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Merricks v MasterCard: Collective Actions Reinvigorated

The Court of Appeal today gave its much-anticipated judgment in the application to bring collective proceedings against MasterCard: see Merricks v MasterCard Incorporated and others [2019] EWCA Civ 674.  It is a major victory for the Applicant and will reinvigorate the collective proceedings regime, which has seen disappointingly few cases brought since its introduction in 2015.

The background is well-known.  Between 1992 and 2008 MasterCard infringed competition law through the imposition of an unduly high fee which was effectively paid by retailers.  Many retailers have brought claims against MasterCard, in the course of which MasterCard has argued that the retailers largely or wholly passed on the overcharge to their own customers.  That must have seemed a sensible defensive strategy, at least until Mr Merricks arrived on the scene seeking to bring collective proceedings in respect of the loss suffered by some 46.2 million consumers – which (given what MasterCard has said about the high level of pass-on) his experts estimated at some £14 billion.

We have blogged before on the reasons why the Competition Appeal Tribunal rejected Mr Merricks’ application.  In very broad summary, it considered that (a) the Applicant had not done enough to show how it would go about assessing the overall damage suffered by consumers – a complex task given that it will involve considering pass-on in several market sectors over a long period, and (b) even if one could calculate the overall damage suffered, it would be impossible to calculate the loss suffered by each individual class member, even on an approximate basis.  The Court of Appeal rejected both of these arguments.

On the question of whether the Applicant had done enough to show how it would assess the aggregate damage, the key part of the Court of Appeal’s analysis is at [50], where it said (paraphrasing Canadian jurisprudence which the Court endorsed):

“the function of the Tribunal at the certification stage is to be satisfied that the proposed methodology is capable of or offers a realistic prospect of establishing loss to the class”

That is a fairly low threshold and the Court held that it was not necessary for the Applicant, at the certification stage, to specify in detail what data would ultimately be available.  The Court observed that if, as proceedings proceed, it becomes clear that it will not be possible to calculate the overall loss, the Tribunal can revisit whether it is appropriate to allow the proceedings to continue.

On the question of whether it is necessary to prove the loss suffered by each individual class member, the Court held that it is not.  This is the most important part of the judgment.  In short, the Court held that if an Applicant seeks an aggregate award of damages, reflecting the overall loss to the class, then it is not necessary to prove any individual’s loss – or for that matter, even to prove that any individual class member suffered loss at all.  All that matters is that the overall loss can be calculated.

When, at the end of the proceedings, the Tribunal comes to decide how to distribute the loss to each class member, it may be appropriate to try to give them each a sum reflecting their own loss; but if that is not necessary and other approaches may also be adopted.  In this case, Mr Merricks accepts that it will not be possible to give each consumer a sum reflecting their individual loss, and the proposal is that each one of the 46.2m consumers will get a fixed amount depending on the period of time when they were in the class.

It would obviously be an exaggeration to say that this judgment solves all of the problems with the collective proceedings regime.  For one thing, Mr Merricks still has a long road to travel, and none of us should make any plans just yet for the hundred pounds or so that might be coming our way.  For another thing, there are other difficulties with the regime, some of which are exemplified by the Pride case which we have blogged about previously.  But on any view today’s judgment is a very important one, and it can be expected to breathe new life into a regime which has not, as yet, lived up to early expectations.

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Retrospective interpretation: DSG v MasterCard

The latest battle over limitation in Competition damages claims was a victory for the claimants – see DSG Retail Ltd v MasterCard Inc [2019] CAT 5.  In some ways it is a surprising decision, because the Competition Appeal Tribunal has decided that when s.47A of the Competition Act was enacted in 2003, certain claims which were time-barred prior to its enactment were revived.  The Tribunal frankly acknowledged that it did not find the matter straightforward, and looking at the rules it is easy to see why.

