Addressing collective redress: Trends, corporate behaviour, funding, and damages

Think of the 2001 Enron securities fraud, the 2010 Deepwater Horizon oil rig explosion, and the 2015 Volkswagen ‘Dieselgate’ scandal. These were notorious events that led to some of the largest mass redress claims of all time, brought by investors duped by corporate fraud, victims of environmental harm, and consumers allegedly misled about product performance.

In more recent years, the courts of England and Wales have become increasingly fertile ground for mass claims, a trend driven by enhancements to legislation, a sophisticated judiciary, the rise of third-party funding, and increased appetite to hold parties to account.

Rise in collective redress

There are now various options for injured parties seeking collective redress in the UK. Multiple affected claimants may, for efficiency and cost reasons, coordinate to bring a multi-party claim, as is seen in several of the ‘truck cartel’ claims currently being litigated in the Competition Appeal Tribunal (CAT).

For large volumes of claimants, opt-in and opt-out class actions may be brought in the CAT under a collective proceedings order (CPO). Through the newer opt-out regime, introduced by the Consumer Rights Act 2015, a class representative seeks CPO certification to represent class members, who must proactively elect to be excluded. Opt-out claims are presently only available for breaches of competition law, such as harm caused by cartels or market dominance. Such is the appeal of the CPO option, it has also attracted some opt-out claims considered to be more tangentially linked to competition issues.

There was a sluggish start, with only nine ‘collective proceedings’ cases brought in the CAT from 2015-20 (and one previously in 2007). However, following the key Supreme Court decision in Merricks v Mastercard (2020), which lowered the threshold for opt-out certification, collective proceedings cases filed in the CAT have since boomed to a total of 57 as of 19 November 2024 (see Figure 1), the majority being opt-out cases. Key sectors for claims so far include technology (eg, smartphone chips and batteries, third-party apps), utilities and energy (eg, sewerage services), and financial services (eg, credit card interchange fees).

Figure 1: Collective proceedings registered in the CAT

^{Note: As of 19 November 2024}

Third-party litigation funding

This rise in collective actions has been made possible by the increase in availability of third-party litigation funding. This is where a party has its legal fees paid by a funder, typically in return for either a percentage of the eventual damages won, or a multiple of the funding provided.

Third-party funding is particularly important for collective actions, as often no single claimant, with relatively modest individual damages, would be incentivised to fund the litigation. Funding can therefore ensure access to justice by enabling cumulatively large and meritorious group claims to get off the ground. A high-profile example is the group action brought by 555 sub-postmasters against the Post Office, for damages linked to the ‘Horizon IT scandal’.

The litigation funding industry has grown rapidly in England and Wales in the past decade, with it being reported that the assets on funders’ balance sheets in 2020 exceeded £2 billion, a significant increase from the 2011-12 valuation of £198 million.

However, in July 2023 the third-party funding market was disrupted by the decision of the UK Supreme Court in PACCAR v CAT (2023), which effectively made many litigation funding agreements (LFAs) with fees based on damages, unenforceable. This was because it found that LFAs are damages-based agreements (DBAs), which must comply with the DBA Regulations 2013, and many LFAs then in place in the market did not comply. Following PACCAR, funders sought to amend and renegotiate terms, generally so their fees only relied on a multiple of funding. This altered their risk and reward profile, however, and sometimes led to a compensatory increase in funding multiples sought.

The UK Government in place at the time recognised the unintended consequences of PACCAR and its potential to limit access to justice. In March 2024, draft legislation was introduced – the Litigation Funding Agreements (Enforceability) Bill – aimed at reversing the effect of PACCAR. This would confirm that LFAs are not DBAs, regardless of when the agreement was entered into.

However, the Bill was not enacted prior to the July 2024 UK General Election. Although the new Government has said it does not intend to reintroduce the Bill, it stated in August 2024 that it is “keen to ensure access to justice in large-scale and expensive cases, while also setting up adequate safeguards to protect claimants from unfair terms”.[1] The Civil Justice Council (CJC) published an interim report[2] on litigation funding on 31 October 2024 and posed a series of consultation questions with a deadline for responses by 31 January 2025. The CJC hopes to provide a full report with recommendations by summer 2025. The Government has indicated that it will take a more comprehensive view of any legislation to address issues in the round once the review is concluded.

Impact on corporate behaviour

For corporates, the threat of scrutiny from consumers, investors and activists, and the possibility of mass claims, may provide a check on their behaviours and a clean-up of pockets of bad practice. This is particularly the case in relation to environmental, social and governance (ESG) issues, such as ‘greenwashing,’ environmental damage, and human rights breaches.

