It was an absurdly large lawsuit covering an absurdly large class: U.S. law firm Quinn Emmanuel wanted to sue MasterCard for 14 billion British pounds on behalf of roughly 70 percent of the U.K. population, which was supposedly overcharged over a 16-year period due to MasterCard’s interchange-fee policy.
And a U.K. court did the logical thing and rejected it. For the commonsense reason that the plaintiff lawyers couldn’t possibly explain how much their individual clients had lost, let alone provide a reasonable method for calculating those losses.
The July 21 decision by the U.K.’s Competition Appeal Tribunal was a big loss for Quinn Emmanuel and Chicago litigation funder Gerchen Keller, which was purchased this year by publicly traded Burford Capital. It also puts plaintiff lawyers on notice that converting the U.K.’s new law allowing consumer class actions into profits won’t be as easy as in the U.S.
Quinn Emmanuel was hoping to capitalize on EU rulings declaring MasterCard’s interchange-fee policy to have anticompetitive effects on retail prices. The theory is complicated but boils down to this: By setting a default fee for so-called issuing banks, which issue credit cards, to charge the acquiring banks that service merchants, MasterCard created an environment for those fees to remain unreasonably high. Since retail is a competitive market, the lawyers claimed, customers overpaid every time they shopped at a merchant that accepted MasterCard, regardless of how they paid.
There’s a lot wrong with this theory, not least because it assumes retailers who accept MasterCard can somehow raise their prices to pass through higher interchange fees when other retailers don’t. Even if they could raise prices in some markets, say, high-end jewelry, they certainly couldn’t do so in cutthroat markets like gasoline or groceries. And the number of retailers who accepted MasterCard increased 60% in the U.K. over the 16-year period, further complicating the purported economic effects.
But the bigger problem is proving individual damages. The millions of consumers whom Quinn Emmanuel wanted to transform into clients display spending patterns that not only vary among individuals and regions, but change over time. A 20-year-old might be spending mostly on clothing and gas, a 70-year-old on groceries. And while a retail customer who pays cash might arguably have suffered damages under the lawyers’ theory, not so a MasterCard customer with a card that paid out rich rewards or airline points.
In the U.S., this so-called ascertainability factor is at the center of a heated battle among courts. My theory is simple: If plaintiff lawyers can’t identify their clients or explain to the court how they are going to pay them their share of damages, they don’t have a case, period. But many lawyers view themselves as private attorneys general, charged with the sacred duty of holding corporations accountable regardless of whether they actually have injured clients. Not incidentally, the class-action procedure allows them to negotiate extremely lucrative fees in settlements on behalf of those distant and often unknowable clients.
A divided U.S. Supreme Court, in the 2012 decision Comcast v. Behrend, rejected a class action on behalf of Comcast customers because lawyers couldn’t come up with a plausible economic theory to calculate their losses. But then in last year’s Tyson Foods v. Bouaphakeo, the court backpedaled a bit, allowing a “trial by formula” class action where Tyson workers were allowed to sue for uncompensated minutes spent donning and doffing protective clothing when the evidence consisted of statistical averages that almost certainly would award some undeserving class members money.
The U.K.’s CAT, a specialized court set up to hear appeals under the new class action procedure established in the Consumer Rights Act of 2015, took a tougher approach.
“It is impossible in this case to see how the payments to individuals could be determined on any reasonable basis,” the court said. The basic idea in any lawsuit is to restore the plaintiffs to the position they’d have been in without the breach. “But this application for over 46 million claims to be pursued by collective proceedings would not result in damages being paid to those claimants in accordance with that governing principle at all.”
The court agreed it would be “totally impractical” for class members to bring claims on an individual basis. “However that is effectively the position in most cases of widespread consumer loss resulting from competition law infringements,” the court said. “It does not mean that an application to bring collective proceedings in such a case must always be granted.”
The funding agreement, attached to court documents, was also a bit funky. The class representative, who under the loser-pays system in England could be liable for MasterCard’s costs, wasn’t fully indemnified. Burford – whose own costs were estimated at 19.5 million pounds — could cancel its contract at any time and even if that was unenforceable it limited its liability to 10 million pounds. That could give the representative an incentive to push for a settlement to save his own skin, at the cost of class members.
Burford, meanwhile, agreed to put in up to 35.6 million pounds and stood to reap the greater of GBP 135 million or 30 percent of undistributed proceeds up to GBP 1 billion, plus 20 percent of anything after that. Hardly an incentive for Burford to push for the type of no-costs-barred notification process to make sure every last class member filed a claim.
U.K. law actually requires unpaid amounts in class actions to be paid to charity, although judges have some leeway to pay some of the unclaimed funds to class representatives to compensate them for “costs.” The court said it was not inclined to treat Burford’s conditional 400 percent return a legitimate “cost,” but noted the plaintiff lawyers and Burford had agreed to amend their contract to make the class representative liable for whatever amount the court ordered.
The important point behind the CAT ruling is that judges can never leave individual claimants out of litigation, regardless of the tales their purported lawyers tell in court. The concept is enshrined in the U.S. Constitution: Federal courts only have jurisdiction over discrete “cases and controversies,” and that means individuals who suffered a loss and are seeking compensation.
The U.K. court took a close look at this case and said the damages may well have occurred. But with no reasonable method for calculating those damages or apportioning them to individual consumers, this was really just an exercise in creative lawyering designed to generate a big fee (and a rich return for the outside funders). The courts have more important things to do than provide a venue for such activities.