UK Supreme Court: Interchange fees restricted competition

On 17 June 2020, the UK Supreme Court handed down a unanimous judgment in Sainsbury's [2020] UKSC 24 relating to the default multi-lateral interchange fees ("MIFs") set by Visa and Mastercard.  The Supreme Court upheld the Court of Appeal's determination that the MIFs had the effect of restricting competition under Article 101(1) of Treaty on the Functioning of the European Union ("TFEU") and handed down important guidance on the application of Article 101(3) TFEU and the pass-on 'defence'.

Background

Visa and Mastercard operate a four-party card payment scheme in the UK.  Under a four-party scheme, MIFs are charged by the issuing bank (which issues the debit or credit card to the cardholder) and are paid by the acquiring bank (which provides card payment services to the merchant).  Visa and Mastercard are responsible for establishing the rules of the scheme and, in absence of any negotiated interchange fees, for setting the default MIFs that apply to card transactions.

The European Commission ("Commission") concluded an investigation into Mastercard's MIFs that applied to intra-EEA cross-border card payments in 2007.  The Commission found that Mastercard's MIFs restricted competition between acquiring banks and inflated the cost of card acceptance by merchants without leading to proven efficiencies under Article 101(3) TFEU.  The Commission's decision was upheld on appeal to the General Court in 2012 and, subsequently, the European Court of Justice ("ECJ") in 2014 (see our September 2014 newsletter).

The Supreme Court's Sainsbury's judgment stems from three sets of standalone actions – claiming damages in relation to MIFs – in the English courts, which resulted in one award of damages in the Competition Appeal Tribunal (the "CAT") in 2016 and two judgments dismissing damages claims in the Commercial Court in 2017.  The cases were appealed and jointly heard before the Court of Appeal in 2018.  In a landmark ruling, the Court of Appeal overturned all three lower courts decisions and remitted the cases to the CAT for a reassessment.  Mastercard and Visa were granted permission to appeal in November 2018 and a hearing was held by the Supreme Court in January 2020.

The restriction of competition

The first ground of appeal sought to contest whether the MIFs at issue amounted to a prima facie restriction of competition contrary to Article 101(1) TFEU.  Mastercard and Visa submitted that the Court of Appeal was wrong to conclude that it was bound by the ECJ's Mastercard judgment (which upheld the Commission's decision finding that Mastercard's cross-border MIFs had breached Article 101(1) TFEU).  They argued that the decision of the ECJ depended on a different factual basis.

The Supreme Court dismissed the appeal, finding that whether the ECJ's Mastercard judgment is binding "depends upon whether the findings upon which that decision is based are materially distinguishable from those made or accepted in the present appeals".  The Court did not consider this to be the case.  On the contrary, the Supreme Court found that "the essential factual basis upon which the [ECJ] held that there was a restriction on competition is mirrored in these appeals".  Visa and Mastercard were therefore found to have breached Article 101(1) TFEU.  

However, the Supreme Court continued to find that, even if the Supreme Court were not bound by ECJ's Mastercard judgment, it would have still followed it and reached the same conclusion.  Here the Court drew upon the "clear contrast in terms of competition" between the default MIFs established by Mastercard and Visa resulting in a "minimum price floor" and the counterfactual world in which the fees paid by merchants are "open to competitive bargaining".

The standard of proof under Article 101(3)

The second ground of appeal considered the exemption criteria under Article 101(3) TFEU, in respect of which Visa and Mastercard complained that the Court of Appeal had wrongly adopted an unduly onerous standard of proof.

Dismissing the appeal, the Supreme Court considered that the complaint by Visa and Mastercard did not concern the standard of proof, but rather the nature of the evidence required to meet the standard of proof.  Indeed, the Court of Appeal had expressly accepted that the applicable standard of proof was the usual civil standard of the balance of probabilities under English law.

The Supreme Court explained that Regulation 1/2003, which recognises the autonomy of Member States to determine the legal test for the standard of proof under Article 101(3) TFEU, does not recognise the same autonomy of Member States on the nature of the evidence required to satisfy that standard.  Those evidentiary requirements – which are imposed by Article 101(3) TFEU – cannot vary depending on whether EU competition law is being applied by EU courts or authorities or the courts or authorities of Member States.

In that regard, the Supreme Court explained that parties seeking to rely on the Article 101(3) exemption must identify, substantiate and evaluate the claimed efficiencies and verify their causal link with the anti-competitive agreement (in this case the MIF).  This evaluative exercise requires detailed empirical analysis and evidence. 

