Consumer Rights Bill

Written Evidence submitted from the U.S. Chamber Institute for Legal Reform (CR 18)

Concerning Schedule 8 of the Consumer Rights Bill

A bo u t t h e U . S . C h a m be r I ns t it u te f o r Le ga l R efo rm

1. The U.S. Chamber Institute for Legal Reform is a n o t - fo r -p r of i t p u b l i c a d v o c a c y o r g an i sa t i o n a ff i li a t e d w i th t h e U . S. C h a m b e r o f C o mm e r c e , t h e w o r l d ’ s l a r g es t b u s i n e s s f e d e r a t i o n , which r ep r e s e n ts t h e i n t e r es ts o f m o r e t h a n t h r e e mi l li o n b u s i n es s e s o f a l l s iz e s , s ec t o rs a n d re g i on s, in addition to state and local chambers and industry associations. Many of the U.S. Chamber’s members are companies that c o n d u c t s u bs t an t i a l b u s i n e s s i n t h e U K . I LR i s therefore d e ep l y i n t e r es t e d in t h e o r de rl y ad m i n i s tr a t i o n o f j u s t i c e in t h e U K .

2. I LR ’ s m i s s i o n i s t o r e s t o re b a l a n ce , e ns u r e j u s ti c e a n d m a i n t a i n in t e g r i t y wit h i n t h e c i v il l e ga l s ys t e m . W e d o t h is b y c r ea t i n g b r oa d a w a r e n es s o f t h e i m p ac t o f liti g a t i o n o n s o c i e ty a n d b y c ha m p i o n i n g co m m o n s ens e l e g a l r efo r m s a t t h e s t a t e , f e de r a l a n d g l o b a l l e v e l s . S i n c e its founding i n 199 8 , I LR h a s w o r k e d d i l i g en t l y to limit t h e i nc i d e n c e o f liti g a t i o n ab u s e a n d h a s p a rt i c i pa t e d a c tiv e ly in l e g a l r e f o rm ef f o rts i n t h e U n i t e d St a t e s, t h e U K and elsewhere .

Summary

3. ILR’s primary interest in the Consumer Rights Bill is not the reforms of consumer law contained in the body of the Bill but the changes to private actions in competition law that would be introduced by clause 80 and Schedule 8 of the Bill. In particular, paragraph 5 of Schedule 8 would introduce opt-out collective litigation to the UK for the first time.

4. ILR’s experience of this model of litigation, not only in the U.S. but also in other jurisdictions such as Australia, is that it is prone to abuse and generates significant costs for businesses of all sizes. These costs sometimes arise as a result of businesses being pressured into taking strategic decisions to settle weak or altogether meritless cases . Therefore, t hese costs will not fall exclusively on those businesses that are adjudged by the Courts not to have complied with the Competition Act. [1] Even businesses that contest claims all the way to judgement and succeed cannot expect to recover their legal costs in full, let alone the costs incurred in devoting time and internal resources to litigation (especially if recoverable costs are capped). ILR calls on the Committee to amend paragraph 5 of Schedule 8 of the bill by removing the possibility of opt-out collective proceedings, which would be the most costly aspect of any additional litigation that occurred as a result of the changes set out in Schedule 8.

5. If, despite the attendant risks, opt-out collective proceedings are to be introduced in the UK, ILR calls for clarification that it will not be possible for third party litigation funders to invest in such cases. As currently drafted, paragraph 6 of Schedule 8 to the Bill would prohibit "damages-based agreements" in relation to such proceedings. While it seems clear on the face of current legislation that third party litigation funding agreements would be captured by this prohibition (see paragraph and footnote , below) the Bill would be improved by explicitly stating that this is the case.

6. ILR also comments below on: the authorisation of representatives in collective proceedings; the eligibility of claims for collective proceedings; the choice of whether proceedings should be opt-out or opt-in; and the assessment of damages in collective proceedings.

The Introduction of Opt-out Collective Proceedings

7. In 2012, the Department for Business Innovation and Skills carried out a public consultation on proposals for the UK regime on private competition litigation. In its response, published in January 2013, the Government reported that its proposals had provoked a strong reaction from stakeholders, particularly on the question of whether opt-out actions should be introduced. [2] Respondents were said to be sharply divided on this point.

