Impact of PACCAR on UK Securities Claimants

On July 26, 2023, the UK Supreme Court issued a decision in the PACCAR case[1] holding that Litigation Funding Agreements (LFAs) that compensate funders with a percentage of any recovery are Damages Based Agreements (DBAs) subject to UK DBA requirements.  This article discusses the potential impact of this decision on claimants in UK securities recovery efforts.

Modest short-term impact

We expect funders are reviewing existing LFAs for compliance with DBA regulations.  DBA requirements arise from multiple sources.  However, they can be grouped into three categories:

• Subject matter: DBAs with percentage contingency fees are prohibited for certain types of matters. For example, they are not permitted for Competition Action Tribunal (CAT) opt-out collective proceedings. So, existing arrangements will need to be reformed. However, this subject matter restriction does not apply to group opt-in securities suits.
• Maximum fees: Contingency fees in DBAs must be capped at 50% of the net recovery (e., after subtraction of expenses). While commission rates in most LFAs for securities cases fall below this maximum, some contracts have provisions by which funders get minimum returns equal to a multiple of their invested funds.  If recoveries are small, funders could get more than half.
• Justification: DBAs must articulate reasons for the stated percentage fees.

Existing LFAs with contingency fees in UK securities cases that do not comply with DBA requirements will need amendment.  In some cases, compensation terms will have to be re-written.  Many contracts contain language obligating the parties to reform terms that don’t comply with the law.

We do not expect these contract amendments to enable claimants to withdraw from pending actions.  Most should not materially change the economic relationship between the parties and when they do, they should benefit claimants by limiting funder fees and increasing their share of gross recoveries, making it difficult to claim prejudice.

It is not clear when funders may start proposing contract changes.  To date, we have not had any raise this issue.  In CAT collective proceedings, court approval of the representative plaintiff’s financial agreement is required before proceeding.  By contrast, UK securities recovery efforts are typically group opt-in actions.  As direct, not representative, suits there is no basis for the defendants to challenge LFAs and no court review of them before proceeding.  LFAs would typically only be examined post-recovery if either party refused to honor the agreements, and their dispute would be resolved in a separate proceeding.

Greater long-term impact

Going forward, LFAs for new securities matters will be drafted to comply with DBA requirements.  Longer term, funders may capitalize law firms rather than contract with claimants.  If this occurs, claimants will instead contract with law firms, likely using DBAs.  For claimants, the registration process should feel the same except for the change in counterparties to the agreements.

Conclusion

The PACCAR decision will most impact LFAs with contingency fees in CAT collective proceedings, where courts must review funding arrangements during the certification process, and where their use in opt-out proceedings is prohibited.  For institutional investors, this impact should be minimal.

The impact on group opt-in securities recovery efforts should be modest.  Funders may review existing agreements and, if necessary, use contract amendments to bring them into compliance.  It is not clear when funders will begin this process.

Going forward, funding agreements will be written to comply with DBA requirements; and longer term, some funders may choose to capitalize law firms that, in turn, will contract with claimants using DBAs.  The change in counterparty from funders to law firms should not significantly impact on the number of cases pursued, how they proceed, or the process by which claimants join them.

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[1] R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28.