The Supreme Court rejected the submissions of Visa that nothing more is required (in terms of evidence in support of the exemption criteria) than expert evidence of economists that an issuing bank in receipt of a payment in respect of each card transaction will probably invest more to encourage its customers to engage in a greater number of such transactions.  Instead the Supreme Court endorsed the Court of Appeal's two-step approach for establishing the requisite causal link between the anti-competitive conduct and the efficiencies claimed under Article 101(3).  In order to satisfy that requirement, Mastercard and Visa must:

• first demonstrate that the default MIFs in each case incentivised issuers to take steps they would not otherwise have taken; and
• second, the steps taken must be shown to have increased card usage or increase the effectiveness of transactions which would have been card transactions anyway.

The conditions that consumers receive a "fair share" 

To satisfy the requirements for exemption under Article 101(3), it is necessary to show, inter alia, that the restriction of competition produced benefits (the "first condition") and that consumers received a "fair share" of the resulting benefits (the "second condition"). 

By its third ground of appeal, Visa argued that the that the Court of Appeal had incorrectly interpreted the application of the second condition in the context of a two-sided market.  In the Court of Appeal’s view, consumers in the relevant market (here the merchants in the acquiring market), would only receive a fair share of the benefits if the advantages to them caused by the restriction of competition outweighed the disadvantages, so that they were no worse off.  Visa argued that the second condition could be satisfied even if merchants were worse off as a result of MIFs, provided they received some objective advantages, and the benefits to cardholders and merchants, considered in aggregate, outweighed the disadvantages.

In dismissing the appeal, the Supreme Court emphasised the second condition's "distinct requirement of "fairness"", which adds to the considerations of economic efficiency with which the first condition is primarily concerned.  As such, the Supreme Court held that aggregate efficiency gains may be relevant to the first condition where restrictive measures have effects in more than one market.  However, they cannot be determinative of the question of "fairness" under the second condition; if merchants are not fully compensated for the harm inflicted on them by the restrictive measure, they cannot be said to receive a "fair" share of the resultant benefits.

Pass-on

The Supreme Court's ruling on the fourth ground of appeal, in relation to pass-on, is the aspect of the judgment which could least be described as a victory for the retailers. 

The Court of Appeal had held that the burden of proof was on the defendant seeking to show pass-on to establish "a sufficiently close causal connection between an overcharge and an increase in the direct purchaser's price".  Importantly, the Court had also rejected the application of the "broad axe" principle used to quantify overcharge, stating that there was "no scope for the application of any such principle where the burden lies on the defendant to establish a pass-on of the unlawful overcharge in order to reduce the amount recoverable by the claimant".

The Supreme Court confirmed that the burden of alleging and proving pass-on remains on the defendant and did not reject the requirement of a close causal connection.  However, it clarified that once a defendant has raised the issue of pass-on, there is a "heavy evidential burden" on a claimant to provide evidence as to how they have dealt with cost recovery.

As to how pass-on is to be quantified, the Supreme Court overturned the Court of Appeal's rejection of the broad axe principle, stating that "in so far as the Court of Appeal has required a greater degree of precision in the quantification of pass-on from the defendant than from a claimant, the Court erred".  In reaching this view, the Court recalled that the application of the compensatory principle must do justice by avoiding under or over-compensation, but must do so at proportionate cost (in accordance with English Civil Procedure Rules).  In line with this, the Court reasoned that "the law does not require unreasonable precision in the proof of the amount of the prima facie loss which the merchants have passed on to suppliers and customers" and, accordingly, that the extent to which any overcharge was passed on by retailers "can only be a matter of estimation".

This aspect of the ruling is likely to have important practical consequences on the approach to quantifying pass-on in the future.  It is likely to be more straightforward both to establish and rebut pass-on, possibly with less recourse to extensive and complex econometric modelling.  This may streamline litigation between direct purchaser claimants and defendants – the extent to which this occurs will become clear once these principles are applied in practice.  

Comment

The Supreme Court's ruling that Mastercard and Visa's MIFs were in breach of Article 101(1) will be welcomed from the side lines by merchants pursuing similar claims relating to MIFs in the English courts.  However, two of the three actions before the Supreme Court – brought by Sainsbury's – must now be remitted to the Competition Appeal Tribunal for the assessment of quantum and a reconsideration of the application of Article 101(3) TFEU.

This means that Sainsbury's must now demonstrate the losses it claims to have suffered as a consequence of the restriction of competition.  The scheme operators will also argue, as they have maintained consistently throughout these proceedings, that the MIFs were exempted under Article 101(3) TFEU. Theses assessments will be far from straightforward and involve complex economic assessments.

Finally, the impact of the Supreme Court's judgment will have repercussions beyond direct merchants.  Further down the supply chain, a simpler approach to quantification and the expectation of disclosure by a direct purchaser will have immediate relevance to consumer actions and, in particular, the Merricks opt-out collective claim currently awaiting certification, on which the Supreme Court is due to rule later this year.  The Court's approach to pass-on in that case, particularly following the Sainsbury's judgment, will be keenly awaited by consumer groups.

With thanks to Emile Abdul-Wahab of Ashurst for his contribution.