Railway collective action: Ticketing, zonal fares and large claims

Introduction

“Merricks” and “Gutmann” are two names which train operators should become aware of, if they are not already. The first is the name of a case which will be heard in the Supreme Court on 13 and 14 May this year, which is set to define the limits of when collective actions can be brought. More specifically, it concerns “certification hearings” under the UK’s opt-out collective action regime for competition damages claims and how the courts should decide whether a particular collective action should be certified. It arises from certain charges levied by MasterCard. The Court of Appeal’s decision lowered the barrier for when collective actions can be brought. The industry is watching this case nervously as the Supreme Court’s ruling will be very important on the viability of other pending class action cases.

The second is a railway collective actions case, which could have very serious financial implications for train operators who operate into and out of London – and in particular those calling at stops within Transport for London’s (“TfL”) zonal fares system. The case has been put on hold pending the decision of the Supreme Court in Merricks.

Background to the Gutmann dispute

The best way to understand the Gutmann dispute is through an example. Let’s assume that Mr Gutmann lives in Surbiton (which is in TfL Zone 6), works in Central London and holds a TfL Zones 1-6 travelcard, allowing him to travel between home and work. However, once a week he goes from his workplace to visit friends in Woking, which is not within the TfL zonal fares system. He therefore needs to purchase a ticket for part of his journey.

He already holds a travelcard valid to the Zone 6 Boundary, represented by the blue arrow in the diagram. In his view, what he should be sold is a ticket from Zone 6 Boundary to Woking (the purple arrow) representing the additional journey not already covered by his travelcard. However, Mr Gutmann’s claim is that ticket vending machines at London Waterloo only sell tickets from London Waterloo (and not Zone 6 Boundary). Moreover, staff in the ticket office at London Waterloo are not aware of, or deliberately choose not to sell, a ticket from a Zone 6 Boundary station. Only if a passenger specifically asks for the particular fare from Zone 6 Boundary will it be sold. Instead, he is sold a ticket valid from London Waterloo to Woking. Effectively, Mr Gutmann’s claim is that he is double paying for the part of his journey from London Waterloo to Zone 6 Boundary.

We deliberately use London Waterloo as an example because, in the first place, Mr Gutmann’s claim is being brought against First MTR South Western Trains and its predecessor train operator, Stagecoach South Western Trains, who operate the London Waterloo to Surbiton and Woking service. The claim is also being brought against London and South Eastern Railway, operating as Southeastern, and is valued at around £93 million. This is because Mr Gutmann is intending to bring a collective action on behalf of all passengers who he believes have been overcharged.

South Western Railway and Southeastern look set to be the test case. But the issue is broader still and potentially affects any train operators operating into and out of TfL fare zones, as well as those selling tickets covering those zones. Depending on the outcome of Merricks, train operators should be concerned about what may happen with the Gutmann case and should be considering now what steps to take.

Rules regarding collective proceedings

Collective proceedings are a relatively new innovation in English law and so the Merricks case is the first case to test the boundaries of the law. The Consumer Rights Act 2015 (the “CRA”) introduced the power to bring collective proceedings into the Competition Act 1998 (the “CA”). As of 1 October 2015, a person is entitled to make a claim¹ in the Competition Appeal Tribunal (“CAT”) for loss or damage in respect of an infringement of, amongst other things, Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) and/or Chapter 1 CA. The CAT has the power² to make a collective proceedings order (“CPO”) where it considers that:

• the person bringing the proceedings is a person who it could authorise to act as the representative; and
• the claims are eligible for inclusion in collective proceedings.

When determining whether the claim is “eligible for inclusion in collective proceedings”, the CAT must be satisfied that, having regard to all the circumstances, the collective proceedings:

• are brought on behalf of an identifiable class of persons;
• raise common issues; and
• are suitable to be brought in collective proceedings³.

