News Detail Banner
All News & Events

Article: Opt-out Collective Actions for Competition Damages Actions—A New Dawn for Litigation in the UK

Business Litigation Reports

The Consumer Rights Act 2015 (UK), enacted on March 26, 2015, heralds a significant development in UK litigation. Following years of debate, and despite the concerns of many that the UK would suffer from the apparent excesses of U.S. class action litigation, the Act introduces opt-out collective actions (the British term for class actions) for competition claims. This new regime should take effect starting October 1, 2015, and significantly raises the stakes for companies found to have infringed competition law, as they potentially face a much larger range of claims.

Background
Over the last five years, there has been a significant increase in private enforcement of competition law. With many decisions being issued by the European Commission and National Competition Authorities, companies have become increasingly aware of the degree to which they may have been impacted by unlawful cartel conduct and the need for them to seek recovery of significant sums for the benefit of shareholders. The English Courts have been at the forefront of this increased focus on private enforcement of competition law. The European Commission’s recently adopted Directive on Private Enforcement seeks, in many respects, to bring most European Member States closer to the UK (see our January 2015 Business Litigation Report for details about the Directive). However, a concern has remained in the UK that it is still difficult for companies and consumers to recover the losses caused by cartels and other anti-competitive practices.

Cartel damages claims have typically been pursued by large corporations, which can either fund claims themselves or attract litigation funding. While it is possible to bring collective actions in the UK, the current opt-in regime, which requires individual claimants to positively elect to participate, has meant that only one collective action has been brought—a 2007 claim by the Consumer Association on behalf of 130 purchasers of replica football kits. The claim was settled in 2008 and no further collective actions have been brought since.

Given the lack of an effective collective action regime, the Department of Business Innovation and Skills undertook a number of consultations that culminated in the Consumer Rights Bill 2013. The Bill proposed a range of amendments to consumer and competition law, but one of the most significant was the introduction of an opt-out collective action regime, similar to the U.S. class action regime. Following protracted debate in parliament, the Bill was passed as the Consumer Rights Act 2015. The collective action amendments are set out in Schedule 8, entitled “Private Actions in Competition Law”, with relevant provisions being inserted into the Competition Act 1998 and the Enterprise Act 2002.

Where Will Collective Claims Be Heard?
Collective actions will be heard in the Competition Appeal Tribunal (CAT), a specialist competition body that consists of three members: a Chairman who is a judge or senior barrister, and two members who are experienced in business, accountancy, economics, and related fields. The CAT can currently only hear cases that “follow-on” from a decision of the European Commission or the UK Competition and Markets Authority—it cannot hear cases where there has been no finding of infringement. However, the Act will extend the CAT’s jurisdiction so that it will be able to hear stand-alone actions where there has been no competition authority investigation or findings.

Who Can Initiate a Claim?
Collective proceedings must be commenced by a person or company that proposes to be the representative who must obtain a collective proceedings order from the CAT.

The intention is that only those with a genuine interest in the case can act as a class representative. In addition to those who have themselves suffered loss, trade associations or consumer groups can also act as a class representative. The Government’s policy is that claims should not be brought by law firms, third-party funders, or special purpose vehicles (in contrast to jurisdictions such as the Netherlands and Germany). The CAT must authorize the class representative, and where there is more than one person or company seeking approval, the CAT must determine who would be most appropriate.

Opt-in or Opt-out?
Unlike in the United States, collective actions can be either opt-in or opt-out. An opt-in claim is one where claimants must elect to join the action in order to be considered a member of the class and share in the remedies. An opt-out claim is one where an action can be pursued on behalf of a class of unnamed and, at that point, unidentified claimants. However, the class of persons, rather than the particular members themselves, must be easily identifiable in order for the CAT to make a collective proceedings order. When determining whether an action should be opt-in or opt-out, the CAT can take into account all matters it thinks fit, including (i) the strength of the claims; and (ii) the practicality of bringing the proceedings as opt-in. This second requirement will likely be a matter of much debate in the early cases, as defendants will try to have the claims brought on an opt-in basis to reduce the scope of the suit, while claimants will want the CAT to allow the claim to proceed on an opt-out basis. The requirement for the CAT to determine whether claims proceed on an opt-in or out-out basis is said to be a safeguard against the potential excesses of U.S.-style class actions. Where cases proceed on an opt-out basis, the class members are limited to those domiciled in the UK. Any non-UK domiciled individuals or companies must opt-in to the claim.

Certification of Claims to Proceed on a Collective Basis
In light of concerns regarding the potential for the collective action regime to be abused through unmeritorious claims, the Act and the draft CAT Rules provide for a range of matters that the CAT will need to consider before it certifies a claim to proceed as a collective action. This includes an assessment of whether collective proceedings are an appropriate means for the fair and efficient resolution of the issues; the costs and benefits of the proceedings; the size and nature of the class; whether the claims are suitable for an aggregate award of damages; and the availability of alternative dispute resolution. In deciding whether to allow claims to proceed on an opt-in or opt-out basis, it is proposed that the CAT also consider strength of the claims.

It will be important to see how the CAT approaches the certification process given that in most cartel damages cases there is significant information asymmetry, as defendants typically have substantially more information than claimants. This issue is addressed in English litigation at the disclosure stage. However, if the certification stage becomes a mini-trial of the substantive issues, as it has become in the U.S., and the claimants have not had the benefit of disclosure, it will remain to be seen how many cases can meet the merit requirements to be brought as a collective action.

How Will These Cases Be Funded?
In April 2013, contingency fees (known as Damages Based Agreements) were allowed in English litigation. However, as a safeguard against the perceived excesses of U.S. class action litigation, the Act prohibits the use of contingency fee arrangements for opt-out collective actions. In light of this, the Act provides that the CAT can order that any unclaimed damages be used to cover the representative’s costs and expenses of bringing the claim. However, the Act also does not remove the UK “loser pays” rule, which means that the class representative is exposed to adverse costs in the event that the claim is unsuccessful. This gives rise to a number of considerations for opt-out claims.

Lawyers for class representatives will need to decide whether they are willing to act under a Conditional Fee Agreement (CFA) with a success fee, or whether the representative will need a litigation funder. For large claims, and given that the experience in the U.S. suggests well in excess of 50% of class damages remain unclaimed, lawyers may be willing to take the risk and act on a CFA with a success fee that can be paid from unclaimed damages. Given the potential adverse costs exposure, class representatives will require “After-the-Event” insurance. It remains to be seen what premiums will be offered by insurers and whether they are willing to defer those and take the risk of whether unclaimed damages are sufficient to cover the premium.

Conclusion
There is much uncertainty in the new collective action regime that will take time to resolve through the early cases, and it remains unclear whether the regime will be expanded in the future to cover claims for breaches of other laws. What is clear, however, is that the new regime both increases the risks and exposure for cartel defendants and presents significant opportunities for claimants to obtain recoveries.