A Supreme Court Win for Britain’s Largest Retailers in a Recent Competition Law Dispute

On June the 12th the UK Supreme Court delivered a judgment concerning for an appeal against a 2018 Court of Appeal decision holding Visa and Mastercard liable for breach of competition regulations by way of their devised schemes of multilateral interchange fees. To the disappointment of the appellants[1], Britain’s highest court upheld the decision of the Court of Appeal and ruled in favour of the respondents[2] reaffirming that Visa and Mastercard breached competition legislation.

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The Judgement

Mastercard and Visa raised the question as to whether the card payment schemes had the effect of restricting competition under Article 101(1) of the TFEU[3]. Beyond denying claims of anti-competitive practices, the appellants argued that in any event the rules in question – multilateral interchange fees – were exempt from the provision in Article 101(1) because they had satisfied the requirements in article 101(3) TFEU[4], whereby article 101(1) will not apply if the agreement was such that it

‘contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit’

and does not

‘

(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question’.

The Multilateral Interchange Fees

Under the Visa/Mastercard schemes[5] the issuers[6] issue a debit/credit card to cardholder customers and acquirers[7] provide payment services to merchants. The scheme is set up and run the operator[8]. Those willing to join[9] must abide by the rules set by the operator, namely that the issuer of the card will make a payment to the merchant’s acquirer whenever a cardholder makes a payment.

Moreover, upon contracting with an acquirer[10], the merchants are subjected to a services charge. Consequently, when the acquirer settles the transaction between the cardholder and the merchant, the merchant will receive monies paid, less the MSC[11].

When the issuers and the acquirers deal with each other in the absence of a bilateral agreement, the scheme provides certain default terms. Namely, the transaction must be settled at face value and an interchange fee per transaction must be paid. Under the schemes, there is a default interchange fee[12] that the acquirer will pay to the issuer on each transaction. The scheme does not mandate that the issuers and acquirers contract based on the MIF, yet, in practice they do so more often than not.

Competition? In which Market?

The court described the relevant market by adopting an economist proposition whereby the said schemes operate in a “two-sided market”:

- On one hand, there is the “issuing market” wherein issuers compete for customers to whom they will issues cards.

- On the other hand, there is the “acquiring market” wherein acquirers compete for merchants to whom they seek to offer acquitting services

It is the latter – “the acquiring market” – which was brought under scrutiny in the current proceedings.

The Issues Before the Court

Four issues were raised in the appeal. The two substantial legal questions related to Article 101 (1) and Article 101(3) of the TFEU. Hence, the court had to decide:

1. On the “restriction issue” - whether the Court of Appeal erred in law finding that the schemes led to a restriction of the competition in the relevant market, and

2. On the “fair share issue”- whether the Court of Appeal had mistakenly ruled that to prove that the consumers receive a fair share[13] the appellants had to show that the benefit provided to merchants as a result of the MIFs outweighed the associated costs, irrespective of the benefits received by the cardholders as a result of the MIFs.

• The Restriction Issue

Concerning the restriction issue, the court cited the Court of Appeal stating that it was bound to follow the decision in Mastercard CJ[14] in that the MIFs restricted competition within the meaning of Article 101(1). Conversely, the appellants were averring that the Court of Appeal erred in following the decision of the Court of Justice.

The Supreme Court disagreed with this submission highlighting that the Commission was focusing on the process of negation between the acquirers and the merchants. It set out two possible scenarios: one in which the MSC charge is determined partly by competition[15] and a second scenario, where the MSC charge is fully determined by competition. In the latter, merchants would have the ability to negotiate a lower charge with the acquirers based on their marginal cost. The court in agreement with the General Court held that given the minimum price floor set by the MIF for the MSC a restriction of the competition followed.

Additionally, implying that Mastercard JC had not set a precedent, the appellants stated that following Budapest Bank[16] the question of whether MIFs restricted competition had to be determined by a national court. The Supreme Court refused this argument and distinguished Budapest Bank on its facts[17]. It submitted that, despite not having the object of restricting competition, the agreement had an anticompetitive effect.

The Supreme Court recognised the authoritative proposition in Mastercard CJ and that the Court of Appeal had rightly held it binding. In particular, the court laid down the following reasoning in finding the schemes anti-competitive:

- The MIFs were determined through a collective agreement between undertakings

- Its effect was to set up a minimum price floor for the MSC

- It is by way of a collective agreement that the non-negotiable MIF of the MSC was set rather than competition

- The only alternative[18] is a no default MIF with transactions being settled at par

- That alternative ultimately leads to no bilaterally agreed interchange fees

- In the counterfactual the MSC would be entirely determined by competition, thus, would be lower

The Supreme Court dismissed the appeal, stating that even if they were in a position not to follow the Court of Justice, they would reach the same conclusion[19].

