Hedge funds and other investors thought they could turn the English legal system into a financial asset class. The courts are not making it easy for them.
Litigation funders lured to the UK by the prospect of sharing in the winnings from multibillion-pound class action lawsuits have supported scores of cases against companies including Amazon, Microsoft and Thames Water.
But a decade since the right to bring collective antitrust legal claims on behalf of consumers was enshrined by UK-wide legislation, investors are still waiting for a big payday from such cases.
Returns from the UK “are not as great as they thought they would be, and it’s taken a lot longer” than expected to generate them, said Jeremy Marshall, chief investment officer at litigation funder Winward.
Tensions in the industry are due to come to a head next week. The Competition Appeal Tribunal, the forum for class-action antitrust cases, is due to adjudicate on a remarkable public spat involving a funder backed by US hedge fund Elliott.
The funder, Innsworth, had financed a landmark lawsuit brought by former financial ombudsman Walter Merricks against Mastercard that claimed the payments network overcharged millions of consumers.
But the pair fell out in spectacular fashion at the end of last year over a deal he reached with Mastercard to settle the long-running claim for £200mn — a fraction of the £14bn he originally sought.
Under the terms of the settlement, at least £100mn would go to consumers and at least £46mn to Innsworth to cover the costs of the claim.
The remaining £54mn would be split depending on how many consumers make claims: if many more than first expected come forward, Innsworth may not generate a profit.
Despite opposing each other for years, Mastercard and Merricks have joined forces to oppose Innsworth and to persuade the tribunal to sign off on their agreement.
In an extraordinary turn of events, Mastercard is even providing £10mn in financial support to its former nemesis in arbitration proceedings Innsworth has brought against him.
The settlement at issue was the latest disappointment for litigation funders, after the tribunal last year dismissed a landline overcharging claim against BT.
Dozens of other claims are bogged down by protracted legal arguments while their funders foot mounting bills. The industry pays out about £500mn in annual legal expenses, according to the Association of Litigation Funders.
Funders meanwhile say they have become more wary of backing new lawsuits thanks to restrictions judges have imposed on how they can be rewarded in successful cases.
The industry has been prevented from receiving a percentage cut of damages from antitrust class-action claims since a ruling in 2023 from the Supreme Court.
Neil Purslow, co-founder of litigation funder Therium, known for financing a claim against the Post Office by sub-postmasters who were wrongly accused of fraud, said the restrictions were “creating an uncertain environment”.
“Many funders operate internationally, and it makes funding in the UK less attractive,” he said, adding that some meritorious cases “are not going forward”.
Funders have responded to constraints by changing agreements with fundees so they instead are line for a multiple of the sums they have spent if they claimant wins.
However, several corporate defendants including Sony — which is fighting a lawsuit over alleged excessive pricing in its PlayStation Store — are challenging the legality of such a change. The Court of Appeal will examine the matter later this year.
Funders have been calling for months for ministers to intervene, and the previous Conservative government had promised to change the law to reverse what former justice secretary Alex Chalk KC, described as the “damaging effects” of the Supreme Court ruling.
However, planned legislation failed to make it through the parliamentary “wash up” before the general election, and Labour has been more cautious.
“Until it’s sorted out, it is very unsettling,” Marshall said. “I have not been as enthusiastic about English opportunities.”
The government is waiting for the outcome of a broad review of the self-regulated sector by the Civil Justice Council, chaired by Sir Geoffrey Vos, Master of the Rolls, before committing to reform.
“Third-party litigation funding plays a critical role in ensuring access to justice, but concerns have been raised about the need for greater regulation and safeguards for claimants,” the Ministry of Justice said. “We’ll outline next steps in due course.”
The council in an interim report last year mooted the possibility of capping funders’ financial returns, although it has yet to make any recommendations and is running a consultation until next month.
Ayse Yazir, managing director at litigation funder Bench Walk Advisors, said that the spat between Innsworth and Merricks was “not a good look, especially during the CJC review”.
Whatever the merits of each side in the dispute, she said, it played into the hands of the industry’s opponents.
“We should concentrate on how we’re helping” prospective claimants secure access to justice at a time when publicly funded legal services are under pressure, Yazir said.
Innsworth said Merricks’ agreement with Mastercard “raises significant policy questions” about the UK class action regime and has called on the tribunal to block it.
Merricks’ lawyer, Willkie Farr & Gallagher partner Boris Bronfentrinker, has claimed Innsworth sought to apply inappropriate “pressure” to maximise its own returns.
He said the settlement Merricks secured was the best outcome for consumers and claimed Innsworth, “backed by one the largest and most aggressive US hedge funds”, is motivated by “greed”.
Innsworth maintains that the funding regime for class actions is there to “hold corporate wrongdoers to account, and provide redress for victims.” It added that the changes to fees litigation funders are allowed to charge “has introduced a level of misalignment and conflict that raises the risks and challenges for the funding” of such cases.
The tribunal is due to hear the dispute over two days, starting on Wednesday. Innsworth said the outcome would “inform our consideration of future funding” of such cases.
Seema Kennedy, executive director of Fair Civil Justice, a body funded by the US Chamber of Commerce that campaigns against a “predatory claims culture”, said the Mastercard case shows the UK’s class action regime “is not working for consumers”.
Kennedy also questioned whether the restrictions imposed by the Supreme Court were really the “death knell” for funders that some in the industry had portrayed.
“There still seem to be plenty of funded cases,” Kennedy said.
Authoritative data on the size of the industry and the returns it produces are thin on the ground, although a report from law firm CMS last year showed class action claims with a cumulative total stated value of €145bn had been brought against companies in the UK.
Despite the recent setbacks, funders have plenty of other chances to hit the jackpot — and to secure meaningful redress for the millions of people in the UK on whose behalf the cases are brought.
“We’re still very busy,” Yazir said.
Ongoing class action cases include one against Apple, over claims that the US company has derived “exorbitant” profits from its app store. Apple denies the allegations and is the first Big Tech group facing such a lawsuit to go to trial.
“There’s lots of cases coming through,” Purslow said. “I don’t think you can judge the legitimacy — or effectiveness — of the system based on one or two.”
