The U.K. Supreme Court has ruled outside funding contracts for antitrust litigation against truck manufacturers are unenforceable, throwing into question the future of the fast-growing third-party litigation funding business in England.
The high court reversed a finding by the Competition Appeal Tribunal that the contracts to fund class-action lawsuits in exchange for a portion of the recovery against DAF, Paccar and other manufacturers weren’t “damages-based agreements” under a law regulating businesses Parliament defined as “claims management services.” That law prohibited claims management services from enforcing contracts that gave them a share of litigation proceeds.
The manufacturers appealed the Tribunal’s finding to the Supreme Court, which reversed in a July 26 decision rejecting a narrow definition of “claims management services” in favor of a broad reading that includes litigation funders even if they have no control over the cases they finance. The court rejected arguments by the litigation funding industry that it was extending the meaning of a vague term – claims management services – to cover an unrelated business.
“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 court ruled in a decision by Lord Philip Sales and joined by three of the court’s four other justices. “The weaker the inherent or established meaning of the term defined, the weaker must be its ability to throw light on Parliament’s meaning when setting out the express words of the definition which falls to be construed.”
Third-party litigation financing is often kept a secret in American cases, with only a few jurisdictions requiring disclosure of such agreements to the defendants. Critics claim it creates excess litigation and suspect plaintiffs lose control over their own claims, given the financial interest of the funder.
Two entities purporting to represent truck buyers sued the industry after the European Commission issued an antitrust enforcement decision in July 2016. They were funded by Therium, a major funder, and Yarcombe Ltd. under agreements that gave them a percentage of any winnings. The Association of Litigation Funders of England & Wales supported them in opposing the appeal before the Supreme Court.
The Tribunal found that it would be absurd to read the 2006 law defining claims management firms to include outside funders, since that would sweep in businesses including banks that lent to litigants. The law was written to cover only a subset of businesses that advised on litigation, the Tribunal ruled.
The Supreme Court disagreed, tracing the history of the law to large changes in U.K. law in the 1990s, when previously prohibited practices including contingency fees were introduced. The common law was hostile to outsiders investing in litigation and banned champerty, the court noted, but “the enforceability of third party funding arrangements have been relaxed in various ways, with the result that this industry has developed.”
That said, Parliament intended to regulate the industry closely and gave the Secretary of State authority to ban practices that could be harmful to consumers, the court said. In one such action, the Secretary ruled unenforceable contracts by claims management services if they worked “in expectation of a fee, gain or reward.”
The central question was whether “pure” litigation funders fell under the broader definition of claims management service. The Supreme Court said yes, citing the statutory language they provide “other services in relation to the making of a claim” in the form of “the provision of financial services or assistance.”
Class actions are called collective actions in England and they can be brought on behalf of consumers only if they are led by a qualified organization with demonstrated funding, including to pay defense costs under the U.K.’s “loser-pays” regime.
Lady Vivien Rose dissented, writing “the giving of financial assistance is only included in the term claims management services if it is given by someone who is providing claims management services within the ordinary meaning of that term.”