Too many class action lawsuits aren't helping consumers
5 min read
If you would be surprised to find that you are involved in a multi-year lawsuit you have never heard of, imagine finding out that you are involved in ten.
Remarkably, that is now true for most British consumers. A little-known class action system currently hosts 655m claims, that is, roughly ten per head. If they are all successful, defendants will need to pay out £134 billion.
So, the seemingly obscure world of the class action is anything but. Where did all these lawsuits come from, and what do they do?
The first recorded English class action is from 1199. A north Hertfordshire priest sued his congregation to demand inflated burial fees. Are the modern ones just as bad?
Ten years ago, UK consumer law embraced opt-out class actions, but only for competition law claims. The idea is that the lawsuit covers everyone involved unless they opt out. Illegal price fixing can be very costly, but no single consumer would take a small claim. A pending case on salmon alleges overcharges between £1.97 and £10.71. A class representative acts on behalf of those who overpaid.
Is this a fishy business? That depends on the case. Illegal price fixing is harmful. But class actions can become adventuresome, in the words of the late US Supreme Court Justice Ruth Bader Ginsburg. A pending case alleges that Facebook took too much data from consumers. That misses the point that 69% of consumers happily trade personal data for free service. The case does not address a concrete consumer harm, but it will still proceed to an expensive trial – in autumn 2027. Don’t hold your breath.
Several recently filed cases take aim at Amazon. A common refrain is that Amazon could have been more open in how it invested in shipping. But it was possible for many to make the same investment. Consumers will all recall how much slower, and how much more expensive, shipping used to be. Amazon gained a high market share - but that is the point. There is a real risk that class actions, which were set up to help the consumer, could result in friendly fire.
Peeling the onion takes us to litigation funders. That’s right - someone invested in all those lawsuits. You’re welcome. The funders rightly hope to gain return on investment. How much is up in the air after a 2023 UK Supreme Court case and pending reforms.
Sometimes the more you peel the onion, the more you cry. One funder recently tried to get £179 million out of a £200 million settlement - which could have left just 48p per purchaser. Even the litigation funders’ trade association disowned those shenanigans - and to be fair to the Competition Appeal Tribunal, which hears the cases, it was having none of it either.
So, the funder started arbitration proceedings against its own consumer representative. It also sought judicial review against the Tribunal. More measured litigation funders must be horrified.
With a mix of adventuresome and strong cases, not much money flowing to consumers, and significant delays, the Government is consulting on reforms.
The key to reform is to help the strong cases but harm the weak ones. My new paper with the Institute for Economic Affairs paper makes five proposals. Fewer but better claims is the aim. The major mechanism is to require a seed payout of estimated damages to a portion of the class - say, 5 per cent of purchasers - before approaching the court. If the case is strong, that is no problem. But if it is weak, it is a very real cost.
Getting funders to put their money where their mouth is early on would also promote a market in claims. Funders would compete to run claims based on how much they promise to pay out, which would be known much earlier.
There is some evidence that funders get paid more the longer they employ capital - normal enough, but it does risk delay. Delay incentives would abate. Once funders commit to a damages figure, they could rightly keep the upside if they can prove more harm. Cost control and speed would then be the focus, as the longer the case goes on, the lower the effective return.
As the cost of litigation would be higher, the Tribunal would need to prevent defendants from undue delay, but that is just as true of the current system.
As for the arguments that Facebook provided too much data-driven service, or that Amazon could have been nicer in how it invested; all eyes on the Tribunal to distinguish genuine market harm from interest group pleading. If some claimants can prove market harm, credit the claims, but they do not always make this very clear in their pleadings. Judges should be discerning every time they put on their robes.
Consolidating claims into immediate purchasers is also a good idea. This is routine in the US system, but an inherited EU law effectively requires the whole supply chain to be modelled in the UK. One-stop shopping with just one lawsuit at the immediate purchaser level would substantially lower costs and complexity.
Recent cases are promising. One pointed out that the purchasers were happy with BT. So, a £1.3 billion claim on their behalf was a bit wide of the mark. Another declined to intervene in musical royalties because the case just moved money about between songwriters, and at quite some expense.
If the government adopts wise reforms, this interesting jurisdiction will fulfil its promise. But some cases, just like the Hertfordshire one from 1199, really ought to be buried.
Stephen Dnes is a founding partner of Dnes and Felver
