Competition law infringements often cause financial harm to large groups of consumers or businesses, who would individually be unwilling or unable to pay to claim compensation for that harm. This is why such groups often make use of third-party funding, known as litigation funding, which is offered by specialised investment funds who pay for the litigation, assume all financial risk (including adverse costs in case of a loss) and in return receive a percentage of any damages obtained.
The opt-out regime at the UK’s Competition Appeal Tribunal (CAT) is entirely dependent on third-party funding. However, litigation funders have had to think twice about how to structure their agreements as a result of last summer’s Supreme Court’s PACCAR judgment—a ruling that brought many litigation funding agreements within the purview of the Damages Based Agreement Regulations (“DBA Regs”). PACCAR rendered unenforceable funder returns that were calculated as a percentage of the damages awarded to a claimant. This development was unexpected. Third-party litigation funding has been encouraged in the UK in recent years. The general consensus pre-PACCAR had been that litigation funding agreements with returns based on percentages would not fall foul of the DBA Regs.
If the PACCAR judgment wrongfooted the litigation funding market, funders will have been comforted by the reaction of Parliament. In the recent Digital Markets, Competition and Consumers Bill (“DMCC Bill”), the Government has added an amendment that, once enacted, means that damages based funding agreements in opt-out proceedings at the CAT should once again be enforceable. In addition, some support has been voiced in the House of Lords for expanding the DMCC Bill’s PACCAR amendment so that it applies to all litigation funding agreements and not just to funding agreements in CAT opt-out cases. Just this week, Justice Secretary Alex Chalk confirmed that the UK government is committed to “reversing the damaging effects of PACCAR at the first legislative opportunity.” Though, it is a little unclear whether the DMCC Bill is necessarily the appropriate legislative vehicle to do so outside of competition opt-out actions.
Parliament appears, in short, to recognise the significance of opt-out claims and third-party funding in delivering access to justice. The recent TV drama, Mr Bates vs The Post Office may also be relevant. That drama has rekindled the public’s awareness of what is considered one of the UK’s most significant miscarriages of justice—the Post Office’s wrongful persecution of sub-postmasters who were unable to balance their books due to technical glitches in the Post Office’s Fujitsu supplied Horizon IT system. The TV drama about the case has dominated the UK political news in the first few weeks of 2024. Among other things, it has illustrated the essential role funders played in facilitating the litigation that uncovered the Post Office’s conduct. Only this week, Alan Bates, the man who brought the claim on behalf of sub-postmasters and the main character in the TV drama, reaffirmed the importance of litigation funding, stating in an op-ed in the Financial Times that in today’s world (ie post-PACCAR) the sub-postmasters attempt to obtain justice would be “a battle we would almost certainly lose”. Mr Chalk’s comments on reversing PACCAR came shortly after that op-ed.
The PACCAR decision itself
The Supreme Court’s decision in PACCAR concerns a damages claim that follows on from the European Commission’s 2016 Trucks cartel decision.
Defendants contended that the class representatives’ funding agreements were unenforceable. They argued that for the CAT to certify the class, the class representatives needed to show, amongst other things, that they had valid litigation funding agreements in place. The funding agreements in question entitled the funders to a percentage of any damages recovered in the event of a successful claim. It was argued that such an agreement amounted to a Damages Based Agreement (“DBA”), and, as such, was subject to the DBA Regs. DBAs are also prohibited by statute in the specific context of the opt-out collective actions regime.
The Supreme Court, by a majority of four to one, found that funding agreements entitling funders to a percentage of the proceeds did amount to DBAs. The decision rested upon the interpretation of three words: “claims management services” (which were part of the definition of DBA, as found in section 58AA(3)(a) CLSA 1990). The statutory definition of “claims management services” included the provision of “financial services or assistance”. The Supreme Court ruled that the funding of litigation fell within the meaning of “financial services or assistance”. Accordingly, the Supreme Court found the agreements in question were DBAs and therefore prohibited.
The decision has had significant consequences on the funding market. All opt-out collective actions brought before the CAT involve funding agreements, many of these included returns based on a percentage of the proceeds. Their enforceability was immediately called into question. Although the Supreme Court was aware of the ramifications of its decision, it took the view that it had been the will of Parliament to include percentage-based funding agreements within the definition of DBAs.
