Jul 31, 2017

Legal Insight Into Mastercard’s $18 Billion Lawsuit Blocked By The UK’s Competition Appeal Tribunal

In 2014, the European Court of Justice finally decided that Mastercard’s ‘interchange fees’ for cross-border[1] transactions were too high and therefore flouts competition law practices which primarily are in place to protect consumers. Subsequent to that ruling, Sainsbury (a UK retail company) brought an action against Mastercard in the UK, before the Competition Appeal Tribunal, and won, the damages Mastercard was asked to pay to Sainsbury was enormous[2].
However, at the trial, Mastercard made some pertinent arguments, and the court professed some dicta that soon led to the present class action led by Walter Merricks on behalf of some 46 million UK consumers against Mastercard in another suit. Mastercard was being sued in the class action for $18 Billion—definitely, the biggest ‘supposed’ class action that would have gone to trial in UK’s history—for the damages suffered by consumers as a result of the ruled Mastercard excessive interchange fees.

For a proper understanding, it might be necessary to discuss some words/phrases, interchange fees, its practicalities, and the Competition Appeal Tribunal especially.

For a proper understanding of interchange fees, examine this scenario: A as a credit card company provides the technology necessary for B’s customers to buy items with their credit/debit cards anywhere in the world A’s services covers. One of B’s customer is C. Now, C wants to buy an item from a retailer D, D also has its own bank E—that helps process payments when a credit card is swiped in his store. The idea is that anytime C swipes his credit card issued by B through A in D’s store, B charges a fee from E for the transaction, the money charged by B goes to A of course. Sadly (for D), for his efforts, E also charges a small amount for helping D’s customer—C—use his credit card in D’s store. [Note the definition of the keys in the scenario, A is Mastercard, B is the issuing Bank/Customer’s bank, C is the Customer, D is a Retailer, E is the acquiring Bank/Retailer’s bank].

From the above, assuming the price of an item is listed by D as $50, at the end of the day, when E pays A through B, and when E removes his own small commission (often called an ‘add-on-rate’) from the $50, D might be having $45, instead of $50. Now, to avoid all of this, what D do is that since the value of the item in his store is actually $50, and D wants exactly $50 from customers so as to keep his business going and make profit, he charges customers $55 for an item that has the value of $50 (the $5 addition is the cost of the payment processing D has to pay/suffer for customers using their credit cards in D’s store). This is why when customers go to some stores and say they want to use their credit card to pay for an item, the store keeper says it charges an extra $3 or $5 or thereabout for credit cards—this cost is to defray the expenses of the card payment processing. Some stores will say they only accept credit cards for items that cost $10 or more, this is because, say an item cost $5, and for the transaction the two banks involved in the payment processing—issuer and acquirer—are already charging together like $3, there is no way the retailer can make profit off such transaction, because he would be left with $2 for a $5 item. Of course, the sophistication of interchange fees cannot be properly dealt with in an article as this, but a small clarification on how it works is only necessary.

Now, consider the second store mentioned in the last paragraph—who only charges customers $3 or $5 any time a customer says he wants to use a credit/debit card. What this means is that the retailer maintains the actual value of the item, in our previous discussion—say at $50—but only inflates it when a customer opts to use a credit card, at which point, the customer has to pay an extra $3 or $5. The rationale behind this is that the retailer here maintains the actual price of the item (at $50) so that a customer paying cash wouldn’t have to pay an inflated price of $55—which contains a card payment processing fee for customers paying with credit/debit card. Now, these type of retailers are small scale retailers and are quite a few, they are the usual bodegas on most corners, they have the time to separate customers using credit cards from those making payment with cash. Large retailers like Sainsbury, Walmart, Tesco, Safeway, QuikTrip, however, do not have that luxury of time of separating customers, they just inflate the price of their items to (in our example) $55—so the item is $55—it doesn’t matter if you as a customer is paying cash or using your credit/debit card, everyone is paying $55 for a $50 item.
To be clear, the lawsuit against Mastercard in the present case is a by-product of the holding by the ECJ in 2014 that Mastercard charges a higher charge rate from issuing banks (B in our example above). The ECJ concluded that Mastercard’s attitude was anti-competitive, since customers would definitely have to use credit cards at stores, and Mastercard has been in business for a while, most banks would opt for its renowned services without considering the cost, since retailers would be the one paying Mastercard, and would have to sort the cost with their customers anyway. Before highlighting the nub of the present class action, it should be noted that as mentioned earlier, following the 2014 ECJ ruling, Sainsbury—a retail company in the UK—sued Mastercard for similar unlawful high card (interchange) fees in the UK, and won. That ruling, in fact, was what gave confidence to the present class action—it is rooted in the idea that if a retailer (Sainsbury) could win, then the customers who ‘suffered’ from the unlawful charges could also win and claim damages.

