Interchange litigation: some clarity from the Court of Appeal's much anticipated decision

The Court of Appeal (CA) has given judgment in three appeals - two from the High Court (HC) and one from the Competition Appeals Tribunal (CAT) - concerning the correct approach for assessing, under the competition rules, the default multilateral interchange fees (MIFs) set by card schemes MasterCard and Visa and charged in relation to debit or credit card payments accepted by retailers.

The current appeals arose out of private damages actions brought by various UK retailers for the excess amounts they say they paid in interchange fees in relation to debit or credit card payments by customers. Default MIFs set by the card schemes apply in the absence of interchange fees negotiated between issuing and acquiring banks; the cost is ultimately passed through to the retailer.

The central question before the CA was whether setting default MIFs was an unlawful restriction of competition, infringing Article 101(1) of the Treaty on the Functioning of the European Union. The European Commission (Commission) took an adverse position on this issue in investigations into MasterCard and Visa default MIFs for cross-border transactions in the EEA. It concluded its investigations by making an infringement finding against MasterCard in 2007 and by granting Visa an exemption subject to conditions in 2002, followed by binding commitments from Visa in 2010 and 2014. The Commission's MasterCard infringement decision was confirmed in 2014 by the European Court of Justice (ECJ decision).

The three decisions appealed

Sainsbury's v MasterCard (July 2016) -  the CAT required MasterCard to pay Sainsbury's £68.6m in damages, having found that MasterCard's MIFs were an unlawful restriction of competition; in the absence of default MIFs, the CAT considered that lower, bilaterally agreed, fees would emerge (0.5% for credit cards and 0.27% for debit cards). 

Asda, Arcadia, Morrison's and others (AAM) v MasterCard (January 2017) - the HC (Popplewell J) held that MasterCard's MIFs, taken in isolation, limited competition between acquiring banks but were objectively necessary for the operation of the MasterCard scheme and not an unlawful restriction of competition; without default MIFs, interchange fees would not have been any lower. The HC also concluded that the MIFs would, if necessary, meet the conditions for exemption under the competition rules (save for some instances where they were above exemptible levels).

Sainsbury's v Visa (November 2017) - the HC (Phillips J) held that Visa's MIFs were not an unlawful restriction of competition but, in a separate later judgment, concluded that if they did in fact restrict competition they were not capable of exemption, whatever their level, because Visa had not demonstrated any advantages (such as efficiencies or incentives to stimulate card usage) that were specific to the MIF.

The three counterfactuals

The three judgments diverged particularly in their approach to the "counterfactual" used for assessing whether the default MIFs were restrictive of competition. The counterfactual considers what would happen in the absence of default MIFs:

  • The CAT in Sainsbury's v MasterCard concluded that bilaterally negotiated interchange fees would emerge (and would be lower than the MIFs set by MasterCard). 
  • In AAM v MasterCard Popplewell J held that there would be no or zero MIFs and this would lead to the collapse of the scheme and MasterCard's withdrawal from the market as Visa, which would continue with its own MIFs, attracted issuing banks seeking to maximise their revenues (the death spiral argument). 
  • In Sainsbury's v Visa Phillips J found that it was unrealistic to conclude that MasterCard would be unable to set default MIFs while Visa could. When assessed against a counterfactual in which there would be neither MasterCard nor Visa MIFs and transactions were settled at par (where the issuing bank pays the acquiring bank 100% of the value of the transaction between the cardholder and merchant and recovers that amount from the cardholder, which is equivalent to no or a zero MIF), a default MIF set by a card scheme is no more restrictive of competition than a no or zero MIF, the only difference between the factual and the counterfactual being the level of the fee. 
The Court of Appeal decision 

The CA had to resolve these considerable differences in approach when deciding on the following central issues.

Do default MIFs unlawfully restrict competition in the acquiring market, within Article 101(1)?

The CA agreed with Popplewell J (and the CAT) that the MasterCard scheme rules providing for a default MIF in the absence of bilaterally agreed interchange fees infringed Article 101(1). Phillips J was wrong in reaching the opposite conclusion in relation to the Visa scheme. The CA said that on the Article 101(1) issue it was bound to follow the ECJ decision.

What is the correct counterfactual?

The CAT had been wrong with its counterfactual of bilaterally agreed interchange fees. 

