Last July, the Supreme Court's landmark decision in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) sent tremors through the litigation funding market. In declaring damages-based Litigation Funding Agreements ("LFAs") unenforceable, the Court appeared to place a roadblock between claimants and funders with (many assumed) catastrophic consequences for the UK's burgeoning collective action regime. But with that decision in the Trucks case now firmly in the rear-view mirror, we ask: will PACCAR survive 2024?
In this article we consider PACCAR's actual impact to date, the reaction of funders, the Courts and the legislature, and look ahead to likely developments in the coming year.
Background
The initial assumption was that PACCAR could put a stop to the period of exponential growth the funding market had enjoyed in the years following the Access to Justice Act 1999. With that and subsequent legislation, the old common law bans on "maintenance" ("the support of litigation by a stranger without just cause") and "champerty" ("an aggravated form of maintenance… in return for a share of the proceeds") were swept aside in favour of a modern, access-for-all approach to civil justice. 25 years on, public policy accepts the necessary trade-off between the societal requirement for funding, and funders' growing wealth and dominance.
Litigation funders provide an important role in access to justice: allowing claimants to bring valid claims where they may otherwise be unable to do so due to lack of funds. Funders have also enabled many group actions to be brought where it would be uncommercial, or, indeed, impossible, for individual claimants to pursue them. Without funding, many potential claimants would effectively be priced-out of the justice system altogether ("In England, justice is open to all; like the Ritz Hotel").
Of course, the proliferation of the enterprise has been – particularly in light of the broadening of the Competition Appeal Tribunal's ("CAT") remit in 2015 to include "opt-out" consumer claims – extremely lucrative for funders. A 2022 report by RPC found the top 15 UK funding houses to have assets worth £2.2 billion – a tenfold increase on the 2010/11 figure. While these outfits differ in their mission statements (their non-financial motivations range from environmental concerns to the protection of particularly vulnerable litigants), their shared overarching aims, as with any other investment model, are profit-generation and bottom-line-protection. Very few funders would fund a claim with less than a 60% likelihood of success, and some are increasingly bullish as regards risk-allocation (i.e. amongst ATE insurers and claimant law firms).
Fundamental to the wealth of the industry, however, has been its preference for a damages-based LFA model. Depending on the precise quantum of a case, funders can generally expect a higher return on their investment where claimants agree to share a percentage of recovered proceeds with them (as opposed to funders getting back a multiple of their capital outlay). If funders were making hay while the sun shined, PACCAR is (for now, at least) a regulatory thunderstorm.
PACCAR
The judgment was the latest in a long line of interlocutory rulings in the Trucks Litigation.
One of the Trucks defendants, DAF Trucks ("DAF"), sought a declaration that the funding arrangements of both the Road Haulage Association ("RHA") and UK Trucks Claims Limited ("UKTC") (with funders Therium and Yarcombe respectively) were unenforceable – in what initially seemed to be a relatively bullish attempt to derail proceedings. DAF argued that LFAs which purport to award funders a percentage of damages upon the success of a claim are, in fact, "damages-based agreements" ("DBAs") within the meaning of Section 58AA of the Courts and Legal Services Act 1990 (as amended in 2009 and 2013) and not compliant with the Damages-Based Agreements Regulations 2013. To give that section and those regulations effect, DAF argued that litigation funding was a "claims management service" within the meaning of section 4(2)(b) of the Compensation Act 2006.
The Respondents made powerful arguments against the broad construction of that definition. Therium and Yarcombe played a purely financial role and had no stake in the "management" of the action. Should their involvement be considered "a service in relation to the making of a claim", then, they said, a bank providing a loan to a litigant would necessarily be caught too.
While these arguments won favour with Lady Rose, who provided the dissenting judgment, Lord Sales said it was not for the Court to "limit the ambit" of the wide power granted to the Secretary of State to stipulate the types of applicable activity. The Secretary of State had not taken steps to exempt litigation funding from the wide definition, and on a broad construction of "claims management services", litigation funding was captured. Section 58AA(3) of the Courts and Legal Services Act 1990 therefore had the effect of bringing LFAs within the scope of the DBA regulatory regime.
Impact
The decision was initially met with dismay by litigation funders who had, until this judgment, proceeded on the basis that their funding arrangements were not required to comply with DBA regulations (indeed, it was common ground that the Yarcombe and Therium LFAs – like the vast majority in the market – did not comply). In witness evidence from the Chair of the Association of Litigation Funders, the Court was told that its decision would "bring to an abrupt end hundreds of funded claims with potentially catastrophic financial consequences for all involved in the case." The Court was not persuaded by this "Chicken-Licken" defence ("the sky is falling down!") – the likes of which are often deployed before decisions with wide-reaching public policy ramifications. Funders are now, perhaps predictably, downplaying the impact the decision will have on their trade.
Funders say they will innovate quickly to ensure compliance with legal and regulatory requirements (in fact, many had sought to amend their LFAs in advance of the judgment, in anticipation of a negative result). If their venture becomes uncommercial, funders appear relaxed with the idea of 'voting with their feet' and re-focussing efforts on other, more funder-friendly jurisdictions. This can be avoided if funders can maintain a viable business model in this jurisdiction post PACCAR. This, in turn, will depend on the reaction of claimants, the Courts and Parliament, each of which we will consider below.
Claimants: Therium vs. Bugsby
PACCAR caused wide panic in the funding industry not just because of its potential effects on long-term profits. Of immediate concern was how funded claimants would react to the Supreme Court striking down their LFAs as unenforceable – particularly where funding had been invested, but not yet paid back. At least one claimant, Bugsby Property LLC, which found itself in the "sweet spot" between funding and repayment at the time of the PACCAR judgment, sought to capitalise.