It used to be the case that competition damages claims could only be brought in the civil courts, where they would be subject to the usual six-year limitation rule (subject to extensions in various circumstances which need not concern us here).  In 2003 a new route was introduced: claimants became entitled bring follow-on claims in the CAT under s.47A, which had its own bespoke limitation regime.  That regime included this provision, which was found in rule 31(4) of the 2003 CAT Rules:

“No claim for damages may be made if, were the claim to be made in proceedings brought before a court, the claimant would be prevented from bringing the proceedings by reason of a limitation period having expired before the commencement of section 47A.”

Rule 31(4) was dropped when the rules were revised in 2015.  The position now is that claimants can still bring s.47A follow-on claims, including for periods pre-2015, but such claims are no longer subject to rule 31(4). The Tribunal had to decide the related questions of what the consequence was of dropping rule 31(4), and what the rule meant in the first place.

The most obvious interpretation of rule 31(4) is that claimants could not bring follow-on claims under s.47A if the claims would have been time-barred in 2003 when s.47A was introduced.  Thus, if an infringement lasted from 1993 to 2003 (and assuming that it was not deliberately concealed), the claimants could have brought a s.47A claim for damages going back as far as 1997 but no earlier.  That would make good sense because it would mean that the introduction of the s.47A regime did not ‘revive’ claims that had otherwise expired.

The main problem with that ‘obvious’ interpretation is that it would lead to very strange consequences when, in 2015, rule 31(4) was dropped.  One possibility is that the effect of dropping rule 31(4) was that, all of a sudden and for no apparent reason, from 2015 claimants were allowed to bring claims for damages which were time-barred in 2003 and which had remained time-barred until 2015.  That would be very surprising.  The only way to avoid such a result would be to say – and this is essentially what MasterCard said – that the rules should continue to be applied as if rule 31(4) still applies.  But that is  an ambitious argument given that the rule was deliberately dropped.

The Tribunal resolved these problems by deciding that what I have called the ‘obvious’ reading of rule 31(4) is wrong.  In fact, the Tribunal held, rule 31(4) required one to ask whether the entire proceedings would have been time-barred in 2003 when s.47A was introduced.  If the answer is that the proceedings would not have been time-barred, because some of the damage was still within the limitation period, then the claimants could have started s.47A follow-on proceedings for the entire loss.  Thus, to take my example of an infringement lasting from 1993 to 2003, the fact that the 1997-2003 period was not limitation-barred in 2003 meant that claimants were entitled to start s.47A proceedings for the entire 1993-2003 period.  Section 47A therefore did, in this limited sense, revive claims that had otherwise expired.

This approach to rule 31(4) has the particular attraction of enabling one to explain why the rule was dropped in 2015.  The explanation, according to the Tribunal, is a practical one: it is extremely unlikely that there will be an infringement decision after 2015 which relates to damages which were entirely limitation-barred in 2003.  Thus, rule 31(4) is no longer practically necessary; the problem with which it was concerned will no longer arise.

The upshot of all of this is that the Tribunal has decided that rule 31(4) never prevented claimants from pursuing claims going back as far as 1993 (or earlier), provided that some part of the damage was suffered in or after 1997, and the fact that rule 31(4) has now been dropped is entirely understandable and makes no practical difference.  Claims can still be brought going back to 1993 (or earlier).  It is undoubtedly a neat solution.

On the other hand, consider this.  It seems pretty unlikely that any claimant who had brought a claim in, say, 2004, or 2014, would have been able to persuade the Tribunal that the 2003 rules had revived claims that were otherwise time-barred.  It is only because the rule was revoked in 2015, and because the Tribunal used the fact of revocation as being relevant to its meaning when originally enacted, that the Tribunal interpreted the rule in the way that it did.  Thus, claims which were time-barred in 2003, and which would probably have been treated as time-barred up until 2015, are now to be treated as having been revived in 2003.  That may well be the least bad interpretation of the regime, but one can well understand why the Tribunal did not find the matter at all easy.

