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Class Action Funding: PACCAR and now Therium – what does it mean for class action litigation?

25 October 2023

There has been some time for reflection since the July 2023 landmark judgment of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 ("PACCAR"), in which the Supreme Court ruled that litigation funding agreements ("LFAs") constitute damages-based agreements ("DBAs") and are, therefore, unenforceable pursuant to s58AA(2) Courts and Legal Services Act 1990 ("CLSA"). 

There has been a lot of commentary in the legal / financial press since the PACCAR decision, lurching from knee-jerk hysteria that the funding market for class action claims has been dealt a critical blow thereby denying claimants' access to justice, to nonchalant "nothing to see here" responses. The reality, (for funders at least), as is often the case, is probably somewhere between the two and will depend very much on the stage at which a particular case is in the litigation cycle.

On the eve of drafting this article, there has been the first judicial treatment of the PACCAR decision in Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm) ("Therium") on 20 October 2023 which can probably encouragingly be described as "anti-PACCAR", albeit the case and the issues to be determined as to enforceability of the DBA in Therium is now set for Arbitration. I reflect on the Therium judgment below.

PACCAR – the facts, a reminder

In 2016, pursuant to Article 101 of the Treaty on the Functioning of the European Union, the European Commission made findings of anti-competitive behaviour of five truck manufacturers. Specifically, it was found that the truck manufacturers had sought to keep the costs of technology emissions low, but in doing so, had passed on these costs to consumers.

As such, UK Trucks Claim Ltd and the Road Haulage Association (together the "Applicants") sought to obtain a Collective Proceedings Order ("CPO") under section 47B of the Competition Act 1998 (amended by the Consumer Rights Act 2015) to enable them to pursue a claim against the truck manufacturers, such as PACCAR.

The CPO regime required the Applicants to satisfy two conditions:

        i.          They could establish adequate funding arrangements to bear their own costs; and

        ii.          Those funding arrangements would also be adequate to bear any potential adverse costs arising out of the litigation in question.

In these proceedings, the Applicants sought to rely on LFAs to satisfy the above requirements. Under the provisions of an LFA, if the Applicants were successful in the action, the funders would be liable to yield a percentage of any damages recovered.  

However, the manufacturers contended that the CAT ought not to make a CPO on the basis that the LFAs were DBAs, which are, prima facie, unenforceable because they did not satisfy the regulatory requirements for a DBA.

Legal basis

The question for the CAT (and thereafter the Supreme Court) was whether the LFAs were DBAs pursuant to section 58AA Courts and Legal Services Act 1990 ("CLSA"). Section 58AA(3) CLSA defines a DBA as "an agreement between a person providing advocacy services, litigation services or claims management services".

Further, section 58AA(4) CLSA includes the requirement that a DBA complies with the Damages-Based Agreements Regulations 2013 (SI/2013/609). The question for the CAT / Supreme Court was, however, whether LFAs fall within the definition of "claims management services", pursuant to section 58AA(3) CLSA. For the meaning of "claims management services", section 58AA(7) CLSA refers to section 419A of the Financial Services and Markets Act 2000 ("FSMA") (inserted in 2018 to replace sections 4(2) and (3) of the Compensation Act 2006 (the "2006 Act").

Section 419A(1) FSMA defines "claims management services" as "advice or other services in relation to the making of a claim", and section 419A(2) FSMA defines "other services" to includes "financial services or assistance". The question for the CAT (and subsequently, the Supreme Court) was whether the LFAs are, indeed, DBAs and if so, whether they fell within the definition of "claims management services" pursuant to FSMA.

The CAT ruled that the LFAs did not fall within the definition of "claims management services", and were, therefore, enforceable on success pursuant to section 58AA CLSA.

The PACCAR appeal

The manufacturers sought permission to appeal the CAT decision, which was dismissed by the Court of Appeal. The manufacturers then appealed to the Supreme Court via the leap-frog procedure.

On appeal, the truck manufacturers sought to argue that "claims management services" should be given a wide reading insofar that they could incorporate DBAs and therefore LFAs. The result of which, would mean that the Applicants were unable to obtain a CPO and bring collective proceedings.

In the judgment handed down on 26 July 2023, the Supreme Court was with the Appellant manufacturers and overturned the CAT decision, ruling that the LFAs were, in fact, "claims management services".

