Avoiding the "death spiral": High Court finds for MasterCard in interchange fee claim

MasterCard has prevailed in ten High Court actions (heard together) brought against it by UK high street retailers, in the latest instalment of the multilateral interchange fee (“MIF”) litigation. In a judgment of 30 January 2017, the High Court found that the MIFs set by MasterCard in the UK and Ireland, broadly from 2006 to 2015, were not a restriction on competition, but rather objectively necessary for the operation of MasterCard’s payment card scheme. Without them, the scheme would have entered into a “death spiral” and collapsed. In addition, although MasterCard’s intra-EEA MIFs were found to have been restrictive of competition, they were in large part exempt and therefore not in breach of EU law. Accordingly, subject to an appeal, the vast majority of the retailers’ total claims (potentially amounting to £437 million) have been dismissed.

MasterCard has faced numerous competition litigation claims in the UK courts (including in the Competition Appeal Tribunal (“CAT”)) in relation to its MIF arrangements. The claims came in the wake of the 2014 decision of the Court of Justice of the EU (“CJEU”), upholding the European Commission’s 2007 decision that the arrangements were anti-competitive and in breach of EU law. In July 2016, the CAT similarly found that MasterCard’s UK MIF was a restriction of competition (1241/5/7/15 (T) Sainsbury’s Supermarkets Ltd v MasterCard Incorporated and Others). In November 2016, the CAT refused permission to appeal its decision, so it is anticipated that MasterCard will seek permission direct from the Court of Appeal.

Although the High Court was not bound by the Commission/CJEU or CAT’s decisions, its judgment was still – in the retailers’ words – “surprising”, because it adopted a different approach to analysing the circumstances that would have existed in the absence of the MIF arrangements (the ‘counterfactual’). The decision is significant and appears already to have prompted most of the retailers in the parallel proceedings against Visa to settle their claims. It will also likely have a bearing on the £14 billion collective action recently filed against MasterCard on behalf of UK consumers. The inconsistent judgments may also have implications more broadly for future parties to competition actions when making their choice of forum decisions.

What is a multilateral interchange fee (MIF)?

A typical MasterCard payment transaction involves four parties: the customer, the customer’s bank (the issuer), the retailer and the retailer’s bank (the acquirer). When a customer uses a MasterCard credit or debit card to pay a retailer, the issuer pays the acquirer the sale price less an interchange fee, at a level set by MasterCard. This fee forms part of the merchant service charge (“MSC”) that the acquirer then charges the retailer upon transferring to it the sale price received from the issuer. The other elements of the MSC are the margin retained by the acquirer and a certain amount paid to MasterCard for operating the scheme. A large part of the MSC is determined by the interchange fee. Interchange fee arrangements can be agreed bilaterally (between one issuer and one acquirer), but in practice are usually agreed multilaterally (by a decision binding all the banks within the MasterCard payment card scheme).

The competition issue

The issue before the High Court was whether the MIFs set by MasterCard for credit and debit card transactions in the UK, Ireland and the EEA, broadly from 2006 – 2015, were anti-competitive and therefore in in breach of UK, Irish and EU law. First considered by the European Commission in 2007, the competition concerns around MIF arrangements arise because setting the MIF at a certain level prevents issuers from developing individual pricing policies for the services they provide to acquirers; the MIF effectively creates a pricing floor. As the level of the MIF is reflected in the MSC charged by acquirers to retailers, there is also the potential for consumers ultimately to pay higher prices where the MSC charge is passed on to them by retailers.

The High Court decision

A prima facie restriction on competition

As a starting point, the Court found that MasterCard’s MIFs did restrict competition on the acquiring market, i.e. the market in which acquirers compete with each other for the custom of retailers, because the pricing floor leads to higher prices being charged to retailers. If the MIFs were lower or zero, acquirers could compete for retailers’ business by offering an MSC below that floor. In this respect, the High Court’s approach is consistent with that of the European Commission/CJEU, and the CAT’s Sainsbury’s decision. The Court described the MIFs as being “no different in kind from a collective agreement by manufacturers to maintain inflated wholesale prices, which prevents wholesalers competing on the retail market below those prices.”

