This summer has seen the conclusion of a number of group actions, including the RBS Rights Issue litigation and the failed attempt at collective proceedings of Merricks v MasterCard Incorporated [2017] CAT 18 under section 47B of the Competition Act 1998. All of these group actions have thrown up interesting issues on the relationship between group litigation or “class action” and litigation funding, which will prove food for thought in the years to come.
Group litigation is on the rise. The 1980s and 1990s saw a series of pioneering group actions in the fields of product liability and personal injury, which in turn led to judges developing a series of principles for the efficient management and disposal of group litigation. These in turn found their way into the Civil Procedure Rules, in particular part 19, practice direction 19B and part 46, which deals with costs. These actions may historically have benefitted from Legal Aid funding, or the backing of trade unions.
The demise of Legal Aid and the introduction of LASPO 2012 with the removal of recoverable additional liabilities left an effective funding gap: whilst for example personal injury claims continue to benefit from a protected costs regime, through for example, qualified one way costs shifting, other areas such as environmental litigation where there is a need to insure against adverse costs have been much more problematic.
The way this gap can and is being filled, is through group litigation to achieve economies of scale and to obtain litigation funding, which can be used to purchase ATE insurance and fund what can be very expensive disbursements.
The important group actions of the second decade of the 21st century, will include environmental litigation, shareholder actions, competition claims, and particularly claims for breach of data protection and privacy laws: a single data breach of personal information held by a large plc could affect tens of thousands of customers or employees.
In turn, the compilation and structuring of cohorts of claims and funding them, will pose unique challenges for solicitors in terms of constructing a litigation scheme, complying with increasingly onerous requirements for client care and regulatory considerations, and measuring and recovering costs. Information technology, and artificial intelligence will assist this process and also throw up more problems which will have to be anticipated and managed.
I therefore turn to what I consider can be described as the key considerations when contemplating venturing into the field of group litigation. Overall I am optimistic that information technology and increasing access to capital, through litigation funding will facilitate group litigation but also lower barriers to entry into what is a very profitable line of business. Even a small well run firm, provided it can access the necessary expertise, technology and capital, can rapidly step up to handle this challenge.
The starting point for group litigation will inevitably be “an event”, causing harm to large numbers of people. It will become apparent that there has been a disaster, a large scale data breach, a well publicised breach of competition law, a product liability scandal, a chemical leak or some other event giving rise to a cause of action.
A solicitor who realises that there is a business opportunity and wishes to act for the victims must then carefully set about constructing a litigation scheme, which satisfies regulatory requirements, is properly funded, fair to the clients and which will profitable at the end of the day.
Underpinning every consideration are the regulatory requirements. Many solicitors will not have read the Code of Conduct since law school, but it contains clear and precise directions on how clients must be treated fairly, provided with the best possible costs advice, the restrictions on advertising and payment of referral fees. Solicitors must also consider the requirements they are subject to, when undertaking insurance mediation activities and now the role of the FCA, which is an issue when funding litigation, if clients are being provided with credit, for eg the funding of disbursements.
Client relationships have a new dimension, when undertaking group litigation. How do you take instructions from 10,000 clients? The usual way is to structure a management committee of representative clients, who have authority to act on behalf of all the clients, effectively being the body which gives instructions to the solicitors in a manageable way. This in turn means that an agreement to provide authority to act must be made between each client and the committee, and then between the committee and the solicitors. Both agreements are usually contained in one document. This is often described as a litigation management agreement.
The drafting of a litigation management agreement poses further challenges. A solicitor will be conscious that it should contain provisions which deal with the usual incidences of litigation, a procedure for settling the case, or a formula for distributing the proceeds to clients who may have different degrees of interest. Can it legitimately commit the cohort of claimants to agreeing unlimited funding advances, ultimately repayable from damages? Can it grant a unilateral power of variation of the terms of the retainer to the solicitors? Would these provisions infringe the obligations in the Code of Conduct to act fairly?
In a group action, the need for funding will be evident and the funding requirements will run into millions. How can this money be obtained, as few firms will have a “war chest” which they could or would wish to use to fund the litigation?
Litigation funding is often used as a synonymous term for third party funding, but it is wider than that. Third party funding is on the rise due to the enormous thirst litigants have for capital. A firm such as Burford Capital, has seen its share price rise from just over 400p per share a year ago, to 1135p at the time of writing, as business is booming.
The drafting of a funding agreement is an intricate business as it must lock in, with the litigation management, and also the terms of the ATE insurance policy, it will invariably be used in part to purchase. The suite of documents would ideally be drafted together.
But third party funding, where the funder asks for three times their outlay or a percentage of damages recovered, whichever is higher, as their fee is expensive. There are other options available.
The litigation against the West Bromwich Building society last year, by the Property118 action group, was crowded funded, using the platform www.crowdfunder.co.uk. It’s campaigns are still ongoing. There is no reason in principle, why crowdfunding cannot be used more widely for group litigation, but it requires detailed knowledge of the regulatory provisions, special purpose vehicles and potential liabilities eg for non party costs to structure efficiently.
On the horizon, is an even more interesting potential development that of raising litigation funding through an initial coin offering (ICO), a cryptocurrency. Although bitcoin remains the best known currency, anyone can launch an ICO, which involves selling cryptographic tokens to investors. These can represent anything from a currency to exclusive access to a service, or potentially a share in the proceeds of litigation. Regulators are globally playing “catch up” with this phenomenon, where already there is a global market estimated at £136 billion.
A solicitors retainer in group litigation will almost invariably be a variant of a conditional fee agreement (CFA). But this could be a collective CFA (CCFA) made with a special purpose vehicle or a normal CFA or a CFA Lite. Almost inevitably a solicitor will charge a success fee. But this in turn, as it will be payable out of the proceeds of the action, will necessitate a priorities agreement, between the litigation funder, the ATE insurer and the lawyers, as a scenario might arise where there would be insufficient money recovered to pay all these parties in full. Moreover, a solicitor will be mindful of the need to ensure that the client’s interests are protected too, with a given percentage of recoveries ringfenced for the client.
The efficient running of group litigation will be dependent on information technology. A solicitor can expect to obtain his clients through the Internet and should consider the construction of a “portal” which acts as an advertisement, but also permits a client to complete retainer documentation, to signify agreement to giving authority to a committee, and which provides information to the client. This in turn requires consideration of regulatory requirements and also cyber security.
Information technology also raises interesting dilemmas for the calculation of individual costs. The cost of servicing a client through email, who is simply part of the cohort, will be very low, well under a £100. At a press of a button, 10,000 standard letters providing a monthly update can be sent. How does one quantify and claim for such work which is delivered at near zero marginal cost? In earlier litigation 1/3 of a unit has been allowed for paralegals stuffing form letters into envelopes and paying for a stamp. In the digital age such justifications can’t apply. The humble unit, however, may not yet have had its day.
From the defendant’s point of view, any costs Order made as part of the GLO will usually provide for several liability on the part of the claimants. There are few defendants who will contemplate with equanimity 10,000 or more sets of enforcement proceedings, each to recover a fraction of their total costs. Accordingly a defendant will scrutinise hard the provision made by the claimants for ATE insurance, be concerned to find out the identities of the litigation funders, and consider at an early stage, applications for security for costs. The RBS Rights Issue litigation demonstrates how important early applications are, and astute litigators will also be aware of the pressure such applications can place upon claimants.
A version of this article first appeared in Litigation Funding magazine October 2017.