Spotlight on Class Actions: Fallout from the Supreme Court decision on litigation funding in PACCAR

Tim:

Welcome to this episode of Ashurst Legal Outlook. My name is Tim West and I'm a Partner in Ashurst London Dispute Resolution practice. In this episode, we are looking at the topic of litigation funding and the fallout of the Supreme Court judgement in PACCAR earlier this year. I'm here with Anna Morfey, a Partner in our competition litigation team, and we are delighted to also be joined by Rosie Ioannou of Fortress Investment Group. Rosie is a Director of Legal Assets at Fortress. And Fortress are a leading highly diversified global investment manager. Their legal assets business itself has more than 10 years' experience of providing capital solutions to claimants, law firms, and corporations across the globe having made billions in dollars in aggregate commitments since 2010. All of which means that Rosie is particularly well-placed to talk to us about the implications of the decision and what it means for the funding industry. So welcome Rosie.

Rosie:

Thanks Tim, and thanks to you and Anna for inviting me to join you.

Tim:

The place to start is obviously the PACCAR judgment itself. For most litigators, I suspect the implications of the judgment are more interesting than the judgment . So we're not going to get into much detail on what the judgment says, but we should just cover the headline points to frame the discussion with Rosie. So Anna, do you want to very briefly just remind our listeners how this issue arose?

Anna:

Yes, of course. So the judgement which was handed down at the end of July, arose out of two claims that were brought, one by the Road Haulage Association and one by an entity called UK Trucks Claims Limited.

And they were claims brought in the Competition Appeal Tribunal, the CAT for class actions, damages based on competition law against the members of the Trucks cartel who were found by the European Commission to have been in a cartel. And the claims were brought by the RHA for an opt-in collective action under the collective action regime in the CAT and by UK Trucks Claims for an opt-out, alternatively an opt-in claim in the CAT. And as is usual in collective actions brought in the CAT, both claims were funded by third party litigation funders and those litigation funding agreements, the LFAs contained a provision that allowed for an award based return or alternatively an investment based return. So just to be clear, the award based return is where the funder gets a percentage of the damages recovered and the funder gets that after... Typically, anyway, gets that after the class has been paid out.

And the investment based return is a return to the funder based on the amount that they've invested in the claim. So the provisions in the LFAs for both claims were alternatively award based or investment based whichever's the higher. And the challenge that the defendants brought to those was that those LFAs were unlawful because they were damages based agreements. And in the case of the UK Trucks Claims, damages based agreements are not allowed for opt-out class actions in the CAT. And either way, in respect of the RHA or the UK Trucks Claims, it was common grounds that neither of their LFAs were compliant with the DBA regulations and if their damages based agreements, they obviously need to be compliant with the DBA regulation. So that's the context in which the funding was challenged in those cases.

Tim:

So Rosie, what do you think the effect on the market is going to be of this judgment ? Initially, there was obviously quite a lot of talk about this having a chilling effect on funding and litigation. Is that something that resonates with you?

Rosie:

It's interesting reading the articles of the judgement that I've seen. I think the catastrophizing of the judgement in articles and its impact for experienced professional and well capitalised funders like Fortress, that I've read in some articles and newspapers is to put it bluntly wrong. This is for a number of reasons, the most significant being that as experienced users of litigation funding know well as a general rule, returns in funding agreements work from a multiple or a percentage of damages basis or a combination of both. As the CATs first instance judgement in the PACCAR case itself recognises, which some others have failed to acknowledge in that case, and therefore the Supreme Court judgement doesn't in itself hit the multiple return. And the role of multiples is to operate to provide a reasonable return to funders where a percentage of damages return, is for whatever reason, not viable. Multiples as returns will continue to do that if the relevant LFA is structured correctly, as to whether the Supreme Court judgement will of itself having a chilling effect on the availability of funding.

I think it's worth noting that there's been some recalibration happening in the market for a while now. That's been going on behind the scenes, more significant and broader global financial and credit market factors have been driving that. That recalibration to my mind, serves to underline the importance of selecting your funder wisely, doing your due diligence and ensuring funding parties work with established, experienced, and well capitalised funders. That's probably for another podcast, but I don't think that necessarily what we might see in the market arising from that will be driven by the Supreme Court judgement . So will the Supreme Court judgement of itself having a chilling effect? My view is that the answer to that is no.

