05 May 2015

(by Sebastian Peyer) On 30 March 2015 the Consumer Rights Act 2015 received Royal assent, introducing opt-out collective actions into UK competition law enforcement. The UK system of private enforcement has long being criticised for being ineffective in compensating small businesses and consumers. The new opt-out procedures is hoped to encourage victims of anticompetitive conduct to seek redress in the Competition Appeal Tribunal (CAT). It mainly implements the changes suggested by the Department for Business, Innovation & Skill (BIS) that . Opt-out collective or class actions are one mechanism to aggregate small individual claims. The success of class action rules depends on whether they provide enough incentives for representatives and law firms to bring these complex and costly legal actions. The general rules on litigation funding in the UK and the restrictions introduced with the Consumer Rights Act 2015 may make it difficult to raise funds to bring collective redress claims in the CAT.

The current opt-in model is flawed

Breaches of competition law typically cause losses to consumers and businesses that are relatively small for each individual. Consequently, the cost of litigation outweigh the potential benefits and victims do not normally seek redress. Legal tools to aggregate claims can overcome this rational inertia. The Civil Procedure rules provide for representative actions in CPR 19.6 according to which a claim can brought by a representative when more than one person has the same interest in the claim. However, this route to opt-out class actions was shut in Emerald Supplies where the High Court held that it was not possible to determine the ‘same interest’ until the question of liability had been tried. Section 47B (old) of the Competition Act 1998 gives specified bodies the right to bring a competition claim on behalf of consumers in the CAT. Only the consumer organisation Which? received the special status that enables it to bring such claims. In the current opt-in model the representative must identify individual consumers and encourage them to join the claim. In the only representative action so far, Which? sued JJB Sports for fixing prices for replica football shirts. It is estimated that the procedure provided benefits of around £20,000 whereas the costs were likely to be in the region of several hundred thousand. The opt-in procedure proved cumbersome and expensive – Which? managed to identify only 130 individuals.

The new opt-out mechanism could help victims

The Consumer Rights Act 2015 completely replaces the old section 47B. The new section 47B permits opt-out collective actions to be brought on behalf of UK citizens in the CAT. Collective actions are a combination of two or more claims, brought either as stand-alone or follow-on damages actions or injunction claims for breaches of UK or EU competition law. A representative can combine two or more claims if they deal with the same, similar or related issues of fact or law. The representative can be a member of the class but this is not a mandatory requirement. However, the BIS consultation of 2012 and the indicate some reluctance to accept collective actions from entities that are not members of the class, especially law firms. Consumer organisations and other claim vehicles are allowed to bring claims but it also seems that non-class representatives may have to satisfy a more strenuous legal test.

Are the ‘safeguards’ too strong?

During the BIS consultation on private damages actions the Government and many stakeholders expressed concerns that opt-out class actions may lead to excessive litigation and litigation blackmail. BIS proposed to disallow exemplary damages and restrict funding to prevent the emergence of a ‘litigation culture’ and ‘speculative litigation’. The question is whether the new arrangements have thrown the out the baby with the bath water.

Section 47C(1) prohibits exemplary damages. Exemplary damages are rarely awarded in English civil litigation – being the only competition case where the defendant was punished. Potential windfall profits from exemplary damages may not play a large role in the claimant’s profit calculation and, thus, probably have little influence on the incentives to bring an opt-out class action.

More problematic is section 47C(8), declaring damages‑based funding agreements unenforceable. Under a damages-based agreements the lawyer’s pay is determined by a percentage of the damages award if the case is won. This allows lawyers to pursue a claim without financial risk to the claimants. While damages-based agreements are prohibited, conditional fee agreements, i.e. so-called ‘no-win, no-fee agreements’, are still permitted. In a ‘no-win, no-fee agreement’, the lawyer’s fee is normally based on an hourly rate with a success fee if the case is won. The Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act 2012 does no longer permit claimants to recover the success fee (or after-the-event insurance if it is taken out) from the defendant. It means that the claimant has to pay the success fee, after-the-event insurance premium or, for example, costs for experts. The cost risk will reduce the attractiveness of opt-out collective actions. Lawyers who are unable to charge a success fee due to limited funds of the class members, cannot mitigate the risk of losing some cases and, thus, may be unwilling to bring opt-out cases. The success fee that the claimant has to pay is likely to wipe out the potential gains from litigation and will reduce the incentives to bring a class action. Section 47C(6) stipulates that representatives can request that unclaimed sums of money are to be paid to them to cover the litigation expenses. However, this payment is uncertain and will not provide enough incentives to overcome the cost hurdle that has been erected in front of potential claimants.

Class litigation is expensive and there may be better ways of providing compensation such as CMA-approved consumer redress schemes . Whether victims of anticompetitive conduct or a potential representative will choose the collective action route depends on the costs of litigation, which are high in the UK, and funding opportunities. Without further government action that would either change the competition-specific rules or, ideally, the funding rules more generally, the new UK collective action regime may have a hard time taking off the ground.

See Part 1 of Schedule 8 of the Consumer Rights Act 2015.

Alternatively, claimants can use group litigation orders to bundle claims in the High Court; however, in practice this tool is not really used in competition cases.

Emerald Supplied Limited v. British Airways [2010] EWCA Civ. 1284

Price-fixing of replica football kit (Case CP/0871/01) OFT Decision CA98/06/2003 of 1 August 2003.

Non-domiciled claimants may opt-in.