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Applicable law in competition infringements: Deutsche Bahn

The recent judgment of Barling J in Deutsche Bahn AG v MasterCard offers important guidance on determining applicable law in competition actions. Practitioners dealing with competition infringements which stretch back prior to the entry into force of Rome II in 2009 should take note – particularly when dealing with limitation issues, which are governed by the applicable law of the tort. The court held that where the 1995 Act regime applies (broadly, between 1996 and 2009) the applicable law is that of the country where the restriction of competition took place. This begs the question: what law applies if the claimants have not defined the geographical market which is affected along national lines?

Background

This judgment is the latest in the interchange fee saga following the Commission’s infringement decision in 2007. It relates to an action brought on behalf of some 1,300 retailers operating in 18 European countries. The retailers claim that Mastercard infringed European and national competition laws by centrally setting interchange fees payable by acquiring banks (and other rules) which in turn inflated the ‘merchant service charge’ paid by retailers whenever they accept payment by Mastercard credit/debit cards.

The claims span nearly three decades, dating back to 1992. As a stepping-stone to determining limitation issues, the parties asked the court to determine the applicable law and nominated test claims relating to 4 countries (Germany, Italy, Poland and the UK).

The three regimes

The resulting judgment is a helpful ready reckoner on applicable law for those faced with claims of long-running competition infringements. The three regimes can be broadly divided as follows:

  • 11 January 2009 to date: where the “events giving rise to damage” occurred on or after 11 January 2009, Rome II applies (see Article 31). Although what constitutes the relevant ‘event’ for the purposes of drawing this temporal dividing line in competition cases was left unanswered ([26]).
  • 1 May 1996 to 10 January 2009: where the “acts or omissions giving rise to a claim” occurred on or after 1 May 1996, the Private International Law (Miscellaneous) Provisions Act (the “1995 Act”) applies (see section 14). This is concerned with the acts and omissions of the Defendant, irrespective of the date of the resulting damage.
  • 22 May 1992 to 30 April 1996: English common law principles will apply.

The parties were in agreement on the import of Rome II: under Article 6(3) the applicable law is the law of the country “where the market is, or is likely to be, affected”. In the present case, it was agreed that this translated to a test of where the claimant was based at the time of the relevant transaction which attracted the merchant service charge ([22]). However, the application of the 1995 Act was heavily contested.

The 1995 Act: place where the restriction of competition occurred

The general statutory test for applicable law under section 11(1) of the 1995 Act is where “the events constituting the tort or delict in question occur”. Where elements of those events occur in different countries, the test outside of personal injury and property damage cases is where “the most significant event or elements of the events occurred” (section 11(2)).

The Defendants argued that that the place where the most significant event occurred was the place where the merchant was based when they paid the inflated service charge, thereby aligning the test with that under Rome II.

The thrust of the claimants’ argument was that ‘the most significant event’ in each claim was not the Claimants’ payment of an inflated service charge – rather, it was the Defendants’ actions in deciding to adopt the relevant interchange fee. The Claimants argued that those actions took place in Belgium (although this was subject to some dispute).

Mr Justice Barling found that the court must make a ‘value judgment’ about the significance of each of the English law constituents of the tort in question and that judgment should be taken in light of the facts of the particular case ([40]-[41]).

In the present case, he found that the most significant element of the cause of action was the restriction of competition. This, he found, was a factual event which could be geographically pinpointed and was not, as the claimants had argued, merely a legal/economic phenomenon without a country of occurrence. In practical terms, Barling J’s approach pointed to the national law of each of the markets where each claimant operated its retail business ([55]).

Beyond national markets?

Mr Justice Barling’s test of where the restriction of competition occurred seems a neat solution on the facts of the MasterCard case. MasterCard relied heavily upon the way in which the particulars of claim had been pleaded by reference to national markets and national laws (see the court’s discussion at [49] and [54]).

