“Would you like fries with that?” Litigation funders upsize in McDonald’s common fund order judgment

Earlier this month in Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162 (McDonald’s), Justices Beach, Lee and Colvin of the Federal Court of Australia upheld the right of litigation funders and plaintiff lawyers to seek a “Common Fund Order” (CFO) as part of a class action settlement approval process.  What does that mean in practice?

The judgment in McDonald’s

CFOs are a valuable tool for litigation funders and plaintiff lawyers embarking on class action litigation, as they provide the security of knowing that a contribution to the costs and funding of the litigation can be clawed back from each and every group member who participates in a settlement distribution scheme.

However, the power of the Federal Court to make CFOs had been questioned by the High Court of Australia in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45 (Brewster) and some other judgments of single judges of the Federal Court.

Brewster contemplated “front end” CFOs made at the early stage of a proceeding, as opposed to the “back end” or CFO settlement approval orders that were under consideration in McDonald’s, and made in reliance on Section 33V(2) of the Federal Court of Australia Act 1976, which provides the Court with the discretion to “make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court”.

Beach, Lee and Colvin JJ were unequivocal in holding that Section 33V(2) provides the discretionary power to make a CFO, in that such matters are within the Court’s domain to approve a class action settlement that contains a “just order”.

As Beach J noted:

“It would appear uncontroversial, for example, that s 33V(2) could be used to make an order for the payment of legal fees to lawyers directly from the settlement proceeds.  If that is accepted, there is no reason in principle why s 33V(2) could not similarly be used to make an order for the payment of fees to a litigation funder for their services…”

And perhaps even more critically given that a Court’s paramount concern in approving the settlement of a class action is protecting the interests of the group members and delivering a fair and appropriate return to group members:

“As to purpose, s 33V reflects the court’s important supervisory role in respect of settlements of representative proceedings for the protection of group members.  That role extends to the supervision of legal costs and funding charges.  It is consistent with that supervisory role for the Court, in considering what orders are just, to assess the remuneration that should be provided to a litigation funder, without which compensation may not have been payable to group members at all, having regard to the interests of the group members and the amount of compensation that they would ultimately receive.”

The practical impact

This judgment has significance for plaintiff lawyers and litigation funders and indeed defendants to class actions for a number of reasons:

1. Subject to the Section 33V(2) discretionary power being appealed to the High Court (NB the use of the term “discretionary”), McDonald’s appears to consolidate the Federal Court’s power to make CFOs. On that point, access to CFOs may no longer need to be cured by legislative intervention if McDonald’s is not appealed and overturned.
2. Whilst Brewster remains authority for the prohibition of the making of CFOs at the preliminary stage of a class action, McDonald’s provides litigation funders and plaintiff lawyers embarking on class action litigation with the security of knowing that the Federal Court has the power at the settlement approval stage to protect their return on investment via the making of a CFO.
3. It may also enable plaintiff lawyers to advise lead plaintiffs and group members with more clarity as to what their out of pocket costs contribution may be, subject of course to the Federal Court approving the proposed funding and costs arrangements as part of the overall settlement approval process.
4. This judgment may see a spike in class actions being pursued in the Federal Court by non-Victorian plaintiff lawyers, noting that the Supreme Court of Victoria had seen an upturn in class action activity when it became the first and only Australian jurisdiction to allow contingency fee arrangements (or group costs orders) in class actions.
5. It should also mean that plaintiff lawyers and litigation funders may be quicker to pull the trigger on issuing class actions, noting that the “book building” and initial registration/funding agreement process in anticipation of a class action may no longer need be as exhaustive and arduous if the promise of a CFO is genuine. This would be of utility where potential group members are difficult to identify, or where group members are located offshore as the High Court allowed last year in BHP Group Limited v Impiombato [2022] HCA 33.
6. Whether access to CFOs means that more speculative class actions will be pursued remains to be seen. As Lee J pointed out, whilst it should be recognised that the CFO discretion is to be exercised “in the context that litigation funding has become a means by which claims which would not otherwise have been able to have been brought are litigated” and thus facilitating the legislative objectives (ie access to justice considerations), his Honour also responded to criticism of litigation funders’ self-interest in providing funding with “what commercial enterprise, one asks rhetorically, is not self-interested?  There is no reason to be ‘squeamish’ in providing the litigation funder with just and hence reasonable remuneration”.  In other words, strategic decisions about commencing a class action will still be made commercially.  There will be no CFO if there is no prospect of settlement.