Merricks v Mastercard: Low funder payout risks future UK class action
Litigation funders take on great risk in class action cases. The CAT’s intervention on Merricks v Mastercard could ultimately come at the cost of consumers, writes Craig Lonie
When the Competition Appeal Tribunal (CAT) recently approved the settlement in the long-running Merricks v Mastercard litigation, attention understandably focused on its scale – a claim for 46m consumers once valued at up to £14bn, eventually settled for £200m.
But tucked away within the judgement is a subtler, and potentially more destabilising, development: the Tribunal’s decision to revise the financial terms agreed between the class representative and the litigation funder.
In doing so, the CAT crossed a line that should concern anyone interested in the future of collective redress in the UK. It did not simply scrutinise the legality of the funding arrangement – it effectively rewrote it, by capping the payout to the litigation funder, Innsworth Advisors. That sets a troubling precedent for litigation funders and risks chilling the very investment that underpins access to justice in complex group claims.
How the CAT intervened in Merricks v Mastercard
The core of the issue lies in the CAT’s determination of how the settlement should be distributed, which departed from the agreement between class representative Walter Merricks and Innsworth. As is standard in funded collective actions, Innsworth financed the claim in exchange for a return based on a multiple of its investment if the case succeeded.
This was a commercial contract entered into by sophisticated parties, fully informed of the risks. Both sides had accepted a ‘fair bet’ – high upside for Innsworth if the case succeeded, and total loss if it failed. Similarly divergent ‘win big or lose everything’ returns are common in other high-risk markets, such as pharmaceuticals or technology.
And yet, in Merricks, the Tribunal appears to want it both ways: collective actions must be well-funded, but funders’ rewards must not be too generous. That balancing act may satisfy short-term notions of fairness but risks long-term damage to the viability of the regime.
Yet the CAT determined that the agreed return was excessive. It imposed a new cap on what Innsworth could recover – not because the arrangement was unlawful or exploitative, but because the funder’s share was deemed disproportionately large compared to the damages awarded to class members, given the “poor outcome” and “low settlement-to-value ratio” (less than two per cent of the original claim).
This seems to go beyond the court’s proper role in safeguarding claimants’ interests. It marks a shift from reviewing funding terms for legal compliance to substituting the Tribunal’s own view of what constitutes a “reasonable” return – after the fact.
Here, the CAT imposed a maximum payment to Innsworth of 1.5x the costs incurred (including amounts paid to lawyers), with limited reasoning. Considering the significant risk that this and similar cases could fail – resulting in a total wipeout of the funder’s investment – this figure seems low. The intervention introduces uncertainty into what should be predictable commercial arrangements and may have undermined the previously agreed ‘fair bet’. It will certainly prompt a re-evaluation of the prospects for similar cases in future.
Litigation funders take on great risk, so they deserve reward
Litigation funders operate in a high-risk environment. They provide non-recourse capital to enable claims that would otherwise never see the light of day, especially in collective actions where costs are substantial, and outcomes are uncertain. The commercial terms reflect this risk – and in the UK, as elsewhere, those returns are already under increasing regulatory scrutiny. Perhaps ‘hindsight bias’ led the CAT to underappreciate the risks Innsworth took on at the outset.
But funders can only continue to invest if there is a degree of legal certainty. If courts are willing to interfere with funding agreements after years of litigation, it undermines confidence in the enforceability of those contracts. This is particularly damaging in collective proceedings, which rely almost entirely on private funding due to the scale and length of these claims.
The timing of Merricks v Mastercard is also unfortunate. The UK’s collective actions regime – still in its infancy compared to the US or Australia – has only recently gained traction. A growing number of claims have been certified under the Competition Act, offering consumers and small businesses a path to redress for anti-competitive conduct. The CAT has repeatedly emphasised the importance of third-party funding in these cases. Without it, there is no access to justice.
And yet, in Merricks, the Tribunal appears to want it both ways: collective actions must be well-funded, but funders’ rewards must not be too generous. That balancing act may satisfy short-term notions of fairness but risks long-term damage to the viability of the regime.
Consumers will pay in the end
The CAT’s reasoning is, no doubt, rooted in a desire to maximise compensation to class members. But prioritising distribution over viability carries danger. If the funding market dries up – or investors view the UK as too unpredictable – future claims won’t get off the ground at all.
If the UK is serious about encouraging private enforcement of competition law and securing redress for consumers, it needs a funding environment that is both transparent and commercially viable. That requires courts and tribunals to respect – within lawful bounds – the autonomy of parties to agree on risk and reward.
Judicial paternalism, however well-intentioned, comes at a cost. And in collective proceedings, that cost may ultimately be borne by the very consumers the regime is designed to protect.
Craig Lonie is a specialist partner at Flint Global, advising on finance matters in regulation, competition policy and litigation. He has provided expert witness evidence on competition and regulatory matters to the UK High Court, the CAT and the CMA