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Director Mohsin Patel discusses the Competition Appeal Tribunal’s decision in Justin Gutmann v Apple Inc.

Director Mohsin Patel discusses the Competition Appeal Tribunal’s recent decision in Justin Gutmann v Apple Inc., suggesting that the judgment provides much-needed clarity for the UK’s litigation funding sector.

Mohsin’s article was published in Law360, 17 April 2024, and can be found here.

Earlier this month, on March 12, the Competition Appeal Tribunal handed down a decision in Justin Gutmann v. Apple Inc., giving the green light to a revised litigation funding agreement, or LFA, proposed by class representative Justin Gutmann in a group action against Apple. The tribunal unanimously held that an LFA may allow for payment to a litigation funder out of an award of damages ahead of class members, providing useful guidance as to the permissibility of such terms in LFA’s.

What’s at stake

The judgment has provided greater certainty regarding the U.K.’s burgeoning litigation funding sector, and provides clarity for the increasing number of consumers involved in such cases. This is particularly helpful in the wake of the U.K. Supreme Court’s July 2023 judgment in PACCAR and ors. v Competition Appeal Tribunal and ors. The PACCAR judgment held that many LFAs that permit funders to recover a percentage of damages are, in fact, damages-based agreements, which are only enforceable where they comply with the relevant regulatory regime.

The PACCAR judgement has certainly created a lot of uncertainty. Many in the litigation funding section considered it a serious blow to the litigation funding model, fearing that the decision could make it unviable to even consider funding certain consumer class actions in the UK. Others were less concerned, relying upon stakeholders and courts taking a common-sense approach to proposed solutions, such as moving pricing to a multiple-based model, on the premise that there was far too much to lose for everyone, for litigation funding to now just come to an abrupt end.

The decision in Gutmann v Apple helps allay such concerns around the litigation funding model by confirming that, contrary to Apple’s argument, an LFA does not constitute a DBA solely by virtue of the inherent “natural cap” of any recovery being limited to the amount of proceeds. Ms Cunningham for the Defendant did, however, reserve their position on this point pending the outcome of the appeal on the same point in the recent cases of Neill v Sony and Kent v Apple, leaving the position open to argument. However, the point might be rendered moot given the Government’s introduction on March 19 of the Litigation Funding Agreements (Enforceability) Bill, currently making its way through the House of Lords, which intends to confine PACCAR to a footnote in legal history through retrospective effect.

Gutmann v. Apple

The matter before the Tribunal in Gutmann v Apple arose in the context of a proposed group litigation action against Apple, which alleges that the company had concealed problems with batteries in the phones of some 24 million customers.

Background

The Tribunal had already certified the proceedings on 1 November 2023. However, this certification was subject to the Tribunal reviewing the terms of a litigation funding agreement, which the claimants’ Proposed Class Representative, Gutmann, had indicated needed to be re-negotiated in light of the PACCAR judgment. This fact, in and of itself, shows the disruptive impact that the PACCAR judgment has had on group litigation cases. Apple, as the proposed defendants, sought to overturn the Tribunal’s certification. Its principle arguments were that:

1. The revised LFA’s mechanism to pay the funder were inappropriate and called into question Mr Gutmann’s suitability as representative.
2. The financial return for the litigation funder was disproportionate and excessive, which impacted the cost-benefit analysis in such a way that pointed against certification.
3. The revised LFA created conflicts of interest.

Tribunal decision

A key argument made by Apple was that the funder’s fees should only be paid from unclaimed damages. In its judgment, the Tribunal carefully considered section 47C of the Competition Act, 1998 (the “Act”). It took the view that, if Parliament had been opposed to the payment of fees out of damages, it would have clarified this in the legislation. The Tribunal reasoned that, since the legislation is silent on this question, Parliament did not intend the Act to prevent such arrangements.

The Tribunal therefore held that paying a litigation funder’s fee out of an award for damages was consistent with the Act, therefore providing much-needed guidance and clarity on the permissibility of such terms in LFAs, as until this judgement there had not been any formal judicial sanction of such an arrangement. The judgment stated unequivocally that the Tribunal had the power, at the conclusion of proceedings, to order that a funder’s fee be paid out of damages awarded to the class. It also noted that a class representative may enter into a litigation funding agreement which contemplates this.

The Tribunal held that “self-evidently a funder must be paid for the risk it takes” but it noted if a funder’s returns were dependent on the extent of unclaimed damages, the risk for funders would increase, which would ultimately raise the cost of litigation funding. The Tribunal specifically held that an express power to make such a payment was given by section 47C(3)(b) of the Act.

The Tribunal also dealt with Apple’s argument that the funder’s fees were excessive. The Tribunal noted that the amount involved did represent a “very large sum,” but went on to say that it did not, at this stage “conclude that it is ‘sufficiently extreme to warrant calling out’, and that this, of itself, is a reason for refusing to certify these proceedings. That is not to say that this fee will not be subject to scrutiny by this Tribunal at the conclusion of these proceedings, in the light of a better understanding of the reason for this fee, the market, and the proportionality of the fee in relation to the damages to be paid.”

It noted that the Tribunal will ultimately have discretion as to the priorities and the sums to be awarded, which set precedent for future CAT cases and questions surrounding funders’ fees.

The Tribunal also noted more broadly that placing “unnecessary hurdles” in the way of those obtaining funding may in fact “undermine the ability of meritorious claims to be brought” and potentially increase the cost of funding. It did stated that “the interests of the litigation funder are not the same as those of the class,” however, also expressed the view that role of the representative served as an “initial safeguard” against such conflicts of interest.

With tribunal stating that conflicts between the funder and the class would be inevitable in any LFA to some extent, and that the arrangements in the case of Gutmann v. Apple made such conflicts manageable, it is clear that this landmark class action may help to quash uncertainties around LFAs in a post-PACCAR legal landscape and develop a more evolved framework for funding in the CAT.

Comment

The UK government’s response to the PACCAR judgment demonstrated a clear intention to support funded group litigation in the UK. In the wake of the judgment, the Justice Secretary, Alex Chalk, announced the government’s intention to legislate (which it has now commenced) to counteract what he referred to as the “damaging effects” of the judgment.

However, funded group litigation is still relatively novel in the UK. Despite Gutmann v. Apple hopefully steadying the post-PACCAR ship by providing guidance as to funding and the role of LFAs, it is clear that the British courts are finding their way through the legal maze of complex group litigation on a case by case basis, as funded group litigation cases become more commonplace and as new issues are thrown up. Each case has its own idiosyncrasies, of course, and we can expect fresh issues and contradictory judicial interpretations to emerge.

Overall, however, as the caselaw evolves, we can expect ever greater clarity and certainty as to what the courts will expect in such actions, and what it deems just and appropriate when it comes to funding arrangements or any of the other myriad issues that may arise. As the case law evolves further, and as new legislation is passed, consumers, companies, funders and lawyers should gain a greater sense of what is permissible and what is not. Such clarity should lead to greater certainty for all stakeholders, which should be welcomed.

In turn, this will enable funders to proceed with far greater certainty. Greater certainty as to the process implies less risk and, with less risk priced in, fees and costs should ultimately become lower for the consumers involved in group actions. For now, all eyes will remain on the Court of Appeal in Neill v Sony and Kent v Apple to see how the PACCAR story will develop.