Settlement approval: The next hurdle for competition class actions

"The next big question, I suspect, will be how settlements are approved".[1] With 10 collective proceedings having now been certified in the UK, the President of the UK Competition Appeal Tribunal ("CAT") has highlighted the next big issue UK competition litigators are turning their attention to: how those proceedings will be resolved. 

In this briefing, we discuss some of the key challenges to settlements in UK collective proceedings. In doing so, we draw on the experience from Canada for guidance on how the UK courts are likely to approach the settlement approval process for collective proceedings in the CAT.[2,3] Indeed, in the landmark Merricks judgment, Lord Briggs noted that he considers the Canadian jurisprudence to be persuasive in the UK "not only because of the greater experience of their courts in the conduct of class actions but also because of the substantial similarity of purpose underlying both their legislation and ours".[4]

The UK's collective proceedings regime was introduced by the Consumer Rights Act 2015. It establishes a mechanism for classes of persons harmed by competition law infringements to seek compensation on a collective basis. Proceedings are brought on behalf of the class by a proposed class representative (or "PCR"). In order for a claim to proceed to trial, the PCR must apply for (and be granted) a collective proceedings order ("CPO") by the CAT:  also referred to as "certification".

To date, the issue of certification has been the focus of the development of the class action regime in the CAT, with question marks over how one of the conditions for granting a CPO can be satisfied: namely, that the claim is "suitable" to be brought as a collective proceeding.

The landmark 2020 Supreme Court ruling in Merricks set a relatively low threshold test for granting a CPO. Importantly, the majority  held that: (a) suitability is a relative concept, and the CAT should ask itself whether the claims are suitable to be brought in collective proceedings relative to individual proceedings - difficulties in quantifying loss are not a reason for refusing certification; and (b) difficulties with (potentially) incomplete data are not a good reason for refusing certification - particularly in circumstances where the likely availability of data will only become clear following disclosure. 

Unsurprisingly, since the Merricks judgment, a flurry of applications for CPOs have been filed and/or certified in the UK.  The first full trial of a CPO is listed for January 2024.[8] Given the nascency of the regime post-certification, there is inevitably still a vast array of issues which will fall to be resolved in the context of the resolution of those claims through the full litigation process. The alternative to trial is, of course, settlement, and there are equally very material questions which arise as to how the as yet untested settlement process will operate.

Similarly to the position in Canada, the UK class action procedure entrusts the CAT with a critical supervisory role to ensure that the interests of absent class members are protected. This is because a settlement will bind all members of the class who do not opt out and, once approved, the settlement cannot be appealed.[10]

The first modern class action legislation in Canada was adopted in Ontario: The Class Proceedings Act 1992 (the "Ontario CPA").[11] Similar legislation has been adopted in the other common law Canadian provinces with class action regimes. In this briefing, we focus on potential guidance for the UK from proceedings under the Ontario CPA (as the longest standing regime in Canada which accounts for a large proportion of its class action litigation).

According to the courts in Ontario:[12]

"Settlement approval is the most important and difficult task for a judge under all class action regimes, including Ontario's Class Proceedings Act 1992. Since most class actions settle, the integrity and the legitimacy of class actions as a means to secure access to justice largely depend upon the court properly exercising its role in the settlement approval process. In scrutinizing a settlement, the court is called on to protect the interests of the class members who are to be bound by the outcome and who will be compelled to release their claims against the defendant in exchange for their participation in the class action settlement" (emphasis added).

Settlement: not a wholly new issue for UK collective proceedings

Whilst the settlement approval process in the CAT is novel, the process of approving settlements is not completely unchartered territory in the UK. For example, settlements reached in the context of proceedings commenced by pension scheme trustees as representative proceedings under CPR 19.7 must be court-approved; the court will only approve the settlement if it is "satisfied that the settlement is for the benefit of all the represented persons".[14] However, the test for approving settlements under the Rule differs from the test under CPR 19.7, and the Rules specify the broad factors that the CAT must take into account for the purposes of approving settlements (see section 4 below), such that the CPR 19.7 case law (which is limited)[15] is unlikely to offer much guidance to the CAT. 

How can collective proceedings before the CAT be settled in the UK?

