Learning lessons from the US – reflections for the UK

30th Jun 2015

On June 2, BritishAmerican Business and the U.S. Chamber Institute for Legal Reform held an insightful panel presentation on the U.S. legal system and its challenges.  The panelists—representing British, European and American business groups, think tanks, companies and law firms—discussed the global spread of U.S.-style litigation, in particular its effect on the UK.

Central to the conversation was the notion that despite notable reforms, litigation in the U.S. continues to boom and evolve at great cost to companies, with often little benefit to consumers.  Companies incur particularly significant litigation costs from class action lawsuits, a device that is steadily spreading globally.

Class actions allow groups of consumers, shareholders or other claimants to file a single lawsuit, obtaining a single liability judgment that will apply to all in the class.  The U.S. has “opt-out” class actions, allowing cases to be launched without explicit consent from claimants who are included in the class, and placing the burden on them to notify the court if they do not wish to be included.  The inclusion of claimants who may be entirely unaware of the case when it is filed makes for huge collective lawsuits. Companies are pressured to settle these cases because the risk of taking them to trial, even if they are meritless, is simply too great.  Often these cases follow on regulatory action, in effect doubling the penalty for corporate actions.

The U.S. also allows for liberal discovery; all documents, including electronic transmissions such as emails—even those unrelated to the current lawsuit but which could “lead” to the discovery of admissible evidence—are routinely requested by claimant’s lawyers.  The production of these documents is a considerable administrative burden to companies: time consuming, invasive, and costly.

The contingency fee system further aggravates the risk and elevates the stakes. Lawyers representing claimants have a direct stake the amount that is recovered, and aggressively recruit claimants for litigation.  In U.S. class actions, it is not unusual for individual claimants to recover cents on the dollar while the lawyers reap million-dollar fees.

According to one of the panelists, these facets of the system have led to U.S. tort litigation costs of 1.6% of GDP, the highest in the world, as disclosed in a 2012 report by the economic conulsting firm NERA.  (Canada and the UK are second and third highest, respectively.) At least 95% of U.S. class actions are settled, regardless of merit, because companies do not want to pay the high cost of time-consuming litigation and suffer possible impact to their reputation.

Some of these U.S.-style litigation elements— specifically, “opt-out” class actions and recoveries for third parties that are based on a portion of the total compensation awarded in a case—are gradually being introduced in countries across Europe.  While supporters of these features claim that they are not recreating the American litigation environment, panelists warned that not all elements of the U.S. civil justice system are needed to create a toxic cocktail.  All it takes to set the stage for abuse is a mechanism to create a sizeable aggregation of claims and a source of financing for the claim that is tied to litigation recoveries.

In the UK and the EU, the first few toxic cocktail ingredients are beginning to bubble.  For example, the British Consumer Rights Act has just introduced for the first time in the UK “opt-out” class action litigation.  Another example at the EU level is the pending Data Protection Regulation, which includes a U.S.-style class action proposal.

Funding for litigation increasingly is furnished via third party litigation financing (TPLF).  TPLF has some similarities to U.S. contingency fee arrangements for trial lawyers.  In TPLF arrangements, large hedge-funds or private equity funds invest in litigation and are paid with a share or percentage of the settlement or judgment.  These funders are already well established entities in Australia, Canada and the U.S., investing billions of dollars into litigation in these countries.

In the U.K., TPLF funders have also become well established.  With the gradual introduction of class action and other collective redress schemes, the toxic cocktail is beginning to brew.  The upcoming collective litigation against Tesco over its misstated profits, which has attracted both Australian and U.S. funders, is a worrisome example and could set a troubling precedent in Britain.

Without appropriate safeguards, the combination of any form of  collective redress and of financial incentives to invest in litigation have a great potential to skew the administration of justice.  Many of the panelists urged that now is the time to act to put in place policies that would safeguard the British civil justice system from American-like abuses.  It is critical that the business community engage with policy makers as rules and regulations are being developed that incorporate these changing features of the UK system.