In relation to whether the claim is suitable to be brought in collective proceedings, the CAT takes into account all matters it thinks fit, including:

• whether collective proceedings are an appropriate means for the fair and efficient resolution of the common issues;
• the costs and the benefits of continuing the collective proceedings;
• whether any separate proceedings making claims of the same or a similar nature have already been commenced by members of the class;
• the size and the nature of the class;
• whether it is possible to determine in respect of any person whether that person is or is not a member of the class; and
• whether the claims are suitable for an aggregate award of damages⁴.

If a CPO is granted and the claim is successful, the CAT is permitted to make an aggregate award of damages without undertaking an assessment of the amount of damages recoverable in respect of each represented member of the class⁵.

Significance of Merricks v MasterCard

On 19 December 2007, MasterCard was found by the European Commission to have breached Article 101 TFEU through its implementation of a multilateral interchange fee (“MIF”). This is a fee charged by the cardholder’s bank to the merchant’s bank when a consumer pays for goods or services using a MasterCard payment card. This fee is “passed-on” entirely to merchants by their banks as part of the charge they pay for payment services.

Walter Merricks CBE (“Merricks”), acting as a class representative, brought an “opt-out” collective damages claim in the CAT against MasterCard in September 2016. An “opt-out” claim means that all members of a particular class are automatically included in the claim unless they notify the class representative that they do not want to be included. In this case, it meant that over 46 million people who had purchased goods or services from UK businesses accepting MasterCard as a form of payment between 22 May 1992 and 21 June 2008. Merrick estimates aggregate damages of £14 billion. You may well be a member of that class!

Merricks alleged that the unlawful MIF was passed on by merchants to consumers almost entirely. He also claims that all consumers would have paid lower prices during the relevant period had MasterCard not been in breach of Article 101 TFEU. This was only the second CPO application brought before the CAT since the new law was introduced in 2015 (although there have been others since).

Clearly, there would be difficulties in valuing the total size of the claim across so many people, with different spending habits. Adopting the principles in the CRA, Merricks instead asked for a “top down” aggregate award which will then be distributed evenly amongst those within the class. Differing from the standard approach in law, this  means that individuals will not necessarily be appropriately  compensated for their actual losses – some could be undercompensated and some, indeed, overcompensated, given the difficulties in assessing each individual’s actual losses.

On 21 July 2017, the CAT refused to grant the CPO certificate on two grounds:

• a lack of evidence showing the connection between the MIF and the impact on the wider UK economy, meaning it would not be possible to assess the amount of damages. There was also a lack of commonality between class members’ claims given that different merchants may have passed on charges to customers to varying extents and the spending habits of customers were different; and
• the difficulties with the “top down” approach noted above in working out how much particular individuals should be compensated for their actual losses, noting that there was “no plausible way of reaching even a rough-and-ready approximation of the loss suffered by each individual claimant”.

Merricks appealed this decision to the Court of Appeal (“CoA”), which, on 16 April 2019, overturned the CAT’s decision. The CoA considered that the CAT had demanded too much of Merrick at the CPO certification stage and had effectively carried out a form of mini-trial. The CoA ruled that, at the certification stage, all that was required was for the proposed representative to demonstrate that he or she had a real prospect of success.⁶

In particular, the CoA found that:

• in principle, a “top-down” calculation was a legitimate basis on which to make an aggregate award;
• the grant of a CPO certificate simply shows that the CAT is satisfied that the claims are appropriate to proceed on a collective basis and that they raise the same or related issues of fact or law;
• once issued, the CPO certificate can be varied or revoked at any time – it is an ongoing process. The level of scrutiny given by the CAT to the claim at this stage was wrong;
• distribution of compensation to affected customers is something to determine once an aggregate award has been made, so it was “both premature and wrong” for the CAT to have refused CPO certification on this ground;
• a losses-based method of distributing an aggregate award is not expressly required; and
• the practical effect of not issuing a CPO certificate would be that MasterCard’s customers would be deprived of any remedy.

