Posted by Noor Kadhim, independent consultant to Legal Futures Associate AxiaFunder
Kadhim: Crowd-based platforms can provide three types of assistance
The possibility of bringing collective (or class) actions in the UK as compared to other jurisdictions such as the USA and Australia was previously limited. The problems lawyers have faced have been associated largely with getting the claim off the ground, when they have limited resources and finances.
The rapid growth of litigation funding has made class actions more feasible. The loss suffered by any single claimant is too small to make individual claims economically viable as typical consumer funding amounts do not exceed £5,000. However, pursuing claims on a collective basis brings economies of scale.
In particular, crowd-based litigation funding platforms are well placed to help catalyse meritorious class actions and ensure they are run effectively.
They can provide three types of assistance for such claims: providing seed funding to assess the merits of a class claim, funding the marketing expenses associated with acquiring the claim, and pre-action funding to prepare the claim for the larger funding to trial to be put in place.
The difference between opt-in (which requires taking actives steps to bring a claim) and opt-out (which does not require express consent) class actions also has an impact on whether a litigation funder is minded to back a claim.
Class actions in England and Wales have operated mostly, if not exclusively, on an ‘opt-in’ basis, unlike in the US where the opt-out regime is more common. This is changing, however.
In 2015, infringements of competition law became possible through opt-out. The £1.5bn collective action filed in the Competition Appeal Tribunal in May 2021 against Apple, and which was backed by a funder, is an example. Apple is accused of overcharging over 20 million UK users for purchases made through its App Store.
For opt-in matters, which require a lot of upfront resource and time in book-building, a seed capital injection can speed up the class action.
First, it can motivate a high-quality legal team to prioritise the case and put it in the best shape before launch. A competent, well-resourced legal team makes the difference between a winning and losing class action.
Second, it can help with momentum and getting the case off the ground quicker. Third, and crucially, it notifies the defendant that the claimants are serious and have the financial capacity to fight the claim until conclusion. This may also prompt a defendant to settle, especially if it values its reputation.
Certain funders are more comfortable in providing seed funding for class action claims than others, so long as they are meritorious. This can even involve funding to assess the merits.
The evolution of litigation technology – including case portals, e-disclosure platforms and artificial intelligence tools – has eased some of the practical challenges involved in building, managing and settling class actions.
In addition to the book-build, seed funding can be sought for counsel’s opinions, asset-tracing reports, expert opinions and even court issue fees to keep claims from being time-barred.
It is important to note, however, that just like in venture capital, the risk is greater when a funder commits seed funding to a case in its nascency. The challenge is that seed funding is inherently speculative and does not fit the parameters of many mainstream funders.
Therefore, the cost of seed capital is greater for claimants. However, sometimes the costs of litigation funding can be recovered in class claims. This depends on the type of action and the applicable legislation or law in force.
For example, in relation to opt-out collective proceedings in the Competition Appeals Tribunal, all or part of any unclaimed damages can be ordered to be paid to the class representative in respect of all or part of the costs or expenses it incurred in connection with the proceedings.
As a corollary to seed funding of the due diligence stage, it is easier for a crowd-based litigation funder, which does not rely on a single investment committee, to commit funds to the marketing costs related to a potential class action. This can include covering the claims management company’s overheads, and marketing the cost of the book-build, such as publicity material and public relations services.
After the seed-funding stage is passed, there is the pre-action stage, which also needs funding. The preliminary stages can utilise a lot of resource and time, as they involve a determination of standing, as well as consideration of qualification, or joinder issues, and assessing which of numerous routes (such as group litigation orders or test cases) is most appropriate to bring the claim.
As such, funding for these stages can be helpful. A crowd-based platform can provide this pre-action funding, which may include procurement of further legal opinions, after-the-event insurance and other legal costs.
For AxiaFunder, if the costs of the class action are less than £1m, the claim may be funded all the way until trial. If costs are greater than £1m, it can seed-fund the crucial initial stages and assist the claimants in finding other funders through its network, and co-fund the matter.
Further, where a second funder perceives that initial funding has already been provided for a strong case by a reputable funder, it will normally have more confidence in co-funding the rest of the claim.
Finally, when assessing would-be funders for a class action, it is helpful to think about both speed and optics. This is where crowd-based litigation funding platforms may be appropriate.
After a claim is assessed as viable by a crowd-funding platform’s legal team, it can quickly be uploaded to the platform, with a deadline (usually two to four weeks) set for achieving initial stage funding. The cases are also anonymised in relation to confidential data.
If all criteria are met, the case is approved and investors can pledge their funds within the deadline. This avoids the lengthy process experienced with traditional funders, where there is one investment committee that is often over-burdened, and which can often take much longer to come to a decision in respect of a larger commitment than is required from the ‘crowd’ on a funding platform.
The optics of funding a claim using a crowd-based funder is also beneficial for a class claim: there is a perceived alignment of interests between a crowd of private individuals backing a collective claim. And sometimes, it even brings positive press coverage.
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