Yet the test may not produce such a neat answer for claims in which the relevant geographical market has not been defined along national lines. Claimants might allege a restriction of the pan-European market or even fail to define the geographical market at all in their pleadings. When faced with the argument that claims may plead restrictions by object rather than effect, the Judge observed that in such cases a restriction of competition is presumed to have occurred “on the relevant market”. Yet this begs the question – what is that relevant market? Can it always be neatly mapped on to a single country?

There is therefore considerable scope for future litigants to argue that ‘where the restriction occurred’ cannot be the ‘one size fits all’ solution in all competition claims reaching back prior to 2009. The seeds for such an argument may well have been sown in Mr Justice Barling’s finding that the significance of the different elements of a tort may differ even as between cases involving the same cause of action (see [118]).

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Market dynamics in the counterfactual: more competitive, not just cheaper

The judgment of Phillips J in Sainsbury’s v Visa [2017] EWHC 3047 (Comm) demonstrates the importance to claimants in competition damages cases of identifying a counterfactual which not only involves lower prices but also involves higher levels of competition.

Sainsbury’s case

Visa’s payment card scheme required ‘acquirers’ (who process card payments on behalf on merchants) to pay an ‘interchange fee’ to the issuer of a payment card whenever a payment was made. All acquirers were required to accept all cards issued in the scheme (the so-called honour all cards rule or ‘HACR’). All issuers were required to remit to the acquirer the whole of the payment made by the customer, less the applicable interchange fee (this was called the ‘settlement at par’ rule). Acquirers passed on all of the interchange fees to merchants, as part of the merchant service charge which also included an element of profit margin for acquirers.

Visa set a default interchange fee (the multilateral interchange fee or ‘MIF’), though acquirers and issuers were free to negotiate different fees bilaterally. However, no acquirer had an incentive to agree to pay more, and no issuer had an incentive to agree to accept less than the MIF. The settlement at par rule prevented issuers from, in effect, forcing a higher interchange fee on acquirers by remitting customer payments at a discount. The HACR prevented acquirers with market power from forcing lower interchange fees on issuers by refusing to accept cards unless bilateral interchange fees were agreed.

The combined effect of these rules was to eliminate any competition as to the level of interchange fees. This was Sainsbury’s case and Visa accepted that these arrangements constituted a restriction of competition ‘in absolute terms’: [103-104].

Sainsbury’s proposed counterfactual, which the court accepted, was one in which there was no MIF set by Visa, but the settlement at par rule and HACR remained in force: [98]. This, in effect, amounted to a MIF of zero and the same dynamics between issuers and acquirers as existed in the factual would have prevented bilateral interchange fees from being agreed in the counterfactual: [126-129]. It followed that on Sainsbury’s counterfactual, the interchange fees paid would have been lower but not because of any re-introduction of competition in the setting of such fees. The suite of rules which had operated to eliminate competition in the factual would operate in the same way and with the same result in the counterfactual, just at different prices: [161]. Sainsbury’s claim therefore failed as it had not established that its loss was caused by a reduction in competition.

What went wrong?

Sainsbury’s counterfactual retained two key elements from the factual scheme: the settlement at par rule and the HACR. All parties agreed that the scheme would be unworkable if it incorporated the HACR but did not require settlement at par: [99]. Such a scheme would be equivalent to allowing issuers to set interchange fees unilaterally, by settling payments at a discount. Assuming acquirers continued to pass interchange fees on to merchants in full, this would result in merchants ceasing to accept Visa, as continued participation in the scheme would mean accepting all card payments regardless of the fee charged.

The parties do not appear, however, to have explored the possibility of a truly bilateral system in which neither the settlement at par rule nor the HACR applied. In a counterfactual from which both of these rules were absent, issuers and acquirers would have been forced to negotiate terms of settlement bilaterally. Issuers would have wished to agree a higher interchange fee (or a larger discount from par) but would have been prevented from demanding too high a fee because of the risk that acquirers (in order to retain merchant business) would cease to accept a certain issuer’s cards.

