CAT approves settlement in Merricks v Mastercard

The Competition Appeal Tribunal (CAT) has handed down its written judgment on the application for approval of a £200 million settlement with respect to the collective action proceedings brought by Walter Merricks (the CR) against Mastercard, on the interchange fees charged by Mastercard. The aggregate damages were initially estimated in the claim form at around £14 billion. The settlement application was opposed by the CR's funder, Innsworth Capital (the Funder).

The CAT "fully recognise[d] the importance of litigation funding" in its judgment, and noted the "extraordinary" circumstances of the settlement, particularly in light of its unusually low value relative to the initial claim value.

Background

In 2007, the EU Commission adopted a decision that the setting by Mastercard of the EEA multilateral interchange fee (EEA MIF) amounted to an infringement of Article 101 TFEU. The CR issued a follow-on opt-out claim against Mastercard in the CAT on behalf of what was estimated to be around 46.2 million UK residents (the Class Members).

The Merricks claim was initially valued at around £14 billion, based on losses incurred by the Class Members on: (1) UK domestic transactions; and (2) EEA cross-border transactions. UK domestic transactions, to which the EEA MIF did not apply, comprised about 95% of the claim value.

A number of judgments during the course of the proceedings significantly affected the value of the claim. In particular, by the time of settlement it was common ground that approximately 95% by value of the transactions were domestic transactions to which the EEA MIF did not apply and that in order to succeed the CR would have to show, among other factors, that the relevant UK interchange fees were caused by the EEA MIFs. This affected the CR's perception of the strength of the claim in respect of UK domestic transactions, and the likely value of the claim in respect of cross-border transactions. Indeed, the judgment refers to the CR having received advice from his counsel that the claim in respect of UK domestic transactions should not be pursued at trial.

The CR and Mastercard entered into settlement negotiations. Informed by the low prospects of success on the claim concerning the UK domestic transactions, no value was given to those claims. Accordingly, and in light of the likely value of the claim in respect of the UK-EEA transactions, the CR and Mastercard agreed a settlement sum of £200 million (the Settlement Sum).

The Funder, however, argued that the Settlement Sum was too low. It also threatened to (and ultimately did) commence arbitration proceedings against the CR for alleged breaches of the applicable litigation funding agreement. As a result, the CR requested a £10 million indemnity from Mastercard to cover the CR's liabilities in respect of the threatened arbitration proceedings, which Mastercard agreed to.

Since the proceedings were conducted on an opt-out basis, the settlement agreement required approval from the CAT to ensure that the interests of the Class Members are protected. The CR and Mastercard therefore applied for the CAT's approval.

The Funder intervened, objecting to the settlement, including as to whether there should be a settlement, the Settlement Sum and the proposed distribution arrangements. 

The judgment

The CAT ultimately approved the settlement, subject to amendments to the distribution arrangements put forward by the CR and Mastercard.  In reaching that decision, that CAT considered the settlement application in two stages: first, whether the settlement was just and reasonable, and second, whether to approve or amend the distribution arrangements put forward.  

Whether the settlement was just and reasonable

• The Funder submitted that the settlement had to be just and reasonable to all involved stakeholders, including the Funder. The CAT disagreed and held that the test for approval of a settlement in opt-out collective proceedings is whether it is "just and reasonable" to the Class Members only who are not actually involved in the proceedings.
• The CAT agreed with the CR and Mastercard that it was reasonable to discount the value of the claim connected to the cross-border transactions from a headline of £707 million. The discount accounted for, among other things, errors in the initial quantum calculations, a judgment against the CR on limitation in respect of certain transactions, and the likely position on pass-on of losses from merchants to the Class Members. As regards the UK domestic claims, the CAT also found that it was reasonable to exclude these. It made high-level observations as to why the CR's case was weak on those transactions.
• Ultimately, the CAT weighed various factors and found that the Settlement Sum was "just and reasonable", even in circumstances where it amounted to less than 1.5% of the value of the initial claim. The CAT was not deterred by the lack of an independent counsel's opinion from the CR that the settlement was just and reasonable in the interests of the Class Members, but recognised that in other cases this may be expected. 
• In reaching this conclusion, the CAT confirmed that the £10 million indemnity from Mastercard did not cause a conflict of interest for the CR, in part because the CR had already decided to enter the settlement agreement before he requested the indemnity. It could not therefore have affected his decision-making process.
• Notably, a factor weighing in favour of the approval was that the CR and the Funder had fallen out very publicly over the settlement, and as a result, the CAT could not see how the case could progress if it did not approve the settlement.

