Disputes 2018: Multilateral interchange fees litigation

April 2018 will see one of the largest pieces of commercial litigation come to court and it is not too late for new claimants to emerge.

In brief

  • One of the largest current pieces of commercial litigation will go to the Court of Appeal in April 2018.

  • The case, which arises out of alleged infringements of EU competition law, has seen three divergent judgments at first instance on similar facts.

  • There have already been prominent settlements, but other high-value claims arising from the same facts are still waiting in the wings.

“MIFs” Litigation: a potted history

A number of retailers have claimed damages from MasterCard and Visa arising from alleged infringements of Article 101(1) of the Treaty on the Functioning of the EU (and equivalent national laws prohibiting anti-competitive agreements). These stem from MasterCard’s and Visa’s central setting of the "multilateral interchange fees" (MIFs) payable (by way of a deduction from funds transferred) by a merchant’s bank to a card-issuing bank when settling a card transaction. These fees form the main part of the transaction cost for a merchant accepting a card payment.

Questions around the legality of interchange fees stretch back to the 1990s, with UK and European regulators considering complicated questions around the permissible level (if any) of interchange fees. In 2007 the European Commission adopted a decision that MasterCard’s cross border EEA MIFs for the period from May 1992 formed a (non-exemptible) restriction on competition. The General Court and the ECJ supported that decision in turn. The European Commission closed a similar probe into Visa MIFs following commitments offered by Visa in 2010. 

In July 2016 the Competition Appeal Tribunal (CAT) agreed with Sainsbury’s that MasterCard’s setting of UK domestic MIFs was restrictive of competition and awarded Sainsbury’s £69m in damages. However, parallel allegations brought by various retailers against MasterCard failed to convince Popplewell J in the High Court, who dismissed the claims. Most recently, Phillips J gave judgment in Sainsbury’s equivalent case against Visa. He disagreed with much of Popplewell J’s judgment, but arrived at the same verdict: Sainsbury’s case was rejected. 

These claims are now heading to the Court of Appeal, though this is not the Court’s first taste of MIFs litigation. In 2015 the Court considered to what extent various retailers’ claims against Visa were time-barred, and earlier this year ruled on the ability of Deutsche Bahn to amend its claim in response to more recent European Commission enforcement action in this domain (that decision is itself on appeal to the UK Supreme Court).

Key points of contention

The counterfactual: A vital question, and the subject of days of evidence from economists and industry experts, is where would we be in a world without interchange fees? Would this ‘counterfactual market’ be appreciably more competitive?

The CAT held (similarly to the European Commission) that in the absence of default MIFs, banks in the UK would agree interchange fees at a level that would result in merchants paying less than under the scheme at hand. This would, however, remain at a rate that would encourage banks to continue to issue cards within the scheme. Popplewell J deemed that no such bilateral agreements would exist in the counterfactual world and that zero-rate MIFs would prevail instead. Phillips J agreed that there would be no bilateral agreements, but found that although this might result in a reduction in fees there would be no change in the level of competition. One default position would simply be replaced with another.

The objective necessity of MIFs: EU case law holds that a provision which has the effect of restricting competition will not constitute an infringement of Article 101(1) if it is objectively necessary for the implementation of the “main operation” of the agreement (provided that main operation does not itself infringe Article 101(1)).

So was the UK MIF inherently necessary to the operation of the card schemes? The CAT said "no", Popplewell J said "yes, without it the scheme would die" and Phillips J said "no, but it doesn’t matter because there is no restriction of competition in the first place".

The Article 101(3) TFEU exemption: A party will have a complete defence to an Article 101(1) infringement where it can show that the relevant restriction satisfies certain conditions for exemption under Article 101(3) (essentially demonstrating the overall beneficial effect of the provision). The CAT held that the MasterCard UK MIF was not exemptible, Popplewell J held that it was, and Phillips J is holding us in suspense: he will provide a further judgment on the Article 101(3) question as, though not necessary given his position that Article 101(1) is not engaged, the matter was canvassed extensively at trial and the point is likely to be picked up on appeal.

What it means for you

Phillips J’s further judgment is expected early in the New Year. The three appeals have been joined and will appear before the Court of Appeal in a single trial scheduled to be heard from 16 to 27 April 2018. The cases present a clear challenge to the Court of Appeal’s ability to manage complex multiparty commercial proceedings and will be followed with interest. It will also be intriguing to see how the Court of Appeal weighs the respective CAT and High Court judgments, particularly given the increased scope of proceedings allowed in the CAT under the Consumer Rights Act 2015.

There is still scope for other companies to bring claims arising out of the alleged anti-competitive nature of MIFs. Even if the Court of Appeal finds against the claimants this would not necessarily be a death knell for further claims by new litigants, as it may well result from a failure to bring evidence at first instance that was readily available. Other retailers may simply reconsider how evidence on the effect of the card schemes should be presented and argued. Given the financial implications of the cases, and the number of interested parties, we recommend that anyone looking to secure a seat at the courtroom should get there early on the morning of 16 April 2018.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.