This counterfactual involves a radical departure from the Visa scheme in the factual, but the market dynamic which would result is familiar: this is how competition works in so-called three-party schemes, such as American Express. The issuer faces competing incentives: higher fees make for greater profits per transaction, but too high fees reduce card acceptance by merchants and reduce transaction volume, ultimately reducing the appeal of the card to customers.

The outcome in this counterfactual could be a patch-work of differing fees charged by different issuers with corresponding variances in merchant acceptance. There are over 50 issuers and around 30 acquirers in the UK[1], which would give rise to a large (but in principle manageable) number of bilateral negotiations assuming the same number of issuers existed in the counterfactual. There may be good reason, however, to think that there would be fewer issuers in the counterfactual: If the setting of MIFs inhibited competition and raised issuer profits, it is likely also to have encouraged more issuers to enter the market than could have been sustained in a competitive scenario. Lower interchange fees, lower profits, the requirement to negotiate deals with all (or almost all) acquirers and the need to reassure prospective customers that the card would be widely accepted would all act to restrain the number of viable issuers in the counterfactual.

Merchants now indicate whether they accept Amex or Diners. Before the emergence of four-party schemes in the UK, merchants indicated whether they accepted Barclaycard, a card issued only by the bank of the same name. In the counterfactual described here, merchants would be required to indicate which of the major banks’ and independent issuers’ cards they accepted.

Of payment cards and dog races: monopoly and monopsony in price setting

Competition within the Visa scheme was inhibited by the fact that fees were set centrally for all participants. The scheme was controlled by participating issuing banks, so central price setting tended to result in higher fees. If merchants (or acquirers who did not also issue cards) had controlled the scheme, the result might have been that low or even negative interchange fees were set, but the result would have been no more competitive. The mischief against competition was the setting of prices centrally; control over the scheme determined which party stood to gain.

In Bookmaker’s Afternoon Greyhound Services [2009] LLR 584, cited by Phillips J at [91], the boot was on the other foot. Whereas in the Visa scheme, prices were set by or on behalf of the party receiving payment, in the BAGS case, prices were set by the paying party, which was controlled by the leading bookmakers, and which had a monopsony on buying live television footage from racecourses. When a group of racecourses jointly agreed to sell their footage exclusively through a newly formed distributor, prices for footage rose and BAGS claimed that the racecourses had acted anti-competitively. On the contrary, the court found, the market power of BAGS had been reduced and competition had been increased. As Phillips J pointed out in Sainsbury’s, the BAGS case shows the pitfalls of a facile analysis which equates price decreases with increases in competitive intensity and vice-versa.

It ought to be possible for the payment card market to operate competitively given the large number of retailers, banks and other issuers. Where collective price-setting is interposed between the parties on each side of the transaction, there is an obvious possibility of distortions to competition. It was common ground in Sainsbury’s that the Visa scheme as implemented had eliminated competition in the setting of interchange fees: [103-104]. A claimant seeking damages for the setting of payment card interchange fees should ask the court to consider a simple counterfactual, in which these distortions are eliminated: What would the result have been if the parties on each side had decided whether to transact with one-another and on what terms, without the central setting of prices or a compulsion to transact?

[1] In Arcadia v MasterCard [2017] EWHC 93 (Comm), at [103] Popplewell J found that there were 55 MasterCard issuers in 2015 in the UK; it is assumed that there were a similar number of Visa issuers.

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Collective (in)action? The CAT’s recent judgments on collective proceedings orders

At first glance, two recent judgments from the CAT may give the impression that the new UK class action regime is dead in the water. However, on closer inspection there is much in these judgments that prospective claimants will welcome.

The first decision was in the Pride mobility scooters case (see Tom Coates’ blog here). The CAT made clear that it might have been prepared to grant a collective proceedings order (“CPO”), but on a basis so narrow that the claimants chose not to proceed. In the second decision, Merricks v Mastercard Inc & Ors [2017] CAT 16, the CAT rejected the CPO application, bringing an end to what would have been an extraordinarily ambitious claim—on behalf of 46.2 million people, seeking aggregate damages of approximately £14 billion, for Mastercard’s unlawful setting of fallback multilateral interchange fees in breach of Article 101 TFEU.