• The Fair Share Issue

This issue raised by Visa concerned the interpretation of Article 101(3) TFEU[20]. Out of the four conditions laid in paragraph 107, the requirement that consumers must benefit from the resulting restriction of competition was being questioned. Because the relevant market to which the case refers is the acquiring market, the consumers in this market are the merchants.

The Court of Appeal upheld the judgment[21] at first instance that stated that the condition would be met only if, for the least, the merchants would receive a benefit from the MIFs that matched the anticompetitive burden. Visa was appealing against that decision claiming that the benefits accruing to consumers in both markets – those of cardholders in the issuing market and that of merchants in the acquiring market –should be accounted for in determining whether the requirements of the fair share conditions are satisfied[22].

Therefore, the Supreme Court was asked to clarify how this condition should be applied in the context of a two-sided market. For this purpose, the court offered an overview of the relevant case law at the Court of Justice.

The CJEU disagreed with the reasoning of the General Court[23] stating that it was wrong in ignoring the benefit to the cardholder that the schemes were said to provide. In addressing the legal question, the Advocate General sought to make a distinction between the direct consumers in the relevant market and consumers in a related market. Nonetheless, he stated that befits provided for consumers in a related market could not compensate for the restrictive effect harming direct consumers. Thus, the second condition could only be satisfied if the merchants themselves received a counterbalancing advantage from the restrictive agreement.

Focusing on the first condition in article 101(3), the CJEU reasoned that in the context of a two-sided market it was necessary to assess the benefits flowing from the restrictive agreements in both markets and assess whether they compensated for the disadvantages entailed. However, when the restrictive effects are identified in one market only, the benefits identified in separate, yet connected market, could not in themselves compensate for disadvantage flowing from the restrictive measures in the relevant market[24].

The Supreme Court rejected Visa's claim that this analysis was equally applicable to the second condition, holding that they were substantively different. The latter adds a distinct requirement of fairness to the considerations of economic efficiency set in the former. The aggregate benefits across different markets may be relevant to satisfy the requirements in the first condition. Nonetheless, they could not determine - under the second condition - whether a “fair share” of the gains were attributed to the affected consumers.

Consequently, the Supreme Court dismissed the appeal on this issue. Furthermore, the Court explained their understanding of how these provisions were interpreted at the EU level. Regarding the second condition in Article 101(3)[25] the Court cited the guidance in the Opinion given by Advocate General summarising it in two key points:

1. the second condition refers to both direct and/or indirect consumers – here the consumers were the merchants.

2. Those consumers who bear the adverse effects flowing from the restriction on competition should be offered full compensation.

Visa’s appeal failed because it did not satisfy either of these two requirements.

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In Passing

Before concluding, it is important to briefly highlight the court’s ruling on the broad axe issue. This concerns the degree of precision required in the quantification of losses where the defendant to a claim arising out of a breach of competition law argues that the claimant has mitigated its loss by way of passing it – wholly or partly – through an overcharge to its customers.

The Court of Appeal, in rejecting the Mastercard submission, explained that the broad axe principle is applicable where loss has been suffered as a result of the defendant’s culpable conduct and there is a lack of evidence as to the amount of loss. The Supreme Court was, thus, asked to rule whether the Court of Appeal erred in finding that the defendant had to prove the exact amount of loss mitigated to benefit from a reduction of damages.

Firstly, the Supreme Court noted that the claims in the appeals were for damages for loss caused by the tortious acts of the operators in breach of their obligations under the 1998 Act. The court clarified that the CJEU had established essential requirements to be followed by domestic courts when assessing damages for breach of EU competition law. In particular, the principle of effectiveness requires that national courts do not make it overly difficult or impossible in practice to enjoy the rights guaranteed by EU law[26].

The merchants’ claims related to pecuniary loss resulting from the breach of competition law. In terms of how they could mitigate for that loss, the court offered four possible scenarios. Particularly, the compensatory principle would require the court to raise a question of mitigation of loss if there is evidence that the merchants responded by reducing their costs in negotiations with their suppliers or passing it on to customers by increasing the prices.

