Craig Lonie, in his analysis of the Merricks v Mastercard case, highlights the potential risks litigation funders face in class action cases.
The Competition Appeal Tribunal's (CAT) recent approval of the settlement in the protracted Merricks v Mastercard litigation drew attention due to its magnitude – a claim for 46 million consumers once valued at up to £14 billion, eventually settled for £200 million, as reported by .
However, within the judgement lies a more subtle and potentially destabilising development: the Tribunal's decision to amend the financial terms agreed between the class representative and the litigation funder.
In doing so, the CAT crossed a boundary that should concern anyone interested in the future of collective redress in the º£½ÇÊÓƵ.
It didn't merely scrutinise the legality of the funding arrangement – it effectively rewrote it, by capping the payout to the litigation funder, Innsworth Advisors.
This sets a worrying precedent for litigation funders and threatens to deter the very investment that underpins access to justice in complex group claims.
How the CAT intervened in Merricks v Mastercard
The crux of the matter centres on the Competition Appeal Tribunal's (CAT) decision regarding the distribution of a settlement, which deviated from the initial agreement between class representative Walter Merricks and the litigation funder Innsworth.
Under the standard practice in funded collective actions, Innsworth backed the claim with the understanding that they would receive a return based on a multiple of their investment if successful.
This arrangement was a commercial contract made by well-informed, sophisticated parties who both recognised the inherent 'fair bet' – a substantial reward for Innsworth upon success, or a complete loss should the case fail.
Such stark 'win big or lose everything' outcomes are not unusual in other sectors known for high stakes, like pharmaceuticals or technology.
However, the CAT has taken a contradictory stance in the Merricks case: insisting on robust funding for collective actions while simultaneously capping funders' rewards to avoid what it perceives as excessive generosity. This approach may seem fair in the short term but could undermine the long-term sustainability of the collective action framework.
Despite this, the CAT ruled that the agreed-upon return for Innsworth was too high and imposed a new limit on their recovery. The decision wasn't due to any illegality or exploitation within the deal, but because the funder's portion was considered disproportionately large relative to the compensation received by the class members, especially given the "poor outcome" and the "low settlement-to-value ratio" – under two per cent of the original claim value.
This appears to overstep the court's remit in protecting claimants' interests. It signifies a move from scrutinising funding terms for legal compliance to imposing the Tribunal's own interpretation of a "reasonable" return - after the event.
In this instance, the CAT capped Innsworth's payment at 1.5 times the costs incurred, including legal fees, with limited justification. Given the substantial risk of cases like this failing, resulting in a complete loss of the funder's investment, this figure seems low.
The intervention introduces uncertainty into what should be predictable commercial arrangements and may have undermined the previously agreed 'fair bet'. It will undoubtedly prompt a reassessment of the prospects for similar cases in the future.
Litigation funders take on great risk, so they deserve reward
Litigation funders operate in a high-risk environment, providing non-recourse capital to facilitate claims that would otherwise not be pursued, particularly in collective actions where costs are substantial and outcomes uncertain. The commercial terms reflect this risk, and in the º£½ÇÊÓƵ, as elsewhere, those returns are already subject to increasing regulatory scrutiny.
Perhaps 'hindsight bias' led the CAT to underestimate the risks Innsworth took on initially. However, funders can only continue to invest if there is a degree of legal certainty.
If courts are willing to interfere with funding agreements after years of litigation, it undermines confidence in the enforceability of those contracts. This is particularly damaging in collective proceedings, which rely almost entirely on private funding due to the scale and length of these claims.
The timing of Merricks v Mastercard is also unfortunate. The º£½ÇÊÓƵ's collective actions regime – still in its infancy compared to the US or Australia – has only recently gained traction.
A growing number of claims have been certified under the Competition Act, offering consumers and small businesses a path to redress for anti-competitive conduct. The CAT has repeatedly emphasised the importance of third-party funding in these cases.
Without it, there is no access to justice.
And yet, in Merricks, the Tribunal appears to want it both ways: collective actions must be well-funded, but funders' rewards must not be too generous. That balancing act may satisfy short-term notions of fairness but risks long-term damage to the viability of the regime.
Consumers will pay in the end
The CAT's reasoning is, no doubt, rooted in a desire to maximise compensation to class members. But prioritising distribution over viability carries danger.
If the funding market dries up – or investors view the º£½ÇÊÓƵ as too unpredictable – future claims won't get off the ground at all.
If the º£½ÇÊÓƵ is earnest about promoting private enforcement of competition law and securing redress for consumers, it necessitates a funding environment that is both transparent and commercially viable. This calls for courts and tribunals to respect – within lawful limits – the autonomy of parties to agree on risk and reward.
However well-intentioned, judicial paternalism comes with a price tag. In collective proceedings, this cost may ultimately be shouldered by the very consumers the regime aims to safeguard.
Craig Lonie, a specialist partner at Flint Global, advises on finance matters in regulation, competition policy and litigation. He has provided expert witness evidence on competition and regulatory matters to the º£½ÇÊÓƵ High Court, the CAT and the CMA.
