Summary

• Recent years have seen sharp growth in the number and scale of class actions filed before the UK Competition Appeal Tribunal (‘Tribunal’). Pending claims are worth an estimated £134 billion. There are 655 million claimants, that is, ten claims per person. On average, there is roughly one new class action every week.


• The sudden increase in the scope of claims raises questions about their quality. The strong economic case against hardcore cartels applies equally to private litigation, but there are also some more adventuresome cases which stray from true cases of economic harm. Such cases increase costs and could harm innovation.


• Three specific concerns arise: (1) Cases are not getting much money, even against hardcore cartels; (2) Some low-quality cases have crept in, but they are mixed up with stronger ones which ought not to be undermined by reform; (3) Cases are very slow.


• This paper explores five related policy options to address these three issues. They can be used together or in isolation to focus cases onto the stronger ones and away from the weaker ones. The proposals span several major aspects of the cases and would significantly focus their remit.

Recommendations

1. A seed payout before class certification. Funders should be required to commit to an estimate of damage and to pay it out to a portion of the class (e.g., 5% of the class) before the Tribunal grants the right to continue to pursue a collective lawsuit (known as ‘class certification’). This disproportionately increases costs for weak cases relative to stronger ones by accentuating risk.


2. A market for claims. Property rights in claims are currently difficult to trade because of a lack of timely public information. By contrast, the seed payout gives rise to a clear, public and early valuation of the claim. If another funder thinks that it can improve on that seed payout, it can buy out the earlier funder and increase damages, thereby competing for claims. Competition to serve the claimant class, and not just funders and lawyers, would then be stronger. Setting a damages amount ex ante also encourages cost efficiency from that point forward. This approach requires greater investment in claimant book building to weed out bad cases, as occurs in German and US models. The fundamental mistake in the underlying 2015 UK reforms was to adopt a Canadian model, which allows class certification without adequate prior book-building investment and without attention to the specific information needed for a funding market to compete for a diffuse class of claims.


3. Sharper economic differentiation at the class certification stage. Several recent Tribunal cases adopt a strongly economic approach, but this is not universal and sometimes only comes after expensive trials. Several economically questionable classes were certified, and not just early on: for instance, claims that Facebook might have worked with less data (Meta); that Amazon might have been fairer in how it innovated in cheap, fast shipping (Stephan v Amazon); and that railway ticket machine displays might have been clearer (Boundary Fares). These adventuresome claims do not, at least as pleaded, show a clear link to diminished economic efficiency. They should not have been entertained without better evidence of a market harm, as distinct from an interest group loss. The issue stems from refusal to engage in deeper economic analysis of the marginal value of a class action from a societal rather than party perspective at an early stage because of fears that this would collapse into a mini trial.
   But a mini trial is apt if it can distinguish good cases from bad especially early on. Indeed, the UK Supreme Court expressly preserved scope for such ‘mini trials’ in Merricks. Drawing on the US experience with the important Daubert case, the paper recommends more fulsome use of openly economic reasoning to differentiate good cases from bad at an early stage. Importantly, this can be done within the flexibility of applicable UK Supreme Court precedent, the existing legislation and the Tribunal Rules as they currently stand.


4. Consolidation of loss. Much of the issue in the much-lamented Merricks settlement which at one stage saw an attempt by a funder to settle for just 48p per claimant – derives from an attempt to model losses through a supply chain. This is not only expensive but also unnecessary. Instead, policy makers should consider consolidation of loss into a claim by the first purchaser – and no one else if their case is sound. This avoids protracted disputes within supply chains, and where applied, as in US federal antitrust law, it results in important efficiencies in analysis. There is an underappreciated contrast with the analogous US case to Merricks, which provided a $5.6 billion settlement to over 12 million direct purchasers. Legislation could alter the inherited position from an EU Directive, which, by mandating full supply chain analysis, undermines this efficiency.


