The UK’s collective redress procedure (introduced on 1 October 2015) got off to a slow start but has been picking up pace over the last couple of years. At the time of writing, there have been nine applications for certification, only two of which were commenced before 2018. The seven actions commenced since May 2018 have all been substantively stayed pending the forthcoming decision of the Supreme Court in Walter Hugh Merricks CBE v Mastercard Incorporated & ors, which will be instrumental in setting the tone for current and future collective actions in the UK.
However, another recent Supreme Court decision relating to interchange (in which Linklaters jointly advised Visa) may also have a huge impact: Sainsbury’s Supermarkets v Mastercard Incorporated & ors ).
What was Sainsbury’s/Mastercard about?
Sainsbury’s sought damages from Mastercard in relation to multilateral interchange fees (MIFs) (fees paid by a retailer’s bank to a cardholder’s bank) arising out of Mastercard payment card transactions in the UK. Sainsbury’s alleged that MIFs set by Mastercard were passed through to it as part of a wider merchant service charge (MSC) (the price a merchant must pay to its bank for accepting cards as a means of payment). Sainsbury’s argued that this set a non-negotiable floor for the MSC, which restricted competition. Mastercard, as part of its defence, asserted that Sainsbury’s was not entitled to recover any overcharge which it had passed on to its own customers.
Why does the judgment matter?
The Supreme Court provided long-awaited guidance in respect of the pass-on defence in the UK. While the position in respect of claims post-March 2017 is governed by Directive 2014/104/EU (the Damages Directive), there had long been unanswered questions about the English principles governing claims before that date. The Supreme Court largely aligned English law principles with the Damages Directive, finding that: (i) competition damages claims are founded in the compensatory principle; (ii) while not strictly considered a ‘defence’ under English law, pass-on can be invoked by a defendant to show that a claimant has mitigated its loss and therefore is not entitled to recover the entirety of any overcharge; (iii) the burden of proof for establishing pass-on lies with the party seeking to rely on it; and (iv) a court has the power to estimate the extent of pass-on in the absence of clear evidence.
The judgment in respect of pass on is a victory for defendants in direct purchaser claims. In addition to confirming that the court can estimate the extent of pass on, the Supreme Court indicated that, once pass on has been raised as a defence, ‘there is a heavy evidential burden on [claimants] to provide evidence as to how they have dealt with the recovery of their costs in their business’ that must be satisfied by a claimant to ‘forestall adverse inferences being taken against it by the court’.
Indirect purchasers will also be pleased with the judgment, which may make it easier to establish that damages have been passed on to them by direct purchasers in support of their own actions. While the full extent of the risk of indirect purchaser claims is difficult to predict before the Merricks judgment, this is likely to boost the (already prolific) funding industry for collective competition claims and may embolden consumer representatives to bring class actions.
What do in-house counsel need to think about?
Private damages claims are increasingly likely to be brought at different levels of the supply chain, and pass on will be key.
Direct purchasers need to think carefully about whether it is worth bringing a claim. Competition damages claims are long, expensive and time consuming, and the Sainsbury’s/Mastercard judgment has swung the pendulum in favour of defendants. If direct purchasers pass on some or all of any overcharge to their own customers, it may well be that the costs of proceedings end up outweighing any eventual damages award. Direct purchasers will therefore also want to consider funding and insurance options, although might find that funders have more interest in indirect purchaser claims in light of the Supreme Court’s judgment. Direct purchaser actions are also likely to require an in-depth analysis of a company’s pricing policies and margins. While that can be done within a confidentiality ring in litigation, direct purchasers should brace themselves for third-party disclosure requests from their own customers who may be considering whether they have claims.
Indirect purchasers should closely monitor direct purchaser proceedings to see if they may have been affected by an overcharge. If those proceedings settle before disclosure, or key documents are disclosed into a confidentiality ring (as is standard in competition damages actions), indirect purchasers should consider third-party disclosure requests against direct purchasers to assess the merits and value of any potential claim. Claims which fall within the Damages Directive regime (ie post-March 2017) are likely to be more successful since indirect purchasers have the benefit of a presumption of pass on. From a strategic perspective, indirect purchasers should consider whether it would be more favourable to join a collective action (which will likely be more impactful and will have costs synergies) or an individual action (which gives the claimant more individual control and may encourage a more favourable settlement). While the Merricks judgment will have a huge impact on collective actions, funders are likely to be buoyed by the Sainsbury’s/Mastercard judgment and it will therefore be important to consider funding options.
Defendants are likely to face difficult strategic decisions between invoking the pass on defence to defeat direct purchaser claims, which may then be used as evidence by indirect purchasers for their own claims. Companies subject to regulatory scrutiny should therefore consider the potential for litigation (and who are likely to be the claimants) at an early stage, and formulate a litigation strategy that aligns with their regulatory strategy. Defendants will want to consider case management options. For example, if a high bar to class certification is set by the Merricks judgment, defendants will be less concerned about indirect purchaser actions within the pre-Damages Directive regime and can focus on defeating direct purchaser actions. Conversely, where indirect purchasers fall within the Damages Directive regime (and have the benefit of the pass on presumption), defendants may seek to join multiple claims at different levels of the supply chain to mitigate the risk of paying different claimants in respect of the same overcharge. Given the abundance of available funding, defendants need to make claims as uneconomic as possible. They may consider, for example, limiting the issues in dispute through early strike-out/summary judgment applications, establishing a compensation scheme for affected groups, or targeting specific claimant groups with which to settle.
Whichever side of the fence you’re on, be prepared for more collective actions in the coming years