UK: Claimants bringing Collective Actions in the CAT suffer Setback at the Supreme Court

In a highly significant ruling, with implications for third-party funders and those bringing collective (class) actions in the Competition Appeals Tribunal (CAT), the Supreme Court has held (R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28) that litigation funding agreements (LFAs), which entitle funders to a percentage of any awarded damages, are ‘damages-based agreements’ (DBAs) and as a result are unenforceable for funding collective proceedings in the CAT.

Many of the LFAs in existence do not comply with the DBA regime, and as a result will require renegotiation to bring them outside of the statutory definition of a DBA, if indeed this is even possible. As a result, there is a question regarding what happens to those actions currently in the CAT, and what is the future for collective damages actions more generally if funding cannot be obtained?

LFAs and DBAs

LFAs are agreements between litigation funders and claimants permitting the litigation funder to recover an amount payable from the proceeds recovered by the claimants if the claim is successful. Proponents of litigation funding argue that the industry has widened access to justice by providing a commercially viable business model to bring mass consumer class actions.

A DBA is a ‘no win no fee’ arrangement, entitling a client’s representative to a percentage of any awarded damages. The relevant statute defines DBAs as “an agreement between a person providing advocacy services, litigation services, or claims management services and the recipient of those services”. “Claims management services” are defined as “advice or other services in relation to the making of the claim”, and include “financial services or assistance”. A DBA is unenforceable if it does not satisfy certain statutory conditions, whereas a LFA does not have to comply with the statutory conditions.

The main claim – The ‘Truck Cartel’ litigation

The appellants in this case were truck manufacturers found to have participated in a cartel. The EU Commission investigated and fined the appellants, providing the basis for a ‘follow-on’ claim from those who had purchased from the cartel. The appellants sought to challenge the financial arrangements of the two organisations seeking to lead a class action on behalf of purchasers, by arguing that the LFAs underpinning both organisations were in fact DBAs which were non-compliant with the DBA regime and thus unenforceable.

Issue before the Supreme Court

The issue before the Supreme Court was whether the LFAs met the definition of a “claims management service”, bringing them under the definition of a DBA. This was a matter of statutory interpretation.

The appellants argued that the litigation funding provided under the LFAs was “financial services or assistance”, falling under the umbrella of “other services in relation to the making of the claim”. The respondents argued that “other services” should be interpreted in the context of management of a claim, on the basis of a principle of statutory interpretation known as “the potency of the term defined”. Under this principle the ordinary definition of a word or phrase throws light on the meaning of its statutory definition. Therefore, according to the respondents, the definition of a ‘claims management service’ should be read through the lens of ‘claims management’.

Judgment of the Supreme Court

Finding in favour of the appellants, the Supreme Court ruled that the words “advice or other services in relation to the making of the claim” including “financial services or assistance” should be interpreted according to their natural meaning, and that the LFAs were covered by the DBA legislation. The “potency of the term defined” principle was not relevant for several reasons, including that “claims management services” had no established and generally accepted meaning with which to colour its own definition.

The Supreme Court also examined the legislative context in which the applicable DBA legislation was enacted in 2006, finding that the intention of the legislation was to allow the Secretary of State a broad discretion to target various services emerging in the then new and developing litigation funding industry. The wide language used to define “claims management service” was an indicator of this. The Supreme Court declined to refer to the 2013 DBA Regulations as a guide to interpretation, since these Regulations were not introduced in the same context as the implementing 2006 legislation, and nor were they reviewed by the same Parliament.

Impact on Collective Actions

The Supreme Court’s judgment means that the vast majority of LFAs in existence will now be unenforceable as many do not comply with the required statutory conditions for a DBA. To bring a LFA outside of the definition of a DBA, the amount recoverable under the LFA cannot be expressed as a proportion of any damages obtained in court. The LFA may instead seek to recover a multiple of the sum invested (commonly a multiple of three). Following the judgment, there is likely to be a scramble to renegotiate non-compliant LFAs under the cover of the severance clause, though some LFAs are likely to have anticipated the Supreme Court’s judgment by including multiple- as opposed to percentage-based recovery provisions.

The ruling is particularly problematic for opt-out class actions in England and Wales, permitted only in competition law cases, since s.47C(8) of the Competition Act 1998 expressly provides that a DBA is unenforceable if it relates to opt-out collective proceedings. It is not clear whether a revised LFA based on the recovery of a multiple of the sum invested will be within the scope of the opt-out class action regime. In addition, there are a number of cases currently in the CAT in which the funding arrangements, even though they have (now non-compliant) LFAs, are approved. It will be interesting to watch how the CAT manages these cases going forward and how these cases will be funded in the future, as most collective proceedings rely on funding from third-party litigation funders to get off the ground.

Overall, a key concern will be whether confidence in the growing UK collective actions regime for competition damages actions and the litigation funding industry that operates in parallel will be severely hampered. The jury is out.

With thanks to Sean Bullock and Alice Drain for their help in putting this article together.