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In a significant development for litigation funding and the broader legal financing landscape, the Court of Appeal is set to rule on the validity of litigation funding agreements (LFAs) that base funders’ fees on a multiple of the sum invested. This pivotal issue is scheduled to be addressed by the end of July, with oral arguments expected to span one to two days between late May and late July. The decision comes as several appeals from the Competition Appeal Tribunal (CAT) are being revived after a recent directions hearing.

Background and Context:

Litigation funding agreements allow third-party funders to finance legal claims in exchange for a portion of the proceeds if the case is successful. Traditionally, some funders have structured their fee arrangements as a share of the damages awarded, thereby categorizing them as damages-based agreements (DBAs). Under the Damages-Based Agreements Regulations 2013, DBAs face strict enforcement requirements and are prohibited in certain proceedings, such as opt-out collective proceedings before the CAT.

In July 2023, the Supreme Court’s ruling in the PACCAR case established that funding arrangements calculated by reference to a share of the damages would be deemed DBAs. As a result, many litigation funders have shifted toward a model that calculates fees solely as a multiple of the sum invested. This approach is intended to avoid the regulatory complications associated with DBAs, but it has now come under legal challenge.

The Legal Dispute:

Defendants in several cases have contested the “multiple” approach used by funders, arguing that this model should still be considered as indirectly calculating fees based on a share of the damages. They contend that since the funders’ fees are capped at an amount that does not exceed the total damages awarded, there remains an inherent link between the fee structure and the damages—a connection that, in their view, should continue to subject these agreements to the stricter regulatory framework governing DBAs.

The appeals in question were initially stayed due to indications that the previous government was contemplating legislation to address the issues arising from PACCAR. However, Chancellor of the High Court Sir Julian Flaux and Lord Justice Green, during a directions hearing, lifted the stay. They observed that there had been no substantial movement toward such legislation since the change in government. Flaux stated, “there is not now a good reason” to keep these cases on hold, emphasizing that it is contrary to judicial principles to indefinitely delay proceedings without compelling justification.

Cases on the Docket:

The Court of Appeal will consider the “multiple” fee approach in several cases, including:

• Alex Neill v. Sony Interactive Entertainment;
• Apple Inc. & Apple Distribution International Ltd v. Kent;
• Commercial and Interregional Card Claims II Ltd v. Visa Inc. & others;
• Commercial and Interregional Card Claims I Ltd v. Mastercard; and
• Gutmann v. Apple Inc. & others.

In addition, another related appeal in Gutmann will address the right of funders to receive payment from undistributed damages, highlighting the multifaceted nature of the dispute.

Procedural Developments:

The Court of Appeal has mandated that joint skeleton arguments, which outline the common ground of the parties’ positions, be succinctly prepared in no more than 35 pages. Any specific issues unique to individual cases must be addressed in separate submissions capped at 10 pages. Although no explicit timeline has been provided for the final decision, the brief hearing window suggests that the ruling could be delivered before the summer.

Implications of the Ruling:

This ruling is of paramount importance for several reasons:

1. Regulatory Clarity: A definitive interpretation of whether the “multiple” model should be treated as a DBA could set a nationwide precedent, affecting the enforceability of litigation funding agreements across various jurisdictions.
2. Market Impact: Litigation funding has grown into a significant industry. A ruling that classifies the multiple-based fee model as a DBA could impose onerous regulatory requirements on funders, potentially reducing the availability of alternative funding for litigation and altering market dynamics.
3. Legal Strategy: For lawyers and firms involved in high-stakes litigation, understanding the implications of this decision is crucial for advising clients on funding options. The decision may influence how litigation is financed, which in turn could impact access to justice.
4. Broader Legal Precedent: The outcome of this case will contribute to the evolving jurisprudence on litigation funding. It will shed light on how courts balance commercial practices with consumer protection and regulatory compliance within the legal financing arena.

Arguments from Both Sides:

• Defendant’s Position: The defendants argue that even though funders now use a multiple of the invested sum to calculate fees, this method should still be seen as fundamentally linked to the damages outcome. They assert that this connection means the agreements should still be regulated as DBAs, thus subject to the Damages-Based Agreements Regulations 2013.
• Funders’ Perspective: On the other side, funders maintain that by adopting a multiple-based approach, they have effectively distanced their fee calculations from the actual damages awarded. This separation, they argue, should exempt them from DBA regulations and provide greater operational flexibility. They contend that the multiple model is a fair and transparent method that aligns more closely with the risk profile of litigation funding.

Judicial Considerations:

The Court’s forthcoming ruling will likely hinge on a careful analysis of statutory language, regulatory intent, and the practical realities of litigation financing. Judges will need to determine whether the fee arrangement, though not directly tied to damages, nonetheless creates a de facto share-of-damages structure due to its cap on the fee relative to potential damages. This nuanced analysis will require balancing legislative intent, market practices, and the fundamental principles of fairness and transparency in litigation funding.

Conclusion:

The Court of Appeal’s decision on litigation funding agreements is poised to be a landmark ruling with far-reaching implications. It will determine whether funders can continue to operate under the multiple-based model without being subjected to the strict regulations governing DBAs. For legal practitioners, this case offers a fascinating glimpse into the intersection of commercial law, regulatory oversight, and access to justice. As the legal community awaits the decision, the broader implications for the litigation funding market—and for the strategic choices of law firms—remain a critical focal point.

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Source: https://www.lawgazette.co.uk/news/appeal-court-to-rule-on-funding-agreements-as-post-paccar-stays-are-lifted/5122244.article