Reed Smith Client Alerts

Authors: Bruce A. Blefeld Edward W. Duffy Matthew J. Siembieda

Type: Client Alerts

The UK held the first two hearings under its new opt-out class action procedure. The precise rules governing UK class actions will be developed over time from the general guidelines in the statute. There are significant similarities between the U.S. and UK rules on a number of topics related to collective proceedings, and barristers and judges alike cited U.S. law at the recent hearings. The critical questions faced by plaintiffs and their experts at the hearings reflect significant hurdles for the plaintiffs and insights about future claims that might face an easier path to continue as collective proceedings. Additionally, the UK’s current rules allow only competition law claims to proceed as class actions, but class actions may be available for other types of substantive legal claims in the future.

Executive Summary

The UK Competition Appeal Tribunal (“CAT”) recently heard its first two Collective Proceeding Order (“CPO”) applications for competition law cases. The 2015 UK Consumer Rights Act (“the Act”) provides the first-ever opt-out class action procedures available in the UK. The Act imposes requirements very similar U.S. class action procedures, and although currently limited to competition law claims, UK authorities may extend its use to other types of claims in the future. The first two CPO application hearings provide insights into problems facing plaintiffs, and where they may turn in future cases.

The CAT held a CPO application hearing in the first case filed – Gibson v. Pride Mobility Scooters on December 16-18, 2016. The plaintiff in that case sought to obtain a CPO for a class comprising all persons who bought a scooter made by Pride in a two-year class period. UK authorities had determined that Pride entered unlawful agreements with eight retailers to restrict advertising below certain prices. A summary of the case is available here.

The second case – Merricks v. MasterCard – is the largest case ever filed in the UK, with the plaintiff seeking £14 billion on behalf of a class of 40 million UK residents over an 18-year class-period. The EC issued a decision in 2007, finding that MasterCard’s interchange fees – imposed by credit card companies on retailers for credit and debit card transactions – restricted competition between the merchant’s banks (the acquiring banks), and increased the cost of card acceptance for MasterCard (resulting in an overcharge to retailers and consumers), and that there were no procompetitive benefits of proven efficiencies. The public enforcement has already brought about several private actions, including Sainsbury’s v. MasterCard, which resulted in a £68.6 million award, plus interest. A summary of the case is available here. The class proposed in Merricks included consumers who allegedly suffered an overcharge because of retailers passing through the supra-competitive interchange fees. The large size of the class and the need to establish a pass-through rate created significant difficulties for the plaintiffs, as evidenced in the January 18-20, 2017, CPO hearing.

The Act Imposes Requirements Similar to Rule 23 Class Certification Standards

The Act allows parties to bring competition law claims as collective proceedings, but only if they establish specific requirements – including the commonality of class members’ claims and the suitability of collective proceedings to resolve the dispute (as well as the existence of a discernible class). These standards parallel the commonality and predominance requirements of Rule 23 of the U.S. Rules of Civil Procedure. At the CPO hearing in the £14 billion Merricks v. MasterCard case, both the barristers and the CAT judges cited and relied upon U.S. and Canadian precedent. The parties and judges looked to U.S. law to determine the appropriate ways to balance a fair and precise calculation and apportionment of damages, with the practical difficulties that increase as greater precision is required. Fashioning such standards requires a complex weighing of various interests and considerations of economic theory and practical administration. Further, once these standards are developed, they will likely require robust, expert testimony, similar to that used in class certification in the United States.

At the Merricks v. MasterCard hearing, for example, the CAT inquired what could be done to allocate damages among class members if the case were successful and an aggregate damages award were rendered. Plaintiff’s expert largely deferred to the U.S. practice of relying on claims administrators to make these determinations, acknowledging that the distribution of damages to class members would be relatively imprecise. Judge Roth again expressed his belief that even at the CPO application stage, it was relevant to consider whether there was a methodology that could fairly apportion damages. Thus, having the ability, experience, and foresight in U.S. class actions (and class actions generally) will be important and invaluable in navigating class actions in the UK.