The court agreed with the claimants in that the defendants bore the burden of proving that mitigation of loss was found in fact. However, it was submitted that once the issue of mitigation was raised, the evidential burden laid on the merchants to show how they had dealt with the recovery of their costs in their business.

Lastly, a higher standard of precision in the quantification of the amount of an overcharge passed on to suppliers or customers was not required [27]. Given that EU law on damages [28] recognises that domestic courts might have to resort to estimates when addressing the issue of pass-on, the Supreme Court held that Court of Appeal erred in requiring a greater degree of precision in the quantification of pass on. The appeal succeeded on this issue.

Conclusion

With this judgement, the Supreme Court offered finality with respect to some, yet not all issues raised by the parties. Ultimately, the payments schemes were ruled anti-competitive, and Visa and Mastercard were found liable. Followingly, the retailers can proceed with the process of seeking compensation for their loss. Even more so, the judgement opens the door for potential future class action regarding MIFs that other retailers might bring.

The importance of this judgements lays on several grounds. For one, it is worth pointing out that the decision of the CJEU, despite Brexit, was held authoritative by the Supreme Court. To this respect, it is interesting to note that, even if the ruling of the CJEU were not to be found binding, the reasoning of Britain’s highest judges seems to be in harmony with their European counterparts, having taken a similar approach in their interpretation of competition law.

The judgement offered important insights into the correct interpretation of the Article 101 (3) TFEU in the context of a “two-sided market” and how the benefits, alongside the burden flowing from the restrictive practice under scrutiny, are to be assessed with respect o consumers in each of the markets.

Nonetheless, despite the dismissal on the restriction and the fair share issue, the appellants were given green light on the broad axe issue. Thus, the questions of quantum is yet to be determined in the remittal at the Competition Appeal Tribunal, which is believed to be set for hearing next year. But, until that comes, the nation’s retailers can freely celebrate their victory at the highest court in the realm.

[1] The appellants in the case were Visa Europe Services LLC and Mastercard Incorporated and others. [2] The respondents in the case were Sainsbury and AAM(Asda, Argos, and Morrisons). [3] And the equivalent provisions set in Section 2 of the Competition Act 1998. [4] The equivalent of which is Section 9 of the 1998 Act. [5] Also called an “open four-party payment card scheme” [6] Banks or other financial institutions. [7] Ibid. [8] Here, Visa or Mastercard. [9] Either as issuers or acquirers. [10] Acquirers provide merchants services enabling acceptance of card payments. [11] In other words, the merchant will receive whatever money is left once the MSC is subtracted from the total value of the payment made by the customer. [12] A multilateral interchange fee (MIF) [13] one of the provisions in Article 101(3) TFEU which creates an exemption for the applicability of Article 101 (1) [14] In Mastercard CJ the Court of Justice, reaffirming the General Court, ruled that the MIF had a restrictive effect in that they limited the pressure that the merchants could exert on acquiring banks in their negotiation of MSC. In short, they stated that higher prices are a result of the MIF which limits the negotiating power of the merchants, thus, leading to a reduction in competition. [15] Because it is negotiated with reference to the minimum price set by the MIF. [16] Gazdasági Versenyhivatal v Budapest Bank Nyrt (Case C-228/18) EU:C:2020:265 [17] The case concerned an agreement between banks to apply a uniform MIF to both Visa and Mastercard schemes with the effect of preventing an escalation of fees. The issue raised was whether the agreement had the object of restricting competition, and not whether it had an anticompetitive effect. [18] The so-called counterfactual in the judgement. [19] That the MIFs were restricting competition within the remit of Article 101(1) TFEU [20] Re the exemption to liability under Article 101(1). [21] Judgement given by Popplewell J. [22] These arguments were advanced by Phillips J’s judgment. [23] A similar argument was advanced by the Commission. [24] In the absence of a benefit in the affected market, the first condition is not satisfied.

[25] The second condition only arises if the requirements in the first one are met. In a two-sided market where the effects of the restrictive measures are felt only in one market, and the consumers in those markets are substantially different, the first condition would be met if those measures offered an objective advantage to the consumers in the adversely affected market and if the aggregate benefit provided by the restrictive measures to consumers in both markets are enough to compensate for its anticompetitive effects. [26] Rules governing claims for damages under the English law shall be given effect to the extent that they do not conflict with this principle. [27] The court stated that doing so would lead to a conflict with the principle of effectiveness. [28] Directive Directive 2014/104/EU