Economist’s Perspective: collective proceedings surge amid uptick of UK unfair pricing disputes

In summary

Since the UK Supreme Court’s landmark judgment in Merricks v Mastercard in December 2020, the CAT has granted 10 CPO applications as of May 2023. However, this should not be interpreted as the CAT just waving through CPO applications. Instead, as the proceedings of Dr Gormsen v Meta show, it will closely scrutinise CPO applications and will not grant a CPO application when it does not consider the requirements for approval have been met. It is important to present a credible methodology for economic analysis for a successful CPO application.

Discussion points

• The collective proceedings regime in the UK including the landmark case of Merricks v Mastercard
• Overview of UK’s collective proceedings from economist’s perspective
• Approach to assessing unfair pricing in proceedings Dr Kent v Apple and Dr Gormsen v Meta

Referenced in this article

• Walter Hugh Merricks CBE v Mastercard Incorporated and Others
• Dr Rachael Kent v Apple Inc and Apple Distribution International Ltd
• Dr Liza Lovdahl Gormsen v Meta Platforms, Inc and Others
• United Brands Company v Commission of the European Communities
• Flynn Pharma Ltd & Pfizer v CMA
• UK Trucks Claim Limited v Stellantis NV (formerly Fiat Chrysler Automobiles NV) and Others

Introduction

The Consumer Rights Act 2015 has introduced a collective proceedings regime in the UK that provides a collective action procedure for private damages claims in antitrust proceedings. Under the procedure, effective from 1 October 2015, a proposed class representative (PCR) can bring a claim in the Competition Appeal Tribunal (CAT) in the UK on behalf of a defined class of claimants. The CAT has the power to grant the PCR’s application for a collective proceedings order (CPO). The scope of cases covered under the regime is wide ranging: the class can be comprised of individuals or businesses, or both, and the claim can be brought on an opt-in or an opt-out, or a mix of both, basis as a stand-alone or follow-on claim in relation to antitrust infringements, such as cartels or abuse of dominance.

Since the introduction of the regime, there have been a number of CPO applications made to the CAT. Among them, Walter Hugh Merricks CBE v Mastercard Incorporated and Others (Merricks v Mastercard) represents a major milestone in the development of the UK’s collective proceedings regime.

As the first collective consumer claim brought under the regime, in September 2016, Mr Walter Merricks, acting as the PCR, commenced follow-on proceedings in the CAT against Mastercard seeking £14 billion in damages on behalf of 46 million class members in the UK on an opt-out basis for alleged losses suffered as a result of Mastercard’s default multilateral interchange fees.

In July 2017, the CAT refused to certify the proposed collective action as suitable to proceed, but in April 2019, the UK’s Court of Appeal set aside the CAT’s judgment and decided that the CAT had adopted a wrong approach to the assessment of evidence. The decision of the Court of Appeal had been largely upheld by the UK’s Supreme Court in its landmark judgment in December 2020, which had significantly lowered the initial certification hurdle for CPO applications to overcome and paved the way for future CPO applications to be certified. The case was sent back to the CAT for further consideration, and a CPO was granted by the CAT in August 2021 for the first time since the collective action regime was introduced in October 2015.

Since then, collective proceedings in the UK have gained momentum and become increasingly popular in recent years. As of 18 May 2023, a total of 31 applications for CPO have been made to the CAT. The year 2022 was particularly busy as it saw 14 applications made (with one application pending), while 15 applications were made from 2016 to 2021. Based on the information available for 20 out of the 31 collective proceedings, the total claim value for those 20 proceedings has already been estimated to be over £60 billion.^[1]

In this article, I provide a high level overview of the collective proceedings in the UK. Further, given that, as the next section shows, a number of the proceedings involve unfair pricing, I look into two representative cases, Dr Rachael Kent v Apple Inc and Apple Distribution International Ltd (Dr Kent v Apple)^[2] and Dr Liza Lovdahl Gormsen v Meta Platforms, Inc and Others (Dr Gormsen v Meta), and discuss the important role of credible methodology for economic analysis in the approval of CPO applications.