Under the new provisions in s.47B of the Competition Act 1998, a CPO application must satisfy the CAT of two criteria. They are, in brief, that (i) the person bringing the proceedings is an appropriate representative of the class of claimants, and (ii) the claims are eligible for inclusion in collective proceedings.

In Merricks, as in Pride, the applicants succeeded on the first criterion but failed on the second. The CAT adopted a relatively liberal approach to certifying the class representative in both cases: a former ombudsman and consumer protection advocate in Merricks (§§93-94), and an advocate for pensioners’ rights in Pride (§§125-139).

The CAT was also satisfied with the litigation funding arrangements in both cases (Pride, §§140-145; Merricks, §§95-140); although it strongly criticised the “impenetrable” drafting of the American-style funding agreement in Merricks, and was only prepared to approve it in light of amendments proposed at the hearing: §§121-127. Prospective claimants will welcome the fact that, in neither Pride nor in Merricks was the CAT unduly concerned by the prospect of a shortfall between the applicants’ costs cover and respondents’ likely costs.

Where both claims failed, however, was on the eligibility criterion. This second criterion is further broken down in rule 80 of the CAT Rules 2015, which provides that claims will be eligible for inclusion in collective proceedings where they (a) are brought on behalf of an identifiable class of persons; (b) raise common issues; and (c) are suitable to be brought in collective proceedings.

In both cases, the CAT was prepared to accept that the claims were brought on behalf of an identifiable class of persons. In Pride that conclusion was uncontroversial, given that the class was defined as “any person who purchased a new Pride mobility scooter other than in the course of a business in the UK between 1 February 2010 and 29 February 2012” (§§5, 85). In Merricks, however, the CAT’s apparent acceptance of the class was no small matter. The class included all individuals who were over 16 years old at the time of the transaction, resident in the UK, and who purchased goods or services from UK businesses which accepted MasterCard cards, at any time over a 16 year period (§1). This included more than 46 million potential claimants; and yet, the CAT was untroubled by the “identifiable class” criterion.

As to the requirement that the claims raise common issues, in both cases the CAT emphasised that the appropriate approach was that followed in Canada, rather than the much stricter approach in the United States (Merricks, §58; Pride, §105). Although only three of the six issues in Merricks could properly be regarded as common, the CAT considered that to be sufficient.

In Pride, the applicant faced the difficulty of proving causation in circumstances where the regulator had focused on a small sample of infringing agreements (“the low-hanging evidential fruit”: §109), and the claimants were time-barred from pursuing anything other than a follow-on claim for the infringement (§110). The CAT’s decision on this issue may well create difficulties for other follow-on vertical infringement claims, but that category of claims is likely to be quite narrow.

In Merricks, the CAT was concerned about the methodology by which the applicant proposed to assess individual losses. The methodology needed to distinguish between three sets of issues: “individuals’ levels of expenditure; the merchants from whom they purchased; and the mix of products which they purchased” (§88). Regrettably, there had been “no attempt to approximate for any of those in the way damages would be paid out” (§88). The CAT observed that the experts’ oral evidence in response to questions from the Tribunal was “considerably more sophisticated and nuanced than that set out, rather briefly, in their Experts’ Report” (§76), but it still could not be satisfied that the damages sought would broadly reflect “the governing principle of damages for breach of competition law”, that is, “restoration of the claimants to the position they would have been in but for the breach” (§88). The judgment sounds a valuable warning to future claimants of the necessity for a detailed and precise methodology for calculating both individual and aggregate losses.

The CAT showed little sympathy for the applicant’s argument that refusing the CPO would result in a vast number of individuals who suffered loss going uncompensated, since there was no realistic prospect of claimants pursuing Mastercard individually. The CAT observed shortly that this was “effectively the position in most cases of widespread consumer loss resulting from competition law infringements” (§91).

