The Decision In Walter Hugh Merricks Cbe V. Mastercard Inc. & Ors

Published: 17/8/2017

On 21 July 2017, the Competition Act Tribunal (the “Tribunal”) has handed down judgment on an application brought under section 47B of the Competition Act 1998 (“CA”) for a collective proceedings order (“CPO”) by Walter Merricks CBE as the proposed class representative of a potential class of 46.2 million individuals who over a period of 16 years purchased goods and/or services from businesses in the UK that accepted MasterCard and who passed on interchange fees to consumers.

The proposed class action was brought on a follow-on basis following the 2007 decision of the EU Commission that the setting of interchange fees charged between banks was anti-competitive and a breach of Article 101 of the Treaty on the Functioning of the European Union.   

The Tribunal dismissed the application for the CPO stating that the claims brought against MasterCard were not suitable for collective proceedings on the basis that even if losses had been suffered by members of the class, there was no appropriate methodology to ensure that an individual class member would receive a distribution of an amount that would properly reflect the loss suffered.  

This is a significant decision that shows the factors that the CAT will consider in relation to collective proceedings and provides an indication of the type of case that it considers may be suitable to be managed within the framework.

Notwithstanding the Tribunal’s decision to dismiss the application for a CPO, it considered MasterCard’s submissions relating to the funding arrangements between the Applicant and its third party funder. Although the comments are obiter dicta, they provide guidance as to how funding agreements might be drafted in a manner consistent with statutory provisions.

We understand that it has been reported today that Mr Merricks has lodged an application for permission to appeal the decision of the CAT.

Suitability for Collective Proceedings

Section 47B of the CA states that:

“(5) The Tribunal may make a collective proceedings order only –

(a) if it considers that the person who brought the proceedings is a    person who, if the order were made, the Tribunal could authorise to act as the representative of those proceedings…

(b) in respect of claims which are eligible for inclusion in collective proceedings.

Rule 79(1) states that the Tribunal must be satisfied that the claims

  1. are brought on behalf of an identifiable class of persons;
  2. raise common issues; and
  3. are suitable to be brought in collective proceedings.

The factors relevant in determining the suitability condition in (iii) are set out in Rule 79(2) and include, importantly for this judgment, whether the claims are suitable for an aggregate award of damages.

(i) Identifiable class of persons

The class in the application is defined as, “individuals who between 22 May 1992 and 21 June 2008 purchased goods and / or services from businesses selling in the UK that accepted MasterCard cards, at a time at which those individuals were both (1) resident in the UK for a continuous period of at least three months, and (2) aged 16 years or over.” [1]

It is anticipated that this class would comprise 46.2 million individuals and that the estimated damages claimed, including compound interest, would be in the region of £14 billion. The sheer magnitude of the class and the figure at stake sets this proposed group litigation apart from any others before the Tribunal.

The size of the class is also a result of the fact that the proceedings were brought on an opt-out basis which although the Tribunal acknowledged in its judgment, “can bring great benefits, if successful, for the class members which those individuals … could never achieve … they can be very expensive and burdensome for defendants.” [2]

(ii) Common Issues

Expert evidence is relied upon in applications of this kind to explain the manner in which the common issues identified in the claim form are capable of being determined on a collective basis. In this respect, the CAT referred to a decision of the Supreme Court of Canada in a case involving Microsoft which states, “the methodology must offer a realistic prospect of establishing loss on a class-wide basis so that, if the overcharge is eventually established at the trial of the common issues, there is a means by which to demonstrate that that it is common to the class….There must be some evidence of the availability of the data to which the methodology is to be applied.” [3] 

The Tribunal noted in order to determine the extent to which a claim raises common issues, it is necessary to consider the issues that would arise in a claim brought by an individual against MasterCard. In its judgment, the Tribunal identified six potential common issues and found that two of these gave rise to some difficulty in establishing commonality, thus working against the suitability of the action for collective proceedings. The two issues identified by the Tribunal were:

  1. The extent to which each merchant at which a claimant purchased goods and / or services passed on the overcharges to the individual and the impact on the prices of the goods and / or services; and
  2. The amount spent by the individual at each merchant.  

In respect of (i), the CAT identified that there were many different alternative hypotheses which would impact the loss sustained by individuals which would vary depending on the different types of goods and / or services and also the different types of retail outlet and the level of costs they passed on to consumers (if at all).

