Will new legislation encourage more competitve corporate behaviour or fuel class actions? Carolyn Holmes looks at the consequences of legislation in Europe and the UK.
There has been an ongoing movement throughout Europe in recent years to increase access to justice for victims of anti-competitive behaviour. On 11 June the European Commission published a Directive on private damages actions for breaches of EU competition law which aims to enable victims to obtain compensation more effectively.
This was swiftly followed by a draft Consumer Rights Bill (CRB) published by the UK government on 12 June which proposes reforms with similar aims. The CRB has seemingly gone one step further than the EC by proposing a US-style opt-out class action regime for the UK. This has sparked debate that these reforms, coupled with financial backing from third party funders and insurers, will bring the perceived US ‘litigation culture’ to the UK.
‘Opt in’ versus ‘opt out’
The UK currently operates an ‘opt-in’ regime for breach of UK and EU competition laws. This means that consumers must sign up as a party to the legal action in order to recoup their losses. However, it is often difficult for consumer groups to contact all the affected individuals and persuade them to sign up to legal action, meaning that many victims of competition law do not receive redress.
In the US anti-trust law consumer groups run claims on behalf of consumers on an ‘opt-out’ basis, whereby individuals must actively opt out of the legal action if they do not wish to receive damages. Quite often individuals are unaware they are part of a class action until a cheque lands in their mail box.
Third party funding and after-the-event (ATE) insurance have long been used by clients to provide cash flow or to hedge risk in group actions claiming a breach of competition law or for damages where breach has already been established. In Third Party Funding a specialist professional litigation funding entity with no prior interest will invest in a claim providing interim cash flow to the claimant, so they can discharge legal fees and associated costs, in exchange for a share of the proceeds if the case is successful. Conversely, ATE insurers provide a policy of indemnity for adverse costs, own disbursements and potentially own legal fees, meaning insurers only pay out at the end of the case if unsuccessful.
Due to the growth of third party funding and ATE insurance as an export product, many UK funders and insurers have experience of ‘opt-out’ class actions in the US. As a result, the funding markets are well prepared to fund and insure opt-out cases in the UK.
Unlikely to increase claims
Some critics believe the introduction of opt-out class actions coupled with the increasing involvement of funders and insurers in competition cases will lead to an increase in claims. Those who have sought to obtain funding or insurance before will know that there is little substance to this argument. In reality litigation funding or insurance is only available if the case has good prospects of success. The funders and insurers apply a rigorous examination of cases to ensure their investments are economically viable. As a result only strong claims are likely to obtain funding or insurance.
The Confederation of British Industry (CBI) strongly opposes the draft CRB, saying that an opt-out regime could hold back economic growth. Given that the ethos behind competition law is to preserve a healthy economy through a competitive marketplace, it seems at odds to say enforcing competition laws hinders the economy. As Competition Minister Jo Swinson MP said: “Competition is one of the great drivers of growth; it keeps our prices low and our businesses innovating.”
Alternative dispute resolution
The CBI believes Government should be promoting Alternative Dispute Resolution (ADR) instead of a “new litigation industry” . However, parties can engage in ADR at any stage of proceedings and the funding industries have always supported ADR, as it encourages settlements, speeding up their return on investment. Furthermore, the CRB facilitates ADR by encouraging defendants to apply to the Competition Appeal Tribunal (CAT) to approve a mutually-agreed settlement. It also states that the CAT must ensure both parties are getting a fair deal, which should prevent undertakings from settling unmeritorious claims.
UK litigation safeguards
We were warned recently by Lisa Rickard, president of the US Chamber of Commerce’s Institute for Legal Reform, that the Commission’s recommendations would result in “the importation of a U.S.-style litigation industry into Europe” . However, this fails to acknowledge the safeguards which fundamentally differentiate UK litigation from US-style litigation. For example:
- The ‘loser pays’ rule in the UK states that an unsuccessful party bears all the costs of the litigation, which prevents frivolous claims being brought by opportunistic consumers.
- UK judges will be restricted to restitutory damages
- The CAT will undergo a strict certification process to eliminate unmeritorious claims and determine whether a claim should proceed on an opt-in or opt-out basis.
Checks and balances
The Government has seemingly proposed sufficient checks and balances to ensure that the new legislation will be good for consumers and responsible businesses alike. Once the CRB is implemented there will be a host of funding and insurance options potentially available for opt-out class actions. However, the existence of funding and insurance for claimants in opt-out actions should not concern corporates engaging in legal commercial behaviour. Surely a model that encourages competitive behaviour, which by its very nature boosts the economy, should be welcomed by UK and European businesses alike? Published in Global Legal Post