Mind the Gap: the Competition Appeal Tribunal rules on the approach to allocation of unclaimed settlement funds

The recent judgment of the Competition Appeal Tribunal in relation to the distribution of unclaimed settlement funds following settlement of the Stagecoach South Western Trains Limited (SSWT) opt out collective action provides important practical guidance for legal and other professionals involved in opt-out collective action proceedings.

The application arose from a series of opt-out collective actions brought by class representative Justin Gutmann (the CR) against several train operators, including SSWT, First MTR South Western Trains, London South Eastern Railway Limited, and Govia Thameslink Railway Limited. The claims were case managed together and each alleged that the defendants abused dominant positions in the passenger rail service markets, causing aggregate losses to consumers.

SSWT settled its claim, agreeing to make up to £25 million available for class members (the Settlement Funds), alongside £4.75 million in “Ringfenced Costs” and £750,000 for distribution costs. A further agreement was reached between the parties (after settlement) to make a charitable donation of up to £4 million to the Access to Justice Foundation from a portion of the pool of Settlement Funds, less any amount distributed to class members, such that class members and the Foundation would receive a combined total of £4 million.

The settlement terms provided that in the event class members claimed less than £10.2 million of the Settlement Funds, the CR could apply to the Tribunal for the remainder of that £10.2 million pot to be paid towards his costs, legal fees and disbursements (the stakeholder distribution).  Once the charitable payment had been made, the funds available for stakeholder distribution were reduced to £6.2 million (Non‑Ringfenced Costs).  The balance of the unclaimed Settlement Funds would revert to SSWT. 

Despite the significant settlement sum, validated claims by class members totalled only £216,485 – less than 1% of the Settlement Funds. The CR accordingly applied to the Tribunal for allocation of the Non-Ringfenced Costs to the appropriate stakeholders, with that application including competing claims from the funder, ATE insurers, and legal representatives (the Application).

Key Guiding Principles Identified by the Tribunal

The Tribunal’s judgment on the Application identifies a number of guiding principles for the distribution of unclaimed settlement funds in collective proceedings.

1. Allocation principles and avoiding 'material disadvantage'

In reaching its decision on allocation, the Tribunal balanced the following considerations:

1. The interests of each of the stakeholders (i.e. the funder, ATE insurers and legal representatives) in the case;
2. The need for the stakeholders to make returns where appropriate;
3. The interests of the collective actions regime as a whole;
4. The sums actually available;
5. The poor outcome in this case in terms of the disappointingly low take-up by class members; and
6. The undesirability of outcomes whereby the beneficiaries of settlements are predominantly if not overwhelmingly the stakeholders rather than the class for whose benefit the proceedings were brought in the first place.

The Tribunal necessarily took a "rough and ready" approach to allocation and blended competing approaches proposed by the parties to inform its allocation of the Non-Ringfenced Costs. It sought to avoid materially disadvantaging any particular stakeholder while acknowledging that likely everyone would be unhappy because it was very clear that not all contractual entitlements could be met due to the limited pool of funds.  It had particular regard to the lack of success of the settlement when considering the various entitlements, and concluded that as a result, each stakeholder should make only a modest return on its outlay. 

2. Prioritising Distribution to Class Members

The Tribunal stressed that the primary purpose of opt-out collective actions is to benefit class members.  Settlements should not be regarded as a success if class member take-up is poor.  In this case, the Tribunal found the take-up "extremely disappointing" and emphasised that future class representatives and practitioners must learn lessons and maximise the amount distributed to class members in such situations.  In a noteworthy departure from previous guidance, the Tribunal warned that distribution concerns should be addressed much earlier in proceedings, including at the certification stage.