Under Section 49A of the Competition Act (the "Act") and Rule 94, claims that are the subject of an opt-out CPO can only be settled by a collective settlement approval order ("CSAO") issued by the CAT.  In contrast, an opt-in CPO can be settled without the CAT's approval, provided the deadline for opting-in to the CPO has expired.[16]

The CAT may approve a settlement (i.e. it may make a CSAO) where it is satisfied that the terms of the collective settlement are "just and reasonable". In undertaking this assessment, the CAT is required to take account of all relevant circumstances, including those specifically set out in the Rules (see section section below in relation to the "just and reasonable" test).

The Act and the Rules also provide a mechanism for approving settlements in circumstances where a CPO has not been made (or any litigation commenced). The parties must apply for a collective settlement order ("CSO") prior to or at the same time as the application for a CSAO – in effect, this means that the claim must be certified for settlement approval purposes only.[20] However, experience in the UK to date tends to suggest that there is still an appetite to fight certification (despite the low threshold test established in Merricks). As defendants have had success in particular in reducing the scope of the class and/or the claim that is ultimately certified by the CAT, there may be less of an incentive to entertain settling a claim prior to certification.[21] The fact that the regime is still in its infancy, in the sense that there is only established jurisprudence in relation to the issue of certification may also reduce the likelihood of early settlements (at least in the short to medium term).

Information to be provided in support of an application for settlement approval

An application for a CSAO in the UK must be made jointly by the class representative and the defendant. Rule 94(4) sets out the information that must be provided in support of an application for settlement, key elements of which include:

(a) the terms of the proposed collective settlement, including any related provisions as to the payment of costs, fees and disbursements;

(b) a statement confirming that the applicants believe the terms of the proposed settlement to be "just and reasonable" – i.e. that the test for a CSAO is met – supported by evidence (which may include any report by an independent expert or any opinion of the applicants’ legal representatives as to the merits of the collective settlement);

(c) specification of how any sums are to be paid and distributed; and

(d) details of how the class representative proposes to give notice of the application to represented persons or class members.

The Guide further notes that the supporting evidence should explain how the represented persons' losses have been calculated and the amount of the settlement arrived at. It may also "be appropriate for the lawyers to provide their assessment of the chances of success at trial".[22] This information is intended to inform the CAT's assessment of whether the settlement is "just and reasonable", being the test for settlement approval in the UK (which is addressed in more detail in section four below). The application for a CSAO will be heard and determined at a fairness hearing.

The categories of information that must be provided under the Ontario CPA[23] and the Rules are broadly similar. However, the Ontario CPA also requires the applicant to address (a) the range of possible recoveries in the litigation; (b) the method used for valuation of the settlement (albeit this is likely to be addressed in a report prepared by an independent expert in support of the application for a CSAO); (c) the total number of class or subclass members, as the case may be; and (d) the number of class members expected to make a claim under the settlement, and of them, the number of class or subclass members who are and who are not expected to receive settlement funds. While these additional categories of information are not specifically addressed in Rule 94(4), they do feature (in some form) as factors which are relevant to the CAT's determination of whether to approve the settlement as "just and reasonable" pursuant to Rule 94(9) (and therefore are likely to be addressed in any application for a CSAO despite not being strictly required).

And what about disclosure obligations?

Following the amendments to the Ontario CPA effective October 2020 (which apply to class proceedings commenced after that date), the party seeking settlement approval must make "full and frank disclosure of all material facts" and must file an affidavit which provides the "party's best information" in respect of the factors set out in the legislation.[24] Whilst the Rules do not impose "full and frank disclosure" or "best evidence" obligations on the parties or their legal representatives, the CAT Guide states that in opining on the reasonableness of a proposed settlement "experts and legal representatives are reminded of their professional duties to the Tribunal".[25] The CAT is therefore likely to expect the parties to adopt a "cards on the table" approach to the settlement approval process.

