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Collective action and its discontents - Stuart Carson article published in FT Adviser

13 October 2015

FT AdviserThis article was first published in the FT Adviser on 8th October 2015

Having come into force on 1 October, could the Consumer Rights Act 2015 pave the way for large US-style class actions in the UK Competition Appeal Tribunal? Labelled by Which? as the "biggest change to consumer legislation in a generation", the Act will provide the victims of anti-competitive behaviour with a mechanism for collective redress with similarities to that currently seen in the US.

Last year alone, the European Commission issued over €1.5bn (£1.11bn) of fines to businesses that had engaged in anti-competitive conduct. Not only does it stifle competition and innovation, but the presumption is that anti-competitive conduct has the effect of increasing prices paid for goods or services. The impact on price is not always limited to the goods or services directly sold by wrongdoers but their actions can have the consequence of increasing prices within the market as a whole. While the exact impact on price will vary from case to case, several economic studies suggest that the average overcharge in price is around 25 per cent, while this could be significantly higher in practice.

Accordingly, the victims of anti-competitive behaviour can pursue the perpetrators for any loss suffered as a consequence. While anti-competitive behaviour may cause huge losses within a particular market, in many cases the losses will be spread across numerous consumers and businesses. Those with smaller claims can lose out if the value of their claim is too low to justify the costs of bringing an action on their own. The process of pursuing such cases through private litigation is also costly and complex and is therefore, in practice, often only accessible to large, well-resourced businesses.

While the current system in the Competition Appeal Tribunal does provide a mechanism for collective actions in the UK, each claimant must be identified and specifically joined into the litigation. The practical difficulties of this are well-documented and it has meant that only one claim has ever been issued under this 'opt-in' regime (where Which? pursued a consumer claim in relation to overcharges on replica football shirts). The Act is a renewed attempt to address this.

When the Act comes into force, a single consumer or business will be able to bring an action in the Competition Appeal Tribunal not just on its own behalf but on behalf of every consumer or business that has suffered similar loss as a result of the same anti-competitive behaviour, without having to actually identify each and every claimant.

Claims can be brought on behalf of individuals, businesses (of any size) or a combination of the two. Unless a claimant specifically 'opts-out' of the group action, if based in the UK they will automatically be included within the proceedings and, should the claim be successful, entitled to a share of the damages recovered. If based outside of the UK the claimant will not be included within the litigation unless it specifically requests to be.

While the value of an individual claim might be too low to warrant the costs of litigation, a collective action on behalf of all those that have suffered loss could be huge - similar to the large class actions seen in the US. While this is great news for claimants who otherwise might not have access to justice, it is feared by certain lobbies that the Act will promote frivolous claims or claims that are unduly oppressive to defendants.

The group Justice not Profit, which represents the interests of more than 3m businesses and is backed by the US Chamber Institute for Legal Reform, fears that the Act could undermine the integrity of our legal system: "US-style class actions, including class actions with 'opt-out' features, will increase the volume and coercive power of litigation, regardless of whether claims have any merit". The concern is that, by allowing a single consumer or business to bring an action on behalf of everyone in the UK who may have suffered loss, the claim value will be so high that defendant businesses will feel compelled to settle the claim to avoid the costs of litigation and the potential adverse publicity.

What this fails to take into consideration is that, in contrast to the US system, in the UK the general principle is that the losing party pays the winning party's costs. Nor is there the threat of triple damages which exists in the US. Not only should this deter claimants from pursuing claims without merit but defendants should also feel less compelled to settle claims if they truly have a valid defence.

We must also remember that in many circumstances, in order to give rise to an opt-out claim, the defendant will have already been found guilty of anti-competitive behaviour by the competition authorities and assumed to have benefited from its infringing behaviour. It is difficult to sympathise with any such defendants in these circumstances, particularly in circumstances where the individual losses suffered by the victims would otherwise be too small to bring an action on their own.

Another key difference is that, in the US, class actions are typically funded by means of an agreement whereby, on success, the law firm acting on the case shares a percentage of the damages ultimately recovered. This is an attractive option for many prospective claimants whose individual losses may be too low to warrant litigation on their own or if, perhaps, they do not have the funds to engage in costly litigation. It is, however, currently proposed that such agreements will be unenforceable under the Act, which poses the question as to how a collective action could be funded in the UK. This emphasises the need for other innovative funding solutions, without which a collective action might not be possible for many prospective claimants.

With the above in mind, it is envisaged that litigation funding will play a big role in facilitating 'opt-out' claims, with law firms working under a conditional fee agreement (no win no fee). While Justice not Profit, a campaign group that opposes the reform, warns that third party funders view litigation as a means to make profit, third party funding is common place in litigation and, unless the Act is amended, will be necessary to facilitate access to justice for many claimants. There are however many complexities in relation to funding issues and adverse cost risk, in particular, that remain to be resolved.

It remains to be seen whether the Act will promote frivolous claims, but the safeguards proposed at least ensure that opt-out claims will be a far cry from the US-style class actions that have faced significant criticism.

Key points

  • The Consumer Rights Act 2015 paves the way for large US-style class actions
  • While the current system in the Competition Appeal Tribunal does provide a mechanism for collective actions in the UK, each claimant must be identified and specifically joined into the litigation
  • Costs associated with class actions in the UK are likely to be quite different to those undertaken in the US

Stuart Carson, Associate, Commercial Litigation, Stewarts Law LLPStuart Carson is an Associate in the Commercial Litigation Department. Stuart specialises in commercial dispute resolution and has a broad range of experience acting for both claimants and defendants in large scale disputes, including dealing with multi-jurisdictions. Stuart has particular expertise of the energy industry, having worked for two years in-house for GDF SUEZ Europe and International Power plc, specialising in high value litigation.

For further information and comment please contact:

Katy McEwen
Marketing Executive, Stewarts Law LLP
Phone: 07587 550 873
Email: kmcewen@stewartslaw.com

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