Overview of collective proceedings in the UK

As mentioned in the previous section, a total of 31 CPO applications have been made to the CAT since 1 October 2015 when the collective action procedure for breaches of competition law was introduced in the UK. In this section, I provide an overview of the collective proceedings in the UK from various angles.

Certification status

Since the approval of the CPO application in Merricks v Mastercard in August 2021, there have been increasingly more CPO applications being granted by the CAT. As of 18 May 2023, 10 applications out of the 31 CPO applications have been certified (eg, Merricks v Mastercard and Dr Kent v Apple).^[3] Seven out of the 10 certified proceedings are related to article 102 decisions. Of these seven proceedings, information on claim value is available for six proceedings, with a total claim value of just under £2.5 billion.^[4]

However, this should not be interpreted as applications just being waved through by the CAT. In fact, three CPO applications have been refused (ie, Trucks UKTC, O’Higgins FX, and Evans v Barclays) and one has been stayed (ie, Dr Gormsen v Meta). It is clear that the CAT will closely scrutinise CPO applications, for example, on whether the proposed methodology is credible for economic analysis in the trial phase. When the CAT does not consider the requirements for approval have been met, it will not hesitate to refuse or stay the application, as the case of Dr Gormsen v Meta shows, which I discuss in the next section.

Consumer class v business class

The UK collective action regime allows the defined class of claimants to be comprised of individuals or businesses, or both. This has been reflected in the 31 proceedings we have seen so far: 19 out of the 31 applications have been brought on behalf of a consumer class, eight on behalf of a business class and four on behalf of a mix of consumers and businesses.

Claims on behalf of business class members tend to have a higher aggregate claim value, a smaller class size and, hence, a higher average loss per class member. For example, in UK Trucks Claim Limited v Stellantis NV (formerly Fiat Chrysler Automobiles NV) and Others (UKTC v Stellantis), which is a collective proceeding on behalf of business class members, the PCR is seeking ‘compensation of up to £20,000 per truck for everyone who acquired one or more of the 648,000 or so medium and heavy trucks registered in the UK in the period 1997 to 2011.’^[5] This also means that the aggregate claim value could be up to £13 billion.^[6]

In contrast, in Dr Kent v Apple, a collective action for consumers, the claim was filed on behalf of around 19.6 million eligible UK iPhone and iPad users, with a claim value of up to £1.5 billion.^[7] This suggests that the average loss per class member would be up to around £80 per user, much lower than the claim value of up to £20,000 per truck in UKTC v Stellantis.

Opt-in v opt-out

CPO applications can be made on either an opt-in or an opt-out, or a mix of both, basis, but the majority of the 31 applications (23 out of 31) have been filed as opt-out collective actions, with another five filed as a mix of opt-out requested for UK residents and opt-in requested for non-UK residents. Only three of the 31 applications have been filed on an opt-in basis only.

The popularity of opt-out claims in comparison to opt-in claims is expected, not least owing to the challenges for an opt-in claim to garner a sufficient number of class members to make the claim viable for the proceedings, which tend to entail significant costs (eg, legal costs).

Article 101 v article 102 and stand-alone v follow-on

The split between proceedings relating to article 101 and article 102 is broadly even: out of the 31 applications, 17 of them relate to the violation of article 101 and 14 relate to the violation of article 102.

These applications can also be analysed through the perspective of stand-alone v follow-on, as a CPO application could be made on a standalone or follow-on basis. Out of the current 31 CPO applications, 19 have been filed as stand-alone claims, while seven have been filed as follow-on claims. There are also five applications filed on a mixture of stand-alone and follow-on basis.