As I've already noted, the hyperbole around the impact of the judgement is just wrong. Administratively burdensome, yes, catastrophic, no. I do think though that the judgement is another cog in a broader wheel about funding of single claims in the UK post Brexit. As funders, we want to fund good, economically sound claims in the UK but also throughout the globe. We fund cases in the UK but also in Europe and beyond. The UK is and will remain a significant jurisdiction for Fortress, but all of our eggs are not in the UK basket. The development of consumer focused and group action regulation alongside significantly lower budgets and the lack of adverse cost risk and from a competition angle, the follow on nature of competition decisions are making other European jurisdictions increasingly attractive to bring funded claims.

Anna:

Thanks Rosie. So you've touched on quite a few points there in terms of the nature of the case within which this Supreme Court judgement arose. But just sort of panning out from that, you've obviously just referred to the fact that this Supreme Court judgement is in relation to competition claims and within that class actions and the question of opt-in, opt-out class actions and UK claims, and you've talked about obviously Fortresses' activities on a much wider scale than that. So in different areas of litigation, not just in terms of opt-out class actions and also obviously in litigation abroad. Where do you see the biggest impact of this decision? Do you feel that insofar as there is going to be a significant impact of this, it's going limited to competition class actions in the UK or do you think this is going to have wider ramifications, albeit not as sensationalised as you're saying the media's sort of picking up on.

Rosie:

I think the implications are only relevant to UK or frankly English and Wales based litigation in its broadest sense. But I think the impact for those cases is the same whatever subject matter of case one is considering.

Anna:

So Rosie, if what's now available to funders is an investment based or cost-based return as opposed to an award based return, what effect do you think that's going to have and do you think that changes the risk profile for funders?

Rosie:

I don't think it changes the risk profile at all, actually. The role of the multiple, which is the investment based approach in funding agreements is among other things to protect against downside scenarios. And we always model our terms and consider our risk from a downside perspective, frankly, as all prudent investors should. So on this basis, I don't think the risk profile for funders has changed.

Anna:

Do you think multiples will just go up? It seemed to me that logically if multiples aren't seen to be enough, you'll just say, okay, it's going to be sort of five to eight X rather than...

Rosie:

I don't think the... Personally, I mean, if we can get eight X, what a joy, but I don't think the market will ever accept eight X. I just don't think commercially claimants or their lawyers would ever be able to justify that.

Anna:

No, I just wondered if it was going to shift your robbing Peter to pay Paul in a way because you don't like the reward base.

Rosie:

Well, that risk exists, but I think it will be more measured than those extremes.

Anna:

Yeah.

Tim:

Rosie, in terms of people reviewing the existing funding arrangements and now looking to ensure that they can remain enforceable, that might include taking a pretty close look at some severance clauses. Do you see a large repapering or renegotiation exercise being needed across the market and would you think that the renegotiation would be in principle preferable to having to just rely on a severance clause?

Rosie:

We've been preparing for this judgement since the Supreme Court hearing earlier this year. And indeed before that, thinking about scenario planning and we've been reviewing all of our funding agreements accordingly, we were prepared for the eventuality of this judgement . It would be wrong for me to say there wouldn't be any agreements that will require tweaking as a result of the judgement , but that doesn't translate into a large repapering or renegotiation exercise for Fortress or a significant impact for Fortresses' investments in the UK.

Tim:

And then moving to what next, beyond the enforceability of particular agreements, thinking more broadly in terms of the market response, what changes would you like to see as the market adapts to the effect of the Supreme Court's decision?

Rosie:

This isn't in response to the Supreme Court decision per se, it is a more a market observation and a drum I've been banging for a long time. It's a bit of a personal crusade of mine. I would like to see a more grown up conversation, an understanding about the role of funding, its position in the market, and the positive impact it genuinely has for all market participants. For access to justice, yes, but also as with any other forms of investment. As a finance tool for the benefit of consumers, businesses, financial institutions, law firms, and beyond. For too long now, the conversation about funding has been linear in the context of them and us, claimant and defendant, single case litigation. The market has developed way beyond that if it was ever there in the first place. In the arena in which Fortress operates legal finances, sophisticated and valuable financing tool for all parts of the legal landscape. My hope is that as discussions following the Supreme Court decision progress, the discourse in the market will move on to reflect that.

Tim:

And in the same vein, thinking about wider implications of the decision, there have been calls for legislative change to address the conclusion that litigation funding agreements may be damages based agreements. But then also many people... I think it's fair to say, have noted that the DBA regulations are perhaps not the clearest regulations on the statute book and there was indeed work to update those going on before the pandemic hit. What changes would Fortress like to see in light of the Supreme Court decision?

