CAT ruling in FX litigation: class action should be opt-in, not opt-out

The UK Competition Appeal Tribunal ("CAT") has ruled for the first time that collective proceedings can only proceed on an opt-in basis, rather than the opt-out basis sought by the class applicants. The ruling came in the O'Higgins/Evans¹ case, concerning two competing applications for a Collective Proceedings Order ("CPO") in respect of claims for alleged loss relating to anti-competitive conduct in foreign exchange ("FX") trading.

In a majority judgment, the CAT ordered that both applications for a CPO be stayed and that the applicants are given permission to submit a revised application for certification on an opt-in basis within a three-month period.

The following notable points emerge from the 255-page judgment:

• First, CPO applicants are not guaranteed the ability to bring opt-out proceedings by pointing to the impracticability of opt-in proceedings. A trend towards opt-out was emerging from the recent certification judgments in Gutmann and Le Patourel where the classes were made up of a large number of consumers, because very few individuals would likely seek to opt-in (see our blog post on this here). However, in these proceedings, the CAT held that the class was comprised of mostly sophisticated businesses with potentially large claims on average – for whom opting into a claim would be practicable. The CAT held that the relevant question is whether opt-in proceedings would be practicable from the standpoint of the members of the class, rather than from the standpoint of the applicant.
• Second, this case highlights the difficulty in bringing a claim based on economic theory alone. The CAT was particularly concerned that the causal chain alleged by the applicants was not clearly pleaded in their respective Claim Forms, and instead they were overly reliant upon economic theory. The CAT concluded on this basis that the applications could have been struck out (the CAT ultimately declined to do so). The CAT's view on the weak merits of the claims was also a material factor in its conclusion that opt-in proceedings were more appropriate.
• Third, in light of the CAT's ruling on the opt-in v. opt-out issue, the question of carriage did not arise (i.e. because both applications were formulated on an opt-out basis). However, the CAT stated that it would have certified the Evans applicant over the O'Higgins applicant on an opt-out basis if that question had been relevant. In making this decision, the CAT provided some guidance on the factors relevant to a carriage dispute, in particular, the CAT held that it was not a factor in O'Higgins' favour in this case that O'Higgins was first to file its application.
• Fourth, the judgment was not unanimous. Unusually, one member of the panel, Paul Lomas, delivered a dissenting judgment.

Background

The two applications for a CPO were brought by Michael O'Higgins FX Class Representative Limited ("O'Higgins") and Mr Phillip Evans ("Evans") respectively (each a Proposed Class Representative, ("PCR")). They were both competing to take "carriage" of the proposed class action for claims following-on from the two FX European Commission Decisions in 2019. Those Commission Decisions found that certain banks had participated in two separate cartels in FX trading.

At the certification hearing in July 2021, the Respondent banks' position was that if the CAT was minded to certify either set of proposed proceedings, it should be on an opt-in basis only rather than on an opt-out basis (i.e. potential class members should have to proactively join the claim, rather than being automatically included).

The CAT's majority judgment

1. Strike-out

First, the CAT, of its own initiative, considered striking out the CPO applications.

The CAT confirmed that it does have jurisdiction to consider this issue of its own initiative under Rule 41(1)(b) of the CAT Rules. The CAT said the fact that the Respondents did not make an application to strike-out is telling and weighed heavily on it, but this was an exceptional case which warranted the CAT proactively considering a strike-out. This was because of the serious concerns the CAT had about the PCRs' case as to how the narrow and limited infringements found in the Decisions caused market-wide harm.

The CAT concluded that both applications could be struck out under Rule 41(1)(b) given that the claims were articulated on the basis of economic theory alone, and therefore the facts and matters necessary to support a proper pleading had not been articulated in the PCRs' pleadings as they stood in either application.

However, as emphatic as the CAT was that the claims could be struck out, the CAT was equally emphatic that the CAT should not at this stage strike-out the claims. This was in light of: (1) the novel nature of the case / the fact that the pleading standard in cases of market wide harm is a relatively untested area; and (2) the fact that the PCRs had not had an opportunity to address the CAT's final thinking on the issue of the adequacy of their pleadings.

2. Certification

Given both of the applications survived a strike-out application (albeit marginally), the CAT went on to consider the certification test. The CAT considered that both the authorisation condition (in respect of the applicant) and the eligibility condition (in respect of the claims) were clearly satisfied by both applications. Not all factors under each test pointed in favour of certification – but the factors against certification did not come close to outweighing the factors the other way. The CAT therefore held that both applications could be certified as collective proceedings.

The CAT's approach here reflects in practice the clear statement of the Supreme Court in Merricks that certification does not involve a merits test. Thus, notwithstanding the CAT's findings that the claims were weak, as it chose not to strike them out, it could not use that weakness against them to refuse certification.

3. Opt-in v. Opt-out

In light of both applications passing the certification test, the CAT was required to consider whether certification should be granted on an opt-out basis (as sought by the PCRs) or opt-in basis (as advocated for by the Respondents). The CAT agreed with the Respondents and concluded opt-in was more appropriate.

The CAT identified factors pointing both ways on the opt-in v. opt-out issue. The main factor pointing in favour of opt-out proceedings in the CAT's view was that opt-in proceedings would mean the end of the road for the class (given that both applicants had said, to a lesser or greater extent, they would not pursue an opt-in claim). Therefore, on one view, the choice was between opt-out proceedings and no proceedings at all. The CAT said this weighed heavily in favour of opt-out proceedings from the perspective of access to justice.  However, the CAT held that this was not determinative, because access to justice does not mean that every case that can only be brought on an opt-out basis must be permitted to proceed on that basis.

