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Director Mohsin Patel discusses Collective Settlement Approval Orders in Law360

Director Mohsin Patel explores the recent Competition Appeal Tribunal case Justin Gutmann v First MTR South Western Trains Limited and Another – the second Collective Settlement Approval Order granted since the adoption of the new UK opt-out class action framework in 2015.

Mohsin’s article was published in Law360, 24 June 2024, and can be found here.

In May 2024, the Competition Appeal Tribunal (CAT) gave its approval to a collective settlement by Stagecoach South Western Trains Limited (SSWT) following a five-year dispute over so-called “boundary fares” on its rail network.[1]

This is the second Collective Settlement Approval Order (CSAO) that the CAT has granted since the adoption of the new UK opt-out class action framework in 2015, and the Tribunal provided detailed comments on key issues relevant to structuring collective settlement, alongside its approval of the settlement, which will offer much-needed guidance to group-action practitioners.

The lawsuit was originally filed in 2019[2] by, claimants who alleged that SSWT and First MTR South Western Trains Limited (First MTR) had overcharged passengers by not making boundary fares or extension tickets sufficiently available, meaning that rail users were effectively charged twice for sections of their train journeys. As such, the railway companies were accused of abusing their dominant position when running the rail franchise, with customers also allegedly not made aware of how to purchase an appropriate fare for their travel into or through the boundary fare zones.

The standalone opt-out claim in Justin Gutmann v. First MTR South Western Trains Ltd. was brought by the class representative (CR) Justin Gutmann, against SSWT and First MTR, asking for around £93 million in compensation from the railway company. The claim was certified by the CAT in October 2021, with appeals against certification dismissed by the Court of Appeal in July 2022. With the first trial having been set for June 2024, SSWT’s eleventh hour offer of settlement leaves First MTR as the sole defendant in the group action case, following the Tribunal’s approval of the settlement figure.

SSWT’s offer is worth up to £25m to claimants, who will be able to submit their claims for redress via a website due to be set up and enabled for use within two months of the CAT’s approval of the settlement offer. Once the claim period begins on 10 July 2024, claim members will have six months to submit their claims via the website.

Remarking on the conflicting interests of class members and the CR’s legal team and funders, where each party has an aligned interest in making a financial recovery but ultimately from a defined pot of monies, the CAT stated that such conflicts meant it was “all the more important that the settlement is properly and carefully scrutinised”[3] by the Tribunal ahead of granting its approval of the CSAO. The CR’s lawyers and funders would benefit from as few claims being made by class members as possible, the Tribunal noted, with more funds available to pay the legal team and funders’ costs as a result of a reduced level of payouts to claimants.

As a result of these concerns, the parties agreed to make the compensatory funds more easily transferable between the various “pots” allocated for payment, in the event that payouts to one particular pot are lower than might have been expected. They also amended the settlement proposal to incorporate a £10.2m cap on funds available to the CR for costs, fees and disbursements once all claimants’ payouts had been made.

The Tribunal also stressed that – while it agreed with a swift settlement in order to avoid a further escalation in costs should the case proceed to trial – it was not wholly comfortable with the amount of evidence available on which to assess the merits of the case and the settlement figure. In future cases, the Tribunal said, more empirical research into claimants’ potential uptake would be required, as well as a projection of likely split of the compensation between claimants and the CR’s legal team and funders.

The settlement agreement also clarified that the compensation will be retained by SSWT, rather than be paid into an escrow account for distribution amongst claim members as would usually be the case following the award of opt-out damages at trial. As such, any funds remaining after all compensation and costs have been paid out will be kept by SSWT, with no such funds going to charity as would have been the case had they been held in escrow in line with the terms of a collective damages award structure.

Any cases that involve third-party funding or lawyers with fees at risk, give rise to inherent and obvious conflicts of interest which the parties must grapple with. While lawyers are expected to act within the bounds of their professional rules, the Tribunal has a duty, in the public interest and the of class members, to carefully scrutinise any such arrangements, which – as set out above – it can be seen to have done in this case. Its commentary published alongside its approval of the CSAO provides useful guidance in such a nascent area of the law, and will no doubt be used as a starting point for future settlement discussions and potential mutually agreed draft CSAOs put before the Tribunal[4].

If a settlement is not just and reasonable, a Tribunal should not accept it notwithstanding agreement between parties. As was the case here, the Tribunal would have refused the Original Proposed Settlement had it not been revised to incorporate the concerns of the Tribunal surrounding distribution of the funds to claimants and the CR’s legal team and funders.

The Tribunal did explicitly recognise that funders and funding are integral to the viability of the claims being brought, and there is a clear recognition that pricing is a function of risk and portfolio management. However, given that only a partial payment of £4.75m was approved by the CAT and further payment is subject to both the take-up rate being low such that there are Non-Ringfenced Costs available for distribution and any future costs order by the CAT, its unclear whether the funder will in fact receive a reasonable return on its investment. This is particularly relevant to funders generally given the length of time proceedings have been ongoing as well as the likely amount invested to date, which will be significant.

Where a Tribunal makes an award of damages in opt-out collective proceedings, the Tribunal is required to order that all or part of any undistributed damages are paid to charity, subject to any order for undistributed damages to be paid towards the CR’s costs. In contrast, there is no such prohibition where there is a collective settlement. In this case, there were no funds earmarked for charity.

The Tribunal took the view that as long as there were sufficient funds made available for take-up by class members then there was no reason for refusing settlement on this ground.  Even if such an arrangement were deemed appropriate, it may still not be necessary; it is possible in a settlement for any unclaimed settlement to revert to the Defendant. As an incentive to settle, this seems an appropriate stance for both the Tribunal and the parties to take when reaching a settlement agreement acceptable to all involved.

[1] Justin Gutmann v First MTR South Western Trains Limited and Another [2024] CAT 34

[2] https://www.catribunal.org.uk/cases/13047719-justin-gutmann

[3] https://www.catribunal.org.uk/sites/cat/files/2024-05/13047719%20Justin%20Gutmann%20v%20First%20MTR%20South%20Western%20Trains%20Limited%20and%20Another%20-%20Judgment%20%28SSWT%20Collective%20Settlement%29%20%2010%20May%202024_0.pdf

[4] https://www.catribunal.org.uk/sites/cat/files/2024-05/13047719%20Justin%20Gutmann%20v%20First%20MTR%20South%20Western%20Trains%20Limited%20and%20Another%20-%20Order%20of%20the%20Chair%20%28Collective%20Settlement%20Approval%20Order%29%20%2010%20May%202024_0.pdf