UK: UK opt-out collective actions – US class action lite, but still set to make an impact

Introduction

On 1 October 2015 the Consumer Rights Act 20151 entered into force. This reforms and consolidates consumer protection laws in the UK but also - significantly from a litigation perspective - provides a mechanism for a form of "class action" to be brought for the first time in the UK. The new regime will allow representative litigants to apply to the Competition Appeal Tribunal (CAT) for "certification" (i.e. approval) to bring proceedings for damages on an "opt out" basis on behalf of a class of claimants (with the exception of those that expressly elect not to be included in the class).

Although the new mechanism will be limited to competition law claims, it is likely to have a significant impact on litigation risk by increasing the scope for consumers and small businesses to claim for losses suffered as a result of an infringement of competition law.

In recent years, there has been significant growth in claims in the English courts being issued by victims of anti-competitive conduct, seeking to rely on infringement decisions by competition authorities as a basis for litigation to recover losses from companies named in those decisions. This includes high profile actions in respect of the air cargo cartel and action by high street retailers against MasterCard and Visa in relation to interchange fees.

Most of these claims have been brought by large businesses, as individual claimants or listed groups of claimants. The introduction of the collective actions regime opens the door for small businesses and consumers to obtain compensation for losses suffered. Such claims are often too small to justify expensive litigation, but the new procedure is intended to overcome this by allowing large numbers of smaller claims to be bundled together without requiring the individuals that might benefit from a damages award being involved in the conduct of the litigation.

Opt-out proceedings under section 47B

The Consumer Rights Act 2015 amends the Competition Act 1998, substituting a new section 47B which introduces an opt-out collective action regime for both: (i) follow-on competition law claims (i.e. claims based on the defendants' liability as established by an infringement decision by a competition authority); and (ii) stand-alone competition law claims (i.e. claims where there is no infringement decision meaning that the claimants are required to prove that the defendants have breached competition law).

The CAT has issued new procedural rules which set out how it intends to consider and manage cases brought under the new regime.2 There remains significant uncertainty which we consider in detail below.

In summary, a claim brought under section 47B will go through the following phases:

Certification – before a claim can proceed, the claimant representative is required to apply to the CAT for a collective proceedings order. An order will only be granted if the CAT is satisfied that the representative body bringing the claim is "suitable", that the class of claimants is adequately defined and that it is appropriate that the claim be brought on an opt-out collective basis (rather than an opt-in basis, which would require the representative to sign up all participating claimants).3

Settlement – the representative body cannot agree a settlement on behalf of the class members. A settlement is only binding when it has been approved by the CAT and even then class members have the opportunity to opt out and proceed with individual claims.

Damages – If the claim reaches trial and judgment is given in favour of the claimants, the CAT will assess damages on a compensatory basis. Exemplary or punitive damages are not available. The CAT will award damages on an aggregate basis and provide directions as to how the claim of each class member should be assessed. The CAT has the power to order that any unclaimed damages be passed to charity.

Limitations on the application of the regime

There are competing tensions in the design of the regime. On the one hand, the fact that claims can be brought on an opt-out basis makes it an attractive commercial proposition for claimant law firms to organise claims. The number of US claimant law firms that have established offices in London is testament to this. There will be competition between claimant firms to identify suitable cases and representatives, and to obtain certification to represent classes.

There are, however, a number of important limitations built into the regime which are designed to limit the scope for abusive litigation. In particular: (i) the regime is limited to competition law claims; (ii) law firms are prevented from bringing claims on a contingency fee (or "damages based agreement") basis4; and (iii) claims can only be brought by "suitable representatives". The limits of these restrictions will be tested in time.

The detail of the procedural rules could restrict the availability of the new regime to a limited number of potential cases. This is because although section 47B states that the collective actions mechanism applies to claims arising before 1 October 2015 – the new limitation rules (set out in section 47E) do not apply to claims arising before 1 October 2015. For pre-existing claims, the old CAT Rules on limitation will apply, which prevent claims being brought until a competition authority's infringement decision is final (i.e. until either all appeals against the substance of the decision have been resolved or the time limit for lodging an appeal has elapsed).5 Although it is possible to obtain permission from the CAT to issue a claim in advance of the expiry of this period, permission has only previously been granted in exceptional cases.6 Any suggestion that there will be a flood of claims under the new regime on (or shortly after) 1 October is unlikely to be realised.