The judgments in Pride and Merricks provide important guidance on the CAT’s likely approach to CPOs in future. In spite of the outcomes in both cases, the CAT’s ready acceptance of the proposed class representatives, its flexibility in regard to litigation funding, and its affirmation of the Canadian approach to collective action, are all likely to give heart to prospective claimants. Further, the judgment in Merricks leaves the door open to mass claims in the future, while signalling the heightened importance which expert evidence on calculating losses is likely to assume in such cases.

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Illegal counterfactuals: the Court of Appeal shuts the back door

Suppose a defendant to a competition claim runs a defence that, in the counterfactual world in which no anticompetitive conduct occurred, pricing would have been no different; and that the claimant replies, “maybe so, but only because you were at the same time operating some independent anti-competitive scheme, which must also be purged from the counter-factual”. Can the claimant amend his claim to plead the independent anti-competitive scheme raised in his Reply as the basis for a new substantive claim even where it would ordinarily be time-barred?

In February last year, Barling J appeared to answer, “Yes”, in a judgment given in the MasterCard litigation. On one view, the curious result of that judgment was that a claimant could apparently circumvent limitation rules by introducing a time-barred allegation of unlawfulness in his Reply, then using that as a basis to apply to amend his original claim. In other words, when a limitation point blocked the front door, claimants could still bring in new claims through the back.

The Court of Appeal, however, has now shut this back door, by overturning the High Court’s judgment. For the background to the judgments, and the details of Barling J’s decision, see my previous post here.

The issue before the Court was whether or not the new claim, premised on MasterCard’s Central Acquiring Rule (CAR) arose out of the same or substantially the same facts as the existing claim, premised on MasterCard’s Multilateral Interchange Fees (MIFs) (see CPR 17.4 and section 35(5) of the Limitation Act 1980). If it did, the Court could permit an amendment notwithstanding that it was time-barred. Barling J had held that it did on the following two grounds: first, the existing claim would already require an investigation into and evidence on the CAR; and, secondly, the claimants’ reply had pleaded that the CAR was unlawful and had to be excised from MasterCard’s counterfactual – so the new claim arose out of facts already in issue with respect to the existing claim.

The Court of Appeal disagreed with Barling J on both scores. Sales LJ said that the facts underlying each claim could not be said to be the same because the counterfactual inquiry required by each claim was so different (§46). On the existing claim, the counterfactual world was one in which the MasterCard rules in dispute (principally the MIFs) were excised but the CAR remained in place. On the new claim, however, the Court would have to investigate both the counterfactual world in which the MasterCard rules were excised as well as the CAR and the counterfactual world in which all the MasterCard rules remained in place but the CAR was excised.

Sales LJ, doubting the obiter comments of Waller LJ in Coudert Brothers v Normans Bay Ltd [2004] EWCA Civ 215, further said that the claimants could not introduce the new claim by pointing to their reply and saying that the CAR’s lawfulness was already in issue. The proper rule was that, where the defendant had pleaded facts by way of defence to the original claim, the claimant could introduce a new claim premised on those facts: Goode v Martin [2002] 1 WLR 1828. However, that was not the case here because MasterCard did not specifically rely on the CAR in its defence.

The Court of Appeal was further clearly motivated by a concern about the avoidance of limitation rules. Sales LJ said at §64:

“…it would be unfair to a defendant and would improperly subvert the intended effect of limitation defences set out in the Limitation Act if a claimant were to be able to introduce new factual averments in its reply (which are not the same as or substantially the same as what is already pleaded in the claim), after the expiry of a relevant limitation period, and then rely on that as a reason why it should be able to amend its claim with the benefit of the “relation back” rule to circumvent that limitation period.”

The curious result of Barling J’s judgment has therefore been reversed by the Court of Appeal. A claimant can no longer pull himself up by his own bootstraps; limitation now guards the back door as jealously as the front.

 

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Illegal counterfactuals: bringing in new claims by the backdoor?