8. ILR has significant experience of the negative consequences of opt-out collective or "class" litigation and was alarmed that the proposal to introduce an opt-out mechanism in the UK was taken forward in the Consumer Rights Bill. ILR also finds it difficult to understand why the Government proposes to expand the possibilities for collective litigation based on competition law when, in relation to consumer law, it has rightly recognised that collective litigation generally (not only opt-out proceedings) creates incentives for intermediaries which result in a heavy burden on businesses. [3] The attempt to distinguish collective litigation based on one particular area of law, which is well known to generate complex and protracted disputes, is unconvincing.

9. The experience of the U.S. class action system, and other jurisdictions that have opt-out proceedings such as Australia, is that they are inherently prone to abuse by profit-seeking third parties such as lawyers and litigation funders. [4] The scale of liability in such cases provides an opportunity for these parties to extract lucrative settlements from businesses which choose to settle claims as a means of avoiding the time, costs and negative publicity associated with large-scale litigation, regardless of the merits of the litigation itself.

10. R ec e n t a n a l ys i s s h o w s t h a t l i ab i lity c os ts a s a p r o p o rt i o n o f G DP a re g r ea t e r in t h e U n i t e d S t a t e s , w h e re op t -o u t c l as s a c t i on s a r e w el l es t a b l i s h e d , t h a n in other major jurisdictions (1 . 66 % in 2011 ) . M e an w h i l e , l i a b i l ity co s ts in t h e U K a s p r o p o rti o n o f G D P h a ve r i s e n in r ec e n t y e a rs a n d a r e a lr e a d y g r ea t e r t h a n i n o t he r E u r o p e a n co u n tr i e s (1 . 05% co m p a r e d wi t h 0 . 63% i n t h e E u r o z one ) . [5] T h e s e h i g h c o s t s m a y de t e r i n v es t m en t a n d i nc r e a s e b u s i ne s s ’ s bo rr o w i n g c o s t s , w h i c h w o u l d ha v e a ne g a t ive i m p a c t o n g r o w t h , i n v e s tm en t a n d j o b c r e a t i o n at precisely the time when the UK economy is experiencing a fragile recovery . In the view of the Australian Institute of Company Directors, class actions, due to their size and scale " can impose costs on the public in the form of higher consumer prices, the diminution in share value ... and decreased tax revenue ". [6]

11. ILR also opposes the provision in paragraph 6 of Schedule 8 to the Bill that envisages unclaimed damages in opt-out proceedings being distributed to charity. Without commenting on the merits of the work done by the designated charity (currently the Access to Justice Foundation), ILR considers the idea of distributing damages awards to non-parties to be at odds with the principle that damages should be compensatory. Furthermore, such a mechanism greatly reduces the incentive for representatives to identify those actually harmed. Instead it allows lawyers and third party funders to focus on their own reward, without having to be concerned about whether victims are actually compensated. Designating a particular charity to receive unclaimed sums may remove some of the problems associated with the use of cy pres mechanisms in litigation, but it does not address the f u n d a m e n t a l i s s u e t h a t t h e d a m a g e s a w a r d e d wi l l no t be n ef it t h e a b se n t c l a s s m e m be r s . [7]

12. Mo r eo v e r, t h e f a c t t h a t op t -o u t p r o c e ed i n g s r e s u lt in l a r g e s u ms g o i n g u nc l a im e d ca l ls i n t o qu es ti o n w he t he r o p t -o u t c o l l ec t ive ac t i o n s a r e ne c e s sa r y to a c h i e v e t h e g o a l o f co m p e n s a t i on .

13. F o r t h e r e a so n s se t o u t abo v e a n d in i t s s u b mi s s i o n to t h e 2012 c o n s u lt a t i o n on private competition actions , [8] I LR do e s no t b e l i e ve t ha t t h e c a s e h a s be e n m a d e fo r i n tr o d u c i n g a n o p t- o u t m o d e l i n t h e U K , p a rti c u l a r ly g iv e n t h e a tt e n da n t r i s k o f f u rt he r i nc r e a s e s in l i a b ili t y co s ts to U K b u s i n e s se s a n d t h e w i de r ec o no m y .

