Federal Court gives green light for solicitor common fund orders in class actions

Solicitors can now take cut of class action proceeds in Federal Court as well as Victorian Supreme Court

What you need to know

• Earlier this year, the Full Federal Court confirmed that it has the power to make common fund orders at the time of settlement. These allow a commission to be paid to a class action funder from the settlement proceeds. See our earlier article here.
• The Full Federal Court has now confirmed that it has the power to make such orders in favour of solicitors. This allows solicitors to take a percentage of the settlement proceeds (and not just payment for costs and disbursements incurred to conduct the proceeding) (Solicitor CFO). It remains to be seen how the Court's discretion will be exercised, although that is likely to happen shortly.
• This decision could see a shift away from the uptick in class actions commenced in Victoria since July 2020 to obtain the benefit of Group Costs Orders – and the corresponding decline in class actions filed in other jurisdictions - although such a shift may await a High Court determination on the availability of CFOs generally and Solicitor CFOs.

• While a Solicitor CFO has a similar commercial effect as a contingency fee, they are not the same thing. The key difference is a contingency fee is a contractually agreed fee, while a Solicitor CFO is an order by the Court.

Why the debate?

The idea of Solicitor CFOs has been controversial. It is essentially like a contingency fee, with law firms taking a cut of settlement proceeds.

Contingency fees are permitted for class actions in Victoria through the Group Costs Order regime (introduced in 2020). This saw a flood of claims commenced in the Victorian Supreme Court and a decline in class action filings in other jurisdictions.

The ALRC recommended that contingency fees be allowed in class actions. Recent research by the McKell Institute is supportive of replicating the GCO model across all class action regimes for a number of reasons including increased transparency and certainty for plaintiffs, improved returns for group members and promotion of competition between litigation funders and law firms which puts downward pressure on costs. But other jurisdictions maintain the prohibition on contingency fee arrangements.

We discuss the journey to recognising a power to order Solicitor CFOs in our earlier article here.

What was this case about?

The Court was asked to answer a very specific question about whether it has power, upon the settlement or judgment of a class action, to make a Solicitor CFO.

The Court said "yes".

• The question here was about the Court's power – not the exercise of discretion. Whether a Court will, in any given case, make a Solicitor CFO depends on whether it is "just" in all the circumstances.
• The question was only decided in the context of an order at the time of settlement or judgment. It does not allow a Solicitor CFO to be sought, or granted, early in proceedings (unlike a group costs order).
• The Court rejected the contention that a Solicitor CFO could never be "just" because it creates a conflict of interest. The Court acknowledged that potential or actual conflicts of interest are an inevitable by-product of the class action regime. Those conflicts are managed by the solicitors (assisted by an independent bar) and the interests of group members are protected by the supervision of the Court.
• A Solicitor CFO does not fall foul of the prohibition on contingency fees. An instruction from an applicant to seek a Solicitor CFO is not a contingency fee agreement – there is no promise to pay any amount. Rather, the Court said "a promise to make an application for an order directing approved remuneration on a particular basis is a quite distinct notion".
  
  In other words, any payment of a Solicitor CFO would not be pursuant to any bargain struck as part of the solicitor/client retainer. Rather, the payment would be made pursuant to a Court order from an identifiable settlement fund controlled by the Court.
• Relatedly, the Court rejected the contention that a Solicitor CFO is contrary to a public policy against contingency fees. Apart from public policy considerations going to discretion, and not statutory power, the Court recognised that open class proceedings are the norm and there is a mature and competitive market in which funders and solicitors are in competition for carriage of class actions.
  
  By way of analogy, the Court looked at the financial return for group members under the Victorian group costs regime. Returns were better than in funded litigation because the only deduction is the group costs rate (i.e. the solicitor cut) and not separate funding commissions and reimbursement for solicitor fees. We are yet to see the award of a contingency fee in Victoria but this is expected shorty in the G8 Education class action. The Supreme Court of Victoria will hear the application to approve the proposed settlement of $46.5m with a GCO of 27.5% on 26 July 2024.

What next?

1. While the Court has confirmed power to make a Solicitor CFO, it has not yet done so. The circumstances in which a Court will find a Solicitor CFO to be "just" are yet to be seen – although we expect that the focus will more likely be on the amount ordered.
2. We also expect more class actions to be commenced in the Federal Court, potentially seeing a shift back from the Victorian Supreme Court. However, for now, there is still more certainty for plaintiff firms in Victoria, as group costs orders are made early in the proceeding (in contrast to a Solicitor CFO which can only be made at the time of settlement approval)
3. The Federal Court's decision was not surprising given comments made in previous decisions. However, the final word on the availability of CFOs and Solicitor CFOs has not been settled by the High Court – we expect the High Court will weigh in on this area if presented with the opportunity to do so.
4. Given that a number of the respondents argued against the power of the Court to make a Solicitor CFO (or any CFO), it is possible that special leave to appeal to the High Court may be sought in these proceedings.
5. Similarly, State Supreme Courts may be called upon to determine their respective positions on the availability of Solicitor CFOs. We have seen a divergence between the Federal Court and the NSW Supreme Court on a number of issues (for example, the ability to make pre-mediation class closure orders – see here). However, the Federal Court's clear position is likely to make it more attractive for plaintiff firms than State Supreme Courts (other than Victoria, which allows contingency fees).
6. While contingency fees and Solicitor CFOs necessarily remove litigation funders from the forefront of claims, funders are likely to continue to play a significant role in class actions in Australia. We expect funded claims to continue, and even where firms act on a contingency or Solicitor CFO basis there will likely be some form of funding or loan arrangements at a practice or firm level.

R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89

Authors: Ian Bolster, Partner; John Pavlakis, Partner and Sally-Anne Stewart, Senior Associate.