Lloyd v Google marks a seminal moment for representative actions. The ramifications for mass data breach claims have been widely discussed by practitioners. In this article, we address the consequences for funders.
In recent years, funders have invested considerable time and money into representative actions for data breach claims. This stems from the financial difficulties in bringing “opt-in” group actions for data breaches. Given the damages likely to be recovered for each individual claimant is in the £100s rather than £1000s, thousands (if not millions) of claimants would have to be identified and signed up to make group actions worthwhile for funders. This poses serious practical difficulties for funders, lawyers and ATE insurers – whilst costs may be recoverable inter-partes, the damages in such group actions (or individual claims) would be insufficient to pay an adequate funder’s return, solicitor’s success fee or ATE premiums.
The “opt-out” nature of representative actions was therefore attractive to funders, who could obtain substantial returns on their investment without incurring prohibitively expensive book-build costs. Such actions adopt a similar model to “opt-out” competition claims in the Competition Appeals Tribunal (the “CAT”), which have a specific statutory basis (s.47C(6) of the Competition Act 1988) permitting unclaimed damages to be used to pay funding costs, and they have proved a fertile area for class actions.
As data breach claims cannot generally be brought in the CAT under this statutory procedure, “opt-out” representative actions are an attempt to fill the gap. They effectively mirror the process in the CAT but without the clear structure expressly provided for by statute and in the CAT rules.
Although this may appear an attractive route for mass access to justice, such representative actions pose particular legal issues for funders. Many but not all of these issues were canvassed in the Supreme Court, although it appears that a number of points were not developed, quite possibly because of a deliberate decision by Google (for whatever reasons) not to do so.
As we discuss below, the outcome is that whilst Lloyd v Google erects substantial obstacles for data breach claims, it highlights and, in some instances, ameliorates other concerns that might have deterred the use of representative actions for mass opt-out class actions.
Funding representative actions generally – the privity issue
First, a major concern for funders has always been whether they will be entitled to be paid any share of the class members’ damages if a representative action succeeds. None of the class members (excluding the representative) will be privy to the funding agreement. They will not themselves have agreed to pay any part of the damages to the funder. Unlike “opt-out” claims in the CAT, there is no statutory provision permitting payment of the class representative’s “costs and expenses” out of any damages award.
Novel issues therefore arise concerning the legal basis on which funders could be paid from the class members’ damages. Clearly, absent a reliable basis for establishing such an entitlement on the funder’s part, the funding is unlikely to be viable.
These issues were not directly grappled with by the Supreme Court (or the courts below). Google’s (ultimately successful) strategy appears instead to have been to: (i) persuade the Supreme Court that this action was really for the benefit of the funders and lawyers; and (ii) raise doubts about how funders would be paid, without directly requiring the court to resolve those issues.
This led the Supreme Court merely to remark in paragraph 83 (emphasis added):
“Although in Independiente Morritt V-C was untroubled by such problems, questions of considerable difficulty would arise if in the present case the claimant was awarded damages in a representative capacity with regard to how such damages should be distributed, including whether there would be any legal basis for paying part of the damages to the litigation funders without the consent of each individual entitled to them: see Mulheron R, “Creating and Distributing Common Funds under the English Representative Rule” (2021) King’s Law Journal 1-33. Google has not relied on such difficulties as a reason for disallowing a representative action, however, and as these matters were only touched on in argument, I will say no more about them.”
As the Supreme Court declined to determine this issue, the question of whether a funder in such a claim is able to establish a right to a share of the damages, whether distributed or not, without the consent of the individual claimants remains unanswered and is a material concern as to the viability of representative actions. Funders should factor this in when considering whether to fund such actions.
The risk of being left, at the end of a case, with no recourse to the damages in order to be paid the funders’ reward could be mitigated in such a case by seeking a preliminary hearing where the funder’s right to recovery under its funding agreement is resolved (e.g. by the court ruling that it represented parties will in due course only be entitled to enforce any positive judgment if they agree to pay a reasonable share of the funding costs out of their compensation). However, whether the court will be willing to give pre-approval to such arrangements remains in doubt, and itself leads to difficult questions of procedure. For example, would a defendant be entitled to attend such a hearing, or would it be held in camera?; would potential representees or potentially interested parties like the Consumers Association have a right to attend or be heard?; would there be scope for carriage disputes, in which rival candidates, with different funding packages, competed for appointment as representative (the first such dispute has just been heard in the CAT in the proposed FX Cartel collective proceedings).
Similar issues arise for lawyers and ATE insures who need to be paid via the damages recovered in the proceedings, whether as a success fee, DBA payment or contingent premium. Only the class representative would be party to the lawyer’s retainer or the ATE policy and would thereby agree (without the class members’ authority) to use the class members’ damages to pay the lawyers and the ATE insurer. Whether this is legally effective remains a concern for lawyers and insurers.
