Collective legal actions spread in Europe
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
As soon as authorities around the world forced millions of small businesses to shut down amid the Covid-19 pandemic, an avalanche of litigation was likely to follow. Company bosses — from hair salons and dentists to builders — all turned to their insurers to cover the impact on their operations, and help them stay afloat.
But would the insurers pay out? And would the potential number of lawsuits needed to determine liability become overwhelming?
In the UK, the Financial Conduct Authority, the financial regulator, and eight insurers, quickly took steps to bring a landmark court case in which they asked judges to determine whether payouts on business interruption policies were due.
The case and its eventual outcome have been closely watched around the world, wherever insurers and small companies are locked in stand-offs over the same issue.
Mrs Justice Sara Cockerill, the judge in charge of London’s commercial court, recently told a conference, the 2021 Dispute Resolution Forum, that the lawsuit was “effectively an international lead case” and a “shining example” of procedural effectiveness. At least one other jurisdiction was staying its own cases pending the outcome of the FCA case, she said.
The lawsuit was the first case brought under the Financial Markets Test Case Scheme, which allows urgent judicial interpretations of key questions affecting financial markets. The case went all the way to the UK’s Supreme Court, which ruled in January 2021 that, in most cases, insurers must pay up.
“I am sure it has saved a lot of litigation,” says Paul Lewis, a London-based partner at law firm Herbert Smith Freehills, who advised the FCA in the case. “Many small enterprises affected by the pandemic might be the ones who could not afford to spend tens of thousands of pounds on litigation,” he points out.
For law firms, the work involved a compressed timetable and weekend working. Lewis and his team were instructed by the FCA in May and the lawsuit was issued in June. The FCA estimated that 700 types of policy held by 370,000 policyholders across 60 insurers could be affected by the case.
The High Court considered the case in July 2020 with an appeal by the losing insurance companies heard by the Supreme Court in November and a final ruling handed down in January 2021. The UK’s highest court found that most types of insurance policies held by the small firms should pay compensation. So far, around £1bn has been paid out by insurers.
Lewis says the speed of the lawsuit and the legal questions were novel. The lawyers also had to select 21 sample insurance policy wordings and the FCA had to argue that previous case law on the topic had been wrongly decided.
Business interruption insurance would normally kick in where there was damage to property such as a flood, Lewis explains. However, “in this case, it was all about assessing business interruption cover absent property damage,” he notes. “I’ve been doing this for nearly 30 years and it was the first time I had cause to look at these extensions to cover. And, of course, there was no real precedent for mass business shutdowns.” That the case was heard at all is significant, because test cases so rarely take place in the UK, he adds.
Equally remarkably, he says: “I never met our counsel team — we all worked remotely and did our case management hearings and trials remotely, which was completely different.”
The FCA case shows that UK government regulators are prepared to intervene with a test case if it will help determine an issue affecting thousands of businesses that otherwise could not afford access to justice. The cost of bringing litigation is prohibitive for small companies, especially if they can only win relatively low levels of compensation.
But this is starting to change thanks to greater use of collective legal actions that help consumers and small businesses bring court cases. While individual claims might be small, their numbers are sizeable when combined.
Cases brought under the 2015 Consumer Rights Act representing multiple claimants are increasingly being financed by the litigation funding market, when funders back lawsuits in return for a slice of any compensation.
Mastercard faces fee claims from 46m Britons
Recent UK legislation, the Consumer Rights Act 2015, allows large groups of consumers to sue in class-action lawsuits for unlawful anti-competitive behaviour. In a mass claim, consumers are automatically enrolled, unless they opt out, which is an important shift from previous legislation that required consumers to opt in.
The first big test of the legislation is heading to the English courts in the form of a class action — Britain’s biggest — against Mastercard, brought on behalf of more than 46m British consumers by Walter Merricks, a former financial ombudsman. Law firm Hausfeld intervened on behalf of the non-profit Consumers’ Association in the lawsuit, which recently had the go-ahead to proceed to trial.
