Fraser of Allander report highlights ‘significant costs’ of group claims

Professor Mairi Spowage

The Fraser of Allander Institute (FAI) report, The Economic Impact of Mass Litigation in Scotland, commissioned by CMS, seeks to update 2013 estimates of the economic impact of the UK-wide Competitional Appeal Tribunal (CAT), which has operated an opt-out regime for competition law since 2015. This finds that, given the volume of cases, the nature of cases, defendant costs and redress payments, the costs to business of the CAT regime can be estimated to be around £3.2 billion, many orders of magnitude greater than the original estimate of £30.8 million produced by the government before the reform was introduced.

A Scottish share of this economic impact (adjusting for the size of the Scottish economy and generally lower legal costs in Scotland) is estimated to be £233m. These costs are for competition related claims, which account for roughly half of the value of group proceedings across the UK. Therefore, the impact of an opt-out regime (in terms of costs to business) for all group proceedings is likely to be significantly larger.

Separately, the report also identifies a total Scottish litigation-cost estimate of around £2.8bn, derived by applying Scotland’s GVA share to UK-wide tort/litigation cost estimates.

The FAI Report comes as Scotland is considering the most significant reform to its litigation regime in decades, which would enable mass litigation to be brought on an opt-out basis, meaning citizens would be automatically included in group legal proceedings without choosing to be unless they specifically withdrew.

At the moment, to join a mass claim in Scotland, affected individuals have to sign-up (opt-in) to a group. Under the opt-out proposals, currently under consultation by the Scottish Civil Justice Council and already in primary legislation, individuals who meet certain criteria would automatically be part of a group claim. Therefore, if a claim were to be brought against a particular company, anyone in Scotland within the scope of the class would automatically be included in the case as a potential claimant – unless they opted out. This type of mechanism is more normally associated with US class actions.

Countries that have introduced these mechanisms, including Australia, Canada, the Netherlands and Portugal have seen a surge in the number of class actions being filed.

The release of the new FAI Report follows last week’s CMS-hosted conference (co-hosted with CBI Scotland, the David Hume Institute and Fraser of Allander Institute) about opt-out class action reform in Scotland where several business leaders and heads of public sector organisations voiced concerns about the new proposals.

Mairi Spowage, director of the Fraser of Allander Institute, said: “The overall conclusion of our report is that mass litigation can play an important role in providing access to justice and deterring harmful conduct, but that there are potentially major economic costs which result due to the increasing litigation which comes with opt-out regimes. Experience in the CAT demonstrates that relatively small changes in procedural design can have very large effects on litigation behaviour and costs.

“If Scotland were to move towards an opt-out model, how that regime is designed will be central in balancing access to justice objectives with the management of wider economic risk.”

Kenny Henderson, a partner and Class Actions disputes specialist at CMS, said: “These proposals carry major economic consequences presenting a real threat to Scottish businesses and key public sector organisations at a time when both business and the public sector are facing strain.

“Evidence from other jurisdictions show that opt-out class actions don’t benefit consumers. A 2019 study by the US Federal Trade Commission showed that the mean claims rate for US consumer class actions is just 9% of the overall settlements awarded by courts. With so little of the settlement sums going to class members, we need to ask whether these mechanisms meaningfully help consumers?

“The proposed opt-out regime needs to be reconsidered. Reform of existing opt-in class actions measures in Scotland and better resourcing of industry regulators would seem a far better option to strike the balance between promoting our economic and societal interests while also ensuring access to justice.”