14. N o twit h s t a n d i n g its o p p o s it i o n t o the introduction of opt-out collective proceedings, I L R offers t h e f o l l o w i n g co mm e n ts o n t h e de t a i le d p r o v i s i o n s se t o u t in S ch e d u le 8.

Damages-Based Agreements in Collective Proceedings

15. I t is p r o p o s e d t h a t d a m a g e s - b a s e d a g r ee m e n ts ( " D B As " ) (i.e., agreements pursuant to which lawyers are paid a proportion of the money recovered by their clients) s h o u ld b e u ne n fo r c e a b l e if they r e l a t e to opt-out c o l l ec t i ve p r o ce ed i n g s . [9]

16. I LR wel co m e s t h is p r op o s a l b u t d o e s n o t b e li e ve t h e a b s e nc e o f DB A s will necessarily p r e v en t a b u s e, especially if DBAs are interpreted as encompassing only agreements by which claimants agree to give up a share of the proceeds of litigation to lawyers. After all, third party litigation financing also involves agreements by which claimants agree to give up a portion or percentage of litigation proceeds, in such instances to the litigation funder s . T h e e x a m p l e o f A u s t r a lia is pa r t i c u l a r l y i n s t r u c ti v e g iv e n t ha t op t -o u t co l l ec t i ve ac t i o n s h a v e b ee n a v a i l a b le t he r e f o r s o m e time , b u t, u n li k e in En g l a n d a n d W a l e s , l a w y e rs in Australia a r e n o t pe r m itt e d to en t e r i n to a g r e e m e n ts e qu i v a l en t t o DB A s . T h is h a s no t p r e v en t e d a b u s e i n t h e A u s t r a l i a n c l a s s a c ti o n s s y s t e m , p r im a r ily a s a r es u lt o f t h ir d p a r t y liti g a t i o n f u n d i n g , w h i c h is w e l l - e s t a b l i s h e d i n A u s tr a l ia [10] a n d is b e c o mi n g i nc r e a s i n g l y p r o m i ne n t in t h e U K . Litigation funding is also problematic in opt-out collective actions because in an opt-out lawsuit where many, if not most, group members are absent, these absent group members will not have an agreement with the funder. This circumstance creates conflicts of interest within the group, especially where a funder seeks its premium in respect of recoveries by non-funded group members.

17. It has recently been reported that one Australian law firm created its own litigation funding vehicle, effectively circumventing the prohibition on DBAs . [11] It was proposed that this vehicle would co-fund class members who were participating in a class action conducted by the same law firm, with the class members waiving any conflict of interest that arose as a result. The law firm initially sought approval from the Court for this arrangement but withdrew its application following unfavourable statements by the Commonwealth Attorney-General. Those statements also reveal that the Attorney-General is to propose further regulation of litigation funding (something that should be done in the UK).

18. I n m an y r e s p ec t s , t h ird pa r t y litigation f u n d i n g p r e s en t s a g r ea t e r r i s k in co n n e c ti o n with o p t - o u t co l l ec t i ve a c ti o n s t ha n DBAs between claimants and lawyers, b e c a u s e l a w y er s a re a t l e a s t s u b j e c t to p r o f e s s i o n a l c o n d u c t r u l e s , w h e r e a s li t i g a t io n f u n d e rs in the U K h a ve o n ly a v o l u n t a ry c o d e o f c o n du c t. I n a d e b a te in t h e H o u s e o f L o r d s o n t h e D a m a g e s - B a s e d A g r ee m en ts R e gu l a ti o n s 2 01 3, L o r d B ee ch a m o b se r v e d t h a t, o f 25 li t i g a t i o n f u n d e rs t h e n e s t a b l i s he d in t h e U K , o n l y n i n e were members of the A s s o c i a t i o n o f L iti g a t i o n F u n d e rs w h ic h ad m i n i s t e r s t h e v o l u n t a r y c o d e . He we n t o n to r e m a r k t ha t " [t] h ey [ l i t i g a t i o n f u n d e r s] a r e n o t e v en jo in i ng t h e ir o wn a ss o c i a t i o n, l et al o n e b e in g r es p o nsi b l e t o a ny in d e p e n d ent a n d i m pa rt i a l or ga n i s a t i o n t o ov e r see t h eir w o r k . " [12]

19. In the recent English case of Excalibur Ventures LLC v Texas Keystone and others , three funders supported what were described by Lord Justice Christopher Clarke as "a range of bad, artificial or misconceived claims" with a "grossly exaggerated" quantum of US$1.65 billion. [13] None of the three funders, two of which were U.S. companies and the third a company incorporated in the Cayman Islands, were members of the Association of Litigation Funders, and there are doubts over whether one of them even continues to exist.

