The Mastercard judgment – a bumpy start for class actions in the UK?

With a claim size estimated at GBP 14 billion, the Merricks v Mastercard litigation is one of the largest damages claims ever to be heard by the UK courts. The case is also one of the first major tests of the new “collective proceedings” (i.e. class action) regime for competition law cases in the UK. In its judgment handed down on Friday 21 July, the Competition Appeal Tribunal (CAT) refused to certify the class action proceedings – thereby stopping the claim in its tracks, for now at least.

The new UK regime for “collective proceedings”

Class actions are common in some common law jurisdictions including the USA, Canada and Australia, but are novel in the UK. The collective proceedings regime was introduced in 2015, for private law competition (i.e. antitrust) cases only. The regime is policed by the CAT. Similar to representative proceedings in Australia under the Federal Court Act 1976, a representative plaintiff is permitted to bring the case on behalf of a much larger group of class members, provided the claims raise the “same, similar or related issues of fact or law” (UK, s.47B Consumer Rights Act 2015) or “a substantial common issue of law or fact” (Australia, s.33C FCA 1976). 

Consumers who satisfy the group definition will be automatically included under the UK rules, unless they choose to “opt out”. But first, a two stage approval is required from the CAT: (i) the proposed representative must be authorised as suitable, and (ii) the underlying claims must be certified as “eligible for inclusion in collective proceedings”, i.e. that they satisfy the commonality test. The UK regime in this regard places a higher burden on the applicants, since in Australia up front court permission is not required and it typically falls upon defendants to raise such challenges at the interlocutory stage.

In Merricks, the allegations against Mastercard are that over a period of 16 years it overcharged consumers in the UK by charging to businesses a fee known as the “multilateral interchange fee”, which the European Commission found to be anticompetitive back in 2007. Pursuant to the group definition, any UK residents who between May 1992 and June 2008 purchased goods and services from businesses that accepted Mastercard were included in the class – a total estimated at 46.2 million people, or three quarters of the entire UK population. 

In a “follow on damages” case of this nature, where there has already been a regulatory finding of anti-competitive conduct, the key issues to prove are typically causation and loss. Thus to succeed in obtaining class certification, the applicant had to show that within the putative class there was sufficient commonality in terms of how the overcharge had been passed onto consumers, and what losses they had suffered as a result.

The “aggregate award” approach to calculating damages

Faced with such an astonishingly large class, it would obviously be impractical for the plaintiff lawyers to collect receipts from all class members in order to calculate the overall losses (and disclosure from Mastercard would not be due until later in the case).  Consequently, an economist’s approach was taken: calculate the total “aggregate” losses first, based on the total number of retail transactions during the relevant time multiplied by the estimated overcharge; and then work backwards by distributing that pot of funds to class members.

As Mastercard argued, this subverts the traditional approach to calculating damages, which requires identification of each individual’s loss on a compensatory basis (so a “bottom up” rather than “top down” analysis).  It would also lead to the odd result that if say GBP 4 billion worth of claimants decided to opt out, the damages claim would remain the same. The CAT’s response on this issue is very interesting, and needs to be broken down into parts:

• The starting point was that the “aggregate” approach towards damages could be permissible in some circumstances [67-77]. The appropriate test – borrowed from Canadian class action jurisprudence – is that the expert 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 it is common to the class (i.e. that passing on has occurred).  The methodology cannot be purely theoretical or hypothetical, but must be grounded in the facts of the particular case in question” (Pro Sys Consultants Ltd v Microsoft Corp [2013] SCC 57). 
• Put another way, there must be some data to back up the assumptions. In this case, the CAT felt there was insufficient data to justify assumptions “across virtually the entire UK retail sector over a period of 16 years” [76-78]. 
• Next, whilst the exact mechanics of a settlement distribution could and should be deferred until much later in the proceedings, the CAT was concerned by the proposed methodology – in particular because there was very little way of calculating what each individual’s entitlement should be. “The problem in the present case is that there is no plausible way of reaching even a very rough-and-ready approximation of the loss suffered by each claimant from the aggregate loss calculated according to the Applicant’s proposed method. The “broad axe” which the Applicant seeks to deploy is not being used as a means to estimate actual compensatory loss at all” [84].

In short - whilst broad loss estimates may be ok at the class certification stage, the Court has to see some connection to the actual damage individuals have suffered. This is consistent with the approach taken in Australian shareholder class actions: the individual shareholder losses can be and typically are calculated at the outset, by taking the investor’s trading data multiplied by the estimated inflation in the share price – the key difference being that loss data is available up front.

Implications for the future

The Court’s conclusion – that there was insufficient commonality to grant the collective proceedings order – will be seen by many, including the small fraction of the 46.2m UK consumers who actually knew they were involved in this litigation, as a set back for the UK’s nascent class action regime. However, and even leaving aside the possibility of an appeal to the UK Court of Appeal, there may be cause for optimism – at least from the perspective of third party funding.

First, the CAT’s judgment makes it clear that the CPO application in this case could in principle have worked, and indeed may have done so had the expert evidence contained more supporting data.  Lawyers in subsequent cases will now know the Pro Sys test, and will be forewarned of the threshold the CAT requires.  If a case of 46.2m people can get certified, there is certainly hope for cases of smaller size and complexity.

Second, the defendant’s critique of the funding arrangements - provided by Chicago based funder Gerchen Keller (now part of Burford Capital) – were not accepted: [92 to 140].  Commercial funding has a particularly important role to play in competition claims, because the UK government (under apparent pressure from the business lobby) carved out such claims from the DBA Regulations, denying lawyers the ability to fund their clients’ litigation on a contingency fee basis.

Third, the CAT held that in principle, claimants in collective proceedings could recover their costs of funding (including the funder’s commission) from the unsuccessful defendant: [113 to 117].  As we reported last year, the English High Court reached a similar conclusion regarding costs recovery under the UK Arbitration Act (Essar Oilfields v Norscot Rig Management [2016] EWHC 2361).  This means that funded claimants who choose English arbitration, or to pursue Europe wide competition damages claims through the CAT in London, are potentially able to recover their TPF costs – which could turn out to be, even in the era of Brexit, a significant boost to the UK as a disputes forum of choice.

Finally, some perspective from overseas. In Australia, the class action regime is now 25 years old. The resulting jurisprudence, thanks in no small part to the work of funders like IMF Bentham, is highly developed and provides meaningful access to justice for victims of wrongdoing. But, there were many bumps along the way, and in time we suspect the Mastercard judgment will be seen as a bump in the road for the UK regime, but not by any means the end of that road.