Rosie:

I think you would be surprised if my answer to this question wasn't that we would like to see legislative change to achieve clarity. Clarity for all market participants is important and legislation expressly stating that litigation funding agreements, including those which have a percentage of damages return sit outside the DBA regime will help to achieve that. As noted in the ALF, which is the Association of Litigation Funders statement released on the day of the judgement , as far as I understand it, it has never been the intention of government for funding agreements to be treated as DBAs.

But it does seem that in light of the Supreme Court judgement , technical amendments are appropriate to reclarify the government's intent when it introduced DBAs. And so I would support legislation to make the position clearer for the benefit of all. More broadly, I think that this point resonates well with my previous one. Legislation would I think, as I've already said, provide useful clarity, but I hope in such legislation being tabled and developed, it will help to better frame the conversation among market participants about the use and deployment of litigation funding and its role in the broader English dispute resolution landscape.

Anna:

All right, thank you very much Rosie. That was a really interesting set of Q&A, so we'll let you go, but thank you very much for your time and we'll look forward to seeing how this pans out in the market.

Rosie:

Thanks for inviting me to join you.

Tim:

Well, that was very interesting, Anna, lots of useful and interesting insights there from Rosie. I thought it might be useful for us to talk about some of the broader implications beyond the impact on litigation funders and look at how things might be impacted in the Competition Appeal Tribunal. Obviously, the vast majority of collective actions in the CAT have been brought and funded as opt-out claims. And in so far as the funding agreements in those claims have a percentage base return, they're obviously going to need to be carefully reviewed and potentially replaced as we discussed with Rosie. But what's your view on how this is currently playing out since the judgement and how you think it might continue to play out in the CAT over the next three to six months in terms of case management?

Anna:

Yes. I think it's interesting what Rosie says that Fortress and no doubt, lots of other well-established litigation funders were prepared for the judgement . And no doubt will have taken steps or were taking steps to ensure that their funding arrangements were compliant with the judgement . I think what we've seen in the CAT in the past few months since the PACCAR judgement was handed down, is that funding arrangements are being reconsidered both in claims that have already been certified and claims going through the certification process at the moment. So for example, in the Gutmann versus Apple collective action, that was one that was certified on the 1st of November, but the certification has been subject to resolving terms of the class representatives funding arrangements, which suggests they're obviously still working those through. There's some other claims, for example, the Spottiswoode claim against the cables cartel that have been granted permission to amend.

Those are also pre-certification stage and that's presumably permission to amend, to align among other things, funding arrangements with the requirements of PACCAR. So we are seeing this in some of the cases that are at around or coming up to the certification stage. We've also in the proposed class claim against Sony, in respect of Sony's conduct relating to its PlayStation ecosystem. We've seen the certification hearing in that claim took place back in June. But in October, there was an additional hearing on funding matters in which Sony has challenged among other things, the compatibility of the multiple return element of the funding agreement with the PACCAR judgement as well as other elements of the funding.

And the CAT hasn't issued its judgement in that case yet as we sit here recording this. So we'll wait to see where that goes. But it's indicative of the direction that defendants might now take in terms of opening up further challenges to funding arrangements for these collective actions. And I wonder if for some claims that were maybe on the verge of being filed again, if they have funding arrangements that need tweaking to ensure compliance. So I think what we are seeing is an impact on claims that are around the certification stage, but more generally, as Rosie says, I think funders were probably largely prepared for this or at least most of them were.

Tim:

Yeah, I agree with all that. I mean, one thing that is interesting to consider as well, I suppose, is whether there will be an impact and if so, to what extent that impact will be on the claims that have been certified some time ago and they are now well underway towards trial. We've not yet... again, at the time recording, seen any of those cases be pulled back for a hearing on funding arrangements. So it may well be that Rosie is right, but I suppose all of that is subject to seeing how the current challenges that you referred to go and whether that then leads other defendants to raise similar issues that halts those claims and requires further hearing on funding arrangements.

Anna:

Yes, and it's always a requirement that a class representative has funding in place to be able to meet the defendant's costs if the claim's unsuccessful. And so I think it's going to be the case that class representatives will come under pressure from defendants if they aren't aligning their funding arrangements to the Supreme Court judgement . And you're right to say that it's within the CATs gift on an ongoing basis to ensure that the class representatives meet the criteria for representing the class, one of which is having those funding agreements in place.

Tim:

That's all we've got time for. Thank you for listening and be sure to check out our other episodes in this series. We would welcome any feedback or questions, so do get in touch with any of us. Our details are on the website. To ensure you don't miss out on any future episodes, do subscribe now on Apple Podcast, Spotify, or your favourite podcast platform. While you're there, please feel free to keep the conversation going and leave us a rating or review. Until then, thanks for listening.