We expect an increase in greenwashing claims brought through class actions on behalf of groups of investors under sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA). To date, most section 90 and 90A FSMA claims have settled before or during trial, including the £147 million case brought by law firm Morgan Lewis on behalf of 60 institutional investors against Serco Group plc (2023), which settled one week into the trial in June 2024.  This means the English Courts have not yet ruled on important legal questions in such cases.

Environmental class actions brought in the CAT include claims against UK water and sewerage companies related to alleged unlawful discharges of untreated sewage and wastewater. Then there is the Municipio De Mariana & Ors v BHP Group and Vale (2023) claim, regarding the 2015 collapse of the Fundão Dam in Brazil and the loss of life, damage and ecological harm that followed. This case likely represents the largest group action ever brought in English courts, with more than 700,000 claimants and £36 billion reportedly sought in damages. The High Court trial started in October 2024 and is being closely watched.

Damages calculation

Quantum of damages suffered is a key area of interest to claimants, which forensic accountants and economists can help establish.

Damages are generally calculated on a ‘compensatory’ basis in English proceedings – putting the injured party back into the position it would have been but-for the infringement. One must compare the economic outcomes for the claimant that prevailed in the presence of an alleged infringement, versus the estimated outcomes had it not occurred (the ‘counterfactual’).

Competition damages claims brought on behalf of consumers, such as the current UK collective action against Apple in relation to the conditions it imposes through its App Store, may involve a comparison of actual prices paid to those that would have been paid but-for the competition infringement. In securities fraud claims, such as the now-settled securities action against Tesco (which was alleged to have made false statements in its accounts), this could involve a comparison of the evolution of the value of an investment over time in the presence of a false statement and subsequent corrective disclosure, versus how this value would have evolved in the absence of the false statement.

In a fair pricing dispute, such as alleged excessive discretionary commission historically earned on some motor finance, this could involve comparing actual interest rates charged to those which would have been charged in the absence of such agreements. While this conceptual comparison is easy enough to define, the challenge is in robustly estimating counterfactual outcomes.

Consider the February 2024 High Court judgment in relation to the claim bought by the liquidators (from Grant Thornton UK LLP) of a PC retailer seeking redress for harm suffered due to a cartel in the market for manufacturing LCD panels (Granville v LG Display, 2024). While not itself a collective action, it illustrates key elements required to compute losses in a competition damages claim. This includes the value of the LCD panels purchased by the claimants (value of commerce); the increase in price as a result of the cartel (overcharge); the extent to which any increase in cost was passed-on to the claimant; which was an indirect purchaser of LCD panels (upstream pass-on); the extent to which any increase in the cost of LCD panels to the claimant was then passed-on to consumers (downstream pass-on); to what extent cost increases caused customers to purchase alternative products instead (lost sales and diversion); profits on lost sales (including on sales of relatively lucrative warranties), and interest applicable to the loss.

While some of these elements relate specifically to a competition damages claim, all types of collective redress require multifaceted forensic analysis. Furthermore, class actions present several novel challenges, for instance quantifying damages for the individual numerous class members.

Conclusion: Responding to a collective redress claim

Collective redress continues to grow in prevalence in the UK. The developing collective redress regime and the availability of third-party litigation funding can provide the means for individuals and organisations that have suffered harm to seek redress and hold corporates to account.

Regardless of whether the claim arises from infringements of competition law, financial disclosure rules or another source, a key component of any claim is the calculation of damages. This typically requires expert input from economists and forensic accountants and can involve an intricate comparison of actual outcomes to those that would have occurred but-for the misconduct or infringement, which should be articulated in a straightforward way that is easy for all parties to understand.

A version of his article first appeared in Financier Worldwide’s eBook - Managing & Resolving Commercial Disputes. © 2024 Financier Worldwide. All rights reserved. Reproduced here with permission from the Publisher. EBOOK: Managing and Resolving Commercial Disputes 2024 — Financier Worldwide

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References

[1] UK Parliament, Civil Proceedings: Finance, Question for Ministry of Justice, UIN HL449, tabled on 29 July 2024. Answer by Lord Ponsonby (Labour) on 1 August 2024.

Written questions and answers - Written questions, answers and statements - UK Parliament

[2] https://www.judiciary.uk/related-offices-and-bodies/advisory-bodies/cjc/current-work/third-party-funding/