Class action settlement approval: fair & reasonable by any other name 


Posted By and on 29/01/24 at 1:22 PM

Just because a class action settlement amount is significantly reduced due to legal fees (and the class members receive a smaller portion) does not mean the settlement is not fair and reasonable and therefore should not be approved 

Settlement in class actions – a tried and tested route 

Class actions generally follow a tried and tested route in which the parties slug it out while winding their way to Court approved settlement. 

Court approval is mandatory and guided by a fair and reasonable test, including by refence to costs, prospects and recoverable damages.      

Ordinarily, settlement will be approved, and the pie split three ways between the litigation funder, plaintiffs’ lawyers and the class. Everyone’s a winner! 

The conventional wisdom is that class members will receive appropriate compensation even though they have not incurred any costs or risk while the funders and their lawyers will collect a return on their investment for their efforts.   

While by no means a “winner”, the defendant (or its insurer) will be relieved to close out the class action chapter that has distracted it from core business. Running the claim to judgment would cost it significantly more in terms of resources and reputation.  

Simple, right? Think again. Litigation is never simple, particularly class actions 

Recently, in Luke v Aveo Group Limited (3), the Federal Court delivered a reminder that fair and reasonable must be viewed in the context of that specific litigation. It does not necessarily translate to a windfall for the claimants.  

In fact, despite legal costs being in the range of $11 million, the entire class was left with only 17% of the settlement amount. Not quite nothing, but pretty close, when divided amongst class members. 

This is because the expert evidence produced at trial demonstrated that proving loss would be a real hurdle. Without any loss, they would not be entitled to any compensation and pursuing the claim would be meaningless and introduce the risk to the funder of an adverse costs outcome.  This is despite the time, effort and significant legal costs that had been invested to that point, apparently largely on liability and not quantum. In the words of the Court, while not a desirable result for group members, the unfortunate reality was that their case was always ‘weak and likely to fail’.   

Fair and reasonable does not trump a flawed claim 

Intuitively, it does not feel fair or reasonable (as was submitted by one of the class members), that the litigation could simply come to a halt with such a paltry outcome for the class while the settlement amount was substantive and absorbed in legal fees. But then, complex litigation rarely fits into a neat box, particularly hard-fought class actions.   

Momentum, pressure and funding can only carry a claim so far. Even these factors cannot make up for a lack of quantifiable damage when pitted against a resolute defendant.  As the judgment notes, litigants can be ‘forced to confront the reality that their claims or defences are not as strong as they thought and are forced to the realisation that it is appropriate to settle the case on unfavourable terms’. 

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George Tabet Lawyer

George is a lawyer in our Litigation & Dispute Resolution team, having commenced at KHQ as a graduate in 2022. 

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