The case against Mastercard stems from a 2007 European Commission ruling that cross-border charges on the use of Mastercard debit and credit cards — known as interchange fees — were in breach of competition law.
Merricks claims that Mastercard infringed EU competition law by imposing such fees for the use of debit and credit cards on retailers. The costs of the fees were passed on to consumers who paid higher prices for their purchases. Mastercard is contesting the claim.
If Merricks wins, each consumer is likely to receive no more than a few hundred pounds. However, without collective legal actions, those cardholders would have no hope at all of any redress.
Law firms such as Hausfeld — which has offices in the US, Germany, Netherlands, UK, France and Sweden — are in the vanguard of those bringing such cases and finding new ways for clients to access justice.
Hausfeld is currently engaged in truck cartel litigation, which is progressing through the courts in Germany, the Netherlands and the UK. The firm’s teams have brought claims stemming from a dispute totalling €5bn and covering 500,000 trucks and 10,000 affected small companies. The actions, brought as individual and group claims, are supported by the transport associations of eight European countries.
The European Commission determined in July 2016 that five leading European truckmakers had co-ordinated the pricing of trucks from 1997 to 2011 and colluded on timing the introduction of emission technologies.
The Hausfeld lawsuit means a business that bought trucks affected by the cartel can claim compensation for any loss suffered from resulting higher prices, plus interest. The lawsuits were filed after a commission settlement decision against Daimler, Volvo, MAN, Iveco and DAF in which it found the companies co-ordinated the pricing of trucks between 1997 and 2011, leading to a €3.5bn fine.
The aim is to use and rely on the EC’s findings to bring this follow-on civil lawsuit for compensation. “One of the key arguments for bringing cases like this is that it helps facilitate access to justice,” says Lucy Rigby, partner at Hausfeld. “Claims are often expensive, time consuming and costly to bring and many of the truck firms are small businesses or family firms, which might not be able to contemplate litigation in many cases.”
Case studies in best practice
Four categories: disputes, digital law, enabling resilient business, rescue, restructuring and recovery.
Researched, compiled and ranked by RSGi. ‘Winner’ indicates that the organisation won an FT Innovative Lawyers 2021 award
Digitisation is being integrated into the practice of law
WINNER: Allen & Overy
The firm’s Markets Innovation Group developed an integrated service to help financial institutions move away from using the London Interbank Offered Rate as the interest rate benchmark for mortgages, loans and contracts. This requires institutions to review and amend thousands of contracts. The service combines technology, legal advice and project management to help institutions manage this task. It draws together lawyers from across jurisdictions and practice areas including lending, trade finance and derivatives, as well as consultants, tech developers and project managers. With a team of almost 200 professionals involved in the Libor transition service, the firm is able to provide solutions to several of the top financial institutions globally.
With the help of US ediscovery company Reveal, the firm developed an artificial intelligence tool for identifying cartel behaviour in big businesses. The service, Aiscension, can identify cartel-related activity within a business’s data and communications in real time. The firm spent four years training the AI tool. In one case, in a set of 40,000 documents, Aiscension identified proof of a cartel within 10 minutes.
The firm developed an online platform using Thomson Reuters HighQ software to manage information and processes in the due diligence phase of a corporate transaction. All due diligence across the firm is now managed on this central platform. It has been used on 50 deals since December 2020 and is now mandated for use on all corporate transactions.
The firm’s technology company, Kennedys IQ, has continued to develop its Portal Manager, which helps insurance claims managers process and organise claims through a dashboard. The firm has built in AI and other tech to mine data sources so that claims handlers can quickly see the implications of claims, spot fraud, and assess settlement costs. One client saved an estimated £1m in fees.
The firm was asked by German law firm Gleiss Lutz to manage the Spanish aspects of a Europe-wide class action dispute. Because Spain’s legal system does not allow for class actions, Cuatrecasas needed to find a way to manage hundreds of individual claims. It used automation, legal project management approaches, a dashboard to oversee all of the work, and a knowledge management tool to cut repetition of work. The firm estimates a time saving of 30 per cent per case, with an overall 20 per cent cost saving for clients.