20. The p r o h i b i ti o n contained in the Bill o n d a m a g e s - b a s e d a g r ee m en ts in opt-out c o l l ec t iv e p r o c e e d i n g s already appears to c ap t u re li t i g a t i o n f u n d i n g a g r ee m e n ts o n t h e b a s is t h a t t h e y fa l l wi t h in t h e d e f i n iti o n o f a DBA con t a i n e d in s ec t i o n 58AA o f t h e C o u rts a n d L e g a l S e rv i ce s A c t 199 0 . [14]     H o w e v e r , in t h e a b s e nc e o f c a s e l a w to c l a r i f y w he t h e r li t i g a t i o n f u nd i n g a g r ee m en t s d o a m o u n t to DBA s , a n e x p r es s p r o h i b i t i o n o n li t i g a ti o n f u n d i n g a g r ee m en ts in opt-out c o ll e c ti v e p r o c e e d in g s s h o u l d b e i n c l u d e d in t h e B i ll. The prohibition should also be extended to opt-in collective proceedings to avoid a scenario in which litigation funders rather than claimants become the driving forces behind collective litigation and are incentivised to promote spurious claims.

C o mm en t s o n Other Aspects of S c h ed u l e 8 o f t h e B i l l

Au t h or is a t i o n t o ac t a s a r e p r esent a t i v e in c ol l e c t i v e p ro c ee d i n g s

21. Paragraph 5 of Schedule 8 to the Bill provides t ha t t h e C o m pe t iti o n A p p e a l Tr ib u n a l ( t h e " Tr i b un al " ) co u l d o n ly a u t h o r i s e a person to ac t a s r ep r e s en t a tive i n co l l ec t ive p r o c e e d i n g s if t h e T r i b u n a l c o n si de r e d it " j ust a n d r e a s o n a b le " . [15] T h e sa m e c o n d it i o n w o u l d a p p ly to t h e n e w co ll ec ti v e se tt l e m e n t p r o c ed u re c on t a i ne d i n t h e B i l l . I t i s f u rt he r p r o p os e d t ha t t h e f ac t o rs to b e t a k e n i n to a c co u n t b y t h e Tr ib u n a l w he n d e c i d i n g w he t he r to a u t ho r i s e a pe r s o n t o a c t a s a r ep r e s e n t a t ive s h o u ld b e s e t o u t in t h e Tr i b u na l ’ s p r o c e d u r a l r u l e s .

22. I n its r e s p o n s e to t h e co n s u l t a ti o n , t h e G o v e r n m e n t s t a t e d t h a t cl a i m an t s o r " g en u i ne l y r e p r es en t a t ive b o d i es " s h o u ld b e p e rmitt e d to ac t a s r ep r e s e n t a t iv e s b u t n o t l a w f irm s , t h i r d p a r t y liti g a t i o n f u n d e rs o r sp e c i a l p u r p o s e v eh i c l es . ILR understands that the Government intends to publish draft Tribunal rules on collective actions that will address this point. The Bill must be read carefully alongside those draft rules.

23. To e ns u re t h a t r ep r e s e n t a t iv e s a re g e n u i n e ly r e p r e se n t a t i v e , t h e B i ll o r t h e T r ib u n a l r u l e s s ho u l d r e qu i r e a t l e as t t h e fo l l o w i n g f a c t o r s to b e t a k e n i n to a c c o u n t :

(a) tr ac k r e c or d a nd e xp e rt i s e – an y n o n - c l a i m a n t r ep r e s e n t a t ive (i.e., any representative which is not itself a member of the class) s ho u l d b e r e qu ir e d t o de m o n s tr a t e t h a t it h a s ac t e d in t h e i n t e r es ts o f t h e pa rt i e s m a k i n g u p t h e m a j o r i ty o f t h e c l a s s ( e. g. , c o n s u m e r s ) fo r a n u m be r o f y e a r s a n d h a s t h e r e l e v a n t e x pe rt i s e t o s e r v e t h e i r i n t e r es t s ;

