takes that away by leveraging their combined power and, at the same time, relieving the courts of having to answer the same question multiple times. It’s one-size-fits-all justice, at an affordable price.

Suddenly, the economics work. Many early progenitors of the modern class action involved the “class” all putting a small amount of money in to cover their combined costs. 

However, that has problems of unwieldiness (herding sheep), so the no-win-no-fee option comes into view. However, unlike traditional single plaintiff claims, that’s mostly an unaffordable burden for law firms to carry.

The answer to that is third party funding. Now the benefits of the class combination are fully realised; it costs them nothing to have a crack, the lawyers get paid win or lose, and all that’s needed is for the economics of the deal to work favourably enough for the funder to want to pay for the exercise.

We know that that equation has been solved, because of the proliferation of funders in the Australian market. It works by a combination of factors: algorithms that determine probability of success with relative accuracy; an environment of litigiousness that increasingly encourages defendants to settle, reinforcing the first point; court rules that make the process smooth and particularly allow funders to exercise primary control; and the payout percentage (usually in the ballpark of 30%).

Having cracked the code for making litigation a profitable enterprise, there is a lot of desire, on the part of both the funding industry and the lawyers whose core business is class actions, to ensure that the model isn’t interfered with.

On the other side of this is big business. The targets of class actions are mostly large corporations, whether the cause of action is an industrial spill, medical device gone bad or lies told to shareholders. They are not keen on continuing to be the targets of class actions, and they are making their objections loudly heard.

There are good arguments on both sides. A wrong should, as a rule, be righted, even if it bankrupts the wrongdoer (righteous example: underpayments of employees, the corporate fraud du jour). 

On the other hand, constant shareholder class actions do risk making life impossibly difficult for corporate boards.

Somewhere in the middle is a policy approach that would appropriately balance the conflicting interests of these two moneyed-up interest groups; I don’t think we’re anywhere near that yet.

We won’t get there at all while the negotiation is being conducted by two groups, and their political friends, who are each as compromised by their commercial interests as the other.

And guess who’s entirely absent from the policy debate? The punters.