Commercial Court rules on retailer claims over MasterCard interchange fees

30/01/17

Mr Justice Popplewell has today given judgment in the Phase I trial of claims brought by twelve high street retailers, including Asda, the Arcadia group and Morrisons, against MasterCard. 

The claim concerns interchange fees payable on transactions using MasterCard credit or debit cards.  Interchange fees are paid between the merchant’s bank (the “acquiring bank”) and the cardholder’s bank (the “issuing bank”) for each transaction by the cardholder with the merchant.  The case focussed on default or fall-back multilateral interchange fees (known as “MIFs”) set by MasterCard, which determine the rate of interchange to be paid where acquiring and issuing banks do not reach agreement between themselves on the rate payable. The judgment is the latest to be given in the UK in a damages claim concerning MasterCard’s MIFs, following the decision of the Competition Appeal Tribunal (the “CAT”) in July 2016 in Sainsbury’s v MasterCard [2016] CAT 11. 

The retailers complained that the MIFs set by MasterCard were unlawful for: transactions by UK cardholders at UK retailers (to which the domestic “UK MIFs” applied), transactions by Irish cardholders at Irish retailers (to which the domestic “Irish MIFs” applied), and transactions in the UK and Ireland by cardholders from other EEA Member States, to which the cross border or “EEA MIFs” applied.  The retailers relied on the decision of the European Commission in December 2007 finding MasterCard’s EEA MIF to have been a restriction of competition by effect, contrary to Article 101, TFEU. 

The retailers contend that since 2006 they had paid about £437 million in MIFs.  Over 95% of the claim’s value concerns transactions in the UK to which the domestic UK MIFs for credit and debit cards applied.

Mr Justice Popplewell found that the MIFs, taken in isolation, restrict competition between acquiring banks by setting a price floor, following the reasoning of the European Commission.  In relation to the domestic UK and Irish MIFs, however, the Judge then considered what the consequences of setting a MIF at zero or setting no MIF (which he found were effectively the same thing) would have been for MasterCard’s ability to survive in the market.  The Judge accepted that it was appropriate to consider the effect of competition from the Visa scheme.  He found that if Visa’s MIFs been set at their actual levels and MasterCard had had a zero MIF, card issuing banks would have sought to maximise their revenues from interchange and would have moved their card portfolios from MasterCard to Visa.  MasterCard would have lost its entire business and would have been driven from the market.  Popplewell J rejected the submission that he should assume that, had MasterCard operated at a lower rate or at zero, Visa could only lawfully have operated at lower rates also; he did not accept that the Visa and MasterCard schemes were materially identical. 

Popplewell J accordingly found that the UK and Irish domestic MIFs were objectively necessary as ancillary restraints for the operation of the MasterCard scheme.  There was, moreover, no restriction of competition because without the MIF, MasterCard would not have had lower interchange fees in any event (since it would have been driven from the market), and Visa’s MIFs would also not have been lower.

In reaching this conclusion, the Judge considered the analysis of the UK MIF by the CAT in the Sainsbury’s case.  The CAT had found that, absent the MIF, issuing and acquiring banks (supported by retailers and MasterCard) would have entered into bilateral agreements and that the MasterCard scheme could thereby have continued.  Popplewell J described this reasoning as a construct of the CAT itself, not advanced by the parties before the CAT or put to the factual witnesses, and which had been rejected by the parties’ experts.  The Judge found that the CAT’s hypothesis that bilateral agreements would arise was not realistic.

Popplewell J went on to consider whether, if the MIFs were a restriction of competition, they were nevertheless exempt under Article 101(3).  He found that MasterCard bore the burden (under competition law) of establishing an exemption, but that the retailers also bore the burden (in tort analysis) of showing that the fees they had paid were above the level that could lawfully have been set.  The Judge found that the MIF provides a range of benefits to merchants who accept payment cards, including “business stealing” from merchants who do not.  To quantify the value of these benefits, the Judge first applied the “Merchant Indifference Test” (or “tourist test”) applied by the Commission (which is designed to exclude business stealing), but then made substantial further adjustments.  He found that MIFs for all UK and Irish domestic transactions, and for cross-border EEA credit card transactions, could lawfully have been set higher than the average rates actually set by MasterCard.  The exemptible rate for cross-border EEA debit card transactions was, however, below the level set by MasterCard between 2006 and June 2008.

The Judgment is here.