Funding private enforcement actions
August 2019 | SPECIAL REPORT: COMPETITION & ANTITRUST
Financier Worldwide Magazine
August 2019 Issue
The general trajectory of an increasing number of ever higher fines against cartelists is now being matched with an increased vigour on the part of claimants who have suffered losses to bring damages claims seeking recompense. The UK remains one of the most popular jurisdictions for initiating these claims. Establishment of a specialised tribunal in 2002, the Competition Appeal Tribunal (CAT), to hear follow-on damage claims (based on an existing infringement decision), as well as willingness of the English courts to grant compensation for breaches of competition law, are two main reasons for making the UK an attractive jurisdiction for prospective claimants.
Equally important is the increased appetite of funders and insurers to fund these litigations. These arrangements are approved by the Financial Conduct Authority (FCA) in the UK. Also, law firms are able to enter into contingency-models or damages-based models (DBAs), where lawyers’ fees are contingent upon success of the cases.
These private enforcement actions or damage claims are assets for any entity which is looking to recover their losses as a result of a cartel or a non-cartel anti-competitive practice (abuse of dominance or vertical restraints). Recent examples include the £68m (plus interest) won in damages by Sainsbury in 2016 against Mastercard’s anti-competitive practice of fixing the multilateral interchange fees for credit and debit cards. Many others have followed this lead since and have filed similar claims, now amounting to billions of pounds worth of damages claims against Mastercard. Other pertinent examples are those equally large claims filed against various truck manufacturers, such as Daimler, MAN and Scania, for their participation in a major cartel initiated in multiple jurisdictions.
Company directors are under a duty to recover debts owed to their company. These damages claims, although contingent upon their success, can be seen as recoverable assets for a company.
In deciding whether to file a claim for a cartel breach, the starting point is to identify the relevant cartel and calculate the overcharge, i.e., the difference between the actual price paid for the cartelised goods or services and the price that would have been payable absent the cartel. Depending on the quantities purchased by an entity, even parties who did not purchase directly from any of the cartelists – but instead purchased from a competitor of the cartelists – may be able to claim ‘umbrella damages’, on the basis that the prices they paid were higher as a result of the operation of the cartel. Claimants can also claim interest on damages, given that cartels and associated conduct often span many years. Interest on damages is often substantial and may sometimes exceed the level of damages themselves. Also worth mentioning is the lack of impact of leniency on private enforcement claims, that is, even if a cartelist is a leniency applicant and has received complete immunity from fines by the regulator, there is no consequent impact on damage claims, which can be filed notwithstanding any immunity received against statutory fines.
There are many ways to fund a competition damages action, some of which can significantly reduce exposure to costs and the risk of adverse costs. Options range from the traditional private client retainer through contingency agreements to third-party funding, or a combination of both, all usually depending on how complex and substantial the claim is. Potential claimants can also lower their overall bill by bringing joint or parallel proceedings with a group or trade body, in the form of ‘collective actions’ or via a law firm with an arrangement with a funder.
Third-party funding would typically involve a commercial funder agreeing to pay some or all of a claimant’s legal costs in return for a share of damages or settlement sums or a payment representing a multiplier against the sums drawn down by the claimant. Due to the increase in number of private funders competing with each other for such claims, pricing is moving downwards. Funding is generally on a no win-no fee basis – i.e., it is typically non-recourse, so if the claimant is unsuccessful the funder loses its investment. Also, the usual rule in disputes in the UK courts is that the loser pays the costs (or a proportion of those costs) of the winner, therefore an ‘after the event’ insurance (ATE) can be taken out.
An ATE insurance policy insures the claimants against their potential liability in the event they lose the case. An ATE policy would typically cover disbursements, including counsel’s fees, administrative costs and the other side’s costs (subject to a maximum limit). Third-party funding, ATE insurance and contingencies can all be pooled together, if needed.
ATE and funding, if disclosed, can also be used as a strategic weapon to encourage settlement. The other side will know that an insurer or funder has conducted an independent analysis of the merits of the case and decided it was strong enough to invest in or cover. Yet another point to consider is the attractiveness of ‘portfolio claims’ as opposed to single-case financing. Portfolio financing gathers multiple claims that a company may have (antitrust or others) and puts them into one portfolio or consolidated package, in respect of which the funding can be claimed. Getting funding for a consolidated package of claims or portfolio of claims has greater financial viability (when compared with single-case funding) as it diversifies risk across various claims and is substantially cheaper than single case funding.
When a claimant decides to bring a damages claim against a defendant, the solicitors (mostly those who have existing and longstanding relationships with the funders and insurance companies) should be able to procure funding on the claimant’s behalf from a third-party funder. They will be able to structure the most appropriate deal for the claimant and draft the relevant documents around the proposed deal. Funding is typically provided directly to solicitors to cover fees and disbursements, as well as cover the fees for structuring and drawing up the deal. Funding can also cover the costs of the expert witnesses and economists, court fees and can even be negotiated to cover in-house resources as well as secondments.
If a claim is unsuccessful, the funder and the insurer would generally absorb both the legal costs and any award of adverse costs through ATE. On the other hand, when the claim is successful, the funder will recover its costs plus a percentage multiple of the recoveries or an agreed sum based on the amount drawn down.
Third-party funding can be highly beneficial for entities that are reluctant to invest their own funds into a potentially time-consuming and costly, yet worthwhile, litigation, and also have the effect of taking the burden of these legal fees off the balance sheet.
Gordon Moir is a partner at Shepherd and Wedderburn. He can be contacted on +44 (0)20 7429 4988 or by email: email@example.com.
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