Distribution proposals

• The CAT rejected the suggestion that it had a binary choice between accepting the settlement and accompanying distribution arrangements proposed by the parties, or rejecting the application. On the contrary, the CAT held that it was able to approve the settlement but amend the distribution arrangements.
• The CAT exercised its discretion in amending the distribution arrangement put forward by the CR and Mastercard. The arrangement approved by the CAT divided the settlement into three "pots":
  1. Pot 1. The first £100 million of the Settlement Sum was ring-fenced for distribution to the Class Members. Payments are to be made to Class Members who claim on a per capita basis. The per capita payment made to each Class Member will increase or decrease depending on the rate of take-up, capped at £70. If more Class Members than expected come forward, the sums payable to Class Members may be topped up by Pot 3 (see below). Any leftover unclaimed sums will go to charity alongside sums left over from Pot 3.
  2. Pot 2. Pot 2 is ring-fenced to pay the Funder's costs of the claim, estimated at around £45 million. The costs include: (1) the direct costs, fees and disbursements paid by the Funder on behalf of the CR to date; (2) the Funder's own costs, such as the costs of obtaining independent advice on specific issues in the proceedings; and (3) any anticipated future costs to resolve the proceedings. Some elements of these costs are to be assessed by an independent costs Judge (paid for from Pot 3).
  3. Pot 3. Pot 3 comprised the remainder of the Settlement Sum including the return to pay to the Funder. The CAT drew on case law from Australia and Canada to assist it in considering what the appropriate return to the Funder should be. It weighed factors such as the litigation risk assumed by the Funder, the adverse costs risk assumed by the Funder, the time to reach settlement, the outcome and the amount of the settlement. The conclusion the CAT reached was that the Funder should receive a return on its investment of 1.5 or £68 million (i.e. the profit element was 50% of its incurred costs). This, the CAT noted by way of cross-check, amounted to 34% of the Settlement Sum.

  After paying out any miscellaneous costs of the CR, the Funder's profit element, and topping up Pot 1 as required, the remainder of Pot 3 was designated for the charitable recipient (the Access to Justice Foundation).

Key takeaways

• The CAT held that a return on investment for the Funder of 1.5 was appropriate. This was significantly lower than the return the Funder had sought. However, the CAT stressed that the circumstances of this case were extraordinary.
  • The Settlement Sum was less than 1.5% of the initial claim value, reflecting that the settlement reached was "very far from a success".
  • The Funder had intervened very publicly, sought to oppose the settlement, and requested a very significant portion of the Settlement Sum be paid to it rather than Class Members. 
  • Despite this, the CAT emphasised (as it has in previous settlement decisions) the important role played by litigation funding in collective proceedings. 

For the reasons above, the CAT was clear that its approach in this case "should not be regarded as a guide for more positive settlements of cases that reflect better the public policy behind the introduction of collective proceedings."

How the CAT might approach the question of distribution (including funder return) will be case specific. However, this case demonstrates that in cases where the outcome is marginal, or the settlement sum relative to costs is low, the CAT will not hesitate to adapt parties' proposals. 

• For practitioners, the judgment makes clear that:
  • Parties are subject to a duty of full and frank disclosure when applying for settlement approval, and the CAT will expect to see arguments both for and against the settlement in the submissions put before it.
  • CRs should produce full opinions from their counsel, explaining why the settlement is reasonable to the class members.
  • As the CAT needs a proper opportunity to consider settlements and the related evidence and submissions, settlements "at the door of the court" are problematic and it should be recognised that the outcome of such an approach is likely to be that the trial will be adjourned and re-fixed if the settlement is not approved. To protect a trial date, ensure applications are made as early in the proceedings as possible.