Recent class action settlements - the court's role in ensuring a settlement operates fairly and reasonably among group members

published Aug 26, 2013
The court will not simply “rubber stamp” a settlement which has been proposed in a class action. The settlement must operate fairly and reasonably in all respects as between group members. This is an important feature of the Australian class action framework and the recent decision by the Federal Court to overturn a settlement in the Storm and Macquarie Bank class action, and to refuse to approve a settlement in the Vioxx class action, show that it is operating robustly to protect the interests of group members.

Storm and Macquarie Bank class action

In 2010, Mrs Richards commenced a class action against Macquarie Bank and Storm Financial. The class action was not funded by a commercial funder, but rather by contributions made by certain group members.

After a lengthy hearing, the parties reached a settlement. Part of the settlement involved “Funding Group Members” (ie those making a contribution to the costs of the litigation) receiving a “Funder’s Premium”. The Funder’s Premium comprised 35% of the settlement amount and was to be distributed among the Funding Group Members. The effect of this arrangement was that Funding Group Members recovered about 42% of the value of their claims, while other group members recovered about 17%. The settlement was approved, despite opposition by ASIC. ASIC appealed the decision to approve the settlement and succeeded in overturning the settlement approval.

The Full Court of the Federal Court found that the distribution of the settlement amount was not fair and reasonable to all group members as:

  • Not all group members had proper notice of the terms of the Funder’s Premium and so did not have equal opportunity to secure an enhanced return.
  • The Funding Group Members did not provide funding on the basis of a commercial return.
  • The calculation of the Funder’s Premium was disproportionate to the risk assumed and the funds contributed.

Vioxx class action

In May 2013, the Federal Court refused to approve a settlement proposed between group members and Merck Sharp & Dome in the Vioxx class action. The refusal was on the basis that that settlement was not fair and reasonable and in the interests of group members as a whole.

Mr Petersen had commenced a class action relating to cardiovascular risks posed by the drug “Vioxx”. The Full Court of the Federal Court held that Mr Petersen had failed to show a sufficient causal connection between his consumption of Vioxx and the heart attack he experienced. However, this finding did not mean that other group members might not prove a sufficient causal connection. Mr Petersen reached a settlement with Merck Sharp & Dome which provided certain limited settlement amounts to group members.

Jessup J in the Federal Court refused to approve the settlement. His concern was that the settlement was advantageous to the representative, Mr Petersen, but could be unjust to other group members with potentially stronger claims.  A further issue of concern was that the application for approval was not supported by an opinion from counsel and that evidence from the solicitor as to the settlement was not sufficiently independent.

Conclusion

Each of the decisions in the Storm and Vioxx class actions show that the court will not simply “rubber stamp” settlements proposed by the lawyers acting in a class action. The settlement must operate fairly and reasonably in all respects as between group members. This is an important feature of the Australian class action framework and these decisions show that it is operating robustly to protect the interests of group members.