Competition Appeal Tribunal gives guidance on pass-on claims

United Kingdom

In a significant ruling, the Competition Appeal Tribunal (CAT) has reflected on the difficulties that arise when assessing an allegation that the victim of a competition law infringement has passed on all or part of its loss to another party. Such an allegation may be made by a defendant seeking to reduce its liability to the victim, or by the party to whom the loss was passed on, which may be able to bring a claim in its own right. The CAT’s judgment provides guidance on the evidential, definitional and legal aspects of such claims.

Background

Pass-on is one of the main issues between the parties in the so-called Merchant Interchange Fee Proceedings, in which claims are brought against Mastercard and Visa by various merchants, as well as by Mr Walter Merricks in a representative action on behalf of consumers. We have reported on this litigation previously, most recently here.

All the claimants allege that they suffered losses as a result of excessive fees, known as Multilateral Interchange Fees or MIFs, charged by Mastercard and Visa. The merchants claim, broadly speaking, that they absorbed these costs. The consumers, on the other hand, claim that the costs were passed on by way of higher prices.

Difficulties in proving pass-on

The CAT in The Merchant Interchange Fee Umbrella Proceedings [2022] CAT 31 set out three main difficulties for parties seeking to establish pass-on:

  • The evidential difficulty of proving that a given increase in price, reduction in profits, etc, was or was not due to the excessive MIFs rather than to other factors;

  • The definitional difficulty of establishing what counts as pass-on – for instance, if a merchant responds to an elevated MIF by reducing staff count or wages to compensate, do the affected employees have a claim for damages against Mastercard or Visa, and must the employer’s damages be correspondingly reduced?

  • The legal difficulty of determining what needs to be pleaded, and by whom, in relation to pass-on, given that it can function both as a claim and as a defence.

The definitional difficulty

The Supreme Court previously considered the definition of pass-on in the case of Sainsbury’s Supermarkets Limited v Mastercard Incorporated & Others [2020] UKSC 24. In its judgment, the Supreme Court distinguished four possible courses of action which a merchant could take in response to excessive MIFs:

  1. It could do nothing and accept the resulting loss of profit.

  2. It could reduce its internal costs, e.g. its wage bill.

  3. It could seek to reduce its external costs by negotiating with suppliers.

  4. It could increase prices.

The Supreme Court indicated that pass-on would occur in scenarios 3 and 4, giving rise to a potential claim by the affected suppliers (in scenario 3) and/or consumers (in scenario 4) and a corresponding reduction in the damages which could be claimed by the merchant. However, the court indicated that there would be no pass-on in scenarios 1 and 2, meaning that in these cases, the starting point would be that the merchant could recover the overcharge in full.

Before the CAT, Mastercard and Visa argued that this indication by the Supreme Court was binding on the Tribunal. However, the CAT held that the Supreme Court’s comments were obiter and that it could, in principle, consider the definitional issue afresh if, for instance, there was evidence that the losses had been suffered in part by the merchants’ employees rather than the merchants themselves.

The legal difficulty

The merchants raised what they said was a lack of clarity in a passage of the Supreme Court’s judgment in Sainsbury’s dealing with questions of mitigation, legal burden of proof, and evidential burden. Mastercard and, indeed, the CAT were critical of the merchants for failing to formulate this issue more precisely. The CAT concluded that there was no real lack of clarity and that the point between the parties was really a pleading point. In essence, the question was whether a party seeking to rely on pass-on had to plead and prove that the merchants took a conscious decision, by reference to the MIFs in particular, to increase prices, or whether it was sufficient to show that the MIFs were taken into account as one cost amongst many when setting their budgets and prices. Based on previous case law as well as practical considerations, the CAT held that the latter position was correct.

The evidential difficulty

Having set out its conclusions as to what pass-on is and what must be pleaded in order to establish it, the CAT returned to the question of what evidence is required. The two defendants had taken different approaches on this point, with Visa proposing to rely on expert econometric evidence and academic studies of pass-on rates, whereas Mastercard intended to seek disclosure on a sample basis to show what decisions the merchants actually took in relation to pricing.

In line with its decision that there was no need to show a specific decision to raise prices in response to the elevated MIFs, the CAT ruled that Mastercard should not be permitted to rely on factual evidence of this type. It indicated, however, that it might be prepared at a future date to allow some limited disclosure if so advised by the econometric experts.

Comment

Anyone who is facing or considering bringing a claim for damages arising from a competition law infringement should study this judgment carefully. The CAT’s willingness to depart from the Supreme Court’s obiter comments on the definition of pass-on, if it finds wider agreement, may open the possibility of new classes of claimants in collective proceedings where losses may have been passed on to employees or other affected third parties. Likewise, both claimants and defendants will benefit from the practical guidance the judgment provides as to how such claims should be pleaded and proved. While the CAT’s ruling limiting factual evidence most obviously benefits the claimants in the present case, the greater cost-efficiency it promotes may ultimately lighten the burden of litigation on all involved.