(b) n o n - p ro f it m a k ing c ha r ac t er – n on -c l a i m an t r ep r es e n t a t iv e s s ho u l d n o t ha v e a n y f i n a nc i a l m o tive fo r c o mm e n c i n g l iti g a t i o n b ey on d t he i r d e s ire t o o b t a in r ed r es s fo r t h o s e w h o h a ve g en u i n e ly s u ff ere d ha r m ;

(c) o wne r s h i p , g ov e r n a n c e a n d s o u r c es o f f un d i ng – t o ens u r e r ep r e s e n t a t iv e s a re n o t m e r e l y f r on t s f o r pr of i t - m a ki n g en t e r p r i s e s with a n i n t e r es t i n l i ti g a ti o n ( e. g. , l a w f ir m s , t h ir d pa r t y liti g a t i o n f u n d e r s a n d c l a ims m a n a g e m en t co m p a n i es ), t h e Tr ib u n a l s ho u ld t a ke ac c o u n t o f w h o o w n s , c o n tr o ls a n d f u n d s (as applicable) parties s ee k i n g to ac t a s r e p r e s e n t a t iv es ;

(d) ab i l i t y t o c o m p l y w i t h a n ad v e r se c o s t s or d er – t h e " l ose r p a y s " r u l e i s a n im po r t an t d e t e r r en t a g a i ns t f r i v o l o u s li t i g a ti o n a n d p r o v i d e s p r o t e c t i o n to pa r t i e s w h o a re f o r c e d t o i nc u r cos t s r e s p o n d i n g t o ca s e s w h i c h u ltim a t e l y p r o v e to b e wi t h o u t m e r i t. To e n s u r e de f e n d an ts a re n o t d e p r i v e d o f t h i s p r o t ec t i on , it i s e s s e n ti a l t h a t r e p r e s e n t a t i v e s h a v e t h e f i n a nc i a l m e a n s to p a y de f e n d an t s ’ c os ts if o r de r e d t o d o s o ;

(e) p r e v i o us c o n d u c t – t h e T r ib u n a l s ho u l d b e p e r mitt e d to t a ke a c c o u n t o f p r e v i o u s c o n d u c t , i nc l u d i n g , f o r e x a m p l e , w h e t he r t h e pe r s o n se e ki n g to ac t a s r e p r e s e n t a ti v e h a s a h i s t o ry o f be i n g a v e xa t i o u s liti g an t o r f a il i n g to co m p l y with r e gu l a t i o n s a n d c o de s o n d ir e c t m a r k e ti n g .

E l i g i b i l i t y o f c l a ims f o r c o ll e c t i v e p ro c e e d in g s a n d ch o i c e o f o p t- in v s. o p t-o ut

24. I t is p r o p o s e d t ha t c l a ims w o u ld on l y b e e li g i b le f o r i nc l u s i o n i n co l l ec t ive p r o c e e d i n g s if t h e T r i b u n a l c o ns i de re d t h a t t h e y r a i s e d " t h e s a me, sim i la r o r r e l a t ed i ssues o f f a c t a nd l a w a nd [ we r e] su i t a b l e t o b e b ro u gh t i n c o ll e c t i v e p ro c ee d in g s . " [16] T h e s a me c o n d iti o n w o u ld a p p ly in r e l a ti o n to t h e ne w c o l l ec t i ve s e ttl e m en t p r o c ed u r e c o n t a i n e d in t h e B ill. I t i s en v is a g e d t h a t f ac t o r s to b e t a k e n i n t o ac c o u n t w h e n t h e T r ib u n a l de t e rmi n e s w he t he r cl a ims a re " su i t a b l e t o b e b ro u gh t in c ol l e c t i v e p ro c e e d in g s " ( b u t no t w he t he r t h e y r a i s e t h e s a m e , s imi l a r o r r e l a t e d i ss u e s o f f ac t o r l a w) w ill b e se t o u t in ne w p r o c e d u r a l r u l e s . H o w e v e r , I LR c o n s i d e rs t h a t g iv e n t h e i m po r t a n c e o f t h e c e rti f i ca t i o n p r oc e s s fo r p r e v e n t i n g ab u se , t h e B i l l s h o u l d a t l e a s t s p ec i f y t h a t as a threshold matter:

