Class action profits out of order

The best class action is one that’s prevented. An increase in this kind of litigation is often a sign of problems that should have been fixed or avoided entirely years before. Sometimes, when a large number of ordinary people do suffer serious injury or loss and face complex litigation against deep-pocket defendants, there may be no other remedy than a class action, but the collateral damage of court disputes can be great, and it’s vital to make sure that a class-action system is cautiously designed and resistant to abuse.

The parliamentary inquiry into class-action reform foreshadowed by federal Attorney-General Christian Porter in this newspaper on Wednesday is overdue. Law suits run by profitable transnational litigation funders have been on the rise. The question is how much of this represents an unjustified drag on business viability, a question that goes to jobs and living standards — especially in a coronavirus-battered economy. There are signs that the pandemic itself is seen as yet another opportunity to expand class actions. The task of reviving our economic fortunes will be difficult enough without industry having to contend with rapacious class actions.

In some high-profile litigation, as reported on Saturday in The Weekend Australian Magazine, the financial settlement due to victims of undoubted harm all but disappears in legal costs and fees. It looks like the problem is systemic. When litigation funders take on a class action, the median return to plaintiffs is just 51 per cent, compared with 85 per cent when no litigation funder is involved, according to the Australian Law Reform Commission. One giant of litigation funding, Omni Bridgeway, has reported returns on its investment capital of more than 300 per cent on two Australian-linked funds. This far outstrips returns in the litigious US, and it’s not surprising that global hedge funds regard Australian-based litigation funders as very attractive. As a nation, we welcome investment but the rationale should be to expand our productive capacity.

Australia’s lawyers are just as entitled as everyone else to make a living but it’s logical for the parliamentary inquiry to scrutinise the links between plaintiff lawyers and litigation funders in order to ensure that there is no conflict with the interests of plaintiffs. Class actions are not an end in themselves and lawyers owe an overriding duty to clients and the courts. In these pages on Wednesday, columnist Janet Albrechtsen raised the reasonable question as to whether litigation funders themselves should have a duty to members of a class action, not just a devotion to the bottom line. It’s also worth reconsidering the exemptions that litigation funders enjoy from regulation applying to other providers of financial services. Some of these entities driving the class-action trend in Australia hail from far-flung islands best known as unregulated tax shelters. For our own rules, of course, we are accountable. We have made it too easy to launch a class action and co-opt unknowing multitudes. The onus is on opponents of an “opt-in” system to explain why it should not be adopted.

The guiding principle for reform should be that litigation is not the same as justice. The social and economic costs of conflict in court are high. It’s better to invest in training, safer technology and light-touch but effective consumer regulation. A class-action culture is bad news for entrepreneurship, industry and personal responsibility — qualities we desperately need for economic revival.