The CAT held that this factor pointing towards opt-out was substantially outweighed by the two specific factors articulated by the CAT Rules as being especially relevant to the opt-in v. opt-out issue, i.e.: (1) the strength of the claims; and (2) the practicability of opt-in collective proceedings.

Strength of the claims

The CAT found that assessing the strength of the claims in the context of the opt-in v. opt-out question did not call for a conclusion on the merits of the claims, nor did it involve the application of the strike-out threshold (although, as the CAT's conclusion makes clear, the strength of the claims weighs strongly in favour of opt-in for claims which do not meet the strike-out threshold). The CAT said that as a general rule, the weaker the case, the less justification there is for certifying on an opt-out basis.

The CAT noted that in the present case, the claims pleaded in the applications were so weak that they were liable to be struck out. Therefore, whilst the claims were framed largely on the basis of defensibly economic theory, in terms of the pleaded causes of action they were without substance.  The CAT found that this amounted to a powerful reason against certifying on an opt-out basis.

Practicability

The CAT said that "practicable" in this sense needs to be considered from the standpoint of the members of the class, rather than from the standpoint of the PCR (and so, e.g., a failed book-building exercise by one PCR was not determinative of practicability). Instead, the CAT relied on the nature of the proposed class members as, on the whole, sophisticated potential litigants, with on average not insignificant individual claims. The CAT noted that the book-building exercise showed that those putative class members appeared to have made a deliberate choice not to participate in the proceedings; the strong inference being that they did not want to participate in the proceedings (for example because they are unimpressed by the way in which the claims were formulated). The CAT said this also weighed strongly against certifying on an opt-out basis. This is a key point of difference between the majority judgment and the dissent of Mr Lomas.

4. Carriage

In light of the CAT's ruling on the opt-in v. opt-out issue, the question of carriage did not arise, because as presently formulated the application of neither PCR could be certified (i.e. because both applications were formulated on an opt-out basis). Nonetheless, the CAT went on to consider how it would have ruled on carriage.

The CAT noted on that basis it would have been minded to certify Evans over O'Higgins. The CAT held that this was a very marginal decision, and noted that in many respects the applications were very similar. However, the CAT said it considered the claims of Evans to be better thought through, and were a marginally better attempt at capturing an elusive loss than that attempted by O'Higgins, i.e. the CAT's conclusion was driven by the strength of the proposed claims, rather than any of the characteristics of either PCR.

The CAT did not view the fact that O'Higgins was first to file its application as a relevant factor, noting that Evans' alleged "lateness" caused no prejudice and on the contrary there was force in the argument that O'Higgins actually jumped the gun in making its application before the Commission Decisions had been published.

The CAT said that for future cases, where there is a second PCR considering making a competing CPO application, they would be well advised to participate in the first CMC, and if they forego that opportunity without good reason, the applicant that is first in time will have a significant advantage in any carriage dispute.

Dissenting judgment

The CAT's judgment was not unanimous. It was delivered by Sir Marcus Smith (the President of the CAT and Chairman in this case) and Professor Anthony Neuberger. The third panel member, Paul Lomas, delivered a dissenting judgment.

Mr Lomas stated that he would have granted a CPO to Evans on an opt-out basis.  He otherwise agreed (at least tacitly) with the findings of the majority, i.e. on strike-out, certification and carriage.

On the opt-in v. opt-out issue, Mr Lomas was critical of the majority's approach of certifying on an opt-in basis. Mr Lomas said he did not see how the EU law principle of effectiveness and the broader objectives of access to justice are met by choosing a method (opt-in) which will either: (i) not occur at all; or (ii) if it did occur, would mean that the overwhelming number of what is likely to be well in excess of 40,000 proposed class members would not opt in.

Mr Lomas did not dissent from the majority's findings on the strength of the claims, but he cautioned against an overly simple approach that a sufficiently strong case is suitable for opt-out and a weaker one only for opt-in.  He therefore said on balance he considers that the strength of the claims points towards opt-in in this case, but that it is not determinative and is a factor of limited impact.

Rather, Mr Lomas said that he considered the practicability factor to weigh heavily in favour of an opt-out CPO. He said practicability has two elements: (i) would a claim happen at all; and (ii) if it did, would it be practicable to bring the claim to the attention of the remaining class members to give them a fair opportunity to consider whether they should opt-in. He said that the evidence from the PCRs on this issue made it clear that it was very unlikely that an opt-in CPO would proceed and very unlikely that many of the class members would opt-in.  He therefore said that opt-out proceedings would be more appropriate.

Mr Lomas stated that if his reasoning was followed, it would have been necessary to determine the carriage issue. In this respect, he confirmed that he agreed with the majority judgment of the CAT without expanding on their reasoning.

Next steps

In light of its majority judgment, the CAT ordered that both applications be stayed, and that the applicants are given permission to submit a revised application for certification on an opt-in basis within three months of the date of the CAT's judgment. The CAT has indicated that such an application would prima facie expected to be successful if it is made. If the PCRs do not bring opt-in claims then the litigation will come to an end (subject to any appeals).

For more information or any queries, please contact Stephen Wisking, Joe Williams or Joe Moorcroft-Moran (contact details below), or your usual Herbert Smith Freehills contact.

1. Case 1329/7/7/19 Michael O’Higgins FX Class Representative Limited v Barclays Bank PLC and Others; and Case 1336/7/7/19 Mr Phillip Evans v Barclays Bank PLC and Others. HSF represents MUFG Bank, Ltd. and Mitsubishi UFJ Financial Group, Inc. (together, “MUFG”), proposed defendants in Case 1336/7/7/19. The content of this post is based solely on material in the public domain and does not reflect the position of MUFG.