In the past 12 months, the firm’s risk advisory services team, which helps clients manage risk exposure across a variety of areas, has launched several digital tools to help businesses manage intellectual property, cyber security and other risks. Alteria, a brand management and enforcement platform, gives clients a dashboard showing IP renewals and immediate opportunities for cost savings. The platform also allows clients to deal with infringements faster. In its first six months, the tool generated more than £450,000 worth of instructions.
Shoosmiths’ Cia is an AI contract review tool that focuses on the negotiation of commercial contracts. Clients send contracts they want reviewing to the firm via an email address, which — once processed by the AI tool — returns them with suggested amendments. The AI is supported by ThoughtRiver, a contract review software company, with the firm providing managed services so clients need not install software. The service saves up to five hours review time per contract and up to 80 per cent on external legal fees.
Simmons & Simmons
The firm launched Rocketeer, an AI-powered tool that reviews IP matters and predicts their outcome in the EU IP Office, where trademark conflicts are decided. Drawing on a history of 10,000 decisions, the tool can predict the outcome of a conflict between two trademarks with 92 per cent accuracy and saves a quarter of the time usually spent on reviewing cases.
Womble Bond Dickinson
To cope with data subject access requests — written requests made by individuals to see the information an organisation holds about them — the firm has repurposed e-discovery techniques from commercial litigation. Its WBD Clarity platform uses Everlaw’s ediscovery software to streamline document review and redaction. In one project, the software cut the documents needing manual review from 12,250 to under 1,600, with an estimated time saving of 220 hours. Commended: Amy Prime.
Within 12 days of the Schrems II judgment — a European Court of Justice ruling that left European companies in limbo over the privacy of EU citizens in data transfers to the US — the firm launched a risk assessment tool called Transfer. It helps clients assess whether data transfers outside the EU are compliant with the judgment. In order to proceed with a data transfer, companies must justify their decision. The Transfer tool automatically generates a report when a data transfer request is made, which meets the criteria for justification.
The firm has developed a data transfer impact assessment tool, to assess whether data transfers are compliant with Schrems II, which rendered the agreement previously used to transfer data between the EU and US invalid. The tool allows clients to assess the risk of a transfer and provides steps to mitigate that risk.
SSW Pragmatic Solutions
With the help of IBM’s Global Technology Services division, the Polish law firm launched Aquila, an AI tool for reviewing documents, such as leases, at volume. The partnership with IBM gives the firm flexibility to deploy the software either on the cloud or an on-site server — important for highly regulated sectors in which there are particular sensitivities around handling data.
Researched, compiled and ranked by RSGi. ‘Winner’ indicates the organisation won an FT Innovative Lawyers 2021 award
Innovative litigators cut through the complexity to find what’s really at stake
WINNER: Herbert Smith Freehills
To avoid years of litigation over pandemic business interruption insurance claims, the UK’s Financial Conduct Authority brought a test case. It was the first using the Financial Markets Test Case Scheme, which is designed to secure expedited judicial interpretations on common disputes arising out of Covid. The FCA was advised by HSF, whose lawyers negotiated agreements with eight insurers to participate and argued the case in the High Court and Supreme Court during 2020. The final ruling came in January 2021 and nearly £1bn had been paid out to businesses by the end of August, according to the FCA. The firm also developed an automated tool for the FCA website to help businesses assess what forms of business interruption caused by Covid they might be able to claim for.
On behalf of a major corporation, the firm successfully argued that a royal decree law approved by the Spanish government in 2016 was unconstitutional. The law introduced a minimum tax prepayment for large companies that was much higher than the actual tax they were required to pay at the end of the financial year, with the difference refunded afterwards. So far, hundreds of millions of euros have been paid in compensation to companies for prepayments made in 2016 and 2017 when tax rates were higher.