In the present case, the class action representative[3]—Walter Merrick—through the chosen notorious law firm—Quinn Emmanuel Urquhart & Sullivan LLP known for similar actions including the Sainsbury's case—sued for the damage and loss caused to customers in the UK between 1992 and 2008[4]. It must be noted that this lawsuit is by the customers and not retailers as Sainsbury—who won. The nub of the lawsuit is that in our above example, assuming Mastercard (A) ought to be charging C (through B) say 1% from every C’s (customer’s) purchase, and as ruled by the EC and ECJ (in the Sainsbury's case), instead of the 1%, let’s assume Mastercard (A) is charging 3% from such purchase. The customers in the present class action are asking for the difference between the 1% and 3%, which is 2% on all of their transactions made with their Mastercard debit/credit cards between 1992 and 2008. They aggregate the damages to be around $18 Billion. 
The case is brought before the Competition Appeal Tribunal. The Tribunal was created by the UK’s Enterprise Act, 2002, and was given new special powers especially as regards class actions in competition law related cases via the Consumer Rights Act, 2015—which also amends the Competition Act, 1998. As the name suggests, the Tribunal handles competition law related issues, and for the new class actions capable of being brought by a large percentage or group of people/consumers, the Consumer Rights Act in its Schedule 8 made some salient provisions[5]. Just like in the US[6], in section 47B(4) of the Competition Act[7], or as discussed under the new CRA[8], “collective proceedings may be continued only if the Tribunal makes a collective proceedings order”. So, Mr. Walter Merrick as the lead representative of the 47 million consumers being represented has to get a collective proceedings order before proceeding against Mastercard in their lawsuit. It was at the hearing for the grant of the order that the court sees no reason and refuse to grant the prerequisite order.

Definitely, the Tribunal and the collective proceeding order as in the US is a mechanism put in place to disallow class actions that are not meritorious (as the present case against Mastercard) from proceeding to proper trial. So, before limited court resources are wasted on a class action often involving a lot of litigants, the court administration devise a means of ‘weeding out’ non-meritorious cases by making class action representatives get an order to proceed to trial from the court/Tribunal first. At the hearing for the grant of the said order or otherwise, the Tribunal relied on two main reasons to refuse the grant of the prerequisite order. One, the Tribunal highlighted its concern on the difficulties embedded in providing evidence(s) that Mastercard fees (charged by it through the issuing banks) were actually passed on to or charged from the customers who are suing Mastercard in the envisaged class action. Secondly, it is the Tribunal’s view that it would be hard to ascertain or calculate the individual losses of each customer considering the complexities of the transactions, and deductions always made in payment processing.

On the first rationale for refusal, Mastercard argued that the retailers are the culprit—charging inflated prices on items (in stores) so as to defray the payment processing cost and not them—and because of that, Mastercard argued it shouldn’t be liable. This argument is sound, unfortunately, the plaintiffs were too grounded in a seemingly opposite argument made by the same Defendant—Mastercard—in a prior Sainsbury suit. In the Sainsbury suit, Mastercard’s argument was that Sainsbury has no ground to sue them because the cost (excessive interchange fee) they complained of and want to retake from them were actually passed off by the retailer to the consumers, so in essence, the consumers are the ones who suffered, and not the retailer. The Tribunal, of course, rejected this argument, and in holding Mastercard’s excessive interchange fee as the causal factor opined that “Sainsbury would have passed on to consumers what it could, made whatever cost-savings it could and—to the extent that its draft Budget returned a profit that was different to market expectations—adjusted its spending…so as to return the expected profit”, It continued, “if Sainsbury did not seek to recover the inevitable costs of its business from its customer, it would rapidly lose more than it made, and become ex-business”. The Tribunal clearly held Mastercard as the instigator of the inflated price of items sold by retailers as Sainsbury in this case.

