This article first appeared on the website of the Thought Leaders4 Competition and is reproduced with its kind permission. You can read the full edition here.
This article considers the approach of the Competition Appeal Tribunal (CAT) to questions of funding for opt-out collective actions following the Supreme Court’s judgment in PACCAR, as well as addressing the proposed Litigation Funding Agreements (Enforceability) Bill (LFA Bill).
PACCAR
In PACCAR, the Supreme Court held that litigation funding agreements (LFAs) where the funder’s return is calculated as a percentage of damages were damages-based agreements (DBAs), which need to be compliant with the Damages-Based Agreements Regulations 2013 to be enforceable. This triggered serious concerns regarding funding for opt-out collective actions in the CAT, and therefore material revisions to existing LFAs, as DBAs are not permissible for opt-out claims.
The CAT’s approach post-PACCAR
Neill v Sony
in Neill v Sony, the revised LFA provided that the funder would be paid the greater of (i) a multiple of its total funding obligation, or (ii) a percentage of the total damages and costs recovered by the class representative “only to the extent enforceable and permitted by applicable law”. The amended LFA contained a severance clause which specified that the damages-based fee provision could be severed if required. The CAT held this was not a DBA, considered the conditional wording permissible and that the severance clause could be used without causing a “major change in the overall effect of the LFA”.
Sony sought permission to appeal on:
- Whether the clause permitting damages-based payment to funders “to the extent permissible by law” is enforceable;
- The severability issue; and
- Whether the fact LFAs are naturally capped by the amount of damages recovered means that such LFAs are actually DBAs.
The CAT stated it considered there was no real prospect of Sony succeeding on appeal, but recognised that the uncertainty following PACCAR required a conclusive view from the Court of Appeal and therefore granted permission to appeal. The CAT also foresaw that permission would likely be granted in other similar cases, and it would be expedient for those to be dealt with together at the appellate level.
Kent v Apple
In Kent v Apple , the CAT followed its reasoning in Neill and approved an amended LFA where the funder’s return was based on a multiple of the costs expended by the funder, instead of the percentage-based return in the original LFA. The potential application of a “ratchet” provision, which would incrementally affect the funder’s return based on the duration of the proceedings, did not warrant intervention by the CAT at this stage. The CAT had case-management powers to manage the proceedings and the funding outcome and “will have ample opportunity to ensure that any fee payable to the funder is proportionate and appropriate”. Apple had not formally applied for permission to appeal but had asked the CAT to grant permission if its arguments were rejected. Recognising the similarities with Neill, the CAT considered there was no real prospect of success but nevertheless granted Apple permission to appeal.
McLaren v MOL
In McLaren, the CAT found that the revised LFA was materially similar to the Neill LFA except that the operative clause calculating the funder’s fee in Neill was based on a multiple of “the Costs Limit”, rather than a fixed fee. Both LFAs contained the same conditional ‘permissible by law’ wording for a percentage payment. Following its Neill reasoning, the CAT held the revised LFA was enforceable but noted that the enforceability of conditional ‘permissible by law’ percentage payment provisions is subject to the appeals in Neill and in Kent.
Commercial and Interregional Card (CICC)s v MasterCard/Visa
At the CPO stage these sets of opt-in and opt-out proceedings had been rejected, but ahead of those CPO applications being revisited the funding arrangements were challenged. The CAT considered the differing financial arrangements for the opt-out and opt-in actions as well as the ATE position, and concluded that they were not DBAs as they were “firmly and primarily based on a determination of the funder’s fee by reference to a multiple of outlay by the funder (or insurer)”. The CAT considered there was no prospect of success on appeal but granted permission on the basis that it might be helpful for the Court of Appeal to consider a different pattern of funding arrangements alongside Neill and Kent.
Gutmann v Apple
In Gutmann, the revised LFA entitled the funder to receive an amount based on drawn-down funds as well as a “Funder’s Return”. The Funder’s Return would be calculated by reference to a multiple of the capital committed. The CAT held that the revised LFA was not a DBA. Separately, the revised LFA provided that, if successful, Gutmann would apply to the CAT for approval that the litigation funder be paid first, out of the total recovered damages and costs, before the class members. Importantly, the CAT held that it is not necessarily inappropriate that a funder could be paid before the class members; once a claim is successful, the CAT can order that a funder is paid first if deemed proportionate given the funder’s contribution to the claim.
LFA Bill
In March 2024, the Government published the LFA Bill which would restore the legal position that existed prior to PACCAR. The LFA Bill is drafted to apply to all types of funded cases and provides that damages-based LFAs are exempted from being deemed DBAs. Such LFAs can therefore be used in opt-out collective proceedings. The LFA Bill will apply both to LFAs entered into before it becomes law as well as future LFAs.
Takeaways
Whilst the Court of Appeal is yet to opine on the position, it seems clear from the CAT’s approach and the LFA Bill that there is considerable recognition of the importance of litigation funding in the UK generally and the need to ensure that this is fully supported going forward.