Extreme 3rd Party Litigation Funding Agreements- now on the cards?

The recent 2017 judgment by the Competition Appeals Tribunal (CAT) in Merricks v. Mastercard, although rejecting the headline main collective action claim at the preliminary class certification stage, nevertheless did provide judicial support for the general principle of 3rd party litigation funding for consumer competition claims, and a rare public insight into the arcane financial economics of this area.

The collective action litigation funding principle

The tribunal, including noted Oxford economist Professor Colin Mayer CBE, stepped back to consider the government’s intentions behind the relevant section (Schedule 8) of the Consumer Rights Act 2015 and quoted a Hansard speech on the issue from then-government minister Baroness Neville-Rolfe, as follows: “There is a need for claimants to have the option of accessing third-party funding so as to allow those who do not have a large reserve of funds or those who cannot persuade a law firm to act pro bono to be able to bring a collective action case in order to ensure redress for consumers. Blocking access to such funding would result in a collective actions regime that is less effective. This would bar many organisations, including reputable consumer organisations such as Which? from bringing cases as Parliament hoped in 2002. Restricting finance could also create a regime which was only accessible to large businesses. This would weaken private enforcement in competition law, which is of course not the Government’s wish or intention.”

In the light of this, the tribunal took the view that: “The Government in promoting the legislation therefore clearly envisaged that many collective actions would be dependent on third party funding, and it is self-evident that this could not be achieved unless the class representative incurred a conditional liability for the funder’s costs, which could be discharged through recovery out of the unclaimed damages. “ 

This led the tribunal in turn to conclude that: “Accordingly, insofar as it might be thought that the statutory provision is ambiguous, we consider that the statement from the relevant Minister in the House of Lords on the passage of the Bill supports the conclusion we have reached.” (paras 126, 127)

The criteria for acceptable collective action litigation funding contracts

On the question of what type of litigation funding was appropriate for such cases, the tribunal stated that their: “Primary concern would be [i] to ensure that the Funding Agreement provides sufficient funding to the Applicant to pursue the litigation and [ii] bear any liability in costs to [the defendant] should the action fail.” (para 104)

The tribunal also dismissed any: “supposed difficulty of the lack of expertise of the Tribunal in deciding what is an appropriate price for litigation funding”  with the competitive-markets type argument that: “There is now a developing market in litigation funding, and the Tribunal can if necessary hear evidence as to what would represent an appropriate return. We note that this appears to be what Sir Philip Otton did as the arbitrator faced with such a question in the Essar Oilfields case.”

Broader learning points from the litigation funding agreement

Key parts of the applicant’s litigation funding agreement behind the Mastercard collective action claim, were also published in the Appendix to the CAT judgment and can now be analysed for general lessons. 

The first point to note is that this agreement was called a “Prepaid Forward Purchase Agreement”, indicating that like almost all litigation funding agreements, it was effectively a derivatives contract, based on an underlying variable, namely the case outcome, measured as a binary or other variable. 

Key provisions under this agreement were that:

• the maximum funding amount provided, including VAT was c. £43,442,000,
• the maximum claim amount was c.£14 billion, and
• the payoff formula for the funder was approximately: i) 30% of unclaimed recoveries up to £1 billion and ii) 20% of unclaimed recoveries from £1 billion upwards, plus interest.

Hence if the final award amount had been £14 billion and only half of these recoveries had been claimed by final consumers, then the funders would have stood to gain c.£1.5 billion of "Total Investment Return" what one might call “potential total investment return.” The ratio of maximum funding amount to this potential investment return was only c.3%, meaning that, before time interest and return on capital considerations, the required a priori break-even probability of case success needed for the funders to proceed was actually very low, and well below 50:50. 

If this is a representative case example, then it suggests that, in the consumer class action world, the combination of very large numbers of applicants within a class and very high maximum claim amounts, together with 3rd party litigation funding availability, means that it will be economic for extremely speculative claims to be litigated in future.

This in turn is likely to increase both the expected number of such claims and also the number that are successfully prosecuted and defended and to draw more 3rd party litigation funders into a burgeoning and developing consumer market.

See also Rupert's technical paper on: Litigation Cost Strategies, Settlement Offers and Game Theory.

(Rupert Macey-Dare is a commercial barrister and PhD-economist. Rupert gratefully acknowledges the comments of colleagues and Lauma Skruzmane. These are discussion points of the author and do not necessarily reflect the views of any other individuals or organizations, and do not constitute legal or economic advice. Freshfields represents Mastercard in the Merricks v. Mastercard case.)