Australian Court warns cooperating class action firms against potential anti-competitive conduct

What you need to know

• In resolving a recent carriage dispute, the Federal Court stated that the commencement of two or more competing class actions, and the Court's procedures for determining which proceeding should go ahead, imposes competitive pressure on the fees charged by the competing law firms and litigation funders. This benefits group members.
• Prior to commencing a class action, two plaintiff law firms entered into a "Cooperative Litigation Protocol". One firm appointed the other firm its "agent", and the firms agreed that each would undertake a share of the legal work. The firms agreed that work would be allocated between them under the Cooperative Litigation Protocol.
• While the Court allowed the proceedings brought by the cooperating law firms to proceed, it stated that a detrimental aspect of the arrangement was that it removes the potential competition that would otherwise arise between the firms (and any litigation funders). The Court warned that any arrangement between law firms (or litigation funders) for the purpose, or with the effect, of avoiding or limiting competition in the supply of legal or financial services may contravene Australian competition law.
• The decision compares to an earlier decision of the Victorian Court of Appeal, in which the Court rejected a submission that orders directing representative plaintiffs in competing class actions to confer to resolve a multiplicity dispute "gave legitimacy or lawfulness to conduct that would otherwise be unlawful" (see our earlier publication here). The key difference between the two cases is that, in the recent Federal Court case, the law firms agreed to cooperate from the outset rather than commence competing class actions.

Background

Two representative proceedings were commenced in the Federal Court of Australia on behalf of online publishers alleging anti-competitive conduct in the supply of ad-tech services used in online advertising. The applicants in the first proceeding were represented by a litigation funder and two law firms under an agency arrangement and Cooperative Litigation Protocol. The applicants in the second proceeding were represented by a different law firm and funder.

Both proceedings alleged that the conduct in the ad-tech supply chain substantially lessened competition in Australian markets. The applicants in each proceeding sought to stay the other proceeding.

The competing class actions

In analysing the competing claims, the Court concluded that the first proceeding should go forward and the second proceeding be stayed. The key factors were:

1. the broader group membership in the first proceeding;
2. whilst there were "obvious deficiencies" in both sets of pleadings, the first pleading provided for more comprehensive claims against the defendant and sought more extensive relief; and
3. while the proposed budget for the first proceeding was higher that the proposed budget for the second proceeding, the Court held it was "more realistic" and the funding arrangements to support the costs of the litigation in the first proceeding were more comprehensive, and therefore more beneficial, to group members.

The Court considered that the respective legal teams, extent of the book builds, proposals for security for costs, and state of overall preparation in each case were either neutral or not a factor in determining the carriage dispute.

The cooperation arrangements

The Court made several observations about the arrangements between the two firms in the first proceeding:

• Both law firms commenced investigating a possible class action at different times. Prior to commencing proceeding, the firms "agreed to consolidate their investigations and jointly commence a representative proceeding".
• The firms entered into an Agency Retainer Agreement. The agreement had "the characteristics of a joint commercial enterprise, in that the firms agree that each firm will undertake a percentage share of the legal work, measured as a percentage of professional fees rendered".
• The legal work to be undertaken by the two firms was governed by a "Cooperative Litigation Protocol. Among other things, the Cooperative Litigation Protocol provided for the formation of a litigation committee (comprising two lawyers from each firm) to manage the litigation and determine the distribution and coordination of work between the two firms.
• There was also a co-funding arrangement between the two firms.

No evidence was adduced to the Court about why the two law firms decided to consolidate their investigations and jointly commence the proceeding.

The Court observed that agency arrangements such as this might be entered into for at least two different reasons:

1. First, one firm wishes to commence a representative proceeding but does not have sufficient resources to conduct the proceeding on its own, and engages a second firm to supplement its resources (and perhaps sharing the financial risk). The Court observed that such an arrangement "may be considered beneficial in that it enables a proceeding to be commenced and run when it might not otherwise be possible".
2. Second, two firms learn that each intends to commence a competing class action. "Rather than commence competing class actions, the firms decide to enter into an arrangement such that only one proceeding is commenced, and the legal work is divided between the two firms".

Regarding the second reason, the Court noted:

• A potential benefit of the approach is that it avoids costs duplication and the Court having to determine which proceedings should proceed.
• However, a detrimental aspect of the approach is that it "removes the potential competition that would otherwise arise between the firms, and any litigation funders that are engaged to support the proceedings". In addition, the arrangement would "result in additional costs that would not be incurred if a single firm were providing the legal services".
• The commencement of competing class actions, and the Court's procedures for determining carriage disputes, have "the desirable effect of imposing competitive pressure on the fees charged by the respective law firms and any litigation funders, which is ordinarily to the benefit of group members", because firms and funders often reduce their fees.
• The Court stated that "[a]ny arrangement entered into between law firms (or litigation funders) for the purpose, or with the effect, of avoiding or limiting competition in the supply of legal or financial services" may contravene Australian competition laws.

The Court did not make any findings in this case about whether the arrangement between the cooperating law firms contravened Australian competition law.

Comparison with earlier decisions about carriage disputes and competition

The Court's decision may be compared to a 2024 decision of the Victorian Court of Appeal (summarised in our article here). In that case, three law firms had (separately) brought proceedings. They subsequently agreed to consolidate the proceedings.

The Victorian Court of Appeal rejected a submission that orders directing representative plaintiffs in competing class actions to confer with the aim of resolving the multiplicity issue "gave legitimacy or lawfulness to conduct that would otherwise be unlawful". The Court also observed that the process of putting competing proposals to the Court is "far from a truly competitive process", and the cost at which legal services are provided to group members is not the predominant consideration in determining carriage disputes.

A key difference between the recent Federal Court decision and the earlier Victorian Court of Appeal decision is that, in the recent Federal Court decision, the firms agreed to cooperate before commencing the proceeding. They did not agree to cooperate with one another in order to resolve a dispute about competing class actions. A potential concern with this approach is that it may reduce the Court's ability to scrutinise the arrangements and determine whether they are in the best interests of group members (which would otherwise occur when the Court was called on to resolve any carriage dispute between competing class actions). This concern is highlighted by the Court's observation in the recent Federal Court decision that it was not provided with evidence about why the two law firms had decided to cooperate to commence the representative proceeding.

Where to from here?

• This decision suggests that Courts may exercise a greater degree of scrutiny over arrangements between plaintiff law firms to cooperate from the outset in bringing a representative proceeding.
• It is clear that the Courts place significant weight on the beneficial competitive effects of competing class actions, including the competitive benefits to group members that flow from the resolution of carriage dispute.
• For future cases, it is suggested that it would be valid for the Court to require evidence from cooperating law firms (and litigation funders) about the reason for the cooperation, including why this benefits group members. This would enable a higher degree of Court scrutiny and supervision of pre-commencement cooperation arrangements.
• It may become increasingly difficult for plaintiffs to convince the courts that two law firms and two litigation funders should be involved in bringing what is in substance the same class action for various reasons including the inevitable inefficiencies, additional costs and the risk of anti-competitive conduct.

Other Author: Jordon He, Lawyer.