Opt-Out Class Actions May Spread to Other Claims in the UK

The Act only authorized opt-out class actions for competition law claims. If proceedings cannot be brought on an opt-out basis, organizing and motivating people to sign on to an opt-in class action is very difficult, which makes opt-in procedures relatively unattractive and ineffective. The UK moved slowly and deliberately in making opt-out collective proceedings available, in part because of fears that plaintiffs would bring a flurry of lawsuits, some of them lacking merit, in the hopes of attracting a large settlement. However, the rules under the Act build in several protections that supplement other features of UK law that disincentivize filing non-meritorious suits. These include the “loser pays” rule, requirements that litigation funders show they have adequate insurance to pay the other party’s attorney’s fees, and the lack of treble or punitive damages. However, the Act does allow for interest and pass-through damages claimed by indirect purchasers (unlike the U.S. federal antitrust rules). Further, the increased activity of professional litigation funders in the UK is making the loser-pay requirements less important. The Act also vests the CAT with discretion to allow a case to proceed as either an opt-out or an opt-in collective proceeding. A key question is whether the Act is a precursor for further UK acts authorizing class actions beyond competition and antitrust.

As the CPO standards are developed in the first few competition law cases, there may be desire within the UK to expand the use of these procedures to other types of substantive claims for which collective proceedings may be workable.

Additional Competition Claims Under the Act

During the Merricks hearing, the CAT judges expressed concern that the class may be too unwieldy to continue as a collective proceeding. A particular problem facing the Merricks plaintiffs is how to determine the appropriate pass-through rate (i.e., how much of the overcharge suffered by retailers was passed on to consumers), given the different spending habits of the 40 million-member class. In the Sainsbury case, MasterCard argued that the pass-through rate approached 100 percent, and although the Merricks plaintiffs noted the tension between MasterCard’s Sainsbury argument and its position in Merricks that the pass-through rate was variable and lower, the CAT did not view MasterCard’s position in earlier cases as a substitute for robust expert analysis.

The plaintiffs in Merricks appeared to face significant difficulties because of the heterogeneity of the class, and the amount of damages sustained by individual class members. There is extraordinary variability in the ways that class members used MasterCard credit and debit cards – both in terms of the amount of interchange fees incurred, the types of purchases made, and the average pass-through rate incurred by individual class members. This variability is a significant challenge that had led the CAT to question whether there is sufficient commonality and whether a collective proceeding is suitable.

Plaintiffs, attorneys, and litigation funders may take aim at targets less likely to face these problems to the same degree, focusing on products and services that are more homogenous and more readily susceptible to reliable pass-through determinations and administrable distribution of damages. These concerns indicate that although the CAT may not allow the Merricks v. MasterCard case to continue as a collective proceeding, plaintiffs may have more success in cases focused on more homogenous products that do not raise these problems to the same degree, but that still offer relatively large classes seeking large aggregate damages.

If, however, the putative class in Merricks satisfied the requirements for a CPO, the nature of the claims and the class likely militate in favor of the case proceeding on an opt-out basis. The large number of claimants, the fact that they are consumers, the relatively small amount of per-capita damages, and the difficulties in proceeding on an opt-in basis, suggest that if this case proceeds as a collective proceeding, it will be on an opt-out basis. Future cases are likely to draw on similar types of classes – large groups of consumers who together can allege large aggregate damages, but who could not economically bring individual lawsuits.

Plaintiffs will likely continue to follow private enforcement actions on the heels of governmental investigations. Given the difficulties in quantifying overcharge and pass-through rate, as well as apportionment of damages and other CPO requirements, plaintiffs are likely to focus efforts on matters where there has already been a finding that defendants violated competition law. Additionally, plaintiffs will have more flexibility to bring claims based on conduct that arose after the Consumer Rights Act took effective, meaning that claims are likely to increase if and when EU and UK authorities disclose investigations and proceedings into conduct post-dating October 2015.

Conclusion

Although the CAT may not rule for some time on plaintiff’s CPO application, there are clues from the panel’s questions that show doubts with plaintiff’s theories, but that suggest future plaintiffs may bring claims that do not suffer from the same problems. The Act poses significant liability risks for companies currently facing competition law investigations or enforcement proceedings, or that may face such actions in the future. These risks are particularly acute for companies that manufacture or sell relatively homogenous and widely available consumer products. Companies should manage all antitrust and competition law proceedings with an eye as to how future proceedings in other jurisdictions may draw on evidence adduced, or positions taken in the earlier proceedings.

 

Client Alert 2017-094