Bugsby's legal costs had been funded by Therium (and Omni, another funder) up to and including trial. Bugsby and the defendant in those proceedings did not agree on a settlement sum until after the Supreme Court's judgment in PACCAR. Therium's expected pay-out (it seeks over £16m) pursuant to its LFA with Bugsby did therefore not fall due until after that LFA was deemed unenforceable. Bugsby sought to ignore the LFA and keep the amount allegedly owing to its funder.
Therium immediately applied for an asset preservation order to protect its interest. In an interim judgment which will be met with a collective sigh of relief by the funding market, Therium was successful in securing the order (pending determination of the substantive issue, which will be arbitrated pursuant to a dispute resolution clause in the LFA).
For the most part, funders and litigants have demonstrated an appetite to find a reasonable work-around to PACCAR (on which more below). This is particularly the case where funded claims are at a relatively early stage. In this situation, a funder's exposure is low, but the risk to the claimant of its case collapsing if the funder is not appeased is high. It is no surprise that some claimants would be less inclined to re-negotiate their LFAs as the end of proceedings nears, and an award of damages is in sight. We expect, however, that Therium vs. Bugsby will dissuade further claimants from attempting to 'take the money and run'.
Courts: PlayStation
So how have willing claimants attempted to get around PACCAR? The answer is relatively simple, albeit not ideal from a funder's perspective. Restructuring LFAs as multiple-based – where funders are paid a multiple of their capital outlay as opposed to a share of the damages – takes those agreements out of PACCAR's reach. Whilst this approach is less lucrative for funders, it looks to be the path of least resistance to protecting both funders' and claimants' interests. Where claimants are willing to do so, re-negotiating the pay-out provisions of an LFA is a far simpler and more practical step than making it compliant with the DBA regulations.
The CAT, which has the power to reject an application for a collective proceedings order ("CPO") if it is not satisfied by a claimant's proposed funding arrangements, has reacted sympathetically in its recent decision in the PlayStation case. That claim, spearheaded by proposed class representative Alex Neill, is being brought on behalf of an estimated 8.9 million UK users of Sony's PlayStation Store, as a result of alleged restrictive practices by the gaming and electronics giant.
Ms Neill renegotiated her LFA in light of the PACCAR judgment and the CAT considered it on 9 October 2023. Rather than separate themselves entirely from the prospect of a damages-based pay-out in future, Ms Neill and her funder made that outcome conditional on Parliament overturning PACCAR (on which more below). The words "only to the extent unenforceable and permitted by applicable law" were added before "a percentage of proceeds", such that the funder would now receive the greater of (a) a multiple or (b) a share of the damages, if the law later changes to allow the latter.
In another boon for the funding market, the CAT found no issue with this proposal. The CAT held that the amended clause "operated with a contingency, such that [it has] no legal effect until the contingency eventuates" and that that was an "entirely proper position to take".
Sony has been granted permission to appeal the CAT's decision. Unless and until the Court of Appeal or Supreme Court overturns the decision, we expect funded claimants to now follow Ms Neill's suit en masse if the practicalities of their claims permit. Whether those contingencies will in fact be triggered will depend on Parliament's next steps.
Parliament: The Digital Markets, Competition and Consumers Bill
Perhaps surprisingly, Parliament appears to be acting quickly to remedy the ill-effects of PACCAR. On 15 November 2023, the Government tabled an amendment to the Digital Markets, Competition and Consumers Bill which would remove the words "claims management services" from section 47(c) of the Competition Act 1998. At present, the combined effect of that subsection and PACCAR is to render all damages-based LFAs in "opt-out" collective proceedings unenforceable. The effect of the amendment passing from an opt-out claimant's perspective would be to nullify PACCAR entirely.
The amendment appears to be passing through Parliament with relatively little scrutiny and is now at the committee stage in the House of Lords. At least one parliamentarian is seeking to expand the amendment to cover "opt-in" CAT proceedings and funded cases outside the CAT, too. While Lord Sandhurst's remarks on the floor of the House of Lords did rather overstate the impact of PACCAR ("Claimants will have no effective access to litigation funding agreements"), the thrust of his argument seems rational. There is no compelling public policy reason why funders of "opt-out" claims should be free to strike damages-based LFAs, but funders of other large claims should not. Indeed, the prohibition of "damages-based agreements" in the Consumer Rights Act 2015 was primarily intended to stop lawyers profiting disproportionately from conditional fee agreements in opt-out actions. Legislating in favour of "opt-out" funding arrangements could have the unintended consequence of diminishing the incidence of "opt-in" proposals which, as in the Trucks case, are often more appropriate.
Whether or not Lord Sandhurst's proposal takes effect, the Bill is not likely to become law until around May 2024 at the earliest. With a general election all but guaranteed this year, that could prove problematic. Funders will be keeping a watchful eye on the Bill's passage and hoping time on the parliamentary clock does not run out.
Conclusion
PACCAR was clearly not the disaster that the Chair of the Association of Litigation Funders said it would be. Collective actions rumble on, and stakeholders appear to be responding pragmatically. The precise mechanics of how claims will be funded a year from now will largely depend on Parliament's response, but we suspect that, by hook or by crook, PACCAR is likely to be looked back on by funders as a bad dream rather than the new normal.
Even if that is not the case, we do not expect PACCAR to render England and Wales a hostile jurisdiction in the eyes of funders. There is simply too much business to be done here. The market will innovate and adapt as it always has done, and funders will probably learn to live with the multiple-based repayment model. The likely prospect of agreeing to a slightly higher multiple should not dissuade claimants with very strong claims from bringing them.
