Merricks ruling will shape debate over litigation funding regulation

Emily Cox and Angelique Bret of Pinsent Masons were commenting after the CAT dismissed a legal challenge raised by litigation funder Innsworth Capital Ltd (Innsworth) (80-page / 598KB PDF) over the terms of a settlement reached by the parties in a class action-style lawsuit it had funded.

Innsworth helped Walter Merricks to fund collective claims against payment card provider Mastercard. The claim alleged that tens of millions of UK consumers suffered loss because excessive 'interchange fees' had been charged to merchants on the use of Mastercard debit and credit cards between 1992 and 2008 and that those costs had been passed on to consumers in the form of higher retail prices.

Merricks sought to represent affected consumers on a representative basis and won a protracted legal battle over whether he could pursue the case under the collective proceedings regime for competition claims provided for in the UK. A collective proceedings order (CPO) was eventually granted by the CAT but, following further satellite litigation relating to the case and before the CAT reached a final determination on the claims, Mastercard and Merricks reached agreement on a collective settlement. They applied to the CAT for an order approving their settlement earlier this year.

Innsworth, however, objected to the terms of the proposed settlement and was granted permission to intervene in relation to the settlement order approval proceedings.

Under the terms agreed between Mastercard and Merricks, Mastercard would pay £200 million to settle the case. The parties proposed that the money would be split into three different pots – half would be ring-fenced for members of the class Merricks represented; a minimum pot of just over £45.5m would go towards the costs, fees and disbursements paid by Innsworth; and the remaining amount of just over £54.4m would go to Innsworth by way of a return on its investment, subject to any reductions to that figure should the tribunal consider that there is a need for some of that pot to be used to compensate class members or go to charity.

Innsworth claimed the £200m settlement figure was too low – it represents a little over 1.4% of the original value placed on the claim of £14 billion. Innsworth commenced arbitration proceedings against Merricks, under the terms of its funding agreement, seeking damages from him. In an unusual step, Mastercard has agreed, under the terms of the settlement, to provide Merricks with an indemnity worth £10m in relation to the arbitration.

Before the CAT, Innsworth further argued against how the £200m settlement was proposed to be split, claiming that it does not fairly account for the significant risks it took on in funding the litigation.

The Tribunal noted on several occasions throughout the judgment the potentially competing interests and priorities of litigation funders and class representatives and members.

For the litigation funder, the tribunal reflected on the fact that continuing the litigation or reaching a settlement is a commercial decision which will involve consideration of their entire portfolio of cases, some of which may fail.

The CAT made it clear that it is the considerations of the class members that should come first when considering any settlement, and that the interests of all stakeholders did not need to be balanced. The CAT said it regards it as “fundamental that the collective proceedings regime should operate for the benefit of [class members] and not primarily for the benefit of lawyers and funders”. However, it stated that without funders and lawyers, the regime would be unable to operate effectively. The unusual circumstances of a funder attempting to intervene in a settlement agreement, and the friction between the funder and class representative in this case, highlight these competing interests.

The CAT determined that it was appropriate to approve the settlement proposed by Mastercard and Merricks, with some amendments. In doing so, it concluded that it was “appropriate” to provide for Innsworth to be paid £68m from the £200m pot – 34% of the total settlement – as a return on its investment.

In making its decision on the allocation of funds, the CAT took into the account the large commitment and significant risk Innsworth had borne but also the “poor outcome” of the case for class members, dismissing the idea that the funder should receive a minimum return regardless of the outcome of the case. 

Competition law expert Angelique Bret of Pinsent Masons said: “The long-running Merricks litigation has been pivotal in shaping the development of the UK’s competition law collective proceedings regime, so it is fitting that it has also led to the first contested collective settlement before the CAT.”

“The case highlights the risks and complexities of litigation funding in CPO cases, and the challenges that class representatives may potentially face. It is possible that the CAT’s approval of the collective settlement may be appealed,” she said.

In its judgment, the CAT commented at length on the low projected uptake from class members in coming forward to claim their share of the pot under the terms of the settlement agreement. Class members have to actively opt in to receive their share of compensation. It has been estimated that only around 5% of total class members in this case will come forward.

The CAT further considered how the amount that class members could recover would likely impact the total number who made claims. Innsworth’s position, that a simple per head split should be used to distribute the settlement funds, was rejected by the tribunal. Depending on the precise approach to distribution, that would have resulted in all class members receiving a matter of just pence or a few pounds. The CAT carefully considered the balance of how much recovery per class member was reasonable and how this interacted with the expected percentage uptake of class members.

Emily Cox of Pinsent Masons said the case raises important questions around the influence of litigation funders and their role in mass litigation – specifically, the balance between the role of funders in supporting mass actions and the profit they expect from such support, and the position of class members. She further highlighted that the CAT’s settlement approval comes amidst growing focus on whether greater regulation of litigation funding arrangements is needed.

In England and Wales, the Civil Justice Council’s litigation funding working group is currently in the process of reviewing the case for regulation of the industry, which is currently self-regulated. It is expected to publish a final report this summer – a report expected to comment on whether further regulation is needed to manage litigation funding and provide appropriate protection to the various stakeholders in funded claims, which include funders and claimants but also defendants who face such claims.

Cox, a specialist in class action litigation, said: “This judgment will provide additional food for thought for the Civil Justice Council working group given the interference of the funder in the settlement process and the potential for conflicts of interest that it raises.”

“This chapter in the Merricks case also highlights that the nature and role of the class representative has not yet been fully explored; that it demands independence and altruism yet may carry significant exposure. Further discussion around this and whether it is consistent with a ‘professional’ class representative is likely to be on the agenda,” she said.

Bret and Cox said litigation funders are likely to be spurred by the CAT’s judgment to re-examine the litigation funding agreements in their portfolio. Those funders, they said, will want to check against the prospects and potential settlements for each case to determine if they still represent commercially viable claims.