(a) t h e co m m o n , s im i l a r o r r e l a t e d i s s u e s o f fac t a n d l a w s h o u l d p r e do m i na t e o v e r o t he r i ss u e s s o t h a t r e s o lv i n g t h e m w ill g o a s u bs t an t i a l w a y t o d i s p en s i n g wi t h a l l o f t h e c l a i m s ; a n d

(b) t he re s ho u l d b e a s u f f i c i en t v o l u me o f c l a i ms to m a ke i n d i v i d ua l p r o c e e d i n g s im p r a c ti c a l.

25. W h e n c o ns i de r i n g a n a p p li c a t i o n fo r a co l l e c tive p r oc e e d i n g s o r d e r, t h e Tr ib u n a l w i ll a l s o h a v e to d ec i d e w he t he r , i f it g r an t s s u c h a n o r de r , i t sho u ld s p e c i f y t h e p ro ce e d i n g s a s op t - i n o r op t - o u t. T h is d e c i s i o n will b e c r u c i a l g iv e n t h e g r ea t e r r is k o f ab u s e with op t - o u t p r o c e ed i n g s , ye t t h e B ill i s s il e n t o n t h e p o i n t a n d it is u nc l ea r w he t he r t h is will b e d e a l t with i n n e w Tribunal r u l es . I f t h e B i ll c on t i n u e s to i n c l u d e a p r o v i s i o n fo r o p t - o u t p r o c e e d i n g s , it s h o u l d c l a r i f y t ha t t h e b u r d e n to b e d i s c h a r g e d b y a n a p p li c an t fo r a c o l l ec t iv e p r o c e e d i n g s o r d e r will b e g r ea t e r w h e re t h e o r d e r s o ug h t is f o r o p t - o u t p r o c e e d i n g s . T h e a pp l i c a n t sho u ld b e r e qu ir e d to de m o ns t r a te t h e e x i s t en c e o f g e n u i n e i n t e r es t i n t h e p r o c e e d i n g s , f o r exa m p l e b y p r o d u ci n g e v i d e nc e o f a t h r es h o l d v o l u me o f u ns o li c it e d co m p l a i n ts o r c l a im s , a n d g ive r e a s on s w h y op t - i n p r o c e e d i n g s w o u ld b e i n a de q u a t e .

As s essment o f da m ag es

26. T h e B i ll p r o p o s e s t h a t t h e T r i b u n a l w o u l d b e p e rmit t e d t o a w a r d da m a g e s in c o ll e c ti v e p r oc e e d i n g s wi t h o u t a s se s s i n g t h e a m o u n t o f da m a g e s r e c o v e r ab l e in r e sp e c t o f e a c h i n d i v i d u a l c l a im b u t l e a v e s f u rt he r d e t a il o n t h e a s s e ss m en t o f d a m ag e s to b e d e a lt wi t h in n e w p r o c ed u r a l r u l e s . [17] To ens u r e g en u i n e c l a i m a n ts r e c e i v e a f a ir a m o u n t o f co m p e n sa t i o n a n d a v o i d d i sp u t e s o v e r d i s t r i b u t i o n s , t h e B i ll sho u ld a t l e as t r e qu i r e t ha t a n y a w a r d o f da m a g e s w h i c h is m a d e o n a n a gg r e g a te b as i s s p e c i f ies t h e t e r m s u p o n w h i c h da m a g e s a r e to b e d i v i d e d a m o n g c l a s s m e m be rs . I n I LR ’ s vi e w, t h os e t e rms s h o u ld a l w a y s r e qu i r e an y u nc l a i m e d da m a g e s to b e r e t u r n e d t o t h e de f e n d a n t.

27. I LR is g r a t e f u l f o r t h e o p po rt u n ity to p r o v i d e this evidence to the Committee a n d sho u ld b e h a p p y t o p r o v i d e f u r t he r i n f o r m a ti o n a b o u t t h e n e g a t i ve c o n s e qu e n c e s o f op t - o u t co l l ec t ive ac t i o n s in o t he r j u r i s d i c t i o n s , i f t h a t w o u ld b e o f a ss i s t a n ce .

February 2014