Competition Appeal Tribunal (“CAT”) Confirms Maitland Walker’s Conclusion on Funding Collective Actions

The Problem

Thus, if costs and return of running a collective action can only be recovered after the class has been paid its damages the risk is that if all, or substantially all, of the damages are distributed a class representative will not receive all of the market rate of return. Indeed, there is a very real risk that upon winning a case where damages can effectively be distributed to the class a funder might lose money.

This is clearly an absurd proposition, as many, if not all, opt-out cases cannot be brought without third party litigation funding. It is of course self evident that if funders are not able to recover their costs and a return, then funding options for opt out actions will be severely diminished and access to justice will be unavailable to potential classes.  Nonetheless, influential commentators argued that the only way that class representatives’ costs can be paid is after the class.

The result of this argument was a widely held view in the market that “good cases”, that is where a good proportion or all of the damages can be distributed to the class members, are “unfundable”. Indeed, our experience of seeking funding for “good cases” is more difficult than cases where damages distribution is more difficult, which is the opposite of what the regime was created to achieve.

Ironically, a closer look at preparatory documents reveals that the Government was particularly interested in encouraging smaller opt-out actions where damages could be distributed.

Our Previously Argued View

Many commentators had paid scant attention to the parliamentary record. We examined the parliamentary record in detail in order to extract Parliament’s intention. When examined it is clear that CAT Rule 93(4) is a damages distribution rule, not a costs recovery rule.

The original draft of the Bill did not include any costs payment provision at all. Section 47C(6) (which is the legislative equivalent of CAT Rule 93(4)) was added at a later date to cover a specific situation. The Consultation and Hansard corroborate that section 47C(6) is designed to provide compensation to pro bono lawyers as per section 194 Legal Services Act 2007. It is an additional route to costs recovery in this situation and was not intended to generally regulate costs recovery.

Our conclusion was that the addition of section 47C(6) was predicated upon it being an additional route to costs recovery. As the Bill was otherwise silent on costs recovery and because it had not been consulted upon our view is that the normal rules of costs recovery continue to apply.

Recent Judgment from CAT Confirms Our Interpretation

A recent CAT judgment (Gutmann v Apple 12.03.24) firmly rejected the view that costs can only be recovered after the class has been paid its damages and endorsed our view that CAT Rule 93(4) is an additional power.

The Tribunal quite rightly asked itself whether a class representative has the power to determine funding decisions. Given the class representative’s power to make decisions, did Parliament “intend[ ] the power of the class representative … to be curtailed beyond the requirement of acting fairly and in the interests of the class.” (i.e., is the power of the class representative limited by CAT Rule 93(4)?).

The Tribunal repeated that its 2017 judgment in Merricks had decided that costs were recoverable under CAT Rule 104 from undistributed damages, that is damages remaining after the class has received its damages. It is also useful to remember some very common sense points that were made in Merricks:

“Clearly, no commercial funder would provide substantial funding and assume the significant financial risk of major litigation … The statute should accordingly be given a purposive interpretation to encompass a funding structure such as the present. In that regard, we were referred to a range of extra- judicial material which recognised the importance of third party funding in enabling access to justice.”

The Tribunal found that CAT Rule 93(4) provides a power to pay unclaimed damages to the class representative for costs – without that power, it could be that undistributed damages would be returned to the defendant. This is a further point that we made previously, CAT Rule 93(4) addressed an understandable gap in UK law, what should happen to undistributed damages in this new regime.

As CAT Rule 93(4) therefore dealt with an issue new to British law – claimants not claiming all damages – and as the CAT Rules are otherwise silent on costs, the normal costs rules must apply (normally, when damages are received, costs are paid before the successful claimant receives the remaining damages). This is confirmed by the Tribunal in Gutmann:

“If the legislature had intended that costs or a funder’s fee could not be paid out of damages, there is no reason why it would not have stated this. [T]he Tribunal can order the payment of damages to such other person as it sees fit, and we see no reason why this power could not extend to litigation funders in appropriate circumstances. [This] is consistent with the view that a class representative has (again subject to supervision by the Tribunal) the power to agree to pay a proportion of damages to a litigation funder.”

Thus, the class representative has the power to agree the ‘normal’ rules of damages and costs.

Finally, the Tribunal confirmed another point that we previously made in that reducing the class’s damages in order to pay funders is not a breach of the principle of full compensation, as has been argued by others.

Conclusion

It is very unfortunate that so much damage has been caused to the market since the collective action regime came into force in October 2015 due to incorrect commentary and that it has taken over 8 years for common sense to prevail.

Nonetheless, prevailed it has, and it can now be hoped that “good cases”, where damages can be put in the pockets of those harmed by competition breaches, are encouraged, rather than being actively discouraged under the previous incorrect understanding of CAT Rule 93(4). This was exactly what the regime was created for – now, 8 years too late it can start being used for the purposes that it was created for.