Johnson & Johnson pelvic mesh victims have expressed dismay at efforts by their law firm, Shine Justice, to stiff them with exorbitant finance costs. Callum Foote investigates.
Has Shine Justice preferred its own financial interests over the interests of its thousands of class action clients by allowing interest at more than 20% to run up on a loan to finance the pelvic mesh class action?
Shine has applied to the Federal Court for reimbursement of legal costs out of the $300m settlement fund arising from the class action for victims of faulty pelvic mesh implants supplied by Johnson & Johnson Medical and Ethicon (J&J/E).
The claim for reimbursement includes finance costs of circa $31.6m. The size and calculation of the finance costs is presently exercising the mind of Justice Michael Lee of the Federal Court.
Justice Lee held a hearing on May 26, and another hearing was set down for June 13 in order to determine whether Shine’s request for these finance costs is fair and reasonable.
Finance charges 1.5 times the invoice costs
Court documents show Shine’s application seeks recovery of $36.2m to pay down a disbursement funding facility from Western Funds Management (WFM) that was used to finance certain outgoings (disbursements such as barristers costs) on the J&J/E mesh action.
In November 2020, Shine had recovered $16.9 million from a costs order by the Court to apply against disbursements. Accordingly, the total amount sought by Shine for disbursements in the mesh action is $53.1m.
The total disbursements of $53.1m include finance costs of circa $31.6m or nearly 60% of the total amount. Hence, the actual bills from external parties for expert fees, barristers’ fees and the like are circa $21.5m but the interest and Shine’s charges on those bills have increased the amount owing by nearly 1.5 times.
In the meantime, the ASX-listed company has been paying regular dividends to its shareholders.
Credit card interest rates
Shine’s application shines the light on the power of compound interest. The finance facility from WFM resulted in the liability for disbursements for the mesh class action growing at an annual interest rate of 20% compounding monthly from June 2018 to November 2021 – and then 14% compounding monthly thereafter. The effective annual interest rates of the finance facility are 21.94% to November 2021 and 14.93% thereafter.
An annual interest rate of 20% compounded monthly becomes a very expensive source of finance if the interest on interest is allowed to accumulate over a significant period. Most of the bills for the J&J/E mesh action were discharged by August 2018, which means there have been more than four years of interest racking up at what looks like credit card rates.
Mesh victims in the class shocked by finance charges
It appears that class members to the mesh action have not been fully informed about the financing arrangements for disbursements. Mesh victims contacted for this story feel shocked by the finance charges that have accumulated on the disbursements loan.
Asked if she was aware of the interest charges, Serena Brejcha responded: “Absolutely not. And I can guarantee 100% that no other of the 11,000 initial women in the class are aware either.
“It’s disgusting. It’s like a betrayal once again from the people that you think you can trust in positions of power.”
Helen Geyer had been studying law before being forced to curtail her studies due to complications that arose from a pelvic mesh implant. “I’m disgusted,” said Geyer. “In the initial days, there was no information provided as to fees and costs to group members. A lot of us asked and I know I asked several times, and the reply was that group members did not have to sign any cost agreements.”
Rachael Wise, another class member who joined in early 2018, noted that even upon re-reading her initial correspondence with Shine, there was no clear mention of third-party funders. “My interpretation was that it was still funded by Shine. I did not know there was a third-party funder.”
Unusual funding model
According to Shine’s analysis provided in correspondence with this journalist, circa $30m of interest is approximately $2,500 – $3000 per group member.
Shine clients and lawyers contacted for this story found no comfort in this justification, that is, framing the costs as spread across the 10,000 members in the class action.
The Shine funding model for disbursements in the mesh action has surprised legal expert Professor Michael Legg from the Faculty of Law at UNSW: “My understanding is that this disbursement funding vehicle is usually used by smaller personal injury firms. And so it is quite unusual to see it then picked up and used in a large class action”.
Legg noted that when significant disbursements have been required to take a large class action in the past, the firm had borne those costs itself. “In other similar cases, my understanding is that the law firm just bears the cost. If you look at the bushfire class action they did in Victoria, the firm paid the experts and the barristers as they went along, and simply had to carry that cost on their books,” he said. “When the class action was resolved, the law firm then asks for reimbursement from the settlement fund.”
Shine’s apparent rationale for the WFM disbursement funding facility is set out in an affidavit signed by Shine Chief Financial Officer Ravin Raj that supports the Court application. According to Raj, the self-funding of work-in-process and disbursements on the mesh action represented “a significant impost on the balance sheet, and financial reserves of the business of Shine Justice”.
Legg is surprised by Shine’s commercial imperative for the WFM disbursement funding facility. “You shouldn’t use a funding facility so that you, the lawyer, are effectively relieved from paying so that you can have a better balance sheet,” he said.
Paying cash dividends instead of paying for disbursements
Most students of business finance know that the cheapest source of finance for a company is internal cash flow.
During the five-year period ending 30 June 2022, Shine utilised internal cash flow to pay unfranked cash dividends to its shareholders of $36.4m. The dividends paid were $5.2m for FY2018, $6.1m for FY2019, $6.9m for FY2020, $8.2m for FY2021, and $10.0m for FY2022.
According to a forensic accounting expert contacted for this story, Shine has used its free cash flow, or net cash flows from operating activities, to distribute cash dividends to shareholders when an alternative option was to self-fund mesh action disbursements.
