The Court of Appeal has ruled unanimously that litigation funders can (in principle) recover their fees in priority to the distribution of damages to class members, thereby removing the risk and uncertainty that there may not be sufficient funds left over to pay funders their return. While funding arrangements remain subject to the supervisory jurisdiction of the Competition Appeal Tribunal (CAT), the decision will be welcomed by litigation funders.
Background
In 2022, Mr Justin Gutmann ("Gutmann"), class representative, commenced collective proceedings against Apple on behalf of 23.8m iPhone users. His claim for £853m alleges Apple abused its position of dominance by failing to be transparent and informing consumers about iPhone battery issues and the impact of performance management software (also referred to as "battery throttling").
On 1 November 2023, the CAT certified the proceedings subject to a requirement that Gutmann revise the funding arrangements to address the Supreme Court's judgment in R (Paccar) v CAT [2023] UKSC 28 ("PACCAR"), which had rendered the litigation funding agreement (LFA) unenforceable.
Gutmann's revised LTA contained “waterfall” provisions whereby the funder’s fee would take priority over the payment of damages to class members (if this was approved by the CAT). Apple challenged the revised LFA, arguing the terms are contrary to statute and unenforceable. The CAT disagreed, noting its powers under the Competition Act 1998 (the CA 1998) are sufficiently broad to approve payment of the funder's fee as proposed in the revised LFA. The CAT recognised the importance of parties having the freedom to negotiate funding terms (providing the class representative acts fairly and not in conflict with the interests of the class) and that funders, for reasons of commercial viability, require payment for the risk of investing in litigation.
Court of Appeal's judgment
Apple appealed the CAT's decision to the Court of Appeal (the "CoA"). The CoA unanimously upheld the CAT's judgment, affirming that the CAT had jurisdiction to approve the payment of the funder's fee from the damages awarded to the class. It rejected Apple's arguments that such arrangements were impermissible under the CA 1988, noting this does not prescribe how the class representative should allocate the damages once received. The Court also dismissed Apple's arguments that such arrangements could create conflicts of interest or incentives for the class representative, noting that the CAT's supervisory role provided sufficient safeguards to protect against this risk.
Significance
Had Apple's appeal been allowed, it would have been nearly impossible for funders to make a fair return on sizeable and lengthy investments in collective actions. The judgment will provide funders and claimant lawyers backing collective actions with greater certainty that they can seek their return in priority and advance of distribution to class members, if successful.
This decision also clarifies the legal framework for third party litigation funders, confirming that they will be remunerated from damages awarded to a class in collective actions (subject to the CAT jurisdiction). It also highlights the importance of the CAT's role in balancing the interests of class members and those who are actually facilitating the litigation. Ultimately, it will be for the CAT to decide whether to give effect to the terms of the LFA in question. Any funding agreement will not bind the CAT who will have absolute discretion as to the sums to be paid to the funder, and in what priority.
Following this decision, the Civil Justice Council ("CJC") has published its final report on its review of litigation funding in the UK. The findings and recommendations made in the report are considered in detail in a separate article in this newsletter. This decision will in the interim provide funders with some respite and clarity whilst the government decides whether to implement the CJC's recommendations.
