UK: Through A Class Darkly: Developments In European Group Litigation

Are class actions on their way? Growing consumer pressure in various countries has led to procedural reforms intended to facilitate litigation by groups of claimants with similar claims. This inevitably draws comparisons and contrasts with the US class action model.

However, the real risk seems to us to lie not as much in procedural reform as with importing the economic factors that make group litigation so profitable for the entrepreneurial Plaintiff Bar in the US. Liability insurers will note with some concern a developing trend in the UK and Europe towards similar commercial participation in litigation by hedge funds and others keen to speculate by funding claims in return for a share of the proceeds. This trend is already established in the U.S.

Recent high profile developments said to raise the spectre of class action litigation in the UK and Europe include the following:

• The European Commissioner of Consumer Affairs announced proposals in March to allow consumers from different EU member states to join together in group litigation. While the detail has yet to be fleshed out, the explicit purpose is to generate more successful group claims across Europe.

• In a similar vein, the UK Government is expected to respond imminently to last October's DTI Consultation on detailed proposals for a new representative action by consumer bodies to enforce consumer protection laws on behalf of affected individuals. The stated objective is to enhance access to justice by increasing the numbers of claims brought.

• Last month, consumer group Which? launched the first action under special powers conferred by the Enterprise Act 2002 against JJB Sports to recover damages on behalf of numerous purchasers of football shirts following price-fixing findings upheld by the OFT. JJB Sports now faces substantial civil damages on top of the OFT's £6.7m fine paid which it has paid to the Treasury.

• Reports also appear frequently in the press speculating on the effect of various procedural reforms underway or proposed in most European states, designed in different ways to facilitate and increase group litigation. Significant developments in the last six months have taken place in France, Germany, Finland, Netherlands, Norway and Sweden, among others.

It is no surprise that well-publicised reports about US class action law firms setting up shop in London have drawn Lime Street's attention. That partly reflects a drive, recently endorsed by the UK's National Association of Pension Funds, to recruit UK and European plaintiffs to join US-based litigation (which may, in fact, also be against UK or European defendants). There is no doubt that US law firms and other commercial enterprises have an explicit agenda of developing home-grown UK and European group litigation.

The UK and other European jurisdictions have sought to reform procedures in different ways to make this easier, so that claimants can band together and share the risks and rewards of litigation. The first point of comparison with the US usually revolves around whether the resulting procedure is 'opt in' or 'opt out'.

'Opt in' is the almost universal approach so far adopted in the UK and Europe, and requires claimants to identify themselves at the outset and often to issue individual proceedings before joining the group. This can be significantly less attractive for claimants, or at least for those financially backing the proceedings, than 'opt out', where the litigation binds the entire class even if most members of that class know nothing about it. 'Opt out' creates the risk for defendants of much higher settlements by instantly bringing many more claimants within the scope of the proceedings. On the other hand, while the numbers may apparently be smaller, 'opt in' procedures may not deliver to insurers the finality from proceedings that they require, because other claimants are not prevented from later coming forward with similar claims and re-opening the dispute.

These procedural differences are significant, and there are many variations on this theme. However, even if an identical procedure to the US were to be introduced here, that would not of itself import the full US experience. Indeed, it has been said that the main problem with US class action litigation is that it is US litigation, not that it is class action litigation.

There are a number of core legal features that distinguish the broader economic environment in which US class actions thrive:

• Broader causes of action. Many US class actions are securities claims, for which liability generally does not exist in the UK and many European countries. An area to watch here, however, is the statutory derivative action under the UK's Companies Act 2006, which creates a new opportunity for shareholders to sue directors.

• Availability of contingency fees. The US Plaintiff Bar is normally rewarded by a share of the litigation proceeds which, coupled with greater damages awards and other factors, considerably multiplies the potential profit and the incentive to pursue speculative claims. We consider below the emerging trend of contingency funding in the UK.

• Greater damages awards. US damages are considerably greater than in the UK and Europe because juries decide upon the amount of compensation due. Hefty punitive awards are also often available, unlike the UK and Europe. The European Union has recently raised the possibility that double compensation might be introduced for consumers in certain circumstances.

• No costs awards. The UK's 'loser pays' principle is also said to protect against the more speculative litigation seen in the US, although in practice this risk for claimants can often be mitigated by purchasing ATE insurance. Many European countries also adopt the US approach of preventing the winner recovering his costs.

Unlike the US, in the UK and most of Europe lawyers are prevented from working on a contingency fee basis. This is perhaps the single most significant fact which differentiates the US litigation dynamic in this area. In the UK, lawyers may enter into conditional fee agreements providing for up to double their normal fees, but they cannot accept a share of the proceeds instead of their fees.

There are, however, clear signs in the UK of a rapidly developing market of independent companies providing litigation funding on a contingency basis. Other cases have been financed by hedge fund capital or private investors. The funding arrangements are a matter of negotiation and tend to involve contingency arrangements.

The legality of these arrangements is complex and uncertain, but the boundaries of what is permitted are constantly being stretched and redrawn as circumstances dictate. The recent decision of the Australian High Court in the Fostif case is a vivid example of what is bound to happen sooner or later in the UK - contingency funding arrangements in Australia have now been given a clear green light. Any illegality is in any case of very limited benefit for liability insurers, as that normally does not give the defendant any additional defence to the funded claim.

The UK and Europe clearly lack some of the key features which drive the US litigation landscape, which should prevent an explosion of liability here merely because ongoing procedural reforms will continue to make it easier for group litigation to be pursued on behalf of large groups of claimants with similar cases. The explicit objective of governments at both domestic and European level is certainly to facilitate those reforms without importing the US "compensation culture".

The real concern is that the debate over these procedural reforms often does not fully factor in the potential implications of the creeping encroachment of contingency funding into the UK landscape. Economics, rather than procedural reform, will be the main culprit if, despite the best efforts of government, our litigation dynamic lurches towards the excesses of the US experience.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.