Background Comments / Pointers

Funding

In England & Wales, the general rules of litigation funding apply to competition litigation cases (i.e., ‘loser pays’). In general terms, this rule seeks to balance the interests of claimants and defendants: claimants are discouraged from bringing unmeritorious claims at the risk of having to bear not only their own costs but also those of the defendant.

In its recent recommendations (November 2007), the OFT has considered that the funding rules may not sufficiently incentivise representative actions in England & Wales. Representative actions are novel and may require litigation work and activity beyond what is normally required in a competition case. So, the OFT is now recommending greater flexibility for funding arrangements in representative actions where the current conditional fee arrangements (“CFA”) are inadequate. Under CFAs, an uplift of base costs of over 100% may be warranted, albeit subject to judicial supervision, but, importantly, the OFT notes that such a rule may not be appropriate for all private actions.

But in seeking to find the correct funding model to sufficiently incentivise lawyers to take meritorious cases, it would give rise to concern if the percentage increase greatly exceeded 100%. If the OFT truly wishes to discourage the development of a ‘litigation culture’, there should not be excessive interference with the existing ‘loser pays’ costs rule (the fact that the loser has to contribute to the winning party’s costs discourages unmeritorious claims) and any significant modification to the current rules (for example, permitting the uplift to exceed 200%) will risk distorting the current balance and encourage the very litigation culture that the OFT says it is trying so hard to avoid.

Any reforms to funding arrangements must also be reviewed carefully in light of other options or recommendations, including the Civil Justice Council’s recommendations on funding options and proportionate costs as a way of improving access to justice.

Finally, it should be noted that third party funding of claims is already permitted and we expect it will be further exploited in competition cases going forward. For example, hedge funds have recently started to consult and employ lawyers to advise on the merits of claims which might deserve financial backing.

Representative Actions

The Competition Act 1998 (s. 47B) already permits limited representative actions to be brought in the CAT or Competition Appeal Tribunal (where the OFT or another national authority has taken an infringement decision, i.e., these are pure follow-on representative actions). However, the direct link to a prior infringement decision will place a natural cap on the number of cases that consumers can bring as part of a collective action: public resources are not limitless and competition agencies bring and conclude a relatively limited number of investigations (typically the most serious infringements). The result is that follow-on actions may be based upon the more serious infringements but, as a result of the limit on public enforcement, will not provide the sufficient depth or number of cases on which representative groups of claimants can rely to obtain full and effective compensation.

The OFT recommends that stand-alone representative actions should also be permitted in the hope that this would encourage a greater number of meritorious cases to be brought. This could be achieved by either: (i) extending the current scope of s.47B Competition Act 1998 to include stand-alone actions; or (ii) modifying the Group Litigation Order (“GLO”) (a generic multi-party procedure). It remains to be seen how these proposals will be implemented, but in general terms it can indeed be said that there is movement towards a greater use and encouragement of representative actions in the competition field.

Holistic Reform

Holistic, rather than piecemeal, reform, whether at EU or national level, requires:

-    A system for representative actions that is designed to be viable and cost-effective, and avoid US excesses (to which we refer below);

-    Sufficient scope for national legislation to adapt to other national civil litigation reforms that could impact one or more of these areas (e.g., possible reforms in England and Wales on funding);

-    Defendants to have the right to challenge the standing of the designated representative body (for example, where the body has no locus, it represents a diverse group of claimants with different or conflicting interests, or the group is not homogenous and claims have been improperly aggregated);

-    Defendants to have the right to apply for summary removal of claimants unable to demonstrate a plausible causation theory or to prove actual injury or damage;

-    Duplicate recovery by direct and indirect purchasers to be avoided (either by a single award covering both groups, or following the US federal court rule that the direct purchaser recovers the entire claim with no pass-on defence);

Finally, as a general matter it would be very dangerous to consider and reform the issue of collective redress without regard to matters such as funding, costs, multiple damages, access to evidence, the issue of fault, etc. Many of the procedural and substantive questions consulted on by the OFT and the EU are interlinked: they include the scope of collective actions for competition claims and therefore rightly should be viewed as part of a package of reforms rather individual, stand-alone modifications.

Competition Reforms as a Trojan Horse

There are undoubtedly advantages to having effective representative actions: they limit the cost and time that consumers have to invest in a claim. It is entirely possible that were representative actions to achieve more usage in the competition setting, they would then gain favour among claimants in other areas.

However, any reforms that encourage greater use of class or representative actions in the competition field must exist within a carefully defined and balanced package of reforms. As noted, certain questions must be taken into account when designing a model for private competition enforcement that may not necessarily apply to other fields of litigation: there is no ‘one size fits all’ model that can be designed.

For example, an important concern in the competition arena is how to avoid any ‘chill’ to the important leniency process: the incentives for companies to report illegal conduct and cooperate with the authorities must not be outweighed by the risk of even greater exposure to private follow-on litigation where, for example, checks and balances are not in place to protect leniency statements.

Other important questions also need answering, including the issue of whether there should be joint and several liability of co-conspirators in all cases, and whether an immunity applicant should benefit from single damages if multiple damages are otherwise available in cartel cases. As this demonstrates, there are unique factors in the competition setting that come into play when designing the appropriate competition model; tailoring the representative action model is just one part of this conundrum. But this means that it would be dangerous for the introduction of increased representative actions in a competition setting to give carte blanche to the introduction of representative or class actions in some or all other private litigation fields.

Nevertheless there is ongoing pressure for general tort reform within the European Union. The EU Consumer Affairs Directorate is pushing for greater consumer protection, covering areas such as environmental and product liability but which also may influence the wider debate in the competition field about how to ensure consumers damaged by the infringement of competition rules can be sufficiently compensated.

Finally, it should be noted that the potential already exists for some form of claim aggregation mechanism to be used in a number of European jurisdictions. However, what does not yet exist (and may be impossible without a treaty amendment) is a mechanism for aggregating different actions in respect of the same competition infringement in different Member States. Notwithstanding inevitable difficult, and perhaps insurmountable, sovereignty issues, the drive to ensure that consumers’ interests are protected may indicate that a mechanism for consolidation - not least so as to achieve uniformity of treatment – is a policy imperative.

US Lessons

In the US, the so-called ‘abuses’ are not necessarily caused by the existence of class actions. The availability of contingency fees, treble damages and jury trials are also important in creating today’s environment of private antitrust enforcement in the US. But these factors together have created an unbalanced climate in which defendants are greatly incentivised to settle litigation cases where the cost of fighting even unmeritorious cases could outweigh the damages to be paid.

There are certain ways in which European countries can seek to avoid encouraging the undesirable elements of the US litigation culture:

-    Introduce a private action model that balances all of the constituent parts with great care (the incentives offered by introducing greater representative actions, modifying funding and costs rules, the damages model, and greater access to evidence interplay with each other and cannot be considered or redefined in isolation);

-    Provide the court with sufficient judicial review and control to prevent or stop abusive litigation tactics and unmeritorious claims; and

-    Gain insight from the hard lessons learned in the US: certain aspects of the US system have been or are currently under review to try to counter some of the imbalances in the litigation system (e.g., the Class Action Fairness Act; de-trebling of damages and no joint and several liability for immunity applicants).