Funders should also be aware that it is likely that security for costs will need to be provided for representative actions. The Supreme Court held at paragraph 79 that the class members would not generally be liable for costs in circumstances where they had not authorised the proceedings – the position in opt-out claims – but the funder would. This is entirely unsurprising. Provision of security for adverse costs by funders, in one form or another, is generally a recognised requirement of funding in representative opt-out claims and no doubt something funders would already have taken into account, but this part of the judgment emphasises that if funded opt-out representative claims outside the CAT regime are viable, the requirement for security is likely to apply.
Funding representative actions generally – the “same interest” issue
The second main concern was whether the court would allow the claims to proceed as a representative action. This often turned on whether the class members satisfied the requirement in CPR r.19.6 that they shared the “same interest”.
Helpfully, the Supreme Court endorsed a liberal approach to the meaning of “same interest”:
“The phrase “the same interest”, as it is used in the representative rule, needs to be interpreted purposively in light of the overriding objective of the civil procedure rules and the rationale for the representative procedure. The premise for a representative action is that claims are capable of being brought by (or against) a number of people which raise a common issue (or issues): hence the potential and motivation for a judgment which binds them all. The purpose of requiring the representative to have “the same interest” in the claim as the persons represented is to ensure that the representative can be relied on to conduct the litigation in a way which will effectively promote and protect the interests of all the members of the represented class.” (at paragraph 71)
Moreover, the fact that there are “divergent” as opposed to “inconsistent” interests is not fatal. Indeed, third party funding is expressly referred to as allaying any concerns arising from divergent interests (see paragraph 72):
“As Professor Adrian Zuckerman has observed in his valuable book on civil procedure, however, a distinction needs to be drawn between cases where there are conflicting interests between class members and cases where there are merely divergent interests, in that an issue arises or may well arise in relation to the claims of (or against) some class members but not others. So long as advancing the case of class members affected by the issue would not prejudice the position of others, there is no reason in principle why all should not be represented by the same person: see Zuckerman on Civil Procedure: Principles of Practice, 4th ed (2021), para 13.49. As Professor Zuckerman also points out, concerns which may once have existed about whether the representative party could be relied on to pursue vigorously lines of argument not directly applicable to their individual case are misplaced in the modern context, where the reality is that proceedings brought to seek collective redress are not normally conducted and controlled by the nominated representative, but rather are typically driven and funded by lawyers or commercial litigation funders with the representative party merely acting as a figurehead. In these circumstances, there is no reason why a representative party cannot properly represent the interests of all members of the class, provided there is no true conflict of interest between them.”
This conclusion, together with the Supreme Court’s guidance on other aspects of CPR r.19.6, will encourage the use of representative actions generally, but leaves the funding difficulties associated with such claims on an opt-out basis to be resolved.
Funding data breach claims – the “damages” issue
The third main concern for funders was whether the “lowest common denominator” approach to damages in data breach claims, based on a loss of data per se rather than on proof of damage, was legitimate under CPR r.19.6.
We now know that it is not – the Supreme Court emphatically rejected this methodology for calculating damages.
However, much of the Supreme Court’s analysis rests on: (i) the way in which the claim had been framed and pursued in the Lloyd case; (ii) the specific facts of the case, namely that the underlying wrong led to varying degrees of loss suffered by the class members; and (iii) as the “lowest common denominator” in this case was reduced to £nil as a result of the court’s findings in respect of (i) and (ii).
It is possible to conceive of data breach claims that may not suffer from these flaws. That said, such claims are likely to be rare, as the Supreme Court adopted a “scorched earth” policy. It erected a series of hurdles which are likely to be insurmountable to most data breach representative actions.
Accordingly, the options for most data breach claims now appear limited to:
- Group actions – where individual claimants, on a collective basis, both commit to a funding regime and are able to advance individual claims for damages, where necessary; or
- Representative actions for declarations of breach, followed by an “opt-in” process to assess damages. Effectively the representative action would then be converted into a group action after breach had been resolved. Whilst this may be more attractive to funders, because it should be easier to build a book once liability is established, it still gives rise to problems in generating a return for the funder. Not only would mass claimants need to be signed up once liability is established, but the claimants would have to agree to pay retrospectively for the funding deployed at the liability stage out of their damages.
Funders will need to consider whether such claims are economic to pursue.
Lloyd v Google is undoubtedly problematic for representative actions for data breaches. Whether such claims could nevertheless be pursued remains to be seen. However, the Supreme Court has removed other obstacles to pursuing representative actions generally. If funders identify claims where the damages do not suffer from the same problems as data breach claims, and are able to resolve or are comfortable about taking the risk on recovering damages from the class members, the potential for successfully funding such claims remains.
Disclaimer: This article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
© Benjamin Williams KC, Roger Mallalieu KC and George McDonald 4 New Square, 17 November 2021