Insights

Do two recent developments post the Supreme Court decision in PACCAR (in R (on the application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28) mean that challenges to funding agreements by defendants in opt-out collective actions in the CAT are now over?

A quick recap – in PACCAR the Supreme Court held that litigation funders were providers of “claims management services” and that litigation funding agreements (LFAs) that provided for the funder’s return to be calculated by reference to the amount of the damages recovered therefore constituted damages based agreements (DBAs) under section 58AA of the Courts and Legal Services Act 1990 and section 47C(8) of the Competition Act 1998 and so would be unenforceable in opt-out collective proceedings.

Most, if not all funders, took the view post PACCAR that if the funder’s return was based on a multiple of the amount funded, the LFA would not be a DBA and would not therefore fall foul of PACCAR. In those situations where the funder was entitled to the higher of a multiple or percentage, many funders and Proposed Class Representatives (PCRs) sought to sever the offending clause on the basis that severance did not affect the substance of the agreement. Despite this, a number of defendants have sought to challenge the parties’ amended funding arrangements more widely, slowing down the progress of cases in the CAT and increasing costs.

The first piece of good news for PCRs and those funding opt-out collective proceedings was the introduction of an amendment to the Digital Markets, Competition and Consumers Bill on 15 November 2023 in response to PACCAR. The Bill is currently working its way through the House of Lords. The proposed amendment, Clause 126, provides that a DBA is only unenforceable in opt-out collective proceedings before the CAT if the agreement is with a provider of advocacy or litigation services. The reference to “claims management services” has been removed. Clause 126 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 and 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 claim management services” there were substituted “or litigation services”.
(2) the amendment made by subsection (1) is treated as always having had effect.

The second piece of good news was the judgment of the CAT in Alex Neill Class Representative Limited v Sony Interactive Entertainment Europe Limited [2023] CAT 73 which dealt with (in addition to certification) Sony’s objections to the post PACCAR amendments to the LFA. The funder’s fee in the Sony case had originally been a multiple of the funder’s outlay or a percentage of the proceeds. Following negotiations, the PCR and funder agreed that the funder’s fee would be a multiple of the costs limit under the LFA (rather than outlay), alternatively “only to the extent enforceable and permitted by applicable law a percentage of the proceeds”.

Sony sought to attack the new arrangements on a number of fronts and also argued, based on comments made by Lord Sales in PACCAR, that the tribunal should consider the funder’s return more broadly in its gatekeeping role under Rule 79. The tribunal rejected the argument that the judgment has wider ramifications in that way.

More particularly Sony submitted that the amended LFA was contrary to section 58AA in a number of respects and therefore still unlawful. Sony also argued that the relevant clauses in the LFA could not be severed. In addition to its section 58AA arguments, Sony challenged the commercial arrangements reached between the parties arguing that the new arrangements meant there was a conflict between the interests of the funder and the PCR.

The tribunal did not agree that the changes to the LFA meant that the agreement was still a DBA. It agreed with the PCR that the plain and ordinary meaning of the words in the amended LFA “only to the extent enforceable…” meant that there would be no payment by reference to proceeds until there is a change in the law.

The tribunal also disagreed with Sony’s arguments regarding severance. It did not consider there was a major change in the overall effect of the LFA if the relevant clauses were severed and was reluctant to go behind express agreement between the parties evidenced in the severance clause in the LFA itself.

Sony also argued that the LFA continued to be a DBA because the proceeds of the claim were a natural cap on the amount paid to the funder; there was therefore reference to a financial benefit received by the PCR in determining the funder’s fee. Again the tribunal disagreed, noting that there was nothing in the LFA (including the multiple based provision) by which the amount of the funder’s fee was limited by the amount of the proceeds.

Finally, Sony sought to challenge the level of the funder’s fee both in terms of the amount of the fee and also the conflict that it said might arise as between the funder and the PCR around settlement.

The tribunal was not willing to interfere with the commercial terms agreed between the parties other than to invite the parties to review the change to the basis for the calculation of the multiple at a certain point, again pointing out that the relevant time to consider the funder’s fee was if and when any recovery is made by the PCR. The tribunal also dismissed any argument about conflict of interest, being satisfied that the PCR was able to discharge their responsibilities.

Despite the commentary at the time of the PACCAR judgment, which suggested the end to funding of opt-out claims, the introduction of proposed legislation and the rejection of the challenges to the revised funding agreement in Sony are positive signs. It is to be hoped that PCRs and defendants can now concentrate on the merits of the claims, rather than being distracted by unmeritorious attempts to derail valid proceedings by reference to the supposed wider ramifications of the PACCAR judgment.