In respect of (ii), The Tribunal held that the individual amounts spent by class members was "manifestly not a common issue". [4]

In view of the fact that these issues were not common in any meaningful sense, the Tribunal rejected the Applicant’s argument that “the individual claims are largely identical".[5] However, the Tribunal was keen to point out in the judgment that this in itself would not necessarily militate against granting a CPO. It referred to the wording of section 47(6) of the CA which states that the claims should nonetheless be “suitable to be brought in collective proceedings.” [6] The Tribunal also acknowledged that this approach is in contrast with the position in the US which requires that “the common issues should predominate over the individual issues.” [7]

The Tribunal noted that the Applicant tried to overcome the issue of the level of pass-through by asserting that the Tribunal could arrive at an aggregate award of damages for distribution to class members. This in itself would require (i) a viable methodology to calculate a sum of the aggregate of individual claims for damages; and (ii) a means for estimating individual loss which can be used for the basis of a distribution. 

(iii) Suitable to be brought in collective proceedings
(a) Aggregate damages

The experts suggested that difficulties in assessing the level of pass-through to consumers in different sectors or markets could be addressed by estimating the higher price paid by consumers as a result of the overcharge and the proportion which card expenditure in those sectors or the markets bore to the total. They proposed that this could be calculated on the basis of information from three possible sources set out below.

Ultimately, the Tribunal considered each of the three potential sources of information on which an aggregated award of damages may be based and rejected each of them for the following reasons:

  • Other litigation

The Tribunal considered that firstly, the periods of time relevant to other litigation concerning MasterCard were much shorter and/or covered different periods. During the sixteen year period with which this case is concerned, circumstances would have changed significantly and it would therefore be meaningless to collect figures from early on in the time period and apply them to the end of the period.  Secondly, other pending litigation is at an early stage and unlikely to have produced any evidence although, in any event, the tribunal noted that these other actions cover a later time period.

  • Disclosure from third parties

The Tribunal noted that although it would be theoretically possible to obtain disclosure from third parties, in view of the number of markets, the time period and wide range of data required to generate a useful estimate, this would be a “very burdensome and hugely expensive exercise.” [8] Moreover, they anticipated that many application would be resisted by third parties and even if granted, the Applicant would be required to pay the costs of parties’ compliance. They concluded that obtaining extensive third party disclosure would be “wholly impractical.”[9]

  • Published data

The Tribunal acknowledged that although there is published data on the passing on of costs of credit and debit card usage, the report is difficult to interpret and noted that no real attempt had been made to consider what data might be available for the relevant sectors over the period.

The Tribunal acknowledged that the proposed methodology of calculating global loss through a weighted average pass thorough is sound nonetheless they considered that applying that method across different retail sectors over a sixteen year period would be a “hugely complex exercise requiring access to a wide range of data.” [10] They said that although they would not expect that exercise to be undertaken for the purpose of a CPO, they would expect “a proper effort” [11] to be made to determine whether it is even practicable to perform such a calculation having regard to the data available.

The Tribunal concluded that there was insufficient data available to apply the methodology on a sufficiently sound basis and that the claims were not therefore suitable for an aggregate award of damages.

(b) Distribution

Even if the loss could be calculated in the aggregate method, the Tribunal still considered that there would be difficulties in determining the level of loss sustained by individuals in the class.

The Tribunal said that this would be straightforward in circumstances where an individual brought a claim against MasterCard as one could assess the level of disposable income of that individual and how it might have been spent amongst various merchants. Although this method would still be somewhat inaccurate, it would, the Tribunal felt, reflect individuals’ respective circumstances. The Tribunal therefore rejected the Applicant’s argument that the level of distribution would be calculated the same regardless of whether a claim was brought on an individual or collective basis. 

Ultimately, the Tribunal referred to the underlying principle and the familiar adage that damages are intended to restore the person who suffered loss to the position they would have been had they not suffered the loss. The Tribunal acknowledged the vagaries of estimation and referred to the judgment of Lord Shaw in Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson in which he said that, “the restoration by way of compensation is therefore accomplished to a large extent by the exercise of a sound imagination and the practice of the broad axe…” 

However, the Tribunal considered that even when adopting the “broad axe” approach, there would be no plausible way of reaching an estimate of the loss suffered by an individual claimant from the aggregate loss calculated under the method proposed by the Applicant which would be in line with the underlying principle of restorative justice. In fact, it appears from the judgment that the experts had not even been asked to consider how the aggregate damages might be distributed amongst the class. 

The Tribunal made clear that this issue could not be dismissed as a “mere question of distribution” to be determined only after the finding of an aggregate award. Indeed, they identified that it was because of the strategy to calculate loss on a “top down basis” rather than on the basis of a common issue concerning loss that the difficulty arose. One problem the Tribunal identified is that, if a large number of people opted out of the proceedings, there would be no proper way of reducing the pot of damages and the result would simply be that individuals received more by way of compensation which would fail to reflect their actual loss.