Interestingly, all of the 14 claims relating to article 102 are on a stand-alone basis, while 12 out of the 17 claims relating to article 101 are either on a follow-on basis only or a mix of stand-alone and follow-on basis. Only five article 101 claims are on a stand-alone basis, with four of them related to the proceedings of Commercial and Interregional Card Claims v Visa/Mastercard.^[8]

This shows that follow-on claims and article 101 decisions are closely related. This is not surprising given the challenges of making a stand-alone claim under article 101 (eg, the difficulties in collecting evidence to prove liability in relation to cartel cases).

Further, out the 14 applications relating to violation of article 102, just two of them are related to exclusionary abuse only, while the other 12 claims are all related to exploitative abuse: seven of them are related to exploitative abuse only and five of them are related to both exploitative and exclusionary abuse.

Of the 12 claims that are related to exploitative abuse, at least five of them are expressly related to unfair pricing, which I discuss further in the next section.

Unfair pricing and the importance of credible methodology for economic analysis

Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits abuse of dominance. It lists as an example of abusive conduct ‘directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions’, which is generally interpreted as including unfair prices such as excessively high selling prices.^[9]

Excessive pricing is a challenging area in competition economics as both the economics theory and the jurisprudence are limited on the topic. As the CAT points out, ‘claims regarding excessive pricing involve extremely difficult combinations of law, fact and economics.’^[10] However, as discussed above, there are currently at least five collective proceedings in the UK that expressly involve excessive pricing. Therefore, I consider that this area is worth of further investigation.

Below I provide a brief introduction of legal guidance on approach to assessing excessive pricing and then discuss two proceedings, Dr Kent v Apple and Dr Gormsen v Meta, that show the importance of presenting a credible methodology for economic analysis in CPO applications.

Legal guidance on approach to assessing excessive pricing

The concept of excessive pricing is elaborated in the seminal case United Brands Company v Commission of the European Communities (United Brands), which sets out a two-limb test for excessive pricing in the judgement:

• whether the price is excessive (excessive limb) – the example mentioned in the judgment is a comparison between the selling price of the product in question and its cost of production; and
• if the price is determined to be excessive, then consider whether it is unfair in itself or when compared to competing products (unfair limb).^[11]

The judgement considers that a price will be both excessive and unfair if it bears ‘no reasonable relationship to the economic value of the product’^[12] and if it results in the dominant undertaking accruing ‘trading benefits which it would not have reaped if there had been normal and sufficiently effective competition’.^[13]

Following United Brands, there have been other cases such as Napp and Latvian Copyright that provide further guidance. The recent UK Court of Appeal judgment in Flynn Pharma Ltd & Pfizer v CMA (Flynn)^[14] provides the latest guidance regarding the application of article 102 through the two-limb test of United Brands.

In particular to economic value, the court holds that in broad terms the economic value of a good or service is what a consumer is willing to pay for it. But this does not apply in an abuse case because, as the judgment points out, otherwise true value would be defined as anything that a dominant firm could get away with. Instead, a proxy might be what consumers are prepared to pay for the good or service in an effectively competitive market.^[15]

Unfair pricing in Dr Kent v Apple^[16]

On 11 May 2021, Dr Rachael Kent, the PCR, made a CPO application to the CAT against Apple Inc and Apple Distribution International Limited (together Apple) seeking damages of up to £1.5 billion on behalf of around 19.6 million eligible UK iPhone and iPad users. Dr Kent alleged that Apple occupies a position of dominance in each of: (1) the market for the distribution of iOS apps developed by third-party developers to users of iOS devices including iPhones and iPads; and (2) the market for the provision of payment processing services for purchases by users of iOS devices. She further alleged that Apple abused their dominant position. In particular, among the alleged abuses, it was alleged that Apple had charged excessive and unfair prices in the form of the commission charged on transactions (the unfair pricing abuse).

Apple denied every aspect of the claims and applied to strike out or alternatively for summary judgment in relation to the unfair pricing aspect of the claim.

