Has the CAT’s MasterCard decision killed off opt-out class actions by indirect purchasers?

(by Sebastian Peyer) On 21 July the Competition Appeal Tribunal (‘CAT’) rejected an application for an opt-out collective proceedings order (‘CPO’) in Walter Hugh Merricks v Mastercard Inc, thereby  blocking the largest opt-out competition claim brought in the UK to date and one of the first large indirect purchaser actions. The applicant brought the claim on behalf of 46.2 million people asking Mastercard for around £14 billion in compensation. Despite the negative outcome for the applicant (and millions of consumers), the CAT’s decision has clarified a number of important points for future CPO applications. But the Tribunal’s decision may have also inadvertently raised the bar for indirect purchaser claims.

The MasterCard multilateral interchange fee

The applicant sought compensation following the European Commission’s decision against MasterCard from 19 December 2007. The Commission found that Mastercard had set an anticompetitive multilateral interchange fee (‘MIF’) for the use of Mastercard payment cards in the European Economic Area (‘EEA’). The card- issuing bank, i.e. the cardholder’s bank issuing Mastercard payment cards, charges a default MIF set by Mastercard to the acquiring bank (the merchant’s bank accepting the card payment). The acquiring bank, in turn, charges a fee to the merchant that includes the MIF. The applicant asserted that the MIF charged in the UK was illegal too, comparable to the EEA MIF, and that the banks passed on the resulting overcharge to merchants, which ultimately passed those through to their customers as part of the price for goods and services. The cause of disagreement in the CPO hearing was the methodology for estimating the amount of pass-through. Mr Merrick sought to establish a claim on behalf of those 46 million indirect purchasers who bought affected goods or services from merchants that accepted Mastercard card payments over a period of 16 years.

Opt-out CPO

Section 47B of the Competition Act 1998 (CA), as amended by the Consumer Rights Act 2015, allows parties to apply for a CPO on an opt-out basis. The CAT must a) authorise the person bringing the claims as representative of the group; and b) certify the claims are eligible for inclusion in collective proceedings. Claims are eligible for inclusion if they raise the same, similar or related issues of fact or law (‘common issues’) and are suitable to be brought in collective proceedings.[1] To demonstrate the suitability of a group action, the applicant need to satisfy the Tribunal, among other things, that an award of aggregate damages is appropriate.[2]

Certification of claims denied

The Tribunal denied certification, finding that the claims were not suitable for inclusion in an opt-out group action because the applicant’s suggested methodology to calculate the group’s loss on an aggregate basis would violate the compensation principle (that damages should amount to no more than actual loss and restore the position of the claimant). The proposed method to estimate the group’s loss was also deemed incapable of reasonably determining the individual loss and, consequently, individual pay-outs at the distribution stage. The applicant had suggested to use the volume of affected commerce, the overcharge percentage and pass-through rates to determine the overall loss of the group. However, the fact that the loss for each person differs according to the individual’s level of expenditure, the merchants from whom they purchased (passing-on depends inter alia on market conditions) and the mix of products they purchased would not allow to approximate the damages for the entire group. These difficulties would also hamper a fair distribution of any damages obtained. The CAT stressed that the purpose of a class action is to restore the position of the claimant and that there is ‘no plausible way of reaching even a very rough-and-ready approximation of the loss suffered by each individual claimant’.[3] This is problematic because calculating the loss to indirect purchasers can rarely be undertaken without the use of estimates and proxies. It is also interesting to note that the distribution of damages will be considered at the CPO stage if there is no method to produce a fair distribution of an award although the precise manner of distribution is not normally assessed when dealing with a CPO application.

Authorisation of the class representative

One positive aspect of the CAT’s decision is that it approved both the class representation and third-party funding in the case. MasterCard had argued that the applicant’s funding agreement failed to cover MasterCard’s expected costs due to the limit of £10 million and that it would not allow the applicant to continue to fund the litigation as it could be terminated by the funder. Further, they argued the terms of the funding agreement would  give rise to a conflict of interest. The CAT rejected all three arguments.[4]

Funder’s fees are ‘costs incurred’ under section 47C(6) CA

The Tribunal’s decision in Merricks clarifies that funders’ fees are costs that can be paid out of unclaimed damages. Section 47C(6) CA allows the Tribunal to distribute unclaimed damages or a part thereof to the class representative ‘in respect of all or part of the costs or expenses incurred by the representative in connection with the proceedings’. The Tribunal held that fees associated with funding agreements constitute costs incurred in connection with the proceedings if a) the agreement obliges the class representative to pay the funder’s fee, i.e. it creates liability on the condition that the claim succeeds; and b) the agreement allows for the fee obligation to be reduced should that CAT order a lower amount to be paid to the class representative. The CAT stressed that funding agreements were needed for an effective operation of the collective proceedings regime.

Conclusions

The Tribunal’s decision could prove to be a stumbling block for future CPO applications on behalf of indirect purchasers. The CAT has clearly been sympathetic to the class representative and has embraced external funding arrangements to support group claims. It is also positive to note that the CAT clarified the pleading standard in a CPO application which should not turn into a ‘mini-trial’.[5]

Despite these useful clarifications, the CAT’s narrow interpretation of what constitutes an appropriate methodology to calculate aggregate losses is likely to discourage indirect purchaser claims. The Tribunal overemphasised the compensation function and the ability to estimate individual losses in a class. Group claims exist because individual damages claims for small individual losses are too expensive to bring. Aggregating those losses in a class action is a crude but useful mechanism to overcome the incentive problem. By their nature, class action will not restore every member of the group to their respective pre-infringement position because this would necessitate the calculation of individual losses and, thus, defeat the purpose of an opt-out group action. Furthermore, section 47C(2) CA allows an award of damages without making an assessment of each represented person.

The Tribunal’s decision means future indirect purchaser claims will either need to consist of smaller, more homogenous groups or be dropped altogether. Smaller claimant groups may enable the representative to provide a better estimate of individual losses through aggregate damages models. But I doubt that smaller groups will necessarily be more homogeneous in complex cases such as MasterCard. Even if we defined a group of claimants that bought products from one supermarket chain as opposed to 46 million customers, this group will still have very different shopping patterns (and we ignore varying costs, profit margins and pass-on rates for different products). If group actions on behalf of indirect purchasers are to become a success, the emphasis on the restoration function and, consequently, the ability to estimate individual losses has to be rethought. The potential claimant group in Merricks was exceptionally large and challenging to deal with, but the principles established by the Tribunal are likely to create difficulties for much smaller group claims too.

[1] Section 47B is reflected in rules 78 and 79 of the CAT Rules which also specify some of the factors that determine suitability.

[2] Rule 79(2)(f) CAT Rules.

[3] Walter Hugh Merricks v Mastercard Inc [2017] CAT 16 [83].

[4] The applicant changed the funding agreement during the hearing to address the CAT’s concerns.

[5] The applicant must put forward a) a sustainable methodology which can be applied in practice to calculate aggregate damages reflecting individual claims; and b) a reasonable and practical means for estimating the individual loss which can be used as a basis for distribution

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