Opt-out class actions in the UK: are we entering a new era in litigation?
International Disputes Digest - July 2019
Class actions have been a feature of the US courts for many years, but to date have not taken root in the same way in the UK. To a great extent, this is arguably due to the lack of an “opt-out” style of litigation procedure in the UK system. However, the recent introduction of these procedures, firstly in the UK Competition Appeal Tribunal and very soon in the Scottish Court of Session, is bringing about gradual but significant changes that may well alter the litigation culture in the UK permanently.
Opt-out and opt-in procedures
Class actions are often raised to pursue claims which are, for the individual claimant, of fairly modest value. A key challenge for the organiser of a UK class action to date has been securing the participation of as many potential claimants as possible, so as to maximise the value of the action as a whole – particularly where external investment from litigation funders is sought. An “opt-out” procedure avoids this hurdle.
Before 2015, the only way to raise a UK class action was by using some form of “opt-in” procedure. This is where an action is brought on behalf of an identified group of claimants who have each proactively chosen to be involved in the action. Opt-in procedures are available in the UK through, for example, group litigation orders (GLOs). By contrast, an opt-out procedure is one in which a claim is brought on behalf of the entire class of potential claimants without the need for them to proactively choose to participate. If the representative claimant successfully persuades the court or tribunal in which the claim is brought to allow the claim to proceed as a class action, and that action is ultimately successful, the remedy awarded will be available to all potential claimants (other than any who proactively chose to opt-out).
A useful illustration of the power of the opt-out procedure is a recent claim that was raised against Wm Morrisons Supermarket plc by some of its employees. The claim related to a deliberate data breach by a disgruntled employee of the personal data of 100,000 other employees. The High Court found Wm Morrisons vicariously liable to pay compensation to the employees who had chosen to participate in the claim, and this decision was upheld by the Court of Appeal (although a UK Supreme Court appeal is currently pending against that decision).
Only around 5% of the 100,000 employees affected by the data breach chose to participate in this claim. If the claim had proceeded as an opt-out procedure, all of the employees would have been included (except any who proactively opted-out). The opt-out procedure is therefore a potentially powerful tool that can exponentially increase the value of such claims – and the litigation risk for the respondent.
The introduction of opt-out procedures in the UK
Until recently, opt-out procedures have not been available in the UK at all. However, that has begun to change:
- The Consumer Rights Act 2015 amended the Competition Act 1998 to introduce an opt-out procedure into the Competition Appeal Tribunal. This is only available for actions relating to breaches of competition law.
- More recently, the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 introduced provisions to allow the Scottish Courts to make opt-in and opt-out procedures available for all types of claims.
Competition Appeal Tribunal
The Competition Appeal Tribunal (CAT) is a specialist tribunal with UK-wide jurisdiction over cases involving competition or economic regulatory issues. In 2015, an opt-out procedure was introduced into the CAT with the objective of facilitating, and encouraging, consumers and SMEs to enforce their civil law claims in respect of competition law breaches.
Under the CAT rules, the first stage with such a claim is to make an application for a Collective Proceedings Order (CPO), certifying the claim as suitable to proceed as a class action. In 2017, the CAT refused the first application for a CPO to come before it (in Walter Merricks v MasterCard). However, in April 2019, the Court of Appeal set the CAT’s decision aside. Subject to any further appeal to the Supreme Court, the CAT will now have to consider the CPO application again.
The claim could scarcely be wider. It was launched by Walter Merricks CBE, the former chief ombudsman of the Financial Ombudsman Service, on behalf of 46 million UK consumers with a potential value of GBP 14bn. The action is based on a 2014 decision that Mastercard had, over a 16-year period, breached competition law by imposing unlawful fees on retailers. The claim states that retailers passed these costs on to consumers, resulting in those consumers being overcharged for purchases during the relevant period, regardless of whether those purchases were made by card or cash.
When Mr Merricks sought a CPO from the CAT for the claim, the CAT refused this on two grounds: that the application was supported by inadequate data and that it would not be possible to determine the individual losses sustained by each claimant. The Court of Appeal ruled that the CAT’s approach was wrong. Firstly, the CAT had demanded Mr Merricks meet too high a test at the certification stage. Secondly, there was no need for each individual claimant’s losses to be determined as the CAT had suggested.
The Court of Appeal commented in its decision that:
…the power to bring collective proceedings introduced into the [Competition Act] by the Consumer Rights Act 2015 was obviously intended to facilitate a means of redress which could attract and be facilitated by litigation funding and had Parliament considered it necessary to limit this new type of procedure to what would be required for the assessment of damages in an individual claim then it would have said so…
After the CAT’s decision in 2017, there was a sense that class actions in the CAT were already dead in the water, but the Court of Appeal’s decision sounds a note of support for the new procedure. Several interested groups – lawyers, consumer rights groups and investors – will be closely watching the next steps in this case.
