UK Competition Appeal Tribunal approves first significant class action settlement

On 10 May 2024, the UK Competition Appeal Tribunal (CAT) approved a collective settlement in Justin Gutmann's collective action against Stagecoach South Western Trains (SSWT), which alleged that SSWT overcharged consumers by failing to make boundary fare tickets sufficiently available to customers.  The CAT's approval of the settlement provides welcome guidance to claimants and defendants on how the CAT will assess future collective settlements.

Key takeaways

• The CAT approved a collective settlement of up to £25 million, plus costs and distribution expenses on the basis that the settlement was just and reasonable.
• The proposed settlement only requires SSWT to pay out actual claims (as opposed to a fixed sum). The settlement includes three "pots" of compensation for class members, with monetary caps imposed on class members who have little or no evidence to substantiate their claims.
• While ultimately approved, the distribution plan was closely scrutinised by the CAT and the parties made a number of amendments to the proposed settlement to address the CAT's concerns.
• The CAT also outlined its expectations for future class action settlements to ensure it is able to make a fully informed decision on whether a proposed settlement is just and reasonable.

Background

In 2021 the CAT issued a number of collective proceedings orders to Justin Gutmann to act as class representative (CR) in a claim for damages against a number of train operating companies, including SSWT.  The CR alleges that each train operating company abused their dominant position by failing to make" boundary fare" tickets sufficiently available to customers and resulted in consumers who had a TfL travel card being overcharged for certain portions of a rail journey.

Ahead of the first of a number of hearings due to commence in June, the CR and SSWT agreed a settlement and submitted a joint application to the CAT for approval of their collective settlement and distribution plan.

The Tribunal's assessment of the proposed settlement

Under the Competition Act 1998, the Tribunal may approve a proposed settlement only if it considers the terms are just and reasonable.  Rule 94(9) of the CAT's rules provide that it will take account of all relevant circumstances in determining whether a settlement is just and reasonable and includes a number of matters relevant to the assessment.

Proposed terms of settlement

When the parties initially submitted their Collective Settlement Approval Order application to the CAT, the CAT sent the parties a number of questions about the proposed settlement, following which the parties revised their proposed agreement. The key terms of the revised settlement include:

• Payment of damages up to £25 million, split into three "pots", as set out in the table below. SSWT's liability to pay damages will be based on the amount of valid claims submitted by members of the class, with £25 million being the maximum liability SSWT potentially owes to the class. 

*  to the extent the total claims in each pot exceeded the allocated amount, claims would be paid out proportionately.

• In respect of costs and expenses, SSWT would make an initial payment of £4.75 million. A further £750,000 was allocated for distribution costs.
• The CR can apply, at a later hearing, for a further payment for costs and expenses, once class members have submitted their claims. The additional payment is capped at £10.2 million (Non-Ringfenced Costs) and reduces by £1 for every £1 claimed by the class. So if, for example, class members make valid claims totalling £4 million, the class representative is entitled to apply for an additional payment of £6.2 million.
• SSWT would only be required to pay damages for amounts actually claimed by class members. That is, the maximum liability of SSWT is £25 million, although its actual liability is dependent upon class members submitting valid claims..

The CAT's assessment

Before considering the CR and SSWT's proposal, the CAT noted that it was incumbent on the CR and settling defendant to make full and frank disclosure to the CAT in respect of a settlement proposal.  The CAT also recognised there was a strong public interest in encouraging the settlement of claims to ensure the Courts are not overburdened.

In addition, close scrutiny of the distribution plan was considered necessary, since the defendant's liability was an "up to", as opposed to a lump sum.  The CAT noted that if the evidential bar for class members to make a claim was set too high, very little of the settlement would be taken up.