The Supreme Court held that "claims management services" read in their natural meaning were capable of covering the LFAs in question. The Court considered the statutory purpose of the 2006 Act and concluded that it was intended to allow a broad power to determine services seeking to facilitate litigation. In particular, Lord Sales observed "where Parliament has taken the trouble to provide a definition, it is the words of the definition which are the primary guide to the meaning of the term defined".

The Applicants / Claimants sought to argue that "claims management services" should be read narrowly and submitted that it related to the actual management of a claim. This argument was dismissed.

Further, the Supreme Court considered the implications of section 58B CLSA which was inserted to make enforceable "certain litigation funding agreements which were otherwise thought to be unenforceable at common law". The Court held, however that section 58B was not a reason to depart from the natural meaning of "claims management services".

As a result, the LFAs were by definition DBAs, and therefore unenforceable. By virtue of the judgment, the Applicants could not therefore be awarded a CPO and could not bring the collective proceedings.

The end of class action funding?

In a word; no.

You would be forgiven for fearing the worst for the continuation of litigation funding in class actions following PACCAR, not least given Lord Sales in the judgment described the impact of PACCAR to be that "most third party litigation funding agreements currently in place are likely to be unenforceable" and further, Lady Rose (dissenting) commented "(i) most (if not all) litigation funding agreements that have been agreed since litigation funding began would be unenforceable; (ii) no collective proceedings order could ever be pursued in the Competition Appeal Tribunal; and (iii) a radical review of the entire litigation funding sector in the UK would be required."

However, the issue in PACCAR was that the LFA by being measured as a percentage of any damages recovered rendered it a DBA and thus unenforceable. Therefore, if an LFA was not measured by reference to the damages recovered (but some other metric), and therefore not aligning the LFA to being akin to an unenforceable DBA, it will not offend the DBA principle and therefore remain enforceable.

Whilst that is the obvious practical answer, there will of course be difficulties in putting this into practice depending on the stage of the litigation. Clearly funders with claims nearing its conclusion will face issues re-negotiating or amending LFAs already in place and will face enforcement issues of those LFAs (and even if they could amend the LFA, that would not likely be retrospective and so there may be no point, financially speaking, in amending an LFA that has the vast majority of the legal spend already incurred).

However, whist that may be a significant headache in some cases, the picture I am seeing in speaking to funders and the market more generally since PACCAR is that they were prepared for it and had already begun a review of their portfolio to identify and restructure LFAs that may have been problematic. A restructure could be anything from aligning the DBA so that it does not offend s58AA(2) of CLSA or amending the basis on which the funders are remunerated on a successful outcome. As to the latter, the most common being a (i) a return of the funding provided by the funder party, and/or (ii)  a return calculated as a multiple of that funding (i.e. not a percentage of the damages).

Therium: the first post-PACCAR decision

The Theirum case I have referred to above provides a potential early steer on how the Courts will navigate PACCAR. In Therium, the Court granted the applicant litigation funder (Therium) an interim injunction to preserve agreed damages from a settlement in funded litigation.

The application was resisted on the ground that the underlying LFA was unenforceable, following PACCAR, and so there was no "serious issue to be tried" pursuant to the well-known test established in American Cyanamid test.  

It was held that there was a serious issue to be tried. The LFA in issue provided for three types of payment to be made to the funder by the funded party, similar to those referred to above:  (i) a return of the funding provided, (ii) a return calculated as a multiple of that funding, and (iii) a return calculated as a percentage of damages/settlement sums above a certain threshold. Whilst the third type of payment comprised a DBA and was unenforceable, the Court held that it was arguable that this did not render the whole LFA unenforceable, first because it was arguable that only the "damages based agreement" part of the contract was unenforceable (leaving the rest of the contract untouched), or alternatively because the offending part of the agreement could be severed in accordance with the ordinary principles applicable to severance.

Final thought

PACCAR has undoubtedly sent shockwaves through the claimant litigation funding market, but even in these initial post-PACCAR months both the market and (seemingly, re Therium) the Courts are working to mitigate against its adverse effects. Whilst I am a defendant class action litigator that welcomes the impact on slowing the claimant class action march over recent years and the impact on defendants and insurers alike, it seems at least to me that the effects of PACCAR are likely to be temporary and limited to a few unlucky funders that might simply be at the wrong stage of litigation, at the wrong time. 

Further Reading