A number of group actions concluded this summer, including the RBS rights issue litigation and the failed attempt at collective proceedings of Merricks v MasterCard Incorporated  CAT 18 under section 47B of the Competition Act 1998. All have thrown up issues on the relationship between group litigation or ‘class action’ and litigation funding.
Group litigation is on the rise. The 1980s and 1990s saw a series of pioneering group actions in 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.
These actions may historically have benefited from legal aid funding, or the backing of trade unions. But the demise of legal aid and LASPO, with the removal of recoverable additional liabilities, left an effective funding gap. While, for example, PI claims continue to benefit from a protected costs regime through 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.
This gap is being filled through group litigation to achieve economies of scale and to obtain litigation funding, which can be used to purchase after-the-event 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. 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. IT and artificial intelligence will assist this process and also throw up more problems.
Overall, I am optimistic that IT 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’ that causes 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 that satisfies regulatory requirements, is properly funded, and fair to the clients, and that will be profitable.
Underpinning every consideration are the regulatory requirements. The code of conduct contains clear and precise directions on how clients must be treated fairly, and 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 example for funding disbursements).
Client relationships have a new dimension in group litigation. How do you take instructions from 10,000? 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 that gives instructions to the solicitors in a manageable way. This in turn means 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, 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 that 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? Few firms will have a ‘war chest’ that 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 has seen its share price rise from 400p per share a year ago to 1,066p now – 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 that 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’s fee will be three times their outlay or a percentage of damages recovered (whichever is higher), is expensive. There are other options.
The successful litigation against West Bromwich Building Society last year by the Property118 action group was crowdfunded. Its 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 (for example for non-party costs) to structure efficiently.
On the horizon too is 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 playing ‘catch-up’ here.
A solicitor’s retainer in group litigation will almost always be a variant of a conditional fee agreement (CFA). But this could be a collective CFA 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, because a scenario might arise where there would be insufficient money recovered to pay all parties in full. Moreover, a solicitor will be mindful of the need to ensure that the client’s interests are also protected, with a given percentage of recoveries ringfenced for the client.
The efficient running of group litigation will be dependent on IT. A solicitor can expect to obtain their clients through the internet and should consider the construction of a ‘portal’ that acts as an ad, but also permits a client to complete retainer documentation, to signify agreement to giving authority to a committee, and provides information to the client. This in turn requires consideration of regulatory requirements and also cybersecurity.
IT also raises interesting dilemmas for the calculation of individual costs. The cost of servicing through email a client who is simply part of the cohort will be very low, at well under £100. At the 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, one-third of a unit has been allowed for paralegals stuffing form letters into envelopes and paying for a stamp. In the digital age, such justifications cannot 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 group litigation order 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 applications for security for costs at an early stage. The RBS rights issue litigation demonstrates how important early applications are; astute litigators will also be aware of the pressure such applications can place on claimants.
Andrew Hogan is a barrister at Ropewalk Chambers in Nottingham specialising in costs and funding.