The counterfactual

Where the High Court departed from the CAT’s approach was its examination of the counterfactual, i.e. in considering the hypothetical circumstances that would have existed in the absence of the MIFs, in order to determine whether the MIFs actually restricted competition by comparison with those circumstances. The CAT previously found that, in a situation where there was no (or zero) MIF, issuers would likely negotiate bilateral interchange fees with each acquirer participating in the MasterCard scheme in the UK. Following a lengthy analysis of the evidence, the CAT concluded that the MIFs negotiated would be 0.5% per transaction for credit cards and 0.27% for debit cards, each expressed as a weighted average.

However, Popplewell J in the High Court agreed with the parties and their experts that the CAT’s bilateral counterfactual scenario is not one that would, or even might, arise and is not realistic. The key issue was that in the “counterfactual world”, the competing Visa card payment scheme was not subject to any regulatory constraints and its MIFs would have been maintained at the levels actually set. The CAT’s counterfactual therefore assumed that retailers would voluntarily have paid the 0.5%/0.27% MIFs on MasterCard transactions simply to avoid Visa having a monopoly. Popplewell J rejected this assumption, instead concluding that “there are no counterfactuals which would or might arise and which are realistic other than, potentially, (i) a zero MIF […], alternatively (ii) a positive but lower MIF as the maximum putatively lawful MIF.” We consider these below.

The “death spiral” argument

The High Court found that, in a counterfactual where the MIF had been set at zero, with Visa MIFs unconstrained, the MasterCard scheme would not have survived in the UK in a materially and recognisably similar form. As the Court colourfully described it, as issuers switched to a rival operator such as Visa, the MasterCard scheme would have entered a “death spiral” and collapsed. On that basis, the Court found that the MasterCard MIFs were not restrictive of competition because, in the counterfactual world, not only would MasterCard not have had lower MIFs, but there would have been no acquiring market at all. The Court found that the MIFs are also objectively necessary as an ancillary restraint, i.e. they directly relate and are necessary to the proper functioning of the objectives of the MasterCard payment scheme.

Considering the second scenario (a lower MIF), the Court found that there was no “putatively lawful lower level of MIF” with which to populate this counterfactual because the MIFs were exempt (see further below).

Exempt/exemptible MIFs

Under Article 101(3) TFEU, an anti-competitive restriction may qualify for exemption (making it compatible with EU law) where it fulfils certain criteria, including (i) conferring pro-competitive benefits such as efficiency gains; (ii) allowing consumers a fair share of those benefits; (iii) imposing on the undertakings concerned only those restrictions that are indispensable to the attainment of the benefits; and (iv) the MIF not affording the parties the possibility of eliminating competition in respect of a substantial part of the products in question. The High Court was required to determine what level of MIF, if any, would qualify for exemption.

The Court identified the benefits conferred by the MIF on retailers (e.g. avoiding costs of other payments and facilitating online spending), quantified those benefits to determine whether their value exceeded the amount of the MIF and assessed the extent to which issuers passed the MIF through to cardholders (e.g. by spending it on the administrative costs of issuing cards and on write-offs for fraud). Following a detailed analysis, the Court held that the MIFs as set were all below the exempt and exemptible level, save for the EEA debit card MIF for the earliest part of the claim period prior to June 2008. The Court placed considerable emphasis on the benefit to retailers of the competitive advantage of taking cards over retailers who do not, i.e. “business stealing”. Despite not having the empirical data to enable the value of the benefit to be quantified, Popplewell J accepted that this was a “real and substantial” benefit to retailers. This contrasts with the CAT’s view that the “saving of transaction costs incurred in negotiating bilateral agreements” was the only benefit and was not sufficient for the exemption to apply.

Therefore, with the exception of the limited period relating to the EEA debit card MIF, the retailers’ claims have been dismissed. The level of damages for the limited remaining claim will be assessed at a separate hearing.

Comment

Inconsistent judgments?

The key issue for the High Court, and where it departed from the CAT, was in determining what the “counterfactual world” looked like. In the view of Popplewell J, the “zero MIF” or “positive but lower MIF” were the only counterfactuals that could be entertained. However, it does not follow that the CAT and High Court’s approaches are entirely inconsistent. Both found that the price floor imposed by a MIF creates, prima facie, a restriction on competition. Popplewell J also noted that his and the CAT’s reasoning in relation to the counterfactual started from the same three premises, namely (i) it is legally permissible to take account of competition from Visa; (ii) the appropriate counterfactual assumption is that Visa’s MIFs were as set by them over the period; and (iii) absent bilateral agreements, the MasterCard scheme would or might have collapsed following a switch to Visa.

