Visa and MasterCard interchange fees restricted competition, English court rules

Source: Global Competition Review | Author: Janith Aranze

Visa and MasterCard have lost appeals in their long-running battle against a host of retailers, as an English court found their multilateral interchange fee schemes restrict competition.

At the handing down of the judgment today at the Court of Appeal, the Master of the Rolls Sir Terence Etherton said the card operators’ fee schemes are unlawful unless they would be exempted as procompetitive. Visa and MasterCard will have the opportunity to argue before the UK’s Competition Appeal Tribunal that the fees contribute to net efficiencies.

The Court of Appeal’s decision today attempted to reconcile four conflicting UK court judgments in retailers’ lawsuits against Visa and Mastercard that claim the card operators’ interchange fees were anticompetitive.

Both card schemes involve the banks where retailers have accounts, known as acquiring banks, immediately paying a retailer when a card user makes a purchase. Acquiring banks then pay the bank that issued the card to that purchaser an interchange fee – which has default rates set by Visa and Mastercard – before those issuing banks charge their cardholders.

In 2016, the Competition Appeal Tribunal found MasterCard’s multilateral interchange fee scheme infringed EU competition law by effect, and ordered the company to pay £68.6 million (€82 million). But in a contrasting judgment the following year, High Court judge Mr Justice Andrew Popplewell said that although MasterCard interchange fees were prima facie anticompetitive, they were objectively necessary ancillary restraints of competition, and exempted under article 101(3) of the Treaty on the Functioning of the European Union.

To further deepen the split, High Court judge Mr Justice Stephen Phillips dismissed supermarket Sainsbury’s lawsuit against Visa, ruling that the existence of its multilateral interchange fee scheme did not breach competition at all. Yet in a separate ruling on exemptions, he found that if Visa’s interchange fee scheme were a breach of competition law, it would not have been exempted under article 101(3) – in other words, nearly the opposite of the Popplewell judgment.

In today’s 99-page judgment, the Court of Appeal followed the European Court of Justice’s 2014 ruling that concluded MasterCard’s fees harmed competition by limiting the pressure merchants could exert on banks when negotiating card charges.

The ECJ’s decision “made it clear” that MasterCard’s interchange fee scheme, by limiting the pressure which merchants could exert on acquiring banks, “resulting in a reduction in competition between acquirers as regards the amount of the merchants service charge”, the Court of Appeal said – and is not a ruling from which the UK court can or should depart.

The judgment, given by Sir Etherton, Chancellor of the High Court Sir Geoffrey Vos, and Lord Justice Julian