5. Avoiding de facto rate-of-return regulation in litigation funding agreements. Following the UK Supreme Court PACCAR judgment, there is a risk that Tribunal review of funding is -perhaps reluctantly – having to apply analysis of a reasonable return on funder investment. This can result in incentives to incur costs and to introduce complexity to justify them (‘rate packing’). Although many agreements pre-date PACCAR, several in the public domain credit time-based elements of return on investment. This ought to be a private capital allocation matter, because there is no public interest in specifically rewarding delay. Whereas currently, funders can charge more if there is a delay. This dynamic may well have fed funder pressure on the class representative to delay settlement in Merricks, which took place just before a return on funding uplift was due.
   A more hands-off approach would simply leave analysis of returns to funders – incidentally, more in line with the underlying theory, including that written by a Burford Capital founder (Molot 2009). Instead of asking whether funder returns are reasonable, the real question is whether money is flowing to strong claims.
   That is easily established in this paper’s approach because funders must commit to an articulated damages payment under recommendation (1) above, before class certification. The early seed payment to some (not all) claimants is then applied to all at the end. Therefore, the concern about funders seeking returns at the claimant’s expense, as arguably seen in Merricks, diminishes because of an early commitment device. If faced with a true attempt to underpay claimants, the class representative could then sell the claims to another funder offering to beat the damages estimate (after costs).
   This package of reforms requires an open mind, because in places it implies a fundamental rethink of current received wisdom. This is, however, merited because of some concerning elements in the current system. As before, these are (1) low/no compensation in good cases; (2) certifying some bad cases even recently; and (3) delay. The above package addresses all three points:
   1. The seed payment forces money towards claimants, thereby focusing litigation onto only those cases in which payments out are realistic.
   Indeed, the requirement to assemble a partial seed payment book of claimants (e.g., 5%) before a case establishes that there is a realistic prospect of people claiming damages. This answers the long-standing question of whether consumers will actually claim by requiring proof that some do first.
   2. Stronger cost-benefit analysis at the class certification stage would distinguish economically rational use of the regime from instances where more adventuresome claims have been filed.
   By openly pointing to the lack of economic efficiency benefits in weaker claims, the Tribunal would encourage focused investment into those cases that can show an economic efficiency benefit and not others. This chimes with both the growth objective underlying the 2015 reforms and the government’s current growth agenda.
   Furthermore, the seed payment makes the pursuit of inefficient small claims untenable. Abusive strategies such as settlements based on legal costs alone rather than real market harms become far less tenable, because of the need to commit to a damage estimate before claims and to fund the seed payout.
   3. Reduced delay incentives. Requiring initial investment into seed payouts and early open articulation of a damages estimate abates the risk of effectively paying funders for delay. Unlike the current system, there would be no uplift for the time involved in funding a claim: that would simply be a private funder risk, as it ought to be, since it is a basic risk element.
   Presently, funders are perfectly happy to invest in lawyers and class representatives but, for some unspecified reason, do not invest in the purchaser class itself.

For the reasons above, an early payment to purchasers, and not just lawyers, is the single simplest and most effective available reform to focus the regime onto only the strong cases.

Avoiding unintended consequences from reform

The risk is that more stringent requirements on funders would accentuate delay tactics for defendants. The underlying policy aspiration is to move compensation to claimants. Making it too hard to bring a claim could be self-defeating.

First, it is important to note that some cases ought not to be brought: those that amount to special interest pleading. If those fall out of the market, that is a good thing. What about strong claims? Here, the market must look to the Tribunal to credit strong claims more quickly. This is an essential part of the recommendations and ensures balance. The triage of stronger from weaker claims at class certification brings focus, and the prospect of much higher damages for the strong claims because of the recommendation to consolidate loss into the first purchasers – and not others – brings very strong funder rewards if they can show a strong claim.

Consider hardcore cartels. These are widely accepted to be harmful. So, why has only 1.7% of the market settled in a leading hardcore cartel case (McLaren)? That ought to be 100%: there is public evidence of wrongdoing, and the book ought to be thrown against those who did it, if not on day 1 then at least by day 100. Part of the answer here is to accept that precision of compensation is not the aim when it comes to hardcore cartel class actions: deterrence is. But cases have often bogged down in the precision of compensation estimates.

So, when cases are economically strong such as hardcore cartels – then speedy justice should emerge with fewer questions asked. Whereas in cases that do not articulate clear economic efficiency benefits, such as the troublingly high number of cases against innovators, many questions should be asked, if the cases are even entertained at all. In a sense, this involves treating some claims very differently from others, but that is the point.

Therefore, the key to moving the debate forward, at a deeper intellectual level, is to accept that the rationale for the regime is deterrent and not compensative except as a by-product, thereby sharpening focus. The paper supplies an economic analysis articulating this and locates scope to apply it within the Tribunal’s existing powers before considering how this change of perspective might alter some important case studies.
First, however, an introduction to the competition law class action regime and its history is in order.

PDF Viewer