The main point of contention related to the methodology that Dr Kent’s economic expert proposed for the consideration of the unfair pricing claim: following the two-limb test set out in United Brands, this methodology considered a number of factors, including comparison of Apple’s return on capital employed (ROCE) with its weighted average cost of capital (WACC), concerns expressed by developers about the level of commission, the persistency of the commission rate and Apple’s high profit margin, comparison between the commission, and prices for other products and services that might serve as relevant comparators.

Apple argued that the unfair pricing claim by Dr Kent was fundamentally flawed, by failing to take account of the real economic value that developers and consumers derive from Apple’s innovations in the iOS ecosystem. It argued that Dr Kent’s approach was just a cost-plus methodology, which cannot measure intangible value and ignored the demand side benefits delivered to developers and device users. In particular, Apple drew a comparison with a hit song or film, where the fact that the revenues generated by the product significantly exceed the costs of production does not indicate unfair pricing.

In response, Dr Kent pointed out that the choice of method for assessing economic value is flexible and will depend on the facts of the case. The ROCE and WACC profitability analysis was to determine whether there was a red flag that required further investigation rather than analysis following a cost-plus approach. Further, there was a variety of methods that could have been chosen to encompass all aspects of economic value, including demand side factors, such as assessing the prices charged by relevant comparators and feedback from customers, that were taken into account in the approach by Dr Kent’s economic expert.

The CAT considered the case law, such as the principles set out in United Brands and explained in Flynn, and concluded that there was not any established rule for assessing demand side factors in relation to intangible products and services or as a result of innovation. Instead, each case needs to be carefully assessed on its merits by reference to the product and service in question and the economic and other evidence.

The CAT disagreed with Apple’s argument for its strike out application that the method that Dr Kent relied on was defective, as the CAT considered that Dr Kent had pleaded facts that could found a methodology that takes into account demand side factors, and she also advanced an argument about the lack of competitive conditions that was relevant to the assessment of demand side factors. Further, the proposed approach was expressed as a preliminary approach that is likely to develop as more information becomes available. The CAT concluded that the method could be open to challenge at trial but that is where the debate should be resolved and not through a strikeout.

As regards Apple’s summary judgment application, it required the CAT to consider not only the way in which Dr Kent put her case, but also the evidence that has been or is likely to be assembled to prove it, including the expert reports from Dr Kent’s economic expert.

The CAT disagreed with Apple’s argument that Dr Kent’s unfair pricing abuse claim has no reasonable prospect of success, as it considered that Dr Kent’s economic expert had in fact considered demand side factors in a number of ways (by attempting to identify suitable comparators, by assessing feedback from developers and by considering the context of Apple’s profitability), and he will be able to further develop his analysis as the case progresses.

In the end, the CAT concluded that Dr Kent had pleaded a case that is consistent with the requirements of United Brands and disclosed no legal error or defective approach. The applications by Apple for strikeout and for reverse summary judgment on Dr Kent’s unfair pricing abuse claim were dismissed.

On 5 May 2022, the CAT granted the CPO application on the spot in a first for the UK collective proceedings regime, as the CAT considered that there were reasonable grounds to advance the claim and it has a realistic prospect of success. This is in contrast with the Dr Gormsen v Meta decision that I discuss below.

Unfair pricing in Dr Gormsen v Meta^[17]

On 11 February 2022, Dr Liza Lovdahl Gormsen made an application to the CAT for a CPO against Meta, owner of Facebook, for allegedly abusing its dominant market position by imposing unfair data requirements, unfair prices and other unfair trading conditions on users of Facebook, seeking more than £2 billion in damages for over 40 million UK consumers.

This application marks the first time that damages have been claimed from alleged abuse in relation to personal data under the competition collective proceedings regime in the UK.

Dr Gormsen alleged that Facebook occupies a dominant position in the personal social network market (comprising Facebook only) and the wider social media market (including Facebook, Instagram, WhatsApp, Snapchat, Pinterest, Reddit, Tumblr, Twitter, TikTok and LinkedIn).