3. Supervisory role and discretion of the Tribunal

The Tribunal retains discretion to allocate costs, fees and disbursements fairly and proportionately, regardless of the contractual arrangements agreed by the parties. It held that contractual funding arrangements set the parameters for distribution of funds between the stakeholders, not outcomes. The Tribunal emphasised that the collective proceedings regime stands on a "three-legged stool" comprising the class representative, the lawyers and the funder/ATE insurers and that "if any single leg is removed or unsupported the entire structure collapses." As such, the Tribunal has an interest in ensuring that the ultimate allocation between those parties does not disincentivise any of them from participating in the regime.

The Tribunal's discretionary oversight is particularly important where the pot of funds available for allocation amongst stakeholders is clearly insufficient to meet the competing contractual entitlements. While recognising the sophistication of the parties involved and their ability to agree contractual terms, the Tribunal exercised its supervisory authority (which had been expressly provided for in the LFA) to ensure a fair allocation between stakeholders, cutting through detail where necessary to arrive at just conclusions. 

4. Level of return for Funders and Insurers

Whilst funders and ATE insurers are entitled to a commercial return for their (necessary) outlay in opt-out collective actions, in this case the Tribunal expressed that they should not expect more than a modest rate of return, given the low take-up by class members.

When analysing the appropriate level of return to this category of stakeholder, the Tribunal calculated returns using the Multiple on Invested Capital (MOIC) metric, and capped the funder's and ATE insurers' returns at a MOIC of approximately 2.34.  In reaching this conclusion, the Tribunal balanced existing contractual entitlements against the interests of all stakeholders and the limited funds available, making it clear that the level of contractual entitlement is not determinative of what the stakeholders may expect to return from a Tribunal-approved distribution.

5. Approach to unclaimed funds and charitable donations

The judgment gave strong endorsement to the approach of donating unclaimed Settlement Funds to charity. It considered the parties' agreement to make a charitable donation to the Access to Justice Foundation to be a "redeeming feature", particularly in light of the extremely low take-up of the Settlement Funds. The Tribunal however refused to order that any portion of the charitable donation be taken from the funds to be reverted to SSWT, as this would have required a rewrite of the settlement agreement to the detriment of SSWT.  The Tribunal emphasised that the agreed settlement terms should be respected.

Practical Takeaways for Legal Professionals

The Tribunal's judgment on the Application sets a useful guide for the distribution of settlement funds in opt-out proceedings, with a clear focus on maximising benefits for class members and ensuring fairness among stakeholders.  There are a number of key practical takeaways from this judgment:

• The judgment was coloured by the "very poor" take up by class members, of less than 1%.  More than half of the claims submitted to the claims administrators were rejected, although it is not clear whether this resulted from a high volume of fraudulent activity, or whether the class members failed to comply with the necessary evidential requirements.  Either way, there was a clear failing at the distribution phase.

• Class representatives must address distribution mechanisms much earlier than previously has been required (and as early as the certification stage), to ensure they are maximising the amount of money that ends up with class members. Low take-up rates will be considered by the Tribunal when it determines the appropriate return for the funder, in particular, so there is a clear causal link between the efficacy of distribution to the class and the returns stakeholders can reasonably expect following a settlement.

• Although the level of contractual entitlement was one of the key factors considered by the Tribunal when deciding stakeholder allocations, it was not determinative.  Legal teams should prepare for the Tribunal’s active supervisory role and anticipate that pre‑agreed contractual entitlements may be subject to adjustment by the Tribunal in the interests of fairness.

• The final apportionments were necessarily rough and ready, and the Tribunal was prepared to cut through detail with a broad axe to arrive at conclusions it perceived to be fair, proportionate, and in accordance with the interests of justice.

• Funders, insurers and legal stakeholders are all essential to the operation of the collective proceedings regime.  In this case, the funder and ATE insurers received a return of 2.34x in circumstances where there "clearly" wasn't enough money to go around, and the legal stakeholders were awarded a nominal success fee.  The Tribunal noted, however, "an air of unreality" in the positions taken by all of the stakeholders in their respective views as to what sums would have been reasonable and proportionate for each of them to have been awarded. 

• In cases with low take-up by the class, in particular, charitable donations will be viewed favourably by the Tribunal.