Mass Tort and Product Liability

Mass torts and product liability were the favoured types of claim after class action legislation first commenced in Australia in 1992. They have had a lower profile in the last few years due to the growth of other areas. However there have been some exceptions.

In 2011, a class action was brought against Grunenthal GmbH, a German company that invented thalidomide in the 1950’s, The Distillers Company  (Biochemicals) Ltd and Diageo Scotland Ltd, the UK companies that entered into contracts in relation to the manufacture and distribution of thalidomide drugs in Australia between approximately 1958 and late 1961, under licence from Grunenthal.  It was announced on 2 December 2013 that the class action has been settled with Diageo for AU$89 million with an additional AU$6.5 million in costs.  However, the drug manufacturer Grunenthal will not contribute to the settlement amount and the class action against them will be discontinued.

In 2013 a settlement of the long-running Vioxx class action was refused by the Federal Court.  The settlement took place in the context where the defendant had defeated the applicant’s claim on appeal but the group contained individuals with different circumstances to the applicant who may be able to recover.  The settlement agreement created two pre-requisites to recovery - namely the group member had (1) heart attack or sudden cardiac death and (2) been prescribed Vioxx.  The settlement made no allowance for the strength of a group member’s claim so that strong and weak claims were treated alike.  Justice Jessup found that as a result some group members would reap a windfall, while others would be subject to injustice.

In 2014 a trial is scheduled to commence against DePuy Orthopaedics, a subsidiary of Johnson and Johnson, in relation to allegedly faulty hip replacements.

Consumer Claims

The Bank Fees class actions will continue in 2014.  In 2012 the High Court in Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30 found that the fact that the honour, dishonour, non-payment and over limit fees were not charged by the bank upon breach of contract and that the customers had no responsibility or obligation to avoid the occurrence of events upon which those fees were charged did not render them incapable of being characterised as penalties.  The first trial which has ANZ as the respondent commenced on 2 December 2013.  The estimated claims against each Bank according to law firm Maurice Blackburn are:

* Citibank includes 1,900 BOQ and Suncorp credit card customers for whom it is the actual credit provider

The Bank Fees class action is significant because of the quantum of the claims but perhaps more so because of its ability to change business practices and potentially remove a source of revenue for the banking industry.  The underlying law on penalties may also have application to other industries.

An area that is likely to give rise to class actions going forward are consumer claims under the Australian Consumer Law which contains prohibitions on misleading conduct and unconscionable conduct that existed in the Trade Practices Act 1974 (Cth) but also new causes of action for unfair contract terms. 

Claims Against Government

Government has become the target of class actions. In Victoria a number of hearings and settlements have occurred in relation to the Black Saturday fires.  These will continue into 2014.  The State of Victoria was also unsuccessfully sued by the commercial abalone industry in relation to a viral infection of wild abalone from an abalone farm.

In NSW class actions were made available from 4 March 2011.  The State of NSW was the defendant in the first proceeding commenced under the new regime. In Konneh v State of NSW (No. 3) [2013] NSWSC 1424 the Supreme Court of New South Wales determined that the NSW police could not rely on the Bail Act to justify the arrest of any young person who was not on bail at the time of arrest. For young persons who were arrested when police were mistaken as to the conditions of their bail, the class action continues.

The Commonwealth has been sued in relation to the outbreak of equine influenza.  The claim is on behalf of 550 clients that allege that the Commonwealth breached its duty to take reasonable care to control a dangerous substance (the equine influenza virus) on the Eastern Creek Quarantine Station.  However, the largest claim ever may be commenced in 2014 in relation to flood damage from the Wivenhoe Dam in Queensland.  Maurice Blackburn has indicated that it will be filing a class action in early 2014 seeking compensation for financial loss and damage caused by the negligent operation of Wivenhoe and Somerset dams during the January 2011 flood in South East Queensland. The action will be funded by litigation funder, Bentham IMF Limited, formerly IMF (Australia) Ltd.  The claim is complicated by Queensland not having a modern class action regime but the causes of action are likely to be in tort with no Federal element so that the Federal Court class action regime is unavailable.  There are procedural steps to try and address this complication but it is also likely to give rise to interlocutory disputes.

Cartel Class Actions

Cartel class actions have gained traction in Australia but plaintiff’s lawyers and litigation funders have found these proceedings to be costly and time-consuming.  This may mean that the area becomes the province of highly specialised plaintiff’s lawyers or cartel enforcement will be left to the Australian Competition and Consumer Commission.