As noted above, the CAT will only approve a settlement if it is "just and reasonable". The test for approving settlements under the Ontario CPA (as amended effective October 2020) differs slightly from the UK test under the Rules. The Ontario CPA provides that the "Court shall not approve a settlement unless it determines that the settlement is fair, reasonable and in the best interests of the class or subclass members, as the case may be" (emphasis added).[26] It will be interesting to see whether this is a distinction without a difference, or whether this will be a source of divergence between the two regimes as it is possible to conceive of a settlement that is "just and reasonable" without being (strictly) "in the best interests of the class" (on the basis that a settlement may be in the interests of the class without being in the best interests of the class). However, similarly to the position in Canada, the CAT's Guide notes that the CAT will not require the settlement to be perfect, and there are likely to be a range of reasonable settlements which could be approved.[27]

The Canadian courts appear to take a holistic approach to the application of the test for settlement approval, as distinct from analysing each constituent element separately. Guidance is awaited as to whether the CAT will also assess the "justness" and "reasonableness" of a proposed settlement in the round, or, whether it will consider these factors separately. In determining whether a settlement is "just and reasonable", the CAT is required to "take account of all relevant circumstances", including (amongst other factors):[28]

(a) the amount and terms of the settlement, including any related provisions as to the payment of costs, fees and disbursements;

(b) the number or estimated number of persons likely to be entitled to a share of the settlement; and

(c) the likelihood of judgment being obtained in the collective proceedings for an amount significantly in excess of the amount of the settlement.

The reference in factor (a) to "any related provisions as to the payment of costs, fees and disbursements" (in combination with the requirement for an application for a CSAO to include a plan as to how the funds are to be distributed)[29] suggests that the CAT will be focussed on the "net" value of the settlement fund which includes taking into account the costs of administering the settlement fund.

The combination of factors (a) and (b) means that the CAT is expected to turn its mind to the likely average pay-out rates for class members based on the net settlement fund: a calculation which depends not only on the estimated size of the class, but also on (i) the number of class members expected to make a claim; and (ii) the percentage of those claims which are likely to be successful.

The Canadian cases in which settlement approval was refused (in part) for failure to adequately address the likely average recovery based on the number of successful claims that are made on the net settlement fund (i.e. after all relevant costs, fees and disbursements have been paid) will therefore be instructive before the CAT (see the pop out box below).

As to point (c), it is difficult to see how the CAT would be able to assess the likelihood of judgment being obtained at trial for an amount significantly in excess of the settlement amount without the assistance of expert evidence based on disclosure. In the absence of a relatively detailed expert analysis (based on the defendant's data) for the purposes of assessing loss, it is also difficult to see how the parties would be in a position to confirm that a settlement is "just and reasonable" in light of the potential recoveries at trial. While an application for a CSAO "may" be supported by expert evidence, it is not a strict requirement.[30]  However, the government consultation which preceded the regime clearly envisaged the CAT being assisted by the evidence of an independent expert[31] (and this appears to be reflected in Rule 94(9)(c)), albeit there is nothing prescriptive in the Rules or the CAT Guide in relation to the process for appointing an independent expert for this purpose (see section 6 below). In Canada, the litigation risk, cost, and range of possible recoveries is typically addressed through an affidavit from class counsel, which describes potential litigation risks and affirms that the settlement is a good outcome in light of those potential risks. While this type of evidence is often sufficient for settlement approval, it has on occasion been criticised by settlement approval judges as "pro forma" and "self-serving".[32] Class counsel may provide a rough estimate of damages to which to compare the settlement amount, generally unsupported by discovery evidence. More rarely, the damages estimate for settlement approval in a competition class action may be provided by an expert economist. In contrast to the position in Canada, for the reasons given above, the CAT is unlikely to approve a proposed settlement in the absence of expert evidence which addresses the issue of quantum.

Importantly, the UK regime does not give the CAT express power to modify the terms of a proposed settlement agreement – it only has express power to approve or reject the proposed settlement. However, it may well be that a practice will emerge whereby judicial suggestions as to areas of concern or potential improvements are addressed at a further fairness hearing.[33]

While the court is "not merely a rubber stamp for settlements",[34] the vast majority of settlements in class proceedings in Canada receive court approval. The approach taken by the Canadian courts has been helpfully summarised as follows:

"[…] there is a strong presumption of fairness when competent class action counsel recommend a settlement and a settlement should only be rejected if it does not fall within a zone of reasonableness. […] To put the matter differently and pragmatically, there would have to be extraordinary factors present – particularly when there are no objectors – to refuse to approve a settlement in an effort to force the parties back to the bargaining table or through to trial.'[35]

That being said, in certain limited cases, the Canadian courts have rejected proposed settlements (albeit outside of the competition law sphere). These cases[36] are nonetheless instructive in the sense that they highlight certain "red flags" that are likely to cause concern for settlement approval (either on their own or in the aggregate).

