Court rejects settlement fund deduction

by Resolve Editor Kate Tilley

A Federal Court judge has rejected an application from Shine Lawyers to deduct more than $32 million from the approved settlement fund for a class action against pelvic mesh manufacturers.

The case, another in a series of class actions against mesh manufacturers, targeted Ethicon Sàrl.

Justice Michael Lee said the deduction to cover Shine’s interest payments was proposed even though:

• Shine had either already recovered or claimed to be entitled to recover about $82 million for costs and disbursements for the case, and
• He already had described approval of the settlement in Gill v Ethicon Sàrl (No 10) [2023] FCA 228 as “borderline” because the $300 million settlement was “at the low end of the range of fair and reasonable settlement outcomes”.

Justice Lee said his decision had no implied criticism of any solicitors, who were committed to the case and secured “a signal victory, upheld on appeal, against a very determined opponent. This was no small achievement and … the curial outcome no doubt had much to do with the hard work, professionalism and dedication of the individual solicitors involved in the day-to-day conduct of the litigation”.

However, Justice Lee expressed “deep scepticism” about whether it was “truly necessary to spend anything like $82 million to conduct the admittedly hard-fought litigation”.

Commercial considerations

He concluded it was more likely the commercial consideration of maximising returns to shareholders led to various decisions that it was better for Shine Justice to prefer paying shareholder dividends over retaining additional cash reserves as a “buffer” to pay disbursements.

“Given the gargantuan nature of the litigation and the fact it was being defended stoutly, it must have been obvious for years” before the trial started that there was likely to be significant and increasing demands for disbursements.

Justice Lee was not satisfied Shine took the necessary steps to:

• plan for the increasing disbursements that would likely occur before trial in a timely fashion
• explore all available options for accessing other funding sources or securing financing at a better rate in the interests of group members
• maximise the chances of recovering the amount from the respondents
• provide sufficient and accurate disclosure to group members of an intention to seek to recover funds otherwise payable to group members at any stage of the process, and
• recognise that a conflict arose between their own and their clients’ interests by entering into the financial arrangement that led to the interest accruing and then pursuing recovery only against the group members.

Justice Lee said Shine’s retainer obliged it to incur and pay costs and disbursements in the proper conduct of the case. Shine repeatedly stressed it had a choice of either entering into the disbursement funding facility on the terms struck or ceasing to act.

“This suggested binary choice is not established on the evidence. Even leaving aside the possibility of other, more favourable funding methods, Shine’s retainer required it to act in the matter subject to termination for some ‘just’ cause.

“Given the pendency of the initial trial when Shine changed tack and ceased funding disbursements out of retained earnings, it is not evident that Shine did not have a duty to continue to act in the proceedings in 2017.”

Implicit suggestion

Justice Lee said Shine’s implicit suggestion the court would “simply allow a firm operating on a no win, no fee retainer to walk away for commercial reasons, just before the initial trial, is one I find difficult to accept”.

He said plenty of plaintiff law firms and funders were hungry for work and, had Shine said it could no longer act unless it exposed group members to the terms of the disbursement funding facility it had negotiated, another proposal for conducting the litigation could likely have been struck.

Justice Lee said it was hard for professionals to make vexing judgements “while working in a large business endeavour ultimately owned by shareholders who are naturally interested in returns and the maximisation of revenue and profit”.

Shine’s acute problem was that one mode of recovery was thought hopeless and the only other was to:

• settle
• seek a payment diminishing the amount payable to group members, and
• treat group members inequitably.

Justice Lee said he was “not satisfied that Shine acted prudently and reasonably”.

Clients under-compensated

If the interest amount were recoverable by Shine, there was a risk group members would be under-compensated because they not Shine would bear the cost and the amount they could recover would no longer be “in the range of what is fair and reasonable”.

“Borderline means borderline. The settlement got a grudging and hesitant pass, not a credit.”

Group members were not alerted to the possibility that Shine might seek an order for the payment of interest under its disbursement funding facility from any settlement sum.

Justice Lee said that failure was fatal to characterising the order Shine sought as “just”.

If Shine wanted to bring another application it would have to provide “proper evidence” on why a lower amount should be deducted and in a way that redressed the differential treatment between Shine and the group members and ensured Shine’s actions were consistent with contractual obligations it owed its clients.

“Given my findings Shine did not act prudently or reasonably in entering into the disbursement facilities in a manner that best protected the interests of group members, and did not maximise the prospect of recovery of the relevant amount against the respondents, how can it be just for me to allow any deduction?” Justice Lee said.

ASIC review

Following Justice Lee’s decision, the Australian Securities and Investment Commission (ASIC) conducted a review of Shine Justice Ltd’s financial reporting, which led to the listed company having to revise its annual report.

An ASIC statement said Shine had “significantly improved disclosure of the accounting for unbilled disbursements and disbursement funding interest in its 30 June 2023 financial report to provide clarity and transparency”.

Previously, Shine did not disclose either the interest expense on its disbursement funding facility or the interest it intended to claim from personal injury clients and class action lawsuit members if a financial settlement was reached. ASIC said that made it difficult for users of the financial report to assess the extent and cost of the disbursement funding facility and to properly understand the risks of Shine’s business model.

ASIC said the net effect of Shine’s historical treatment was no interest income or expense was disclosed for personal injury actions and class action lawsuits. However, both the income and expense should have been disclosed in accordance with accounting standard AASB 7 Financial Instruments: Disclosures.

ASIC said the $32.4 million in interest that Shine had expected to recover and had previously recognised as revenue was adjusted to become an expense, which ASIC said “highlights the importance of transparent disclosure of interest expense”.

Gill v Ethicon Sàrl (No 12) [2023] FCA 902 judgement 3/8/23

The feature article in the August issue of Resolve outlined Justice Lee’s reasons for agreeing to a settlement in one of several class actions brought against manufacturers of pelvic mesh, despite him saying the amount was “at the lower end” of the range. Read more here.