However, the key difficulty for the retailers’ case appears to have been the clear requirement in the jurisprudence to analyse the potential restriction on competition “within the actual context in which it would occur in the absence of the agreement in dispute [the MIF]”. The Court had to consider whether, in the counterfactual, Visa’s MIFs would have been set at their usual levels or would also have been unlawful and constrained. In the latter scenario, there could be no “death spiral” and MasterCard’s MIFs would not be an anti-competitive restriction. But the retailers were unable to show that the schemes were “materially identical” such that the Court would have to proceed on the assumption that the Visa MIFs were also unlawful. Popplewell J noted an apparent reluctance on the part of the retailers to invite the Court to make findings on the lawfulness of the Visa MIFs. This was likely to avoid pre-judging the parallel Visa MIF trial that was soon to get underway in the High Court, but the retailers’ argument depended upon the Court making a finding of material identity, which would inevitably have amounted to a finding that the Visa MIFs were unlawful. The retailers could not have one finding without the other and their argument appears to have been weakened by their failure to discharge their evidentiary burden on material identity and the unlawfulness of the Visa MIFs. Ultimately, despite some common ground, the CAT and High Court reached divergent views on the competition implications of MIFs.

Broader implications

The inconsistent judgments have left the law on this issue in an unsatisfactory state. Following the judgment, most of the retailers settled their claims in the parallel proceedings against Visa, likely unwilling to take their chances with the High Court again in light of the MasterCard decision. (We understand that the claim by Sainsbury’s against Visa is still live and closing arguments are being heard at the end of February 2017.) The retailers have also said they intend to appeal the MasterCard judgment, and must seek permission to do so direct from the Court of Appeal, having been refused permission by Popplewell J. MasterCard is also due to appeal the CAT decision.

In the circumstances, it would appear prudent for the Court of Appeal to hear the appeals together, allowing it to consider the issues in the round and avoid further inconsistency. The retailers will likely seek to address before the Court of Appeal the perceived gaps in their reasoning before the High Court, to the extent they are able to do so, including in relation to Popplewell J’s comments on the relevance of the lawfulness of Visa’s MIFs. Any Court of Appeal judgment will likely have significant implications not only for the MasterCard retailers affected by the High Court and CAT decisions to-date, but also for the remaining parties to the Visa proceedings and the parties to future claims against both card operators, including the £14 billion collective action filed against MasterCard in September 2016 on behalf of UK consumers.

We understand that, following the MasterCard judgment, further claims against Visa and MasterCard were filed in the High Court by various regional train companies. Given Popplewell J’s judgment in favour of MasterCard, the train companies’ decision to file in the High Court is perhaps surprising. The CAT is generally understood to be a more claimant-friendly forum, particularly given its recently expanded jurisdiction and new powers (see our Law Now for more information). The CAT’s MasterCard decision in favour of Sainsbury’s arguably supports that view. Subject to the outcome of any appeal of the MasterCard cases, the divergent judgments could prompt future claimants (both in relation to MIFs and other issues) to file their claims in the CAT, or seek to transfer High Court claims to the CAT, in the hope this would increase the likelihood of an outcome in their favour. Indeed, the High Court has the power, pursuant to section 16(4) of the Enterprise Act 2002 and CPR Practice Direction 30.8, to order a transfer to the CAT either of its own initiative or on an application by one of the parties, taking into account all the circumstances of the case, including the wishes of the parties. Similarly, should a defendant to a claim filed in the CAT prefer it to be heard by the High Court, on the basis that forum may subject the claimant’s claim to similar scrutiny to that exercised by Popplewell J, they can apply to the CAT for a transfer under Rule 71 of the CAT Rules 2015. The CAT has the discretion to make the transfer to the High Court at any stage of the proceedings “after considering any observations of the parties”.

It is too early to predict whether future claimants and defendants may respectively be drawn to the CAT and the High Court in light of the divergent approaches adopted in the MasterCard decisions. However, potential parties to competition actions are likely now to pay close attention to decisions coming out of these forums. Unless some consistency emerges in the case law, we could start to see parties to competition actions making tactical choice of forum decisions and use of the transfer provisions. For the time-being, as regards the MasterCard litigation, the Court of Appeal is likely soon to be tasked with providing some much needed clarity on this long-running litigation and increasingly complex area of law.

The High Court judgment is available here and the CAT decision is available here.