In this section we address, taking into account practical experience in Canada, three of the key practical challenges that are likely to arise for parties seeking to settle competition class action litigation, namely:

1. How to get the parties to the negotiating table early using without prejudice disclosure?
   
   
2. What can be done to (partially) ameliorate the difficulties facing settlement approval judges in circumstances where the settlement approval process involves a "break down" of the traditional adversarial system?[38]
   
   
3. How do the parties (and the CAT) ensure there is adequate commitment to the claims administration process, such that class members are the main beneficiaries of any settlement?

In light of the costs and risks involved in litigating a CPO, some parties may be attracted to the prospect of a relatively early settlement (albeit likely following certification, for the reasons given above). However, it may be difficult for the parties to arrive at a meaningful starting point for early settlement negotiations in circumstances where the best indication of the estimated losses suffered by the class are likely to be found in the defendant's data (which may not yet have been disclosed, for example if there has been no (or limited) pre-certification disclosure).

Whilst the CAT has a broad discretion in relation to disclosure,[40] orders for disclosure may trail certification by several months. The Rules envisage the CAT making a decision on whether and when a Disclosure Report and Electronic Document Questionnaire should be filed at the first case management conference after a CPO has been made, with orders for disclosure to be provided at a subsequent case management conference.[41]

As well as impacting the parties' assessment of a potential settlement, the absence of early disclosure also has implications for the CAT's role in the settlement approval process. First, it is difficult to see how a settlement could be assessed as "just and reasonable" without analysing key data relevant to an assessment of loss. Second, it would be difficult for the CAT to determine the likelihood of a judgment being obtained at trial for an amount significantly in excess of the amount of the settlement.[42] Whilst the CAT is not required to determine what it would have awarded in damages (if anything) had the claim proceeded to trial, and will instead "adopt a broad brush assessment of the position, having regard to the prospect of success and estimated quantum of damages",[43] any meaningful estimate of the quantum of damages will need to be based on the relevant data (for both follow-on[44] and stand-alone[45] claims). The exception will be those (likely limited) cases[46] where the CAT is content for damages to be assessed by way of a simulation model (which is not dependent on any data). Indeed, the CAT Guide recognises that: "The Tribunal will wish to be satisfied that the class (or settlement) representative and its lawyers had sufficient information in order to assess the reasonableness of the settlement to the class members. Accordingly, it may be relevant to ascertain whether and to what extent the class (or settlement) representative has received disclosure from the settling defendant(s), either voluntarily as part of the negotiations or in the course of the collective proceedings".[47]

One potential solution is for the parties to agree to disclose certain key data (which is relevant to the issue of quantum) on a without prejudice basis.[48] Although settlement negotiations are not mandated or ordered by courts in Ontario, defendants may see them as a useful opportunity to educate plaintiffs on the merits of the claim which in turn functions as a platform for further settlement negotiations. However, in practice in Ontario it has in fact been more common for only limited disclosure to occur in the context of settlement negotiations. Indeed, avoiding the costs of an extensive disclosure process can be a key driver for defendants engaging in early settlement.

It is also worth noting that in the UK the CAT has the power under the Rules to encourage and facilitate the use of alternative dispute resolution procedures if the CAT considers that appropriate,[49] such that parties could be forced to the negotiating table – an exercise which may not be productive unless there has been sufficient disclosure.

Similarly to Canada, the settlement approval process in the CAT is likely to prove controversial given the conflicts of interest that invariably arise as between on the one hand, the class representative (and his or her lawyers/funders) and the defendant(s)), and on the other hand, the class members.  As noted in the CAT Guide, unless a class member objects to a settlement, the CAT will not have the benefit of adversarial argument in considering whether to approve the proposed terms.[50] Indeed, as the President of the CAT noted earlier this year, there is "no one to play devil's advocate".[51] This "adversarial void" makes it difficult to stress-test the robustness of any proposed settlement. As Perell J noted in a recent settlement approval case in Ontario:[52]

"… a judge is discomfited by being required to be a doctor for the litigation to make sure that the inherent conflicts of interest of an entrepreneurial model of class proceedings have not metastasized. Under the entrepreneurial model of contingency fees measured against the value of the settlement for the entire class, Class Counsel has far more to gain than any Class Member from a settlement. This inherent conflict of interest emerges in full bloom on the occasion of settlement and fee approval."

