Competition Litigation | New ruling from the Supreme Court: Opt-out class actions cannot be funded by priority reduction in awarded compensation

In a recent decision, the Norwegian Supreme Court takes the view that class representatives in opt-out class actions cannot seek litigation funding on the condition that the funder receives a share of the total awarded amount. The decision is likely to have significant consequences for the ability to secure funding for opt-out class actions in Norway.

The much-awaited decision was rendered in the class action filed by the Alarm Customer Association (Nw.: Alarmkundeforeningen) against home alarm system providers Verisure and Sector Alarm for compensation for alleged competition law infringement. The Supreme Court dismissed the Alarm Customer Association as class representative because the association, as a condition for acting as class representative, required that the awarded amount would be split with a third-party funder which the association had reached an agreement with. The decision from the Supreme Court is expected to influence the market for third-party funded opt-out class actions in Norway.

The class action for compensation stems from an earlier decision by the Norwegian Competition Authority against the two alarm providers for infringement of competition rules on illegal market sharing from 2011 until 2017. The providers were issued fines of respectively MNOK 766 and MNOK 467.3 for the infringement.

Following the decision from the Norwegian Competition Authority, the Alarm Customer Association was founded, with the sole purpose of pursuing claims for compensation on behalf of the more than 400 000 customers of the alarm providers in the period of the infringement. The customers claimed that the illegal market sharing had led to them being overcharged for the products and services provided.

The Alarm Customer Association filed an opt-out class action against the alarm providers. The conditions for filing a class action are regulated in Chapter 35 of the Norwegian Dispute Act. For opt-out class actions, the prerequisite is that each claim concerns values or interests so limited that it cannot be expected to be pursued otherwise, and that it does not require individual consideration. According to the Dispute Act Section 35-2 letter d), there must be grounds for appointing a class representative to act on behalf of the class in accordance with Section 35-9. The class representative must be willing to act as class representative and must also be able to bear the total potential liability for costs to the opposing party, cf. the Dispute Act Section 35-9. The class action must be approved by the court to proceed, and in this assessment, the court must decide whether the class representative can be appointed.

The Alarm Customer Association had entered into an agreement for third-party funding. If the class action was unsuccessful, the funder would bear both the association’s and the alarm providers’ legal costs. If successful, the funder would receive a compensation equal to three times the amount the funder had invested in the class action. The funder’s share of the potential award would be covered with first priority, meaning that the compensation potentially awarded to each member of the class action would be reduced to cover the compensation to the funder.

The Alarm Customer Association would only accept to act as class representative if the court approved the arrangement the association had agreed on with the funder. Further, the class representative would not be able to bear the total potential liability for costs to the opposing party if the arrangement with the funder was not approved and could accordingly not be considered willing to act as class representative. The key question before the Supreme Court was thus whether the association could be appointed as class representative on these terms.

As a starting point, the Supreme Court found that according to the wording of the Dispute Act, a member of class actions may only be held liable for the class representative’s costs in opt-in class actions, and not in opt-out class actions. This applies even if the liability is indirect, as in this case, by way of a reduction in awarded compensation as opposed to a liability to make actual payments.

In this assessment, the Supreme Court also considered the significance of the EEA-principle of effectiveness. The principle requires that procedural rules governing actions for safeguarding rights which individuals derive from EU/EEA law must not make it practically impossible or excessively difficult to exercise these rights. As the Dispute Act contains several other means to enforce their claims deriving from EU/EEA law, the Supreme Court found that the principle of effectiveness did not influence the interpretation. However, the alternative to allowing funding by an indirect responsibility for costs on the members of opt-out class actions, where the individual claims cannot be expected to be pursued on an individual basis, is that the claims will not be pursued at all. On this basis, the Supreme Court stated that there may be reasons in favour of altering the rules for externally financed opt-out class actions to allow priority reduction in awarded compensation but that this must be for the legislator to decide.

The Supreme Court’s decision was that the arrangement could not be approved, and, consequently, that the class representative was not willing, and could not be appointed. Without a willing representative, the class action could not proceed and was dismissed.

The decision from the Supreme Court is undoubtably a setback for third-party funded opt-out class actions in Norway. While the decision cannot be understood as a rejection of third-party funded opt-out class actions, it is difficult to see that funding such lawsuits will have any appeal for professional funders when the funder cannot claim costs from the class actions members, neither directly nor indirectly. In the field of competition law, private enforcement, including class actions, play an important part in deterring infringements. In the UK, where third-party financing for-profit may be accepted, such class actions have played an increasingly larger and more important role in recent years. We have seen opt-out class actions being brought in Norway before, such as the 2020 case where the Norwegian Consumer Council acted as class representative in a class action on behalf of 180 000 fund customers against DNB (a Norwegian Bank). However, the class action was not funded by a professional third-party, and the members were not held liable for the group representative’s costs. Limiting the probable class representatives in opt-out class actions to non-profit actors and publicly financed institutions, who will themselves fund the lawsuit, will in turn limit possible opt-out class actions.

The alternative for third-party funded class actions is opt-in class actions, where the members can be held liable for the group representative’s costs. Following the Supreme Court’s decision and given that opt-out class actions are in fact quite rarely allowed at all in the European countries, the Norwegian market for third-party funded class actions may not be comparably limited after all.

The Supreme Court’s nod to the legislator to consider altering the regulation of possible third-party financing of opt-out class actions is also worth noticing and may potentially bring forth new rules that will allow for indirect liability for the class representative’s costs. Further, we expect more cases about alternative arrangements for third-party funding of class actions to be heard going forward.

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