The Air cargo cartel class action has been set down for trial to commence on 27 October 2014 and is listed to run for 26 weeks ie for half a year.  This is a price fixing class action against major international airlines.  The Applicants allege that from 1 January 2000 to 11 January 2007 the respondents engaged in cartel conduct to fix the price of international air freight services, and specifically the level of fuel and security surcharges imposed, including international air freight services to and from Australia.

Litigation Funding – Institutionalised but Still Developing

In 2012 the Australian litigation funding industry was subject to a light touch regulatory regime that addressed conflicts of interest but declined to impose a licensing regime or a requirement for a specified level of capital adequacy to ensure the funder could meet its financial obligations. 

The former Labor government’s light-touch regulation of funders appears to have been an attempt to keep barriers to entry to the litigation funding market low so as to attract greater funding which provides a means for consumers to access justice, hopefully at lower cost.  

However, this approach may leave consumers of funding services open to the risk that an under-capitalised and/or foreign funder will assist in the commencement of litigation but if the proceedings are unsuccessful the funds to pay adverse cost orders will not be available.  Both domestic funders and potential defendants have called for reform.  Attorney-General George Brandis has indicated that further regulation may be forthcoming. 

While some funders may be concerned about further regulation the idea of third party funding of litigation being outlawed now seems very remote.  Litigation has been institutionalised with its recognition in court rules and practice notes.  The institutionalisation of litigation funding continued in 2013 with the Full Federal Court in Madgwick v Kelly [2013] FCAFC 61.  The case concerned an application for security for costs in a class action brought by investors in forestry plantation schemes that failed.  Security for costs is procedure whereby the respondent seeks to have the applicant provide some form of bond or bank guarantee to cover the respondent’s costs in the event that the litigation is unsuccessful.  In reversing the trial judge the Full Court expressed the view that the availability of litigation funding was an important factor in determining whether the applicant and group members should be required to provide security for the respondents’ costs.  Presumably this is because funders will usually provide security as part of funding the litigation.  The practical effect of the judgment appears to be that individuals will need to seriously consider obtaining litigation funding so as to be able to provide the necessary security for costs or risk having the proceeding stayed.

The significance of litigation funding, not just in Australia, but as export to the UK and US was recognised by The American Lawyer in its August 2013 edition when IMF (Australia) Ltd’s co-founders were recognised as being amongst “The Top 50 Innovators in Big Law in the Last 50 Years”.  The article accompanying the award noted that IMF had opened offices in New York and Los Angeles, with one planned for London.

Litigation Funding was also in the news in relation to the size of the percentages claimed from group members’ recoveries and which group members had to pay.

In the Richards proceedings, a class action against Macquarie Bank Ltd settled for $82.5 million.  As part of the court approval, the applicant sought a funder’s premium of 35% for those group members who co-funded the litigation.  This meant that group members who contributed to the legal costs and disbursements involved in running the class action recovered 42% of their losses, while those who did not contribute only recovered 17.602% of their losses.  The percentage used was determined by reference to the range of premiums which one sees afforded to third party litigation funders in respect of class actions.  Due to the novel nature of the funder’s premium ASIC intervened in the proceedings.  At first instance the settlement was approved. ASIC appealed.

The Full Federal Court in Australian Securities and Investments Commission v Richards [2013] FCAFC 89 overturned the settlement and the 35% uplift in recovery for group members who self-financed the cost of prosecuting their class action.  The Full Federal Court observed that in the instant case the evidence adduced to support the imposition of a premium of 35% was insufficient.  Further a return on investment of 525% was disproportionate to the funds provided.  These observations may suggest a greater willingness to test the reasonableness of a funder’s fee in the future.

The mechanics of litigation funding were also reviewed in the GPT shareholder class action settlement.  Approximately 92% of group had executed a Litigation Funding Agreement (LFA) with the funder which provided for a commission of between 25% and 30% of net recoveries after reimbursement of litigation costs.  However, the Settlement Distribution Scheme proposed that the funding commission be deducted from the individual entitlements of all group members including the 8% who had not entered into a funding agreement.  Gordon J rejected this aspect of the scheme as her Honour explained that the funder had made a commercial decision to fund the proceedings by entering into a LFA with just 92% of group members. Her Honour stated that the deduction of the funding commission was not a part of the commercial bargain reached by the funder with the 8% who had not entered into a funding agreement and that it should not be imposed on those members. Gordon J distinguished Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 where Pagone J had approved a similar provision, as the notice given to group members in that case differed with respect to the timing of the notice and the stage of the litigation. However, her Honour also remarked that “it is difficult to conceive of a circumstance in which it would be appropriate”.  The differing approaches may become important factors as to where class actions are commenced as the Victorian approach provides a greater return for the funder.