It was because of the above ruling that the plaintiffs thought if Mastercard is being held as the instigator in Sainsbury, then the consumers should consequently be able to recover for their losses as instigated as well especially since Mastercard itself has admitted and argued that the customers are the ones who suffered from their excessive interchange fee. The plaintiff refused to understand there is a difference between a retailer’s claim and a consumer claim, in a consumer claim, it is a whole different set of facts that need to be proved. The plaintiffs also forgot that in almost prominent legal systems[9], ‘precedents’ are different from ‘connection’ between cases, and also that two cases might be connected, it does not necessarily mean a ruling in one would serve as a precedent or continuation in the second one. In fact, this is the basis upon which the ‘distinguishing’ discussion in applying precedents at court trials comes in—as there are no two similar cases, and cases can be distinguished.

It is no wonder that Mastercard’s argument in the Sainsbury's case appears to be a two-edged sword which can be used and used in the almost opposite as well—this is the brilliance in Mastercard’s argument. Mastercard is now saying in the present case that although it suggested that the consumer who actually suffered are the ones that ought to be suing them in the prior Sainsbury case—an argument which was refused—still, the cost was added by the retailers and not Mastercard. These two arguments do not flow, especially if considered in the same case where a ruling has been made that Mastercard instigates the inflated cost of items by retailers, but it buttresses the age-long legal principle that admission/arguments in a case cannot be transferred to another case—each case is different and must be proved differently, in fact, the Plaintiff must prove his case beyond the preponderance of evidence in the present case without necessarily relying on what transpired in another case, even if they are connected.

The ongoing also signaled the incompetence and greed of the plaintiffs in this case. From the legal perspective, since the current plaintiff representatives are similar in both Sainsbury and this class action, they could have looked for a way to join the class action to the Sainsbury case where Mastercard was found as the instigator of the consumer peril, it would have been easy to claim damages on the customers behalf in that case as the case would have flowed. But the plaintiffs wanted a new class action suit where they would be able to sue for $18 Billion, and that greed, lack of insight and incompetence has affected their case.

On the side, the Tribunal wasn’t sure the said excessive Mastercard interchange charges complained of were actually charged by retailers on their customers—i.e. the retailers might have inflated the prices of some item and not of some other items, there is no way the Tribunal could have known that all the charges (which are alleged to be excessive) were actually charged to all the 46 million customers in the class action. So, what the Tribunal is saying is that, at best, Mastercard is an instigator, but we are not sure if the excessive interchange fees it charges were collected via an increased price of items from the 46 million customers in this class action. As mentioned above, the separation of the retailer and consumer claims destroyed the present consumer claim, it would have been hard for Mastercard to say there was no evidence that the excessive fees were passed to the customer in the same suit where the Tribunal had already held Mastercard as the instigator of the inflated price on items sold by the retailers.

The second ground for refusal is that the Tribunal was wary about the difficulties embedded in calculating individual losses for the 46 million customers. On this ground, it may appear that the Tribunal was wrong as contested by Walter Merricks. The consideration of whether (total) damages could be calculated (although should not be excessively speculative in an ideal civil trial) appears not to be relevant in determining whether a pre-trial collective order should be granted or otherwise, as that should be a trial issue after the defendant has been found liable. Section 47B contains most of the requirements for the grant of a pretrial collective proceeding trial order, there is nothing like the possibility of ascertaining damages payable by the defendant before the grant of the order. In fact, more convincingly, section47C(2) states that “the Tribunal may make an award of damages in collective proceedings without undertaking an assessment of the amount of damages recoverable in respect of the claim of each represented person”.

The problem with the ongoing argument is that it is not flawless when closely examined. The Tribunal was right for refusing to grant the order on this ground as well, this is how. It must be understood that primarily, the essence of the pretrial order is to disallow trials that are non-meritorious and won’t stand so as to save the Tribunal’s limited resources. It is in the spirit of this duty that the Tribunal reasoned that a trial that if it embarks on will lead to undeterminable damages is a waste of time. Also, section 47C(2) closely read only applies to an instance where the proceeding itself which the order contemplates has concluded, and where the court has determined that the defendant is liable. In the present case, from the order pretrial, the Tribunal has already seen grounds to find that Mastercard is not and will not be liable, hence its decision to block the order. On the side is the argument that the use of “may” in section 47C(2) suggests the Tribunal has discretion, which can be (prudently) exercised.