The CAT is, however, only a small part of the civil justice system as a whole. There are presently no active proposals to introduce opt-out procedures in any other courts or tribunals in England & Wales. However, this is something that is being actively progressed in Scotland.
Developments in Scotland – the 2018 Act
Following many years of debate about class actions in Scotland, last year the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 was passed, setting out the basic structure of a new “group procedure” which will incorporate both opt-in and opt-out processes.
The opt-out process will cover both (a) all claimants domiciled in Scotland (who do not proactively opt-out) and (b) any claimants outside Scotland who proactively choose to opt-in.
The Act came into force on 30 January 2019 but the Group Procedure will not become operational until the detailed rules are in place – these are currently awaited.
The Act provides that:
- Group proceedings may be brought in the Court of Session, with the permission of the court, by a representative party on behalf a class of persons;
- For permission to be granted, claims will need to raise common issues and reasonable efforts must have been made to identify and notify potential class members; and
- That the detailed rules are to cover a variety of matters, including:
- The circumstances in which group proceedings may be brought as opt-in proceedings, opt-out proceedings or both;
- Any particular types of claim that are to be excluded from the procedure; and
- Various points of detail such as who may be authorised as a representative party and what steps that party requires to take to launch a claim.
Other drivers for change
The proposed EU Collective Redress directive
The UK is not alone in looking at the need for mechanisms to facilitate mass claims. In 2018, the European Commission issued a proposal for a new directive on collective redress as part of its “New Deal for Consumers”. The intention is that this directive will permit certain qualified entities (which must be nonprofitmaking) to bring forward class actions concerning infringements of EU laws, for example in relation to rights relating to consumer law, financial services and data protection.
The aim of the directive is to address a justice gap across the EU, as only certain member states currently have collective redress mechanisms. The directive will not impose a particular model on member states but will rather set down minimum standards that must be met. While an opt-out procedure will not be required (and this directive may not ultimately be directly relevant to the UK) at the very least this adds to the general mood music that there is a need for effective collective redress tools for these types of claim.
Another EU creation has amplified this mood music: GDPR.
Since GDPR (and the Data Protection Act 2018) came into force last year, awareness of mass data breaches has greatly increased. Much of the initial focus was on the potential regulatory consequences of breaches, particularly the huge fines that could be imposed following a breach. However, the potential for mass civil claims is an equally significant risk. The hype associated with the introduction of GDPR and the headlines reporting mass data breaches that have followed – often affecting individuals across multiple jurisdictions – have dominated recent conversations around class actions reform. Indeed, it is difficult to think of a better case study for the debate on opt-out procedures than the data breach landscape post-GDPR.
Provision was made in the Data Protection Act 2018 for compensation due in respect of GDPR breaches to be dealt with under the UK courts’ class actions rules. In practice, this means that in England & Wales, for the foreseeable future, collective redress will be available only through the existing opt-in procedures – although the UK Government has indicated it will review the position in 2020. In Scotland, however, such claims will be able to be made under the new Group Procedure, so there may be an opt-out procedure available for mass data breach claims in the UK very soon.
Investors are showing considerable interest in this new potential market. From a litigation funder’s perspective, the large claimant pool associated with a mass data breach offers an attractive investment opportunity when redress is available by way of an opt-out procedure. From the perspective of businesses (and their insurers), however, the potential to exponentially multiply litigation risk will be a cause for concern.
The 2017 CAT decision on the Mastercard claim led some commentators to conclude that opt-out class actions were unlikely to get off the ground in the CAT. However, the recent comments of the Court of Appeal sound a different note, explicitly recognising that the UK Parliament introduced the procedure with the intention of facilitating the provision of redress to individual claimants through funded class actions. If that logic can be applied to claims arising out of competition law breaches, it is not difficult to see it being extended to other areas of the law and further reform coming down the line in the courts in England & Wales.
It will be interesting to see what the approach of the Court of Session will be to the new procedures in Scotland. Subject to the terms of the detailed rules which are awaited, an early permission application for a mass data breach claim to proceed under the opt-out procedure appears fairly likely. As well as automatically covering all Scottish-based claimants, such a claim could also cover opt-in claimants from the rest of the UK.
The policy objective behind opt-out procedures – improving access to justice for individual claimants – is an understandable one. However, it is important to bear in mind that there are competing policy considerations such as ensuring that the primary beneficiaries of such actions do not end up being the advisers and investors rather than the claimants on whose behalf the action is brought. Going forward, the CAT, the Court of Session and the EU will be looking to balance these competing considerations as they establish the ground rules for operating these new procedures for a wide range of claims.
The road ahead is likely to be a bumpy one, with more litigation to come.