Facebook allegedly abused its dominant position, through the imposition of its terms and conditions, by imposing unfair terms, prices and other trading conditions on its users. In particular to the unfair price allegation, it is alleged that:

Facebook demanded an unfairly high “price” or “payment in kind” for the provision of social networking services. By taking valuable personal data without paying for it (i.e. by offering a zero monetary price) and offering only social networking services in return, Facebook offered an unfairly low purchase price for users’ personal data. In particular, the incremental cost to Facebook of offering Personal Social Network and/or Social Media Services to each additional user is very low, the revenues generated by Facebook’s advertising activities by virtue of the personal data were very high and Facebook earned substantial excess profits above those expected in a competitive market. Facebook’s “prices” were unfair because they enabled it to reap trading benefits, including supra-competitive profits, which it could not have obtained in conditions of workable competition.^[18]

Dr Gormsen’s economic expert contended that the proposed class suffered loss and damage, including in that they were not adequately compensated for the commercial value of their personal data monetised by Facebook. The economic loss suffered by proposed class members is the difference between (1) the economic value that users would have received in the counterfactual scenario (ie, in a scenario where Facebook had not held a dominant position or had not abused its dominant position, or both); and (2) the economic value that users actually received (ie, in the actual scenario that Facebook abused its dominant position).

The expert also considered that there are a variety of possible competitive counterfactuals, including ones in which users are paid for the data that they provide to the social network and Facebook continues to monetise the data through selling advertising.

The CAT considered whether the methodology for assessing an excessive pricing case was sufficiently set out to enable the claim to be tried. It set out some of the issues that will have to be addressed in some way to try this case. In particular, it points out that this is a ‘two-sided’ market case as Meta is ‘selling’ social media services on one side of the market and selling advertising services on the other.

As regards the methodology proposed by Dr Gormsen’s economic expert, the CAT considered that it pre-supposed the very outcome that the CAT was searching for: it assumed that there was an abuse of a dominant position, which needed to be established. In particular, the CAT found that the proposed methodology asserted to which the situation pertained (an equilibrium price in the social media market where Facebook is priced at zero) was infringing competition law and needed to be replaced by a different system, comprising one of the various options set out in the report by the economic expert. The CAT considered that this was not the purpose of the inquiry at trial at all, which did not involve working out what price would pertain if the market were differently structured, but working out whether Meta’s price is too high.

In the end, the CAT concluded that there was no blueprint to trial and the proposed methodology would need a root-and-branch re-evaluation. It determined to stay the application for a period of six months so as to enable Dr Gormsen to file additional evidence setting out a new and better blueprint leading to an effective trial of these proceedings.

Conclusion

Since the collective proceedings regime was introduced in the UK in October 2015, there have been increasingly more CPO applications made to the CAT, especially in 2021 and 2022. It may not continue growing exponentially forever following the current trajectory, but more CPO applications are expected to be made in the years to come, possibly in a similar mix as discussed above.

Following the landmark judgment in Merricks v Mastercard by the UK’s Supreme Court in December 2020, the CAT has granted 10 CPO applications. However, this should not be interpreted as the CAT just waving through CPO applications – although the CAT has been very cautious in rejecting CPO applications, it will closely scrutinise CPO applications and will not grant a CPO application when it does not consider the requirements for approval have been met. For example, in the proceedings of Dr Gormsen v Meta discussed above, the CAT considers that the PCR did not present a credible methodology for economic analysis and decided to stay the application for six months to give the PCR a chance to set out a new approach.

As the proceedings Dr Kent v Apple and Dr Gormsen v Meta show, it is important to present a credible methodology for economic analysis for a successful CPO application. The CAT has made it clear that it is not running a mini trial, but it needs to assess whether the PCR’s proposed methodology for economic analysis has been sufficiently set out to enable the claim to be tried. If the CAT is not convinced that a blueprint leading to an effective trial has been sufficiently set out, it will not grant the CPO application.

^* The author is grateful to Ling Zhou for research assistance. The views expressed in this article are those of the author alone and do not represent her or AlixPartners’ views.

Appendix: collective proceedings in the UK

Notes