Certification

The application of the test for certification of an opt-out class is integral to the success of the regime. There are a number of elements that the CAT is required to consider before granting a collective proceedings order (certifying the class) and many are vague and open to interpretation. In particular:

  • The claims must be "suitable to be brought in collective proceedings". In determining this, the CAT is required to consider: (i) whether making a collective proceedings order would give rise to the promotion of "fair and efficient resolution of common issues"; (ii) a cost/benefit analysis; (iii) the ability of the court to award an aggregate amount in damages; and (iv) whether making a collective proceedings order is "appropriate". In any case claimants and defendants will have very different views on all of these considerations.
  • The CAT's obligation to consider "whether it is practicable for the proceedings to be brought as opt-out collective proceedings, having regard to all the circumstances, including the estimated amount of damages that individual class members may recover." The CAT might interpret this requirement as an indication that collective actions should be restricted to consumers and small businesses with low value claims that would be uneconomic to bring alone. Claims which do not meet this threshold would be required to be brought on an opt-in basis.
  • The CAT will only certify a claim where the class representative is "suitable". It will be interesting to see how the CAT applies the suitability test and in particular how it will treat special purpose vehicles (SPVs) if they are used to collect representative claims. In the law reform process, SPVs (together with law firms and funders) were originally to be prevented from bringing such claims but there is no absolute prohibition in the legislation.

Given these uncertainties, certification will be the key battleground in the new regime, with claimants and defendants looking to test the boundaries of the rules and set helpful precedents going forward. With so much at stake, certification hearings are likely to be heavily contested and could result in multiple appeals on the interpretation of these points. The first cases could, therefore, take many years to reach resolution. We expect claimants and defendants alike to refer to aspects of the approaches taken to class action certification in the US and Canada – where there is a significant body of case law – to support their arguments on how the CAT should interpret the factors it is required to take into account in considering certification.

In an ideal world, claimant law firms will be looking for a test claim which is narrowly-defined and straightforward (giving rise to as few issues as possible) to allow them to work through the myriad of issues that will need to be resolved. However, the combination of the fact that the size of the claim will need to be substantial to justify the time commitment and the associated costs for the first case, and the competition between claimant law firms to be the first to bring a strong claim, means that this may be wishful thinking.

Settlement

Collective claims cannot be settled directly between the representative body and the defendant(s). Consistent with the approach taken in the US and Canada, the Consumer Rights Act provides for a court-approved settlement procedure. The CAT will only approve the settlement if it is satisfied that its terms are "just and reasonable".7 In deciding whether a proposed settlement meets this test, the CAT can consider: (i) the likelihood of the claimants being awarded more than the settlement at trial; (ii) the likely cost and duration of proceedings; (iii) an independent expert opinion; and (iv) the view of represented parties.

These are all questions that the CAT has experience of in other contexts, but it is not clear how the CAT will approach some of these questions in a damages settlement situation where it will be concerned to protect the interests of a large class of absent litigants. This applies in particular at an early stage of proceedings where the relative merits of the parties' cases remain unclear.

Relevant to potential defendants, the Consumer Rights Act also contains a mechanism for companies that have infringed competition law to apply to the CMA for approval of a statutory voluntary redress scheme.8 This procedure complements the collective redress regime and gives companies that have infringed competition law the opportunity to settle cases before proceedings have been brought. Companies caught up in competition investigations will need to consider whether a voluntary redress scheme might help avoid protracted follow-on litigation if they end up subject to an infringement finding. An advantage of the mechanism is that the CMA approves the scheme as offering appropriate compensation.

Conclusion

The new regime sees the UK take a Europe-leading step forward in antitrust litigation, increasing its attraction as a venue for damages claims. In time we expect that it will have a significant impact, but in the short term there are significant uncertainties about the scope and application of the new rules which is likely to slow down the progress of the early cases. These early claims will be critical in establishing precedent for how the mechanics of the regime will operate. Only after these first claims have been certifed (or not) will we know how far the UK legal system might travel down the road towards US-style class actions.

Footnotes

1 http://www.legislation.gov.uk/ukpga/2015/15/pdfs/ukpga_20150015_en.pdf
2 http://www.legislation.gov.uk/uksi/2015/1648/pdfs/uksi_20151648_en.pdf
3Note that the opt-out mechanism only applies to UK domiciled claimants. Non-UK domiciled claimants will be required to formally opt-in even if the claim is categorised as opt-out.
4Competition Act 1998 section 47(C)(8) – the prohibition on damages based agreements is contrary to the position in general litigation rules and could limit the scope for genuine collective claims to be brought. While difficult to reconcile with the wider policy of allowing such cost arrangements, this limitation perhaps reflects the government's nervousness about the development of a class action industry and the political implications of claimant lawyers recovering a potentially substantial costs payment from any award that would otherwise be due to consumers.
5The Competition Appeal Tribunal Rules 2003, Rule 31.
6Emerson II [2007] CAT 30 – the CAT exercised its discretion in this case and granted the claimants permission to issue at an earlier stage as there was an enhanced risk that documents in the possession of the defendant would not be available for disclosure if proceedings could not be brought until the exhaustion of all rights of appeal.
7Competition Act 1998 section 49A (as inserted by the Consumer Rights Act 2015)
8Competition Act 1998 section 49C (as inserted by the Consumer Rights Act 2015)

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