The firm successfully prosecuted a Spain-based online developer who wrote software that could be used to create bots that fake engagement levels on Instagram. The lawyers deployed arguments of infringed intellectual property and breach of fair competition in the Spanish commercial court. This is the first such case that Instagram owner Facebook has prosecuted through courts rather than managing within its user terms of service. The firm devised a solution that would work in the Spanish courts while allowing Facebook to pursue its strategy of suing for breach of contract. The case sent a message to Facebook users that its terms of service can be legally enforced.
Litigators are representing consumer rights organisations in a number of collective action cases, which are made more complex where there is no regulatory decision underpinning the claim. In this case, the firm is using group litigation orders and “opt out” claims where cases are brought on behalf of consumers and the compensation is then advertised afterwards. It has had the first of these cases formally certified, concerning Mastercard interchange fees that are charged to retailers for card use. This means it can now go before a tribunal.
The firm secured a UK Supreme Court ruling in favour of J Sainsbury, the supermarket retailer, against Visa and Mastercard. The ruling showed the credit card companies violated competition law by charging retailers excessive fees that are passed on to consumers, each time a customer uses one of their cards, without retailers having adequate opportunity to negotiate the fees. The case tested several legal questions, such as the extent to which the UK Supreme Court is bound by the Court of Justice of the European Union’s decisions. The judgment confirms the 2018 Court of Appeal ruling, where Morgan Lewis lawyers also led the case, and will enable retailers to claim damages as well as opening the door to collective action claims.
Twenty years after a judgment in Singapore in which military supplier Strategic Technologies won damages from the firm’s client, the Taiwanese Ministry of National Defence, the judgment was recognised in the Cayman Islands and then registered in the English courts. The lawyers overturned the English court’s “judgment on a judgment” in this case, arguing against the use of the 1920 Administration of Justice Act. The precedent prevents “judgment laundering”, where judgments are made enforceable by the English court simply by sending them through a Commonwealth jurisdiction.
Freshfields Bruckhaus Deringer
The firm renegotiated US-based payments company Wex’s acquisition of two travel payments companies, eNett and Optal, amid the disruption of the pandemic. The lawyers argued for the material adverse effect to these companies given that they were in the travel industry as well as the payments industry. The notion of material adverse effect is common in US-drafted contracts but not commonly argued in English courts. The targets were eventually acquired for $575m, roughly a third of the original amount.
Researched, compiled and ranked by RSGi. ‘Winner’ indicates the organisation won an FT Innovative Lawyers 2021 award
Enabling resilient business
Structuring deals that foster sustainable growth
WINNER: Slaughter and May
In June, UK insurance group RSA was bought by a consortium comprising Canadian insurance group Intact and Denmark’s Tryg. Slaughter and May created a framework baked into the court process that would simultaneously secure the takeover and agree to splitting the company between the two new owners, with one portion remaining shared. The firm negotiated with regulators in several jurisdictions on antitrust concerns, designed a structure that protected the company’s pensions benefit scheme, and secured certain fund provisions despite myriad funding sources.
In order to help the UK’s largest workplace pensions provider, Nest, digitise its pensions scheme, the firm advised the trust on procuring technology company Atos to run its IT services. The law firm acted as a professional services consultancy, providing legal advice on the contract but also considering cultural values as part of the procurement process — such as a commitment to diversity and inclusion. Commercial professionals prepared the business case and onboarding strategy for HM Treasury.
Paul, Weiss, Rifkind, Wharton & Garrison
The firm advised private equity firm KKR on the carve-out and spin-off of Telecom Italia’s last mile assets — the part of the network that delivers telecoms services to retail end users. These assets created a new company, FiberCop, into which KKR invested €1.8bn. As well as Telecom Italia, Italy’s largest telecommunications company, the lawyers had to negotiate with Fastweb, a Swiss company that had an existing contract with Telecom Italia to provide fibre connections.