The CoA therefore set aside the CAT’s order refusing CPO certification, and sent the application for certification back to the CAT to reconsider.

However, in another twist, the case has now been appealed by MasterCard to the Supreme Court, where it is due to be heard on 13 and 14 May. It will now be up to the Supreme Court to determine the legal test for the certification of CPO claims as eligible for inclusion in collective proceedings. The Supreme Court will also resolve the correct approach to questions regarding the distribution of an aggregate award at the stage at which party is applying for CPO certification. Ultimately, the key questions will be “how high is the threshold for obtaining CPO certification?” and “what is the correct approach to the distribution of damages?”.

The outcome of the Merricks case is obviously of great significance to the issue of CPO certification. The Supreme Court’s ruling will directly impact the approach that the CAT will take in deciding whether or not to approve CPOs in other “opt-out” cases which are currently pending before the CAT – including the Gutmann case. Indeed, as noted above, the CAT’s hearing of the CPO certification application has been put on hold until after the Merricks Supreme Court decision has been handed down.

Potential outcomes at the Supreme Court

There are a number of potential outcomes at the Supreme Court. These were articulated by counsel for the train operators at the CAT hearing on 23 September 2019, which decided to put the Gutmann case on hold⁷.

In short, the Supreme Court could adopt one of the following four approaches:

• The CAT approach;
• The CoA approach;
• A hybrid approach; or
• An entirely new approach.

In particular, counsel noted that the issues that the Supreme Court may address in Merricks would not necessarily be restricted to the question of how high the threshold should be set for a certification application. Rather, the Supreme Court could choose to comment on a number of other issues, such as the test for the standard of evidence required on an application for CPO certification.

The answer may be that the test is, as the CoA held, merely that the applicant's approach to what data would be available is credible, or whether, as the CAT held, a more detailed review of what data would be available is appropriate.

Impact on Gutmann dispute and what you should be thinking about

As noted above, the developments in Merricks have already had an impact on the Gutmann case, in that they have delayed the CAT hearing for the application for the CPO.

However, the Supreme Court judgment, when it comes, will have much wider implications for the certification process as a whole. The approach that the Supreme Court ultimately adopts in respect of the Merricks case will directly determine how high a hurdle Mr Gutmann will have to surmount in terms of securing CPO certification. This may be the difference between bringing a claim against the train operators and being prevented from doing so.

If the Supreme Court adopts the CoA approach (or something similar to it, or even a more lenient approach) then it is more likely that Mr Gutmann will be granted a CPO and be able to proceed with his claim. Ultimately, if this then went to full trial and his complaint was upheld, this could lead to a very significant damages award against the train operators. This is potentially franchise-ending territory.

However, if the Supreme Court adopts the CAT approach (or something similar to it, or even a more stringent approach) then it is less likely that Mr Gutmann (or any other individual seeking to bring a similar claim) will be granted a CPO. This would surely be a relief to the train operators present and past involved in the case, as well as to the wider industry.

The issues do not stop with the train operators involved in the case. In principle, they could also apply to any other train operator operating services into and around London and the TfL fare zones. If Mr Gutmann is successful, this will no doubt be highly publicised which could lead to further claims brought by other affected individuals. We strongly recommend considering whether this could be an issue for your business and working out the likely magnitude of any claim. Obtaining expert advice will be essential – both in relation to the merits of any claim in the context of your business and the strategy for approaching or even intervening in the Gutmann case.

We will provide a further update when the Supreme Court hands down its ruling on this important issue.  We stand ready to assist if helpful.

¹ New section 47A CA.

² Section 47B.

³ Competition Appeal Tribunal Rules 2015, Rule 79(1).

⁴ Competition Appeal Tribunal Rules 2015, Rule 79(2)

⁵ Section 47C(2) CA.

⁶ Merricks v Mastercard Incorporated [2019] EWCA Civ 674.

⁷ See transcript of CAT hearing re stay in Gutmann dispute