Supreme Court litigation funding ruling poses challenge for mass actions

The Supreme Court, ruling in a competition collective proceedings case (98-page / 4.14MB PDF), found that litigation funding agreements (LFAs) entered into by two representative bodies were in fact damages-based agreements, required to meet certain statutory conditions. As the LFAs did not meet these conditions, they were unenforceable.

Competition law expert Tadeusz Gielas of Pinsent Masons said: “To date, the UK’s competition collective proceedings regime has been defined by two landmark Supreme Court judgments: the Merricks case, which lowered the bar for initial ‘certification’ of competition law collective proceedings – and now this judgment, which will impact collective claims.”

The ruling came after UK Trucks Claim Ltd (UKTC) and Road Haulage Association Ltd (RHA) each sought an order from the Competition Appeal Tribunal (CAT) to enable them to bring collective proceedings on behalf of people who acquired trucks from DAF Trucks N.V. and other truck manufacturers. They sought compensation for the higher prices allegedly paid for trucks as a result of a breach of EU competition law.

Both UKTC and RHA relied on LFAs to show the tribunal that they had adequate funding arrangements in place to meet their own costs and any adverse costs order made against them should they lose. LFAs involve the agreement of a third party, with no prior connection to the litigation, to finance all or part of the legal costs of certain legal action. The agreement may, in return, provide for a percentage of any damages recovered should the funded litigant be successful.

A dispute arose over whether certain LFAs constitute “damages-based agreements” (DBAs), which must satisfy certain statutory conditions under the 1990 Courts and Legal Services Act and 2013 DBA Regulations in order to be lawful and enforceable. Both UKTC and RHA’s LFAs were entered into without satisfying these DBA conditions, which led to uncertainty over their enforceability.

In the case before the Supreme Court, whether the LFAs were classed as DBAs turned on whether they involved the provision of “claims management services”, as defined in the 2006 Compensation Act and 2000 Financial Services and Markets Act. Such services are defined as “advice or other services in relation to the making of a claim” and “other services” includes “the provision of financial services or assistance”.

The CAT ruled that the LFAs entered into by UKTC and RHA were not DBAs and were therefore enforceable because they did not involve the provision of claims management services. The Divisional Court dismissed an appeal launched by DAF Trucks N.V. and the other truck manufacturers, who then appealed under the ‘leap-frog procedure’ directly to the Supreme Court.

Handing down the court’s majority decision earlier this week, Lord Sales said that when the words “claims management services” in the Compensation Act were read according to their natural meaning, they were capable of covering the LFAs. The court allowed the appeal, ruling that the LFAs in question were unenforceable because they did not meet the statutory requirements for DBAs.

Gielas said the ruling would have important implications for the UK’s collective proceedings regime that applies to competition law cases. “At least to the extent that they provide for funders to take a share of any damages, existing LFAs for ‘opt-out’ competition collective damages proceedings are effectively rendered unenforceable by this judgment, because DBAs are expressly prohibited for such type of claim under section 47C(8) of the 1998 Competition Act. It remains to be seen if LFAs could be revised to escape the definition of a DBA, or whether there might be government intervention to amend the Competition Act regarding LFAs for opt-out claims,” he said.

Highlighting the potential ramifications of the Supreme Court ruling, Gielas said that nearly all competition law collective proceedings currently before the CAT are “opt-out” claims. “Moreover, all current “stand-alone” competition collective claims are opt-out claims. In stand-alone proceedings, the claimant must establish the competition law infringement from which the damages claim is said to arise, rather than simply “following-on” from an existing infringement decision of a competition authority.”

Gielas added: “Stand-alone opt-out claims are increasingly common, and are used to bring novel competition law issues before the CAT or in some instances to ‘leapfrog’ ongoing regulatory investigations. Such claims could now be curtailed unless a workaround to the legislative ban on DBAs is found”.

He added that the Competition Act does not prohibit the use of DBAs in ‘opt-in’ collective proceedings but, in the wake of the Supreme Court’s majority ruling, LFAs for opt-in claims before the CAT would need to be revised to make them compliant with the DBA Regulations.

Explaining the broader impact of the ruling, commercial disputes expert Tom Cottrell of Pinsent Masons said: “The decision means that any LFA which provides for a return based on a proportion of the damages recovered will be classified as a DBA, and will therefore be unenforceable unless it complies with the 1990 Courts and Legal Services Act and the 2013 Damages Based Agreements Regulations. Any LFA where the return is simply calculated by reference to a multiple of the amount invested will not be a DBA and will not be impacted.”

“In readiness for this decision, many funders will already have taken proactive steps to address the potential impact. Others will, however, now be reviewing their existing portfolios and deciding what remedial steps can be taken. This will include decisions as to whether existing LFAs can be amended and/or replaced by compliant LFAs. Funders will also need to consider the risk that any funded party on historic cases may seek to challenge amounts previously paid to the funder.”

Cottrell said any future LFAs will need to comply with the DBA Regulations or, alternatively, be based exclusively on a multiple of the amount invested so that they will not fall within the definition of a DBA.

The decision comes at a time when LFAs and their regulation are also under scrutiny in Europe.  While still under consideration, the European parliament has proposed new rules to increase regulation of third-party litigation funders. Some member states have also been considering the role of third party litigation funding in mass actions when deciding how to transpose the new EU Representative Actions Directive. The German transposing legislation, for example, provides that a mass action brought under new procedures introduced as a result of the Directive will be inadmissible if a provider of third-party funding is entitled under the LFA to more than 10% of any amount paid by the defendant.