Ropes & Gray
The firm advised Liberty Global, a telecommunications company that owns shares in Virgin Media, O2 and others, on the joint venture combination of O2 and Virgin Media in 2020. Lawyers had to design bespoke financing structures to allow Liberty Global to keep the operating businesses separate, with the ability to combine them in the future.
Lawyers assisted El Corte Inglés, one of Europe’s largest department store groups, in creating a business-to-business platform to streamline payment conditions for businesses and suppliers. The firm led on the design and execution of the platform’s structure, which allows for advanced payment options to be agreed to at the push of a button, with terms and conditions built in. The platform allows suppliers to have invoices paid early for an agreed discounted rate, enabling El Corte Inglés to maximise the profitability of its excess cash.
Kirkland & Ellis
The firm advised a bidding consortium led by private equity firms Advent International, Cinven and the RAG Foundation, an investment vehicle, on acquiring the elevator division of Thyssenkrupp, the German steel and materials group. Despite a highly competitive bidding process, Cinven and Advent were successful. This was in large part because of drafting by the lawyers that allowed Thyssenkrupp to invest and retain a stake in the elevator business and meet other commercial objectives. The deal was among Europe’s biggest buyouts in 2020 and gave Thyssenkrupp a €17.2bn cash injection.
Pedersoli Studio Legale
The firm represented Intesa Sanpaolo, an Italian banking group, in its hostile takeover of UBI Banca, creating a combined banking group with more than €1.1tn in customer financial assets. The firm advised on several aspects of the deal including selling some branches to BPER Banca, another Italian bank, to address antitrust issues. Hostile takeovers are uncommon in Italy and the deal establishes Intesa Sanpaolo as one of the biggest banks in the country and the eurozone.
Researched, compiled and ranked by RSGi. ‘Winner’ indicates the organisation won an FT Innovative Lawyers 2021 award
Rescue, restructuring and recovery
Lawyers found creative mechanisms to unlock capital for clients in crisis
WINNER: Sidley Austin
Travelex, the world’s largest currency exchange, went through a restructuring at the height of the pandemic in August 2020, a few months after it suffered a cyber security breach. Because of this timing and legislative and policy measures being introduced, the law firm developed a structure that split the group into segments. Some parts moved to the new company immediately, while others went over in time or were subject to options. This technique gave Travelex the flexibility to rebuild the business.
The firm provided legal support to the state-owned British Business Bank and to the UK government on the creation of the Future Fund — a government scheme run through the bank that provided convertible loans to early-stage businesses affected by the pandemic. Lawyers helped set up the scheme, launching it within six weeks. The fund helped almost 1,200 companies.
Latham & Watkins
The firm advised New Look, a UK fashion retailer, on its second financial and operational restructuring last year. It obtained an injunction when one landlord instigated a winding-up petition for unpaid rent during the pandemic, arguing that the terms of the Corporate Insolvency and Governance Bill 2020 should be applied early. The court rejected the argument by landlords that a company voluntary arrangement (CVA) between a company and its creditors could not treat groups of creditors differently. This reaffirmed the flexibility of CVAs for restructuring unsecured liabilities.
The firm assisted Camera Nazionale della Moda Italiana, a non-profit that promotes the Italian fashion industry, in its efforts to make Milan Fashion Week a digital event. Lawyers helped to procure tech services and advised on the creation of a digital platform to broadcast shows and sell products. They negotiated deals with media outlets globally for streaming rights and made arrangements to host ecommerce on the platform.
The firm helped R3, the trade group that represents restructuring and insolvency professionals in the UK, to design forms that can be used for arranging a CVA. This makes restructuring easier and cheaper for smaller businesses, which are most likely to be affected by the pandemic.
Gibson, Dunn & Crutcher
The firm advised EuropaCorp, a French film company, and 10 of its subsidiaries, including EuropaCorp Films USA, on its restructuring. It is the first time that a US entity domiciled and operating in the US was able to open safeguard proceedings in France, and the first time that US courts have recognised and enforced French safeguard proceedings on US territory.