Also, how can the Tribunal effectively calculate the damages payable by Mastercard when we have already established that the retailers inflate their prices to cover Mastercard charges and these prices applied to both customers using their credit/debit card and those paying cash too? What about the extra money made by the retailers from customers who paid with cash on a similar item or service which contains the alleged excessive interchange Mastercard charges?, how will the Tribunal differentiate between the customers paying with card and cash? The exercise posed by this last question is definitely an almost impossible task that gives room for high speculation on the number of customers who paid with cash only, those who paid combining cash and card, and those who paid with their cards only—since the envisaged trial is meant to seek restitution for only customers who holds and uses a debit/credit card carried by Mastercard.

The complexities of interchange fee must be understood by competition law regulators in the light of effective card services, need for continued innovation in payment system, and the current necessitated increase in security of digital payment incited by this modern era. How do competition law and its regulator expect those who serve as the intermediary as Mastercard, VISA provide the necessary effective services if customers are complaining about interchange fees and suddenly exclude all of the benefits of the digital payment system they enjoy?. The line must be drawn between competition law and practicing business in a fair manner—a manner Mastercard is known for—considering the fact that similar cases in the US had been thrown out by US courts, and even in the UK, the High Court still ruled in January 2017 that Mastercard had charged interchange fees at a lawful level, and has not been anticompetitive in similar cases brought by retailers. Competition law must be careful so it doesn’t stifle innovation, and good companies with fair business praxis out of the market, as competition law tenets could then have a cobra-effect since it is the consumers for which it was initially created for that will suffer from the imminent negative consequence(s).

Scheming through the new Consumer Rights Act, 2015, it could be reasoned that by virtue of section 47B(13) which provides that “the right to make a claim in collective proceedings does not affect the right to bring any other proceedings in respect of the claim”, that consumers/plaintiffs in the class action can still bring an action before the normal High court in the UK. This reasoning will also be wrong, as this provision contemplates an instance where the action has not been brought at all—i.e. where the right to bring an action has not being exercised. What is pertinent is that, whatever the interpretation one gives section 47B(13), that section wouldn’t have contemplated an instance where the plaintiffs can bring simultaneous actions, or different but similar actions with similar facts in different courts because the ruling of the court of first instance is unfavorable, such interpretations would be absurd and would constitute abuse of court process. If there is one thing the court frowns at the most, it is the abuse of court process, as same can attract cost by the defaulter to the court and the non-defaulting party. On the side, even if it is possible to still instigate the same action at the High Court in the UK, the intention of the Enterprise Act and CRA would have been relegated or almost obviated since these laws have created a special Tribunal for competition law related issues as this. It would be unbecoming of a High Court that entertains normal civil claims to entertain a competition law case, especially when there is a statutory Tribunal created for such special cases. 

The only remedy for the class action order which has been blocked thus seems to be an appeal to the Court of Appeal in the UK, but the appeal also needs the leave of the Tribunal—see section 49(2)(b) of the 1998 Competition Act—which the Tribunal can and will most likely deny in its discretion. Although upon denial, the plaintiffs can proceed to the Court of Appeal for its leave based on first application to the Tribunal and refusal. Even then, the possibility of the Court of Appeal granting the leave is bleak.

[1] Mastercard being a US company, but doing business in Europe
[2] The CAT awarded Sainsbury's damages as follows :
- £102,7 million for credit card overcharges, reduced by £33 million due to excess interchange received by Sainsbury's Bank
- £760,000 for debit card overcharges
- Compound interest costs on 50% of the overcharge amount - 20% on cash balances and 30% on the cost of borrowing [See: http://www.cmspaymentsintelligence.com/eu/blog/article/sainsburys-mastercard-open-floodgates-uk-merchants]
[3] Most class actions require a representative who will represent their interest in court since all the class members can’t come to or address the court. The representative is often approved by the court as it must find him/her capable to defend the class member’s interest.
[4] 2007/2008 being the period when the European Commission ruled Mastercard’s (interchange) fees were anti-competitive
[5] See especially section 5 of Schedule 8—which amends section 47 of the 1998 Competition Act, by creating a new section 47B
[6] The new CRA class action operation is modeled after what obtains in the US, it also shares the opt-in (which is automatic under the UK law in so far as a consumer is considered eligible) and opt-out of class member feature as it presently obtains in the US.
[7] 1998
[8] Consumer Rights Act, 2015
[9] Continental European Legal System and common law.

Gbenga Odugbemi
Ed’s Note – This article was first published here