Popplewell J was wrong to consider the death spiral argument (applied to the zero MIF counterfactual) in relation to the question whether the MIFs were (in themselves) a restriction of competition under Article 101(1). The correct approach is to ask whether the restrictions on competition would or would not have occurred on the market.

It was also wrong to consider, under the ancillary restraints doctrine, whether the default MIFs were necessary to ensure the survival of the MasterCard scheme in view of competition from Visa. Under the ancillary restraints doctrine the question to be asked was whether default MIFs are objectively, not subjectively, necessary to the survival of schemes of this type (four party schemes); the CA concluded this was clearly not the case, as demonstrated by a number of such schemes elsewhere in the world. 

The CA held that the correct approach was to compare the default MIFs with the counterfactual identified in the ECJ decision, in which there were no default MIFs and a prohibition on ex post pricing or a settlement at par rule, equivalent to a no or zero MIF.

Are the default MIFs capable of exemption under Article 101(3)?

The CA rejected Popplewell J's approach because it was based on a fallacious assumption that default MIFs could lead to increased card usage.  MasterCard had not met the first condition for exemption – requiring that the restriction give rise to benefits in terms of improving the production of goods or promoting technical or economic progress. Phillips J had also been wrong because he overlooked or ignored important factual and empirical evidence, which required reconsideration.

The CA did not make its own findings on exemption, deciding that various Article 101(3) issues should be remitted for reconsideration.

How should damages be quantified?

The CA, agreeing with Phillips J (and disagreeing with Popplewell J), held that retailers do not bear the burden of proving the lawful level of MIF. The court must apply Articles 101(1) and (3) to determine whether all or part of the MIF is unlawful and then assess damages on the unlawful portion. 

On the narrow issue of whether there was inconsistency between the CAT's decision not to reduce Sainsbury's damages on account of "pass-on" (whether Sainsbury's had passed all or part of the overcharge on to its customers, thereby mitigating its losses) and the decision to restrict the compound interest payable on the basis that 50% of the MIF was passed on, the CA found there was no inconsistency. The first conclusion, that there had been no pass-on of the overcharge, applied the legal principles for establishing pass-on, and the compound interest decision was based on economic assumptions different from the legal principles, the CAT effectively saying that the award of such interest should reflect the fact that some of the cost of the MIF was absorbed internally through savings and the like.

In the context of pass-on, the CA made other observations on how it is to be established. It accepted the CAT's first requirement for establishing pass-on, that the defendants must prove that there is a sufficiently close causal connection between an overcharge and an increase in the direct purchaser's price, which could in principle be established by a combination of empirical and expert economic evidence. The CA also indicated (without being required to decide the point) that it did not consider the CAT's second requirement, that the defendants must identify a purchaser or class of purchasers to whom the overcharge has been passed, a necessary condition to establish pass-on. 

Outcomes and conclusions

The retailers will welcome the CA decision allowing their appeal on the Article 101(1) issue. With its finding that default MIFs are an unlawful restriction of competition, the CA seems to have now put this beyond doubt.

The CA is remitting all three cases to the CAT for reconsideration of Article 101(3) exemptions and assessment of damages. The CAT has been chosen because of its specialist expertise in competition matters and the choice of the CAT over the HC may give retailers even greater cause for optimism over the final outcome. The remittal of all three cases together is particularly desirable because, as the CA points out, it will permit the CAT to reach consistent conclusions on the issues in each case. 

The final resolution of all the issues raised in the appeal, by the CA and, in time, the CAT, should provide greater clarity and certainty for future claimants and may ultimately facilitate the settlement of more of the many claims that are still in the pipeline. 

Meanwhile, there is further activity by the Commission on interchange fees, this time on interregional MIFs (charged on transactions using cards issued outside the EEA) which have not been fully addressed in Commission decisions to date. In August last year the Commission sent Visa a statement of objections on its interregional fees for debit and credit card transactions; this was followed up by an oral hearing in February. A statement of objections was sent to MasterCard in July 2015 relating to the level of its interregional fees and rules on cross-border acquiring. 

With continuing Commission action and the ongoing damages actions against MasterCard and Visa, there is still plenty to watch out for in the interchange space. We will keep you posted.

Key Contacts

Rona Bar-Isaac

Rona Bar-Isaac

Partner, Head of Competition, Co-Head of Retail & Consumer Sector
London, UK

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Al Mangan

Al Mangan

Partner, Competition & Regulation

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