In order to ensure that the unfunded group members would not receive what Gordon J described as a “windfall”, her Honour proposed that the amount which would have been deducted and paid to the funder under the scheme should be pooled and distributed pro rata to all group members.  Referred to as the “equalisation factor”, the above approach has been used in a number of class action settlements. This ensures that the funder’s fee is effectively shared by all group members regardless of whether they are funded or not and as a result, the burden of the funder’s fee is shared by all. At the same time, the litigation funder is not able to recover more than they are contractually entitled to.  The difficulty with the equalisation factor is that the Court imposes the fee from the funding agreement on group members who have not signed up to the agreement and without any review of the reasonableness of the fee.

Lawyers’ Fees

Lawyers’ fees were put under the spotlight in the GPT shareholder class action settlement.  On 21 June 2013 the Federal Court approved the settlement sum of $75 million inclusive of interest and legal costs, but refused to approve the sum of $9.3 million claimed in respect of the applicant’s lawyer’s legal fees and disbursements.  The request for approval was referred to a Registrar of the Court to conduct an assessment and report back to the Court.  The Registrar reported back and a further judgment was delivered on 7 November 2013 with $8.5 million awarded for legal fees and disbursements.

Justice Gordon of the Federal Court stated that there were two aspects to the request for the approval of legal fees. The first was that the amount approved by the Court was to be shared on a pro rata basis by all group members irrespective of whether they executed a Legal Costs Agreement (LCA). The second aspect concerned the quantum of the professional costs and disbursements incurred by the applicant’s lawyers which the law firm sought approval from the Court.

The first issue deserves comment because the liability to pay legal costs in a class action in Australia was always thought to be the same as for other litigation – there needed to be a contractual obligation to pay.  Admittedly, the issue has rarely arisen because the legal costs usually form part of the settlement to be paid by the respondent.  Justice Gordon’s approach is similar to the common fund approach used in US class actions, although no reference is made to this jurisprudence.  Her Honour also suggested that given the increasing number of class actions, perhaps there should be a requirement that any LCA or equivalent between group members and a firm of solicitors should be approved by the Court before it is binding on the group members.  This is also a novel approach as the LCA would not normally be binding on group members who are not a party to the LCA.

On the second issue, her Honour expressed concern that the law firm was acting for itself in circumstances where group members were unable to oppose the application and there was no other contradictor before the Court. The group members were unable to oppose the application as they had no notice of the fees and disbursements or how they were quantified.

The applicant’s lawyers had engaged a costs consultant to provide an expert opinion on the reasonableness of the legal costs and disbursements incurred. Gordon J was highly critical of the law firm and the costs consultant’s report and was not satisfied that  the report provided the Court with the basis for approving the law practice’s fees. Her Honour noted that the amount claimed by the applicant’s lawyers was almost three times the original estimate of $3,500,000 (which the report failed to explain), that the hourly charge out rate seemed to have increased by 5% with no demonstrated notice of that increase to the members, and the costs for discovery (based on a rate of $550/ hour) seemed unreasonable. The LCA signed by (most of) the group members did not seem to be properly referred to and utilised in the assessment of costs by the consultant.

The Federal Court’s judgments in the GPT class action settlement signal that the fees charged by law firms to group members will be the subject of greater scrutiny at the settlement stage. 

Lawyers as Funders

Maurice Blackburn, which is known for its class actions expertise, especially in the shareholder and cartel class actions area, has created its own funder: the Claims Funding Australia Trust which has as its trustee Claims Funding Australia Pty Limited.  The media has reported that two of the law firm’s senior principals are shareholders in the funder and a third is one of the funder’s three directors.  Further all of Maurice Blackburn’s principals are beneficiaries of the discretionary trust. 

Due to the novel nature of a law firm creating a litigation funder, the trustee of the funder has sought approval to be able to fund the equine influenza class action against the Commonwealth government.  The EI class action is also being run by Maurice Blackburn.  The request for approval has been referred to the Full Federal Court to ensure that the trustee would be “justified” in providing funding and performing its obligations under the funding agreement.  In lay terms the issue is whether the arrangement would breach the ban on contingency fees which currently exists in all Australian states. 

Whether the structure adopted for the litigation funder is sufficient to avoid a breach of the legislation outlawing contingency fees may in many ways be beside the point.  If law firms are able to establish litigation funding entities that they can direct clients to, and receive from, albeit indirectly, a proportion of the client’s recovery, then Australia will have contingency fees in substance.  This then raises two further issues.  Whether lawyers creating and controlling funders should be prevented so as to avoid the excesses of contingency fees seen in the United States?  Or if such arrangements are seen as a desirable then should the Australian states amend their statutes governing the legal profession and allow lawyers to charge contingency fees directly?