You lose, you pay (some) – the CAT’s cost ruling in Walter Hugh Merricks

(by Sebastian Peyer) The burden of costs in civil litigation is considered of great importance to the incentives to recover damages in competition law. In particular, the ‘loser-pays’ rule that dominates European legal systems is thought to create significantly greater risks for prospective collective actions, in contrast to the American rule where each party is normally responsible for paying its own costs.[1]  The UK Competition Appeal Tribunal’s (‘CAT’) recent ruling on cost in Walter Hugh Merricks v MasterCard is therefore significant in thwarting an attempt to deviate from the loser-pays rule that is prevalent in English civil litigation and striking a balance between applicants’ and respondents’ interests. Earlier this year, the CAT rejected an application for an opt-out collective proceedings order (‘CPO’) under section 47B of the Competition Act 1998 (see my comment here). The question that the CAT still had to answer was who would bear the cost of that unsuccessful CPO application and to what extent are the actual costs incurred recoverable. In its decision, the CAT stressed that the loser-pays rule applies to CPO applications, but reiterated that the parties’ expenses must be proportionate in order to be recoverable. This means that parties cannot inflate their expenses to discourage would-be claimants.

The question of recovery of costs is not a trivial one given the enormous expenses that were accumulated for the CPO application only. MasterCard aggregated total costs of £1.99 million whereas the CPO applicant spent ca. £1.75 million in making the CPO application. To put this in perspective, it may be useful to remind the reader that at this stage the parties had not dealt with the actual substance of the claim, i.e. liability and damages, and no hearing on the substantive issues had taken place.

Rules 98 and 104 of the Competition Appeal Tribunal Rules (‘CAT Rules’) govern the allocation of costs. Rule 98(1) provides, amongst other things, that costs may not be awarded against a person who is not the class representative. Walter Hugh Merrick, the CPO applicant, argued that his application failed and that he did not become a class representative. Consequently, costs should not be awarded against him in accordance with Rule 98(1). On the other hand, Rule 104(2) allows the CAT to exercise discretion when awarding costs at any stage of the proceedings and in respect of the whole or part of the proceedings. The applicant tried to make a case that Rule 98(1) limits the discretion the CAT would normally have under Rule 104(2), in other words, that the CAT does not have jurisdiction to award costs in these circumstances.

The CAT rejected those arguments and held that, as a matter of policy, the unsuccessful CPO applicant is not protected from liability for the other party’s costs. The CAT referred to the position of the Government in the 2013 consultation on private actions where it stated that the loser-pays rule should be kept in collective action proceedings.[2]  The CAT clarified that it would apply the principles laid out in Rule 104(4) to determine if liability for costs is incurred. The starting point is that the successful party should be awarded its costs. Alterations to the loser-pays rules, like for example, in Canada or in the Civil Procedure Rules, are based on specific statutes and policy considerations which that CAT did not find transferable to opt-out collective competition proceedings.

In the final part of its decision, the Tribunal looked at the actual amount and proportionality of the parties’ costs. It reduced the recoverable costs by 20% to reflect the partial success of the applicant (the CAT had authorised the applicant as suitable class representative) and it also found that some of the respondent’s special counsel fees were not proportionate and, thus, not recoverable. Overall, the CAT held that MasterCard’s costs were “wholly unreasonable and disproportionate […] as regards both counsel’s and solicitors’ fees”. The Tribunal reiterated the point made by other courts before that parties are free to spend on litigation but that these expenses will be looked through the lens of proportionality if they are to be recovered from the losing party. Consequently, the CAT reduced MasterCard’s counsel fee from £559,197.50 to £250,000 and hinted that the solicitors’ fees of £1.2 million were disproportionate.

So the CAT’s cost rules make clear that the loser-pays principle applies in CPO applications but that a considerable part of the respondent’s costs will not be recoverable if they lack proportionality. It seems that the Tribunal has tried to balance the ‘chilling effect’ of an adverse cost order (as argued by the CPO applicant) and the cost risks faced by respondents. Had the applicant’s arguments prevailed, the CAT would have effectively introduced some type of one-way cost shifting in favour of the CPO applicant. While the idea seems attractive in order to incentivise group claims and opt-out CPO’s, it would have also provided incentives to bring claims with dubious merit. It is said that the loser-pays rule discourages the bringing of cases that do not have merits, i.e. it reduces the occurrence of frivolous claims. However, it also discourages legal actions where the claimant faces uncertainty as to the chance of winning and proving his case (something that is more likely in CPO applications).

 

[1] Section 4(a) of the Clayton Act entitles winning claimants to recover reasonable attorney cost (‘one-way fee shifting’), 15 U.S.C. § 15.

[2] The Government also recognised that the CAT may depart from this rule in exceptional circumstances but that the existing CAT rules are sufficient to cover such situations.

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