Court increases litigation funder’s fee

By Resolve Editor Kate Tilley

The Full Federal Court has enabled a litigation funder to take 25% of a class action settlement.

The Full Court overturned a February 2023 decision by Justice David O’Callaghan that litigation funder Galactic Seven Eleven Litigation Holdings LLC was entitled to only $12.05 million of the $98 million settlement.

Two representative proceedings against 7-Eleven Stores Pty Ltd, ANZ Bank and Texas-based 7‑Eleven Inc alleged they had misled franchisees about the potential profitability of stores.

A trial was scheduled to start on 9 August 2021 for an estimated 10 weeks. After mediation in June and July 2021, before former High Court Justice Susan Crennan, the parties agreed to settle the proceedings for $98 million.

Galactic then sought approval for payment of $24.5 million (25% of the $98 million settlement sum) as a common fund order (CFO); reimbursement of about $20 million for legal costs incurred and paid; and the return of almost $7 million paid for security for costs.

Discretionary power

Justice O’Callaghan approve the settlement on 8 March 2023 but refused to make a CFO for $24.5 million or for any amount.

He found the court did not have power to make a CFO and, even if it did, it was inappropriate to exercise its discretionary power to order a CFO of the type or in the amount sought.

Justice O’Callaghan instead made a funding equalisation order (FEO) for $12.005 million.

Galactic’s appeal was heard by Justices Bernard Murphy, Michael Lee and Craig Colvin. The funder successfully argued that Justice O’Callaghan had erred in each of his findings.

Two barristers, Jonathon Redwood SC and Ryan Jameson, who acted as the contradictor before Justice O’Callaghan to represent the group members, fulfilled the same role in the appeal.

Justice Murphy, who delivered the main judgement and with whom Justices Lee and Colvin substantially agreed, found the court did have the power to make a CFO and Justice O’Callaghan could have exercised his discretion under s33V(2) of the Federal Court of Australia (FCA) Act to do so.

‘Off the rails’

He made a CFO of $24.5 million in Galactic’s favour, saying the amount was “commercially realistic and properly reflects the costs and risks Galactic took on by funding the proceeding.”

Justice Murphy criticised the settlement process, saying it “went off the rails”.

Although the issues were “relatively commonplace”, the parties presented 49 affidavits, and Galactic and the contradictor both adduced expert evidence on what was Galactic’s reasonable rate of return on its investment.

Consequently, hearing the approval application took six days and involved a huge expenditure of time and resources.

“Much of that work was at the expense of the applicants and group members. 

“Putting to one side the impost on a busy court, in a case such as this the approval application should not have been permitted to cost the group members $2.54 million.”

Justice Murphy said parties and the court “must be vigilant” to ensure settlement approval applications were not conducted in a way that was “plainly inconsistent with the overarching purpose in s37M of the FCA Act”.

Benchmark percentage

The applicants had not opposed a CFO in the form or the amount sought by Galactic, but Justice O’Callaghan rejected it because he did not accept that the funding commission should be determined principally by reference to a fixed or “benchmark” percentage of a settlement sum.

Justice Murphy said the Full Federal Court, in a decision handed down about seven months after Justice O’Callaghan’s decision, found the court did have power to make a CFO at the stage of settlement approval. “This court is bound to follow that decision unless satisfied it is plainly wrong. We are not so satisfied; indeed, we agree with that finding.”

He said the language of s33V(2) imported a wide judicial discretion and there were no strong reasons for favouring a FEO over a CFO at settlement approval.

Apart from Justice O’Callaghan’s complaint about the inadequacy of Galactic’s evidence and his objection to using a fixed percentage of the gross settlement, his reasons “almost entirely favoured making the proposed CFO”.

Justice Murphy said an error in the exercise of the s33V(2) discretion was apparent in the finding that a $24.5 million CFO would mean Galactic would be entitled to receive “something approaching double” what it would be entitled to receive under the litigation funding agreements (LFAs) it had entered into with the applicants and about a third of the other group members. The LFAs would have entitled Galactic to 35% of their settlement amounts.

Strenuously defended

Justice Murphy said the proceedings were large commercial class actions involving a high level of risk for the applicants and thus for Galactic; they were “extremely complex and hard fought” and settlement was reached only six days before the trial was due to start.

At that point Galactic had paid or incurred legal costs of about $20 million and paid $6.95 million in security for costs. 7-Eleven’s costs were more than $17 million and its estimated costs to the end of the trial were about $27.9 million.

“Galactic provided the finance that enabled the proceedings to be run to a successful conclusion, doing so on the basis (at least from February 2018 when it became apparent to Galactic that insufficient group members would enter into LFAs) that it would seek a CFO upon success in the proceedings,” Justice Murphy said.
 
“The proceedings were large, highly complex, strenuously defended, expensive to conduct, and involved substantial risks on liability and quantum.” There was a high level of risk that Galactic may not be successful or, even if they were, may not get a judgement that justified the huge expenditure and risk.
 
Galactic Seven Eleven Litigation Holdings LLC v Davaria [2024] FCAFC 54 (2 May 2024)

Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 (14 Feb 2023)