Against this background, the CAT ultimately found that the revised settlement put forward by the parties was just and reasonable.  In reaching this conclusion, the CAT had regard to the following key issues:

• Value of the claim: The CAT noted the expert evidence demonstrated that the settlement amount represented 64% of the claim value, with an average class member claim being £27.90 and an estimated loss per journey of £5. The CAT accepted expert evidence which indicated that the settlement amount was fair and reasonable and it was not likely that the CR would obtain damages that materially exceed the settlement amount at trial.
• Strength of the claim: The total settlement was considered fair and reasonable by the CAT in view of its assessment of the merits of the claim, as to which the CAT noted that, "we do not regard this as a wholly speculative claim with a low prospect of success, but we do not regard it as an overwhelming case either, and, at trial, there is a real possibility that the CR may lose". The CAT went on to note that, had they considered that the merits were strongly in favour of the CR, they may not have accepted the settlement and that "it may have been the decision of the Tribunal that the matter should go for trial".
• Approval of "pots": The CAT approved the settling parties' approach to have different pots of damages for class members to claim from, depending on the evidence each class member is able to produce. Class members able to produce full documentation have no cap on their potential recovery (pot 1). In contrast, class members unable to produce evidence can claim on pot 3 for up six £5 claims (£30). The cap in Pot 3 was estimated to be slightly above the average claim (£27.90). The CAT considered that due to the passage of time, this would be the most popular pot for class members to claim from.
• Level of evidence required to make a claim: The CAT considered that class members who can fully evidence their claim should be entitled to claim the full amount of their losses (from the £19 million in pot 1). In contrast, the CAT indicated that the threshold for class members who do not have such evidence should not be set in a way to automatically exclude class members. In this regard, the CAT endorsed a self-certification process for Pot 3, without requiring class members to produce details of journeys they have taken; and was clear that class members who had paid in cash should not be disadvantaged in making their claims. The CAT noted that the application form includes warnings and a declaration that the class member is aware that action can be taken against them if they make a claim that they know to be untrue.
• Likely take-up rates: The CAT noted that the parties estimated a take-up rate of 10-20% which, based on the CR's estimate, would result in between 140,000 to 280,000 individual claims. The Tribunal considered 10% may be an over estimate. Having commented that it would have been better had the settling parties undertaken empirical research to estimate the likelihood of claims, the Tribunal independently considered the general research on take-up rates in North American class actions and stated that while "[i]t is obvious to the Tribunal that the majority of potential claimants will not claim… quite frankly, no one knows for sure what that [take-up] is likely to be".
• Costs and expenses: the CAT approved the split approach to payment of the CR's costs and expenses, with £4.75 million payable by SSWT upfront and £750,000 for distribution costs. The CAT stated that reasonable costs were "probably well in excess of £10 million" for the claim and that further payments for legal expenses and funder's fees, in respect of Non-Ringfenced Costs, would be considered once class members have submitted their claims.

Implications for future collective settlements

The CAT's decision is the second collective settlement order made by the CAT and first time it has approved a settlement distribution plan.  With nearly 50 ongoing collective actions before the CAT and a clear statement from the Tribunal that there is a strong public interest in parties settling their claims, the decision provides welcome guidance for CRs and defendants on key issues relevant to structuring collective settlements, including:

• Lump-sum or "up-to" settlement amounts: the CAT outlined that while it approved the proposal for SSWT to pay an "up to" damages sum, in cases with stronger merits, it may not be appropriate for the CAT to approve "up-to" settlements, particularly if the take-up is likely to be a low proportion of the class. The endorsement of an "up to" amount gives defendants more flexibility in structuring settlement agreements in contrast to a fixed sum, which may revert to them at a future date if unclaimed.
• Take-up rates: in future applications for collective settlement approval orders, the Tribunal will require applicants to produce estimates of likely take-up rates for members of the class, based on empirical research they have undertaken assessing the total amount likely to be claimed. While the CAT considered the take-up rate for the settlement is likely to be very low, it remains to be seen what these rates will be in this jurisdiction (compared to the evidence before the CAT, which related to take-up rates in North America). If take-up rates are very low, this may impact the CAT's assessment of future settlements, particularly those involving "up to" settlement amounts.
• Legal costs and funders fees: while the CAT approved a partial payment of the CR's costs and expenses (£4.75 million), the degree to which further costs are be paid out is contingent on both the take-up rate being low such that there are Non-Ringfenced Costs available for distribution and the CAT making a future costs order. The Tribunal recognised the important role of funders in providing the capital to bring claims, but it remains to be seen whether the CR's funder will receive a reasonable return when, on the CAT's own estimate, reasonable costs for the claim are in excess of £10 million.
• Flexibility in addressing the CAT's concerns: as with applications for a collective proceedings order, the CAT took a flexible approach in considering the revised settlement proposals which it found addressed its concerns. In the context of this settlement, the CAT indicated that it would have refused the parties' original proposal.