“Arguably, Shine should have opted to at least pay down the disbursement funding facility to a significant extent during the five years to 30 June 2022, so that the finance costs on actual disbursements would be minimised.”
The Court, he said, might well ask the following two questions when considering Shine’s application:
- What exactly is the point of using internal cash flow to pay unfranked dividends to shareholders while borrowing money at 22% annual effective to pay for disbursements on a large and lengthy class action?
- Have the cash flow needs of Shine’s shareholders, especially its major shareholders, been preferred to the cash flow management of the J&J/E mesh action, that is, has Shine preferred the interest of its major shareholders over the women victims who are class members?
Holding monies in trust instead of paying down the disbursement loan
Shine is responsible for a one-year delay in applying monies it received to pay for disbursements against the WFM disbursement facility. This delay resulted in additional interest charges of circa $3.4m.
In November 2020, Shine received $16.9m from a costs order that was specifically for disbursements arising from the mesh class action. Shine decided to keep this money in a trust account until all legal avenues of appeal for the J&J/E mesh case had been exhausted. That would take another year and during that time the meter was still running on the WFM disbursement funding facility at 20% interest compounded monthly.
In November 2021, Shine finally released $15.7m of the funds held in the trust account to pay down the WFM funding facility.
According to the Ravin Raj affidavit, Shine’s reason for holding the monies received for disbursements in a trust account instead of immediately paying down the WFM finance facility, was that it may not have been able to redraw on the facility if the case was lost on appeal.
However, clause 6.2 of the execution version of Shine’s funding agreement with WFM appears to anticipate that when Shine receives monies for disbursements, those monies would be paid to WFM as soon as reasonably practicable rather than held in trust to assist with the management of Shine’s financial affairs.
The amount of $16.9m received in November 2020 for disbursements shrunk to $15.7m by November 2021 when it was finally applied to the WFM facility.
In correspondence with this journalist, Shine explained that “The difference in sum [the $1.2m] covered Shine’s disbursement fees, which was money the firm had paid at its own risk and from its own pocket, for the success of this class action.”
It is not clear why, or when, Shine decided to charge $1.2m in disbursement fees and pay itself these fees out of the monies held in the trust account. These fees may have the character of a financing return to Shine because it carried the cost of disbursements before the first disbursement funding facility for the mesh action was put in place in May 2017.
Allocating finance facilities retrospectively
Anyone who uses negative gearing on an investment property knows that the Australian Taxation Office will not accept interest deductions on borrowings if those borrowings were not used to purchase the investment property. It is not possible to allocate borrowings against investment properties that have already been paid for in the past.
This principle is one that the Court may wish to apply when considering Shine’s application for reimbursement of legal costs. Shine’s initial funding facility for the mesh action was with Access Medical Group (AMG) in May 2017. The funding facility was transitioned to WFM from June 2018.
In the agreement with AMG, a tranche of $7.5m was assigned for past disbursements, that is disbursements that had been incurred and paid by Shine at the date of the agreement. The $7.5m tranche for historic invoices already paid by Shine is roughly one third of the actual disbursements. Hence, roughly one third of the total finance charges of $31.6m are attributable to historic invoices that were self-funded by Shine, that is, approximately $10m.
Justice Lee could have grounds to strike down Shine’s claim for this $10m component of the finance charges on the basis that the funds used to repay Shine for self-funded, or historic invoices, are irrelevant.
Other concerns relating to class members
There are other concerns held by some class members to the J&J/E mesh action that ought to be publicly ventilated and discussed. These concerns include the amount of the settlement fund and communication with class members.
A letter written by Serena Brejcha, one of the women in the class action, and co-signed by 30 other women to Justice Lee of the Federal Court, pleaded that Shine not be given carriage over the settlement fund. Brejcha wrote:
There is a palpable sense of desperation, betrayal, and worthlessness amongst the group members. This is evident in the support groups.
“Shine Justice, we believe, has “under-settled” and want this case finalised ASAP so they can receive their costs of the settlement sum,” said Brejcha and the group.
Justice Lee in approving the settlement sum, noted that the figure was not “self-evidently” fair, and approved it “notwithstanding some hesitation.”
Brejcha and the group believe the settlement offer was accepted without sufficient disclosure. “We do not believe the lead applicant was fully aware or informed of the terms of the settlement in relation to the full disclosure of Shine Lawyers costs.”
Breach of fiduciary duty?
Professor Michael Legg from UNSW explains that law firms have a fiduciary obligation to those that have retained their services. In the J&J/E mesh case, Shine is under a fiduciary obligation to three women who are the lead litigants. But Legg notes that it is not settled at law whether law firms also have a fiduciary obligation to the members of a class action.
Legg believes that informed consent is a possible issue for the disbursement funding arrangements. Informed consent requires that the person owed a fiduciary obligation is provided with all relevant information about an arrangement so that they give their consent to it. If a class member is owed a fiduciary obligation but has only signed a standard form retainer agreement, does that qualify as informed consent? Probably not.
Legg explains the conundrum faced by Shine in funding disbursements for the J&J/E mesh action. “I think this all comes from the fact that this is a kind of product liability case. And litigation funders have not traditionally funded product liability. Running a claim all the way to the High Court is a costly exercise. Class actions remain a cost-effective vehicle for thousands of people who have suffered wrongdoing.
According to a Shines spokesperson, “Without this action, many clients would not have had the means to prosecute their claims, particularly with such a litigious defendant.“