CAT considers class representatives’ freedom to enter into litigation funding agreements

17 May 2024

In a recent judgment in Gutmann v Apple Inc [2024] CAT 18, the Competition Appeal Tribunal (CAT) considered the legal basis on which a class representative in opt-out collective proceedings can agree to pay a litigation funder’s fee out of damages recovered in the litigation. The judgment is of particular interest because the CAT held that a litigation funder can (in principle) be paid before damages are distributed to class members, meaning that a funder is not limited to recovering its fee out of unclaimed damages.  

The class representative’s funding arrangements

Mr Gutmann is bringing a claim against Apple on behalf of iPhone users for an alleged abuse of a dominant position. The claim arises out of Apple’s alleged lack of transparency regarding certain problems with iPhone batteries. In November 2023, the CAT certified the proceedings subject to reviewing the terms of Mr Gutmann’s funding arrangements (which had required renegotiation in light of the Supreme Court decision in the well-known case of R (on the Application of Paccar Inc and others) v Competition Appeal Tribunal [2023] UKSC 28).

An important feature of the revised funding agreement was that the “waterfall” provisions included a mechanism for the funder’s fee to take priority over the payment of damages to class members (if this was approved by the CAT - the other option being payment out of recovered costs and undistributed damages). Apple argued that this was neither appropriate nor permissible. In particular, Apple submitted that there was no legal basis for creating an obligation on a class representative to pay a proportion of damages to a litigation funder to cover its fee ahead of class members, and that a funder was only entitled to receive its fee from unclaimed damages.

The parties agreed that there was no previous authority directly on this point. In Merricks v Mastercard Inc and others [2017] CAT 16, the CAT held that that section 47C(6) Competition Act 1998 (the Act), which grants the CAT the power to order the payment of a class representative’s “costs or expenses”, extends to authorising the payment of a litigation funder’s fee. However, that case was concerned with the payment of the funder’s fee out of unclaimed damages.

Funders can be paid ahead of class members

The CAT made a number of general comments about a class representative’s freedom to agree terms with a funder which is, in their view, curtailed only by the requirement that the class representative should act fairly and in the interests of the class. They made the point that a class representative will, in the course of collective proceedings, necessarily be required to take decisions on behalf of class members, including in relation to the funding of the litigation. Except in extreme circumstances, the CAT should be slow to interfere with the detailed negotiations in relation to that funding. The CAT also realistically recognised that funding plays an important role in the bringing of meritorious claims and that funders, “self-evidently”, require payment for the risks they are taking.

On the specific question of whether a class representative can agree that a funder should be paid its fee ahead of class members, the CAT attached importance to the fact that there is nothing in the Act to prohibit this. In their view, if the legislature had intended such a prohibition, there was no reason why it could not have made this clear. To the extent that express provision in the Act was required, this could be found in section 47C(3)(b), which empowers the CAT to order the payment of damages to “such person other than a represented person as the Tribunal sees fit”. This was, in the CAT’s view, broad enough to encompass the payment of a funder’s fee.

Apple also argued that the funder’s fee was excessive and disproportionate, and that this risked creating perverse incentives and conflicts of interest. The CAT noted that the funder’s uplift could exceed £70m and recognised that this was a “very large sum”. Nonetheless, they took the view that this was not “sufficiently extreme to warrant calling out.” Nor was it a reason to refuse to certify the proceedings at this stage, given that the CAT would have an opportunity at the conclusion of the proceedings to scrutinise the reasonableness and proportionality of the funder’s fee when supervising the distribution of the proceeds of the litigation. 

Comment – a funder friendly decision?

The CAT’s conclusion that a class representative can enter into funding arrangements, which provide for funders to be paid ahead of class members, will doubtless be welcomed by the funding industry. It means that (providing the CAT endorses the agreed structure – see below) funders will not be required to take the risk that all the damages recovered will be distributed to class members, leaving no money left to pay their fee. Furthermore, funders will in theory be entitled to receive their fee immediately, rather than having to wait until after class members have been given sufficient opportunity to come forward to claim their damages.

However, it should be noted that ultimately it will be for the CAT to decide at the end of the proceedings whether to give effect to the terms of a funding agreement. As counsel for Mr Gutmann himself argued, the funding agreement will in no way bind the CAT who will have a complete discretion as to the sums to be paid to the funder, and in what priority. Furthermore, the CAT made it clear that they would scrutinise the fee at the end of the proceedings, when they would have a better understanding of the reason for the fee, the market, and the proportionality of the fee in relation to the amount of damages awarded. They expressly envisaged the possibility that, at that stage, they could decline to give absolute priority to the funder. 

Therefore, whilst this judgment makes it clear that it is permissible for class representatives to enter into funding agreements, which provide for funders to be paid ahead of class members, it provides no guarantees that the CAT will give effect to such agreements.

It is also worth noting that the CAT has given permission to appeal to the Court of Appeal. As described above, the CAT adopted a broad purposive interpretation of the Act in this case. It remains to be seen whether the higher courts will take the same approach.