It is fairly well-established in competition cases that the hypothetical counterfactual – which, for the purposes of causation, posits what the situation would have been absent any breach of competition law – cannot contain unlawful elements: see e.g. Albion Water Ltd v Dwr Cymru [2013] CAT 6. In a normal case, C will claim damages, arguing – let’s say – that D abused a dominant position by imposing discriminatory prices. D defends the claim on the basis that, absent any abuse, it would have set prices at a certain (high) level. C replies that those prices too would have been discriminatory – i.e. the counterfactual is inappropriate.

In other words, the legality of the counterfactual normally becomes an issue when the defendant pleads a hypothetical scenario which C alleges to be unlawful. But consider a different situation. In this, D pleads by way of defence that prices would not have been any lower even without the alleged anti-competitive conduct. C replies that that is only the case because D was actually engaging in some separate anti-competitive conduct – about which it has made no complaints in its original claim. Is C entitled to raise this kind of a response to a counterfactual? The answer may well be yes, according to Barling J’s recent judgment in Deutsche Bahn AG and others v MasterCard Incorporation and others [2015] EWHC 3749 (Ch).

The context is the MasterCard litigation, in which various retailers are claiming that the multi-lateral interchange fees (MIFs) charged by MasterCard to banks breached Article 101 TFEU and caused them loss. Specifically, the MIFs inflated the charges (MSCs) that banks imposed on merchants in connection with processing MasterCard payments and distorted competition in that market.

One line of defence which MasterCard has adopted is that the MIFs did not have any material effect on some categories of MSCs. MasterCard specifically points to a period when the MIFs were set at zero and there was no consequent deflation in MSCs. The retailers riposted by pleading in their Reply that that was only because MasterCard was operating another different rule which was also anti-competitive (the “Central Acquiring Rule” or “CAR”) – absent this too, the Claimants say, MSCs would have fallen. The retailers had originally made no complaint about the CAR in their Particulars of Claim.

Not only this, but the retailers relied on their pleaded case on the CAR in their Reply to support an argument that they should be entitled to amend their Particulars to raise the CAR as a fresh and independent claim. Even though the CAR claim was arguably or partially time-barred, the fact that it appeared in the Reply meant that it “arose out of the same facts” as the original claim under CPR 17.4(2). The application to amend was the issue before Barling J. He granted it, accepting that it was an ‘arguable’ point which the Claimants were entitled to run in their Reply, that evidence on the CAR would therefore be needed, and that they could therefore also add it as a new claim under CPR 17.4(2).

There are perhaps three interesting points arising from the decision. The first is that it raises the prospect that in responding to a counterfactual, C can do more than simply say that the hypothetical conduct on which D relies is illegal. C can arguably go further – and claim that some other aspect of D’s actual conduct – not previously in issue – is also illegal and so must be purged from the counterfactual. This represents a departure from the kind of arguments run in Albion Water and Enron Coal Services Ltd v EW&S Railway Ltd [2009] CAT 36 – as Barling J himself recognized (§72) – although there are closer similarities with C’s argument in Normans Bay Ltd v Coudert Brothers [2004] EWCA Civ 215.

The second is that that kind of argument can seemingly be raised even though the conduct complained of is not specifically raised in the Defence. MasterCard had not pleaded that MSCs were not affected by the MIFs because of the CAR. But that did not prevent the retailers from raising the legality of the CAR in response to the counterfactual. The situation was therefore unlike that in the Norman Bay case – where D had pleaded in its counterfactual conduct which C claimed was itself negligent in its Reply.

The third is that the allegation of unlawfulness that C raises in its Reply may even be time-barred. And, if it is, the plea may allow C to argue that it should be able to amend its Particulars so as to include the substantive new claim on the basis that it is one which arises out of facts already in issue under CPR 17.4(2). Barling J rejected MasterCard’s submission that this was to allow the retailers to pull themselves up by their own bootstraps. The retailers therefore succeeded in bringing a new claim into their Particulars through the “back door” of their Reply.

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