The strange case of the banned DBA

All in this together: government funding restrictions will hamper opt-out oactions

Posted by Oliver Gaynor, litigation funding manager at Litigation Futures sponsor Burford

Following the conclusion last year of its consultation on private actions in competition law, the UK government has announced that it intends to introduce an opt-out regime for large class actions against defendants who have infringed competition law.

Such claims are to be called ‘collective’ actions, and the basic principle is that unless they specifically choose to opt out, UK-domiciled consumers and businesses will automatically be included as claimants provided they satisfy the basic criteria for membership (which will be set by the Competition Appeal Tribunal, the proposed guardian of the regime, at the outset of proceedings).

A hypothetical example might be a claim against a gas supplier for overcharging: all purchasers of gas from that supplier would automatically become claimants, provided they can produce a gas bill from the relevant time.

The policy objective behind this proposal is to open up markets to small businesses by facilitating their means of redress against large, dominant corporations who have acted in an anti-competitive manner; and to deter such conduct (for example, price fixing through cartels) in the first place. In other words, it is to help the Davids against the Goliaths.

Whilst that may seem like a laudable aim, the proposal has its critics. A number of fears and objections were raised in the consultation process; in particular the familiar argument that the changes will open the floodgates to frivolous and unmeritorious claims, and the UK will be plunged into a US-style class action culture.

In response, the government decided to introduce certain restrictions, including the fact that lawyers will not be permitted to enter into any form of contingency arrangement, such as a damages-based agreements (DBA) in respect of any opt-out actions.

The result is an unusual paradox: in the space of two years, the government has introduced legislation to permit lawyers to act under DBAs, but has then decided to restrict competition lawyers from doing so on collective actions – which, due to factors such as the likely size and variety of the claimant groups, would have been some of the most suitable cases for alternative funding arrangements.

The issue is further complicated by the Jackson reforms. Since April 2013, in most cases success fees and after-the-event insurance premiums must be paid by claimants and cannot be recovered from opponents. Thus, the damages pool at the end of a successful claim will be reduced by any such costs, leaving less headroom for litigation funders to make a return.

In opt-out cases where the economic margins are tight, claimants may already find it hard to attract funding, and now will be restricted from asking their lawyers to step into the breach.

The effect may well be to undermine the effectiveness of the policy before it has even been implemented. Put simply, why would claimants choose to bring an opt-out action if, in all likelihood, it is going to mean paying month after month of legal fees? Faced with that choice, it would be surprising if the policy succeeded in bringing a large number of struggling small businesses into court.

Many may decide that focusing on the day job would be preferable to rolling the dice of long, uncertain and hostile proceedings against a global corporation which is determined to protect its market share at all costs.

This anomaly will need to be addressed if the policy aims are going to succeed. In the short term, synthetic risk-sharing arrangements such as the hybrid DBA recently launched by Burford may offer a solution. In a hybrid arrangement, a litigation funder enters into a separate private agreement with the law firm to share a pre-agreed portion of its proceeds in the event the claim succeeds.

Such arrangements are not caught by the DBA regulations, which only apply to agreements between ‘client’ and ‘representatives’ (i.e. the lawyers). In short, there is nothing to prevent a funder agreeing to support a collective claimant group on a contingency basis, and then agreeing back-to-back arrangements with the lawyers.

Clearly, though, it would be preferable for the issue to be properly addressed in the primary legislation. It may be questioned how valid a concern the ‘floodgates’ argument is. Similar arguments were used against the introduction of litigation funding in the UK around a decade ago; however, 10 years of practice have shown that funders will only support strongly meritorious claims that are likely to generate a financial return.

Consequently, as Lord Justice Jackson underlined in his report, third-party funding in fact tends to act as a filter for frivolous claims. The same rationale would apply to any lawyer when considering whether to act on a contingency basis.

Further, the comparison to the United States is specious, given that that US courts do not provide for the shifting of cost risk onto losing parties, and so attitudes to risk are fundamentally different.

Some safeguards for the new collective action regime are clearly appropriate; but excluding the lawyers from sharing in the litigation risk and reward should not be one of them.

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