In Canada, the Law Commission of Ontario recommended that the Ontario CPA be amended to give the court express power to appoint an amicus curiae in appropriate circumstances to assist the court in evaluating a proposed settlement. However, this recommendation was not adopted when the Ontario CPA was amended in 2020.

That said, perhaps the real issue facing judges is an information deficit (not an adversarial one). The judge does not have access to all of the information available to the parties during the settlement discussions, nor do they normally have the benefit of (extensive) disclosure or evidence on the merits of the claim. The appointment of an amicus curiae would not resolve this issue, as he or she would face the same information deficit as the settlement approval judge.

While it is not possible to perfect the information void, the lesson for parties before the CAT is likely to be to view Rule 94(4) as setting out the "bare minimum" requirements for the information to be included in support of an application for a CSAO, and to furnish the CAT with any additional useful information which will assist it in its assessment of whether the settlement is "just and reasonable".

In practice, the CAT is likely to consider the questions of settlement approval and distribution together. Not only are the parties required to explain in the application for a CSAO how any sums received under the collective settlement are to be paid and distributed, the application should be supported by a distribution plan explaining how sums can be claimed, how the class representative proposes to manage the distribution process and how the costs of that process are to be funded.[53]

A robust distribution plan is essential for ensuring that class members are the main beneficiaries of the settlement (such that the regime achieves its purpose in providing mass redress). However, the Canadian experience in the consumer class action context is that take-up rates are low, such that class members are not necessarily compensated. In practice, these settlements tend to transfer monies from defendants to society via a cy-près distribution.[54] Under the Rules, any unclaimed amount of the settlement fund can be paid to any destination which is judicially approved, including reverting to the defendant[55] However, this may be conditional on take-up rates reaching a minimum threshold (i.e. a minimum amount of the settlement fund must reach the hands of class members before any unclaimed amount can revert to the defendant).

It is clear that the CAT and the Court of Appeal are alive to the issue of ensuring that the regime fulfils its objective in securing compensation for class members (as distinct from payments being made to charity). In the context of consumer class actions, one potential way to sidestep the issue of low take up rates (and therefore maximise recovery and compensation) would be for the parties to agree a settlement which reflected some of the more innovative mechanisms that have been suggested to date for the purposes of compensating class members. For example, the proposal in the BT class action for consumers to be compensated via a credit to their account,[56] or in the Trains class action where a prospective reduction in certain fares would overcome the practical difficulties in compensating class members for past over-payments.[57]

In Canada (in the context of a conventional distribution of settlement monies), "holdback provisions" (whereby a portion of class counsel's fees are held back and applied for after class counsel has reported on the claims administration process and take-up rates) have been used to align the interests of class counsel and class members "to ensure the claims and distribution process is working smoothly so that the maximum amount ends up in the hands of class members".[58] In any application for a CSAO, it may be in the class representative's interest to suggest a holdback provision in order to demonstrate the commitment of the class representative and its lawyers to the claims administration process.[59]

In multi-defendant class actions, class members may not receive any compensation until the claim has settled with each defendant (or is otherwise determined at trial in respect of any non-settling defendants). In Canada, defendants often do not address the issue of distribution in their application for settlement approval in these circumstances (on the basis that it would be cost ineffective to distribute sums to class members in a piecemeal fashion). It will be interesting to see whether, in practice, the class representative and (at least) a first-settling defendant will also be excused from addressing the issue of distribution in the UK, despite the fact that an application for a CSAO must specify how the settlement is to be paid and distributed.

As a result of the significant number of competition damages claims that have been brought before the English courts, where settlements have been common, claimant and defendant solicitors in this jurisdiction now have significant experience in how to negotiate, structure and agree settlements of claims by single company claimants. However, given the substantial time it has taken before class claims have proceeded beyond the certification stage and into the substantive phase of proceedings, practitioners have not yet had to grapple with the significant additional complexities involved in settling a claim between a class and a defendant, in particular, navigating the judicial approval process.

Given the number of claims now through the certification stage, and those further claims likely to be certified in the short to medium term, and given the commercial benefits defendants commonly perceive in settling competition damages actions, it will likely not be long before the first settlements are brought before the CAT for approval. Those cases will be watched closely to see how the parties and the CAT grapple with the issues raised in this briefing, with the previous Canadian experience likely to be of significant benefit to the CAT.