The Tribunal also did not accept the Applicant’s argument that given the difficulty with which individual members of the class could claims on an individual basis, in circumstances where the CPO was not granted it would deprive people who suffered loss of fair compensation. However, the Tribunal said that this is the position in most cases of widespread consumer loss and it does not mean that a CPO should be granted.

It is clear from the judgment that the Tribunal expects applicants to prepare a sensible and coherent proposal for distribution of the aggregate damages which should be based on reliable evidence and in accordance with the principle of restorative justice.  

Funding Arrangements

As a separate matter, the CAT considered the funding arrangements in place where the matter to proceed. The objection was raised ads an opposition to the Applicant acting as class representative but was in effect a challenge to the funding arrangements he had entered into.

MasterCard objected to the funding arrangements in place on three grounds:

  1. The Funding Agreement would not enable the Applicant to continue to fund the litigation or pay adverse costs orders since the Funding Agreement could be terminated by the funder;
  2. Even if it could not be terminated in this manner, the limit of £10 million for funding a liability of MasterCard’s irrecoverable costs was inadequate; and
  3. The terms of the Funding Agreement gave rise to a conflict of interest on the part of the Applicant.

In considering these issues, the Tribunal noted, that it is unfortunate given that the Funding Agreement, which was a “US style contract” was “convoluted and verbose” and given that it was drafted for the benefit of a large class of consumers “drafted in such an impenetrable manner.”

     (i) Termination

Under the terms of the Funding Agreement, the funder was to be paid, in circumstances where the claim was successful the greater of of (i) £135,000,000; or (ii) 30% of the undistributed proceeds up to £1 billion plus 20% of the undistributed proceeds in excess of £1 billion. This was defined in the Funding Agreement as the “Total Investment Return”.

Section 47C (5) of the CA states that any damages that are not claimed within a specified period must be paid to charity. However, section 47C(6) contains an exception to this rule in circumstances where the CAT orders that the unclaimed damages should be paid to the representative in respect of all or part of the costs or expenses incurred by the representative in connection with the proceedings.

The CAT held that that the Total Investment Return was a “cost or expense” of the proceedings however, the terms of the Funding Agreement meant that it was not a “cost incurred”. They held that the relevant terms of the Funding Agreement either imposed a best endeavours obligation on the Applicant to obtain orders from the CAT that the Total Investment Return be paid to the funder; or that there is no obligation on the Applicant to make such a payment unless the CAT made an order for payment of the unclaimed damages to the Applicant.

The CAT concluded that the terms of the Funding Agreement as drafted would not permit the CAT to order the payment of the Total Investment Return under s47C (6) and therefore the provisions of section 47C (5) would apply and the unclaimed damages would be donated to charity.

However, the Applicant indicated that he would amend the Funding Agreement so as to provide for an obligation to pay the Total Investment Return, subject to recovering it from the unclaimed damages pursuant to an order of the CAT.

     (ii) Insufficient cover for liability of costs

MasterCard argued that the £10 million set aside under the Funding Agreement to satisfy any adverse costs awards was insufficient. It referred to the Applicant’s costs budget which estimated its total costs of the proceedings would be c. £19.5 million was evidence that £10 million would be inadequate to cover MasterCard’s costs.

However, the Tribunal did not accept that there was a useful comparison to be drawn between the costs of the Applicant and those of MasterCard. It noted that MasterCard had already been party to similar actions concerning interchange fees and thus already had undertaken investigations and collected substantial evidence. By contrast, the Applicant would be “starting from scratch” and could therefore expect that its costs would be higher. They also noted that in circumstances where MasterCard had failed to prepare an estimate of its own costs, the Tribunal had no basis to find that £10 million would be inadequate. They therefore rejected MasterCard’s argument although noted that MasterCard could apply to vary a CPO if it subsequently transpired that £10 million would be inadequate.  

     (iii) Conflict of Interest

MasterCard argued that the Funding Agreement gave rise to a conflict of interest as the provision of the payment of the funder’s fee out of the unclaimed damages might conflict with the best interests of the class in relation to distributing funds.

The Tribunal did not accept this argument and noted that the Funding Agreement clearly stated that the Applicant had to act independently and have sole control of the litigation in the best interests of the class. However, they did note the absence of a provision requiring the Applicant to use his best endeavours to distribute any damages recovered and considered that one might expect to see this in such a detailed agreement.

They also noted that the Tribunal had to be satisfied that the recipient would make all reasonable efforts to achieve the fullest distribution to the class and that it could require undertakings in this respect. It could also decline to approve a settlement if it considered that the terms allowed the funder to recover excessive amounts from the unclaimed proceeds.

 

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