Navigating collective actions in England and Wales: how settlements can favour defendants

There has been approval of collective settlements in three cases in the last year (including in Walter Merricks v Mastercard). Various settlement structures are available to defendants in collective actions, but there are a number of issues for them to consider. In particular, what are the potential benefits to them of settlements in collective actions; how can settlements be structured to save them money while protecting the interests of the represented class of beneficiaries? And what are the incentives for claimants and funders to settle?

Why should defendants consider settling collective actions?

Certainty and predictability – As in most litigation, settlements provide defendants with a controlled and predictable outcome; the outcomes at trial can be uncertain, with significant risk exposure particularly in competition law claims involving complex expert economic evidence. A well-structured settlement not only provides for a certain outcome but in collective claims can result in the defendant actually paying significantly less than the headline settlement sum.

Flexibility – Settlements allow for more flexible and creative solutions that can address the specific needs and interests of both parties. Defendants can also negotiate the terms of compensation and other settlement conditions to better align with their financial and operational capabilities.

Efficiency – It is not uncommon for complex cases to take in excess of five years to reach trial and to generate large costs for both claimants and defendants. When taking into account potential appeals, litigation may not conclude for seven or eight years. Settlements are a convenient mechanism by which to exit litigation in the near term, allowing defendants to resolve the matter and move forward with business operations and core activities.

Structuring a settlement in a collective action

Broadly speaking, settlement agreements in collective actions are structured so that the settlement proceeds are allocated to several different "pots" for the purposes of distribution. These usually include:

• a sum to reflect the damages to be distributed among the class (which can itself be split into tranches);
• a sum contributing towards costs and disbursements incurred in the litigation, along with additional amounts due to the funder; and
• a sum in respect of the costs of enacting the "distribution plan" which is the mechanism by which the damages payment is shared among the class.

However, any settlement in opt-out collective proceedings must be approved by the Competition Appeal Tribunal (CAT), which must be satisfied that the settlement, and the proposed plan for distribution to the members of the class, is "just and reasonable". Contrary to arguments by the funder in Merricks, the CAT has confirmed that the focus of the "just and reasonable" test is on the interests of the class members as it is their interests which the CAT is protecting when deciding whether to approve or reject a proposed settlement.

Nevertheless, the flexibility of settlements can enable parties, subject to receiving CAT approval, to tailor settlement agreements to their specific needs without unreasonably prejudicing the interests of the class members. There are some notable features that have emerged in recent agreements.

Control

Unlike with a court's judgment, where a defendant has no ability to influence any aspect of a decision to award damages or costs, when drafting a settlement agreement the settling defendant may be able to ensure that its provisions meet the needs specific to its business, provided that the interests of the class members are also protected. For example, it may be reasonable for payment timelines to accommodate quarterly earnings reports or end of financial year constraints.

Collective settlements may offer an additional level of control; defendants can influence the criteria that class members must satisfy in order to receive a portion of the settlement sum. It may be principled and reasonable to impose restrictions on those who can claim compensation, thereby reducing the amount that will be paid out to that which is necessary for fair compensation. The proposals for distribution of the settlement proceeds will be subject to the approval of the CAT (and must therefore be 'just and reasonable') but recent decisions indicate that it can be just and reasonable to impose restrictions on those who can claim (while also benefitting the settling defendant). Some examples are discussed below.

Reversion of funds back to defendants

Since proceedings were issued in 2020 in the maritime car carriers collective litigation, the Class Representative has agreed settlements with three of the five defendant groups.

The Class Representative’s 2023 settlement with CSAV (one of the defendant groups) is of particular note as it includes a mechanism for the reversion back to CSAV of any damages that remain undistributed after the case has concluded against all defendants, up to the amount of damages paid by CSAV (£1.12 million). This has the effect that CSAV may receive back all of the monies it has paid out by way of compensation to the class; the favourable terms are perhaps explained by the fact that it was a very small player in the context of the wider case and the Class Representative may have been happy to save the costs of continuing to litigate against CSAV for comparatively little value.

The settlements reached in November 2024 with WWL/EUKOR and K Line contain more complex provisions, but still achieve the result that the defendants’ final liability may be considerably less than the headline settlement figure. In K Line, this is achieved by way of a reversion mechanism, so that K Line may be reimbursed up to £1.75 million of the £7 million in damages it has agreed to pay, once all claims by class members have been satisfied.  In the case of WWL/EUKOR, the headline sum of £15.25 million in damages may finally be as low as £8.75 million; the settlement provides for a guaranteed amount of £8.75 million with the possibility of a further £6.5 million available, but only to the extent there is shortfall in monies available to pay all class members who come forward after the end of the entire case.

These settlement show the effectiveness of reverter provisions and tranched payments to limit final exposure, based on the assumption that only a minority of class members will ever claim entitlement to receive damages (an assumption that featured starkly in the Merricks case discussed below).

Eligibility and mechanisms to limit exposure

While the settlements in the maritime car carriers case have not dealt with the details of distribution, one of the Trains cases has shown how this is another area where defendants can benefit from structured settlement. In the settlement entered into by Justin Gutmann and Stagecoach South Western Trains Limited in spring 2024, a mechanism was agreed by which Stagecoach would only pay out in respect of claims that were actually made. Coupled with stringent eligibility requirements, this structure may prove very effective at limiting its final exposure.

How this operated in practice is that three separate funding pots were created, each requiring a different level of evidence in order for a potential class member to claim damages, as illustrated below. The pay out to a class member from each pot reflected the level of evidence required to make a claim. In what might be considered as the opposite side of the coin to the mechanism agreed in McLaren for reversion of funds, Stagecoach would only pay out what was validly claimed during the distribution process.

Pot 1 - £19m

• Full proof of journey required to receive actual difference between price paid and boundary fare.
• No limit to the number of claims that can be made by a class member.
• If Pot 1 is oversubscribed, each claim is rateably reduced.

Pot 2 - £4m

• Only partial proof of journey is required to receive £5 per claim.
• A maximum of 20 claims per class member.
• Any residue will transfer to Pot 3.

Pot 3 - £2m

• No evidence is required to receive £5 per claim, only a self-certification.
• A maximum of 6 claims per class member.
• Any residue will transfer to Pot 2.

Costs pressure on claimants

As in "non-group" litigation, the making of well-crafted settlement offer in a collective action can exert real costs pressure on the claimants to settle the dispute. However, in a collective action, the dynamics are more complicated.

There will always be a funder and even if the action is successful, the defendants will not have to pay the funder's return and/or any after-the-event costs insurance premium; further, the extent to which these amounts can be recovered by the funder from the damages awarded at trial will be a matter for the CAT. This means that the class representative must consider carefully whether the outcome at trial is likely to result in more money for the represented class (after payment of the funder). Meanwhile the funder will be concerned about the risk of not being permitted to recover its return from the awarded damages. There are therefore significant incentives for all concerned to reach a settlement.

Osborne Clarke comment

Collective action settlements can provide defendants with a controlled and predictable resolution to litigation, allowing companies to focus on their core business activities and exit proceedings quickly and efficiently. Achieving an early settlement can never be guaranteed but, to maximise your chances, you need a thoughtful and strategic analysis of the interests of all those involved in the litigation.

The authors have been involved in the successful settlements of numerous competition claims, including both individual and collective actions. Should you require any advice on collective action settlements, or competition claims more generally, please contact one of Osborne Clarke's experts.