The Court of Appeal recently held that payments from damages to funders and lawyers ahead of class members are clearly permitted by the Competition Act 1998 (CA98), thereby confirming last year’s judgment of the Competition Appeal Tribunal (CAT). 

The CAT’s position on the class representative’s funding agreements 

Class representative Justin Gutmann is pursuing a claim against Apple on behalf of iPhone users for an alleged abuse of a dominant position arising out of Apple’s alleged lack of transparency regarding issues affecting iPhone batteries. In November 2023, the CAT certified the proceedings, subject to reviewing the terms of Mr Gutmann’s funding arrangements (which had been renegotiated following the Supreme Court decision in R (on the Application of Paccar Inc and others) v CAT (PACCAR)).

As outlined in our previous article which considered the CAT’s judgment, Mr Gutmann’s funding arrangements had two waterfall mechanisms: 

• Waterfall 1, which allowed for the payment of the funder’s costs, fees and disbursements (based on multiples of the funder’s committed capital) otherwise than from undistributed damages, subject to the approval of the CAT. This effectively allowed for the funders (and also solicitors and counsel) to be paid ahead of class members. 
• Waterfall 2, which permitted the payment of the funder’s costs, fees and disbursements (again based on multiples of committed capital) from undistributed damages, should the CAT so require. 

The importance for funders of them being able to provide for “Waterfall 1” style arrangements had been increased by the CAT’s interest (in some of the cases to date) in "active" distribution mechanisms (such as account credits) which could result in 100% of damages being distributed.

The CAT noted that class actions “necessarily require” third party funding, and that funders require payment for the financial risks they are taking. The CAT stated that there was nothing in the CA98 to prohibit class representatives agreeing to pay funders ahead of class members, and noted that Parliament could have included such a prohibition in the legislation if it intended to proscribe such agreements. 

The CAT therefore concluded that it did have the power to order that the funder’s fee be paid out of damages awarded to the class, and that class representatives were therefore entitled to enter litigation funding agreements that allowed for this (i.e. that Waterfall 1 was acceptable). 

Agreement from the Court of Appeal 

In the Court of Appeal, Apple primarily argued that the CAT did not have jurisdiction to certify proceedings where the class representative’s funding agreement allowed for the funder to be paid ahead of the class, and therefore requested that the certification of these proceedings be quashed.

Apple quoted from the majority judgment in PACCAR, in which the Supreme Court stated that “the funder of opt-out proceedings always takes the risk that all of the damages recovered will be distributed to members of the class with the result that there will be nothing left to pay its fee and also takes the risk that the Tribunal might decline to exercise its discretion to order a payment in favour of the funder”. However, it is important to note that this comment arose in circumstances where the judge was only being asked to consider a payment of the funder’s fee out of undistributed damages. 

Apple contended that Parliament had not been considering the possibility of 100% take-up by class members or account credits when the collective actions regime came into force, but that did not permit the CAT or Court of Appeal to “reverse engineer” the statute to enable the funder to be paid first in specific circumstances. Indeed, following the PACCAR judgment, Parliament had been asked to consider amending the relevant provisions of the CA98 to accommodate this possibility. 

Conversely, Mr Gutmann argued that the CAT’s judgment was correct, as funders need to be paid for the risks they take. He said that if payment to the funder was contingent on there being enough unclaimed damages left at the end of the proceedings, this would increase the risks for funders and therefore increase the costs of bringing collective actions.

Mr Gutmann also noted that the Court accepting Apple’s submissions would result in a “peculiar” outcome, in that everyone gets paid if proceedings are brought on an opt-in basis, but in opt-out proceedings, there is a significant risk of lawyers and funders going unpaid. This peculiarity would also extend to collective settlements, meaning that everyone can be paid if there is a settlement in opt-out proceedings, but that is not necessarily so in the event of a judgment awarding damages. 

Although the Court of Appeal described the arguments made on behalf of Apple as “ingenious”, it rejected them, concluding that payments to funders and lawyers ahead of the class were “clearly permitted” by the CA98. In doing so, the Court agreed with the obiter statement in the collective proceedings brought by Justin Le Patourel against BT that “the CAT has a wide discretion to make any case management order it sees fit and it is within its power to ensure that funders and representatives are paid” – noting that the CAT’s supervisory jurisdiction would ensure that such recoveries are not excessive. 

The Court also considered that the “peculiar” differences referred to by the class representative, which would otherwise arise between opt-in and opt-out proceedings, were “difficult to justify” given the CAT’s powers under both regimes are identical. 

The Court’s judgment is also consistent with recent CAT rulings approving opt-out collective settlements (e.g. in Gutmann v First MTR South-Western Trains Limited and in Mark McLaren Class Representative Ltd v MOL Europe (Africa) Ltd), where provision has been made for funders. Indeed, the Court of Appeal considered that having different approaches for awards of damages on the one hand, and settlements on the other, would be “unthinkable and unprincipled”.  

A good result for funders

Like last year’s CAT’s ruling, this judgment will be viewed as a good result for the litigation funding industry. It is also likely to have a knock-on effect on other collective actions, with funders now more likely to seek payment ahead of the class and to include provisions to that effect in their litigation funding agreements with class representatives. 

This judgment cannot, however, be read as giving funders a promise of payment ahead of the class (whether agreed in their litigation funding arrangements or otherwise). The CAT retains complete discretion as to the sums to be paid to the funder, and the priority attaching to such sums. This supervisory jurisdiction was stressed by the Court of Appeal in its judgment.