Third-party funders line up as competition law appeal grows
8 October 2007
Brace yourselves: competition law is coming to the masses. It was once the territory of economist techies and fans of obscure European law, but now the Office of Fair Trading (OFT) has decided that wronged consumers deserve, or rather need, to become directly involved in seeking redress.
The increasingly stretched regulator has been busily promoting private enforcement of anticompetitive behaviour for the past few months. In April it published a discussion paper on the topic, with the aim of presenting proposals to the Government by the end of the year.
And what better time to encourage private enforcement than as the UK's first representative action is being played out? Consumer group Which? decided this year to use its representative powers for the first time, bringing an action against retailer JJB Sports to seek compensation for "hundreds of thousands" of customers who bought over-priced replica football shirts in 2000 and 2001.
The OFT is hoping the JJB case will be the first of many such actions. But who is going to foot the bill for the expected wave of competitionrelated claims?Stepping into the breach is the third-party litigation funder. Funding as a phenomenon has become increasingly common in personal injury (PI) or insolvency cases, in which the probability of success, or the probability of success over a series of cases, can be asserted.
But, leaving aside questions of champerty and maintenance (the laws that stopped litigation being an exercise in profiteering), why is third-party funding suddenly so appealing in private enforcement? The private funding industry received a major fillip this summer when the Civil Justice Council published its recommendations to the Lord Chancellor on the future funding of litigation. It recommended that "properly regulated third-party funding should be recognised as an acceptable option for mainstream litigation".
There is the 'access to justice' argument. The OFT itself recognised that the major obstacle to bringing competition-related private actions is the cost. After all, an action that would run in the High Court could easily rack up hundreds of thousands of pounds in legal fees, and, obviously, there is the risk that if you were on the losing side, you would be liable for adverse costs. That might not be much of a consideration for a large corporate, but for small to medium-sized enterprises (SMEs) and individuals, a £500,000 legal bill could be insurmountable.
For these types of claimants, using external funding would be "doing what the City does", explains Edwin Coe's head of litigation David Greene. "They're sharing the risk and sharing the spoils, like any hedging process."
It is hardly surprising, then, that hedge funds have been swift to sniff out an opportunity. Their cash is managed by external funders.
The UK's key purveyors of external litigation funds can be counted on one hand: Commercial Litigation Funding, Corporate Claims International, IM Litigation Funding (IMLF) and Smith & Williamson. Then there is Calunius, a broker that has no funds of its own, but seeks to match funders with claimants. Typically, external funders look at cases in which there is a 60 per cent or greater chance of winning.
On that point, competition law has the added appeal of including follow-on actions. These occur when a regulator - be it the OFT or the European Commission - has already found that a company or group has been anti-competitive and typically a fine has already been levied. Then the wronged party or parties can bring their own suit. "You've already got a decision from the regulator. All you've got to do is prove you suffered damages," explains DLA Piper's Europe, Middle East and Africa head of competition and trade Mike Pullen. "It's a slam-dunk, as the regulators prove the breach of competition law."
A funder will obviously be drawn to a case where liability is already in the bag. Commercial Litigation Funding's chairman Brian Raincock says: "They're very difficult to argue against. But they're not automatic. Forensic accounting is very important and it's the first thing we ask our clients for. But we will pay for it."
But competition is not like other areas of the law, such as insolvency or PI, that have so far attracted the attention of private funders. While follow-on cases are obviously attractive, the OFT is going further than suggesting just this form of action. It is encouraging stand-alone suits for which evidence would have to be collected by claimants, which makes establishing a prima facie case a slightly different proposition. And a far more risky one.
But stand-alone actions are still attractive to funders, according to Raincock. "They're an opportunity," he says. "The OFT has limited resources and so it's inevitable that many actions will fall outside their scope. Either people will be denied justice or funders will step in to fill the void."
This kind of altruism comes at a price. Raincock typically seeks to take a cut of about 30 per cent of any successful claim - generally the market rate.
IMLF's managing director Susan Dunn is starting to consider competition-related cases after building up a healthy portfolio in insolvency and PI. "We typically fund a case where the damages outcome will be for a single claimant," she says. "But we've been approached by some group actions, including competition claims. We have to get our head round the implications, but generally the same rules apply as with any case: is it a good claim? Who is the defendant? Can they afford to pay? And is there appetite on the part of the claimant?"Dunn typically rejects 90 per cent of the cases presented to her.
It must be noted that the Which? representative action did not rely on external funding and so far the consumer group has not come out in favour of the concept. For their part, funders are eyeing representative actions with scepticism.
"The real problem is the recruitment and organisation of claimants, as we saw in the football shirts case," says Raincock, referring to the fact that although there was the potential for hundreds of thousands of claimants, only 130 were eventually signed up by Which?'s lawyers at Clyde & Co.
According to Clydes, this was not due to consumer apathy, but because a natural filtering process took place once potential claimants realised they would have to provide evidence that was several years old and travel to London to give evidence. "Those thousands of claimants have to be coralled," says Raincock. "And that tends to happen before solicitors are instructed. So there is a gap."
For IMLF's Dunn, the problem of representative actions is more an existential one. "Once again, it comes back to appetite. We're talking about money lost in the past, and the consumers probably didn't know they were losing it at the time," she says. "We need to be confident that the claimant has the appetite to follow the action through. If they lose that appetite halfway through, there might be a small fee to pay, but they're entitled to walk away."
So how does she ensure they will go all the way? "It's a 'whites of their eyes' thing," she says. "You can't do it without meeting the person." Fair enough if that is an SME or an individual, but this is not really feasible in a representative action.
Another stumbling block to external funding of competition cases is solicitors themselves. "Attitudes vary greatly," says Dunn. "You do get a lot of dinosaurs talking about champerty and maintenance arguments."
Unsurprisingly, US firms, such as Cohen Milstein Hausfeld & Toll, which have class actions firmly in their sights, are more open to the concept of external funding. Cohen Milstein European managing partner Rob Murray says: "We think it's a big issue and we're taking active steps to know what's going on in the market. Internationally, it's far larger than just what's going on in the UK."
It seems that for such firms, it's not the funders alone who will be making money. "These chaps from America know how to run actions and funding and clean up," says Raincock. You have been warned.