Mastercard settlement puts UK class action lawsuits on trial

A groundbreaking legal claim against Mastercard had been billed as the UK’s largest class action lawsuit, putting much of the population in line for hundreds of pounds each in compensation for alleged overcharging by the global payment network.

But after a legal battle lasting over eight years, the prospect of a big payday for tens of millions of people — and the threat of a multibillion pound bill for Mastercard — has failed to materialise.

The US company this week reached an agreement in principle to settle the case, brought by former financial ombudsman Walter Merricks on behalf of about 46mn consumers, for £200mn — a small fraction of the £14bn the claimants had originally sought.

Details of the agreement, including how the pot would be distributed, have yet to be confirmed, but the headline figure equates to just a few pounds per eligible claimant.

The deal sparked an extraordinary public spat between Merricks and the financial backer of the case, Innsworth, which is owned by US hedge fund Elliott. The litigation funder criticised the agreed sums as “too low”.

The settlement in the case, which is among the first to near a conclusion since the right to bring collective lawsuits on behalf of consumers was enshrined by legislation passed in 2015, has also attracted broader scrutiny.

Proponents of the nascent class action system, which has allowed a wave of claims to be filed in the Competition Appeal Tribunal (CAT) against companies including Apple, BT and Microsoft, have cheered the regime as a much-needed way to hold companies accountable for unlawful anti-competitive behaviour.

Yet cases have been bogged down by protracted arguments over process. Critics contend that dealing with such claims is ensnaring corporate Britain in legal red tape, and seized on the relatively small payout in the Mastercard case as evidence such litigation fails to result in meaningful redress for consumers.

“It’s fairly likely that the lawyers will be paid more than will be distributed to the class members,” said Kenny Henderson, partner at law firm CMS.

“This claim has been watched closely as a bellwether for the UK’s class action regime, but this settlement indicates that the regime is dysfunctional.”

The characterisation is dismissed by Charlie Morris, chief investment officer of Woodsford, which has provided backing for several high-profile CAT cases including ongoing claims against railway companies for alleged fares overcharging.

He said the regime helped facilitate access to justice, noting it was not “viable” for customers in such cases to bring claims individually given the cost of doing so in contrast to the level of compensation sought.

As well as compensating victims, the regime also “serves as a form of private regulation, which has the effect of deterring anti-competitive behaviour”, Morris said.

The claim against Mastercard was that it imposed unlawful fees on transactions processed through its network over several years. The company said it was “pleased to have reached an agreement in principle to put this case behind us”.

The case, in common with other claims of its kind, was brought on an “opt-out” basis, meaning consumers are automatically included unless they proactively state they do not want to take part. Compensation, however, will only go to those who apply for it.

Merricks’ lawyer, Boris Bronfentrinker, said those who do so should secure about £40 to £50 each, although that would need to assume that only a small proportion of those eligible come forward.

Bronfentrinker, partner at Willkie Farr & Gallagher, said it was a “very good outcome” for consumers, who would receive “money they would not otherwise have got”.

Yet Innsworth said Merricks and Bronfintrenker “seemed to have rushed to settle” the claim, which had been struck without its consent. The funder said had written to the CAT, which would need to sign off on the settlement, to challenge it.

A person familiar with the case said Innsworth was expected to warn the CAT that approving the settlement could have “adverse implications” for the plethora of other class actions before it.

Bronfentrinker hit back, describing Innsworth’s claims as “absurd”. New evidence had come to light that showed “the realistic value of the claim has now become much clearer”, he added.

Innsworth’s opposition “has nothing to do with advancing the interests of UK consumers and is all about funder greed”, he maintained.

The war of words brings to the fore tensions that can develop between litigation funders and the claimant law firms and other parties, such as Merricks, on whose behalf such cases are brought.

Although they are seemingly on the same side, conflicts can arise between funder and fundee, as depending on the agreement, the former may be incentivised to seek a higher settlement amount.

Some lawyers said the outcome of the Mastercard case could give other funders pause. Charles Balmain, partner at White & Case, said: “If funders see awards or settlements that are a fraction of the headline claimed amount, they’re going to be even more rigorous” in determining which cases to fund.

“It may have a stultifying effect on the funding industry, in terms of their appetite to pursue” such claims.

The settlement comes at a time of broader uncertainty for litigation funders in the UK. The Supreme Court last year ruled that an agreement to award a funder a percentage cut of damages was unenforceable, in effect blocking similar deals.

Funders can be remunerated in other ways — most obviously by receiving a multiple of the sums they invest — but the ruling has complicated their relationships with fundees.

The Civil Justice Council, chaired by Sir Geoffrey Vos, Master of the Rolls, is meanwhile undertaking a review of the sector. An interim report published in October mooted the possibility of capping funders’ financial returns, although no recommendations were made.

The council, set up to make recommendations to the Lord Chancellor about possible changes to the civil justice system, is running a consultation that closes at the end of next month.

Despite the Mastercard judgment, the UK’s class action regime remains largely untested. More settlements and rulings should give a clearer picture on how much damages can flow to consumers.

A judgment is expected in a £1.3bn claim in the CAT against telecoms operator BT that it overcharged about 3mn landline customers. The case, financed by Harbour Litigation Funding, was the first claim of its kind to proceed to full trial earlier this year.

For UK corporate executives navigating the threat of class actions, said White & Case’s Balmain, “I’m not sure it [the outcome of the Mastercard case] is going to be a great relief”.

“Each case is different,” he said, adding that funders still have appetite for such cases. “That’s not going to go away completely.”