DMCC Bill amendment
The PACCAR amendment added to the DMCC Bill reads as follows:
“126 Use of damages-based agreements in opt-out collective proceedings
(1) In section 47C(9) of CA 1998 (collective proceedings: damages and costs), for paragraph (c) substitute—
“(c) “damages-based agreement” has the same meaning as in section 58AA of the Courts of Legal Services Act 1990 but as if in subsection (3)(a) of that section, in the words before sub-paragraph (i), for “, litigation services or claims management services” there were substituted “or litigation services”.
(2) The amendment made by subsection (1) is treated as always having had effect.”
As can be seen, the DMCC Bill amendment seeks to reverse PACCAR in so far as it applies to opt-out claims.
The DMCC Bill is currently in the committee stage in the House of Lords and is expected to receive Royal Assent around Q2 2024.
How the CAT approached PACCAR arguments
The CAT’s judgment in Neill v Sony was its first opportunity to address funding agreements post-PACCAR. Sony had argued that the Proposed Class Representative’s funding agreement was unlawful on various grounds, including as a consequence of PACCAR.
The funder’s remuneration was based on a multiples-based approach—the funder agreed to fund the claim in return for a fee that reflected a multiple of the amount it invests. However, the agreement also contained a condition that enabled the funder to claim a percentage of the recoverable damages if the law was to change. The funding agreement was drafted in the light of PACCAR, anticipating that Parliament was likely to address the problem sooner, rather than later. Sony attempted to argue that the funding agreement was unlawful in this form, notwithstanding the fact that the right to a percentage of damages was conditional on there being a change in the law. The CAT disagreed and found that the funding agreement “operate[d] with contingency” and was thereby lawful.
During the hearing, Sony also tried to argue that the Proposed Class Representative’s funding agreement was unlawful by suggesting that it mechanically operated as a DBA and therefore should be treated as such. Under the funding agreement, the funder’s fee (calculated with reference to a multiples of spend/committed capital) was to be paid out from the amount of available damages. Sony argued that, by extension, the available damages acted as a natural cap on the amount that the funder could recover, which, in Sony’s opinion, was tantamount to an agreement which enabled a funder to recover a percentage of the recoverable damages (in other words, a DBA). The CAT dismissed this argument on the grounds that, amongst others, it was in fact the CAT that determined the funder’s fee in the event of judgment, under Rule 93, or settlement, under Rule 94.
The CAT has granted Sony permission to appeal so it will be interesting to see what the Court of Appeal makes of this.
Similar funding arguments were considered by the CAT in its recent decision in Commercial and Interregional Card Claims (and others) v Mastercard and Visa. The funder’s fee in this case (like Sony) was also to be paid out of the available proceeds. Mastercard and Visa contended that this was unlawful on various grounds (again, in part, because of PACCAR).
Mastercard and Visa suggested that the Court of Appeal’s decision in Zuberi—which concerned a solicitors retainer entitling it to a share of its client’s damages and required the court to consider what a DBA consisted of—was relevant to determining whether or not non-percentage based return funding agreements were, in fact, DBAs. They argued that Zuberi meant that any payment to a funder that is “out of recoveries” (ie out of the available proceeds) amounted to a DBA. The CAT rejected this argument, essentially stating that Mastercard and Visa’s interpretation of Zuberi was incorrect, and that, in any case, there were no grounds of public policy in support of widening the definition of DBA to such an extent.
Mastercard and Visa also tried to argue that the Proposed Class Representative’s funding agreement was unlawful by virtue of an express provision of the agreement, which capped the funder’s fee from being any more than the amount of available damages. This was a very similar argument to Sony, save for the fact that the funding agreement in this case had an express cap, whereas in Sony the cap was ‘natural’ as there was no such express provision in the funding agreement. Accordingly, Mastercard and Visa contended that this provision meant that the funder’s fee was determined by reference to the amount of available damages, making it a DBA. The CAT also rejected this argument. In reaching its decision, the CAT stated that it is important to consider the legality of funding agreements on a “holistic, common sense basis”, and noted that while there may be many factors that may influence the funder’s fee, there is a “difference between a factor which might have an influence, and one which is determinative in the sense of being the substantive mechanism by which the funder’s fee is arrived at.”
Conclusion
PACCAR certainly caused a stir. Parliament and the Courts now have an opportunity to provide a more stable legal framework for UK litigation. Public statements from MPs and the draft DMCC Bill would seem to suggest that litigation funding has a future in the UK. The Post Office case is likely to give new impetus to efforts to ensure that it does.
The Thicket 