The Competition Appeal Tribunal (CAT) last week threw out what would have been the largest opt-out collective action since the procedure was introduced – but at the same time gave a boost to third-party funders by dismissing objections to the funding agreement.
Under it, Burford Capital was set to receive at least £135m in the event of a successful outcome.
The £14bn claim was a follow-on action after Mastercard was found to have infringed EU law by imposing charges (known as ‘interchange’ fees) on the use of MasterCard debit and credit cards. It was claimed that this increased costs for retailers and consumers.
It was brought on behalf of a class of 46m people who used a Mastercard over a 16-year period, with Walter Merricks, a solicitor and one-time senior Law Society official who went on to be Chief Financial Services Ombudsman, as the class representative.
However, on Friday, the CAT ruled that it could not grant a collective proceedings order. It was not satisfied that the claimant’s experts would be able to get the evidence to show that the illegal fees were then passed on to consumers in the form of higher prices.
Further, it said there was “no plausible way of reaching even a very rough-and-ready approximation of the loss suffered by each individual claimant”.
It said the way Mr Merricks sought to calculate the aggregate loss did not estimate actual compensatory loss at all.
“The governing principle of damages for breach of competition law is restoration of the claimants to the position they would have been in but for the breach. The restoration will often be imprecise and may have to be based on broad estimates.
“But this application for over 46 million claims to be pursued by collective proceedings would not result in damages being paid to those claimants in accordance with that governing principle at all.”
While acknowledging the argument that it would be impractical for members in the class to bring individual claims, the tribunal said: “That is effectively the position in most cases of widespread consumer loss resulting from competition law infringements.
“It does not mean that an application to bring collective proceedings in such a case must always be granted. Every case has to be considered on its own terms, having regard to the statutory requirements.”
As it had been fully argued, the CAT went on to consider the question of whether Mr Merricks would have been a suitable class representative.
Mastercard opposed him because of various terms of the funding agreement with Gerchen Keller Capital, the US funder since bought by Burford Capital.
Describing it as a “US-style contract”, the CAT criticised it for being “convoluted and verbose”, and “impenetrable” for the individual members of the class who had a right to read it.
In return for a funding commitment of up to £35m, the funder was to receive the greater of £135m or 30% of the undistributed proceeds of the action up to £1bn, plus 20% of the undistributed proceeds in excess of £1bn.
The CAT ruled that the funder’s fee did form part of the “costs or expenses” of the claimant for the purposes of section 47C(6) of the Competition Act 1998.
It also allowed an amendment to the funding agreement to ensure that it was “incurred” by the claimant – the original version of the agreement did not impose an obligation on Mr Merricks to pay the fee. It was changed to create a conditional liability to pay the fee subject to recovering it out of the unclaimed damages pursuant to an order of the tribunal.
The CAT said: “Section 47C(6) CA is not an inter partes costs rule and it is not dependent on a strict application of the indemnity principle as that applies to recovery of costs.
“As we have already observed, this is a specific rule designed for a new and discrete procedural regime. The question is whether the statutory reference to a cost or expense being ‘incurred’ is broad enough to cover a conditional liability. In our judgment, it is.”
It added: “The government in promoting the legislation therefore clearly envisaged that many collective actions would be dependent on third party funding, and it is self-evident that this could not be achieved unless the class representative incurred a conditional liability for the funder’s costs, which could be discharged through recovery out of the unclaimed damages.”
The CAT also ruled that Mastercard had not provided any evidence for its assertion that the agreement’s £10m cap on adverse costs would be inadequate.
Mr Merricks, who was represented by US firm Quinn Emmanuel, with Freshfields on the other side, said he was “surprised and disappointed” by the decision.
“The new collective action regime was introduced by the Consumer Rights Act to overcome the difficulty for consumers seeking to recover losses from competition law infringements. I am concerned that this new regime, designed to benefit consumers, may never get off the ground.”
Saying that the issues identified by the CAT could have been addressed and overcome had the claim been allowed to proceed, he added: “I am actively considering with my advisors and litigation funders the possibility of an appeal.”
Adam Rooney, a partner at City financial disputes firm Signature Litigation, said the CAT’s decision was “unsurprising when considering that [the claim] raised key differences on pass-through, possibly one of the trickiest defences for claimants to grapple with and one not yet substantially tested in the English courts.
“The judgment is also interesting as it highlights the focus the court will put on the terms and basis on which any representative will be allowed to act in a collective proceeding.
“It is a salutary reminder that those acting for claimants in these cases need to structure groups very carefully; if the court is unhappy, for example, with funding arrangements, it can and will ask for these to be changed.”
Steven Friel, chief executive of Woodsford Litigation Funding, was pleased that the tribunal “spoke in positive terms about litigation funding”.
“They said that it should not be difficult for a tribunal to work out what a reasonable litigation funding return should be, not least because there is ‘now a developing market in litigation funding’.
“Many lawyers in the UK will feel smug about the CAT’s criticism of the American-style drafting of the funding agreement. Smugness aside, the CAT makes a good point that all of us in the funding world should take on board, namely that funding agreements for the benefit of a large class of consumer should be drafted in plain English.”