Class action settlements in Australia - the need for greater scrutiny.

• Jurisdiction: Australia
• Author: Legg, Michael
• Date: 01 December 2014

Class actions in Australia are frequently resolved through a court-approved settlement. Yet settlement is fraught with difficulties due to the representative nature of the class action which sees group members who are not before the court bound by the settlement. Consequently the legislature and the courts have taken steps to protect group members. This article explains and critiques those protections before suggesting reforms to ensure that class action settlements are subject to greater scrutiny. In particular, the article focuses on court-appointed costs experts to assess legal fees, an independent guardian to represent group members' interests, less use of suppression orders in relation to the details of the settlement and ensuring settlement approvals are set out in publicly available judgments.

CONTENTS I Introduction II Settlement Must Be Approved by the Court III Evidence to Assess the Reasonableness of Proposed Settlement A Reliance on Lawyers B Objections by Group Members IV Legal Fees and Litigation Funders A Legal Fees B Payments to Litigation Funders and Equalisation Orders V Distribution of Settlement Funds VI Improving Scrutiny of Class Action Settlements A Court-Appointed Costs Experts B Guardian for Group Members' Interests C Overuse of Suppression Orders D Open Justice VII Conclusion I INTRODUCTION

Settlement of class actions (also referred to as representative proceedings or group proceedings) (1) is the most common way in which this form of litigation is resolved. (2) However, settlement in the class action context is more complicated, and more regulated, than other litigation. Complexity in class actions arises because a representative party brings proceedings on behalf of a number of similarly situated persons or entities, known as group members. (3) The group members may be included in the proceedings without their consent and may not be specifically known, although they are afforded notice to allow them to opt out of the proceedings. (4) The group members' interests are affected by the outcome of the proceedings (5) but they are not present before the court. (6) The proceedings rely heavily on lawyers and frequently on litigation funders to create and guide the proceedings, (7) for which they receive substantial monetary rewards. (8) Consequently, settlement must be approved by the court and will usually require the giving of notice to group members and a hearing as to whether the settlement is 'fair and reasonable'. (9)

While the law has responded to the group members' vulnerability with added protections, most significantly judicial oversight, there remains a need to improve and refine the protections to ensure class actions are conducted in the interests of the group members as well as the parties. This article proceeds in three sections. First, Part II provides an outline of the requirements for settlement that flow from the complexities of the class action identified above. Second, Parts III-V identify concerns about the operation of class action settlements, namely, the evidence being provided to the court not being subject to testing as normally occurs in the adversarial system, the inadequate examination of the fees being paid to lawyers and litigation funders and, lastly, a lack of transparency in the operation of the settlement distribution scheme that divides settlements amongst group members.

Finally, in Part VI four suggested reforms are put forward so as to provide courts with better information and subject settlements to greater scrutiny: court-appointed costs experts, an independent guardian for group members' interests, a more open approach to class action settlements that involves less use of suppression orders and ensuring settlement approvals are set out in publicly available judgments.

II SETTLEMENT MUST BE APPROVED BY THE COURT

As I have argued elsewhere,

[settlements are usually viewed as a form of contract in which the parties can settle their dispute for whatever amount they agree upon. The fairness of the settlement amount is not examined provided the parties are competent and not under any disability. In class actions the settlement amount needs to be reviewed because the lawyer for the class is potentially an unreliable agent of the class and the class is unable to effectively monitor the lawyer. In terms of principal (class) and agent (lawyer), the principal has too little at stake to expend resources monitoring the agent and the agent has superior information. (10) Furthermore,

[t]raditional adversarial positions dissipate in the settlement approval context and the judge must be alive to the possibility of conflict and collusion--class counsel may collude with defendants, and there may be conflict between the representative plaintiff and other plaintiffs, or between class categories. (11) The advent of litigation funding adds to, or alters, the above concerns. The funder may be able to monitor the lawyers but it may also collude with those lawyers or pressure the lawyers, and be an unreliable agent for group members. Litigation funders are profit-oriented entities that fund a portfolio of cases to further their own commercial interests, including the interests of their investors, which may conflict with the interests of group members. Settlement is prone to lead to conflicts where the terms may be acceptable to a funder who can avoid the risk of trial and invest in another case compared to the group member who has the one opportunity to obtain compensation to make them whole. (12) Consequently, it is essential that the court exercise a critical supervisory and protective role to ensure that a settlement is in the interests of all the group members. (13)

The Federal Court of Australia Act 1976 (Cth) ('FCA Act') therefore provides the Federal Court with the power, indeed the responsibility, to examine the terms upon which a representative proceeding is being settled or discontinued. (14) Section 33V provides:

(1) A representative proceeding may not be settled or discontinued without the approval of the Court.

(2) If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.

Despite the importance of settlement approval, s 33V makes no express reference to the criteria for approving settlement. Consequently the Court has developed its own criteria for approving settlement. (15) The Courts approach has now been consolidated into Practice Note CM 17--Representative Proceedings Commenced under Part IVA of the Federal Court of Australia Act 1976 (Cth) ('Practice Note CM 17'), which sets out the test as follows:

11 Court approval of settlement

11.1 When applying for Court approval of a settlement, the parties will usually need to persuade the Court that:

(a) the proposed settlement is fair and reasonable having regard to the claims made on behalf of the group members who will be bound by the settlement; and

(b) the proposed settlement has been undertaken in the interests of group members, as well as those of the applicant, and not just in the interests of the applicant and the respondent/s.

11.2 When applying for Court approval of a settlement the parties will usually be required to address at least the following factors:

(a) the complexity and likely duration of the litigation;

(b) the reaction of the group to the settlement;

(c) the stage of the proceedings;

(d) the risks of establishing liability;

(e) the risks of establishing loss or damage;

(f) the risks of maintaining a representative proceeding;

(g) the ability of the respondent to withstand a greater judgment;

(h) the range of reasonableness of the settlement in light of the best recovery;

(i) the range of reasonableness of the settlement in light of all the attendant risks of litigation; and

(j) the terms of any advice received from counsel and/or from any independent expert in relation to the issues which arise in the proceeding. (16)

The above factors have been applied on numerous occasions. (17) Reference should also be made to s 33ZF(1), which gives the Court the power to 'make any order [it] thinks appropriate or necessary to ensure that justice is done in the proceeding', as this provision is relied upon by the Court to allow it to address novel issues that arise as part of a settlement.

Central to the current analysis is the settlement approval or fairness hearing at which evidence addressing the above factors and to support the making of the following orders is put before the Court: (a) approval of the proposed settlement, (b) approval of legal fees and disbursements, (c) approval of any scheme for distribution of the settlement payment, (d) confidentiality of evidence provided in support of the settlement, and (e) disposing of the proceeding (for example, by dismissing the application). (18) The hearing also provides an opportunity for group members to voice objections. (19)

The judge considers the evidence in relation to s 33V and determines if the orders sought should be made. If the settlement is approved there will follow various steps to administer the settlement, including calculating each group members claim and distributing payments. (20)

III EVIDENCE TO ASSESS THE REASONABLENESS OF PROPOSED SETTLEMENT

The evidence as to whether a settlement should be approved chiefly comes from the lawyers for the applicant, and objections to a settlement, if there be any, come from disgruntled group members.

A Reliance on Lawyers

The Federal Court has observed that 'the task of the court in considering an application under s 33V is indeed an onerous one' and '[i]t is a task in which the court inevitably must rely heavily on the solicitor retained by, and counsel who appears for, the applicant to put before it all matters relevant to the courts consideration of the matter'. (21)

Reliance on the lawyers is premised on the duties that they owe to group members. In relation to the...