This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
The Competition Appeal Tribunal ("CATMIFs"), the UK's specialist competition tribunal, has ordered MasterCard to pay Sainsbury's damages of £68.5m (plus interest) for infringing competition law in its setting of UK multilateral interchange fees ("") for its credit and debit cards.
The case is the first successful stand-alone damages action to be brought in the UK which has made it all the way to judgment, with such cases normally reaching settlement before the conclusion of litigation. As such, this judgment provides an exceptionally useful roadmap for those seeking to bring damages claims in relation to infringements of competition law generally, as well as those currently pursuing or considering whether the pursue related damages claims against MasterCard and Visa.
What are MIFs?
Sainsbury's claim against MasterCard relates to the imposition of UK MIFs under MasterCard's world-wide payment scheme. Put simply, the MIF forms part of the service charge paid by retailers to their acquiring banks in relation to each credit and debit card transaction accepted by them.
Under its payment scheme, MasterCard licenses participating issuing banks and acquiring banks. Issuing banks have a contractual relationship with holder of a MasterCard debit or credit card while acquiring banks have a contractual relationship with the merchant, to which they provide payment acceptance services. When a customer of an issuing bank makes a purchase, the issuing bank forwards to the acquiring bank the full transaction amount minus an 'interchange fee', which is retained by the issuing bank. The acquiring bank then deducts and retains a charge for its services (the merchant service charge) and forwards the remaining amount to the retailer. The result of which is that the merchant bears the cost of the interchange fee as part of the merchant service charge, unless it charges customers a surcharge for paying by MasterCard.
The interchange fee may either be bilaterally agreed between the issuing and acquiring bank, or the parties can use the default fee established multilaterally by MasterCard under the MasterCard scheme, the MIF. It is the default UK MIF which was challenged by Sainsbury's before the CAT.
How does this case relate to the European Commission investigations?
Sainsbury's action for damages was a standalone damages claim – meaning that for the claim to succeed Sainsbury's would need to (i) establish that MasterCard had infringed competition law; and (ii) demonstrate that it had suffered loss as a result of that infringement. This can be distinguished from a follow-on damages claim where a claimant can rely on an infringement decision of a competition authority as proof that an infringement has taken place and need demonstrate only that it has suffered loss as a result of that infringement.
The fact that the claim was a standalone claim was not in contention. However, Sainsbury's also sought to rely on the European Commission's decision finding that MasterCard had infringed competition law with respect to intra-EEA MIFs, a decision which has been affirmed in appeals to the General Court and the Court of Justice of the European Union. It was Sainsbury's position that there was "read across" from the Commission's decision to the case before the CAT.
The CAT considered that because the Commission's case related to a MIF with a different territorial scope (intra-EEA MIFs as opposed to UK MIFs) and that MIF was imposed in a period prior to period in question in this action, the cases were factually different enough for the CAT not to consider itself bound by the Commission's decision. With respect to the judgments of the European Courts, the CAT noted that where the facts considered by the European Courts were "materially indistinguishable" from those before it, it would be bound by the European Courts conclusions. On this basis, it considered itself bound only with respect to the finding that the setting of a MIF by MasterCard was a "decision by an association of undertakings".
How did the MIFs represent an infringement of competition law?
As the CAT could not rely on a previous infringement decision, it had to determine whether the setting of the UK MIF infringed Article 101(1) of the Treaty on the Functioning of the European ("TFEU") which prohibits agreements between undertakings or decisions by associations of undertakings which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market. Chapter I of the Competition Act 1998 contains an equivalent prohibition relating to agreements affecting trade within the United Kingdom. We look at each of the elements of the infringement in turn:
- the MasterCard scheme was an agreement between undertakings, being MasterCard and the member banks and a decision of an association of undertakings;
- not an object restriction: the imposition of the UK MIF was not considered to be a restriction of competition by object for a number of reasons including that, although the UK MIF could be described as a price fixing agreement, the extent to which anticompetitive consequences could be presumed was diluted by the fact that the UK MIF was the default position of the MasterCard Scheme, meaning that licensees to the Scheme did not have to accept the UK MIF and could instead bilaterally negotiate an interchange fee if they so desired.
- The CAT therefore had to consider whether the UK MIF nonetheless had the effect of restricting competition on the affected markets. This is assessed by reference to what the position would have been on the markets affected by the restriction (in this case the imposition of the UK MIF) in the event that the allegedly anticompetitive conduct had not taken place (i.e. the relevant counterfactual). The CAT identified at least three markets affected by UK MIFs namely: (i) the acquiring market; (ii) the issuing market; and (iii) the market between payment systems.
- The CAT held that absent the UK MIF, interchange fees would have been bilaterally negotiated, which would have resulted in lower costs for retailers. It found that had acquiring banks been in a position to compete amongst themselves to provide payment acceptance services to merchants, the interchange fee would have fallen from 0.90% to 0.50% for MasterCard credit card and from 0.36% to 0.27% for MasterCard debit cards.
- No scope for objective justification: MasterCard defended the UK MIF by claiming that it could be objectively justified, and that it benefited from the Article 101(3) TFEU exemption for pro-competitive agreements. The CAT found that MasterCard could not objectively justify the UK MIF because it considered that the scheme would operate well, and would arguably be even more competitive, without the default UK MIF. Similarly it did not consider that MasterCard had shown that any of the four limbs of the Article 101(3) TFEU exemption had been met.
How did the CAT calculate the damages award?
In considering the award of damages to Sainsbury's the CAT firstly assessed the extent of the overcharge paid by Sainsbury's over the claim period. The CAT estimated, as part of the infringement finding, that without the infringing agreement, Sainsbury’s would have paid the equivalent of 0.50% in the case of credit cards and 0.27% in the case of debit cards. On this basis, the CAT calculated that the starting amount for the overcharge was £102,787,541 for MasterCard credit cards and £760,405.74 for MasterCard debit cards.
Although the CAT dismissed MasterCard's claim that Sainsbury's Bank had engaged in the infringement and should therefore not benefit from any illegality, it nonetheless considered it appropriate to take account of the fact that Sainsbury's Bank would have received interchange fees under the MasterCard Scheme and to reduce the award of damages accordingly. The CAT considered that some of the benefit of the fees received by Sainsbury's Bank would have been passed on to the retailer, particularly via the Nectar Card. Consequently, using a "broad axe" the CAT reduced the amount of damages to be awarded by 80%.
The CAT also considered whether MasterCard could rely on the so-called "pass-on defence", whereby in the event that a defendant can prove that the claimant has passed on losses relating to the infringement to its customers, it will not be liable for damages to the claimant. The CAT recognised that the "pass-on defence" did exist in English law (although it noted it was not really a "defence" as such but merely "an aspect of the process of the assessment of damages").
The CAT nonetheless set a very high bar for the defence to succeed, that was that the defendant could prove that there was an "identifiable increase in retail price" and that this increase in price was "causally connected " with the anti-competitive behaviour in question. MasterCard failed to provide sufficient evidence to show this.
Therefore, Sainsbury's was awarded £68,582,245 (plus compound interest) in damages.
Advice on instructing economic experts
Finally, it is worth noting that the judgment contains a warning for parties instructing economic experts to appear before the CAT. The CAT notes that it is "incumbent" upon parties to litigation to ensure that experts give their opinion based upon a common, and preferably agreed, factual basis. It warns that parties need to be "especially assiduous" in ensuring that the economic experts are "clearly instructed on the legal principles they are to apply" and "absolutely clear as to the factual material on which their reports are to be based".
Sainsbury's Supermarket Ltd v MasterCard Incorporated and others, Case 1241/5/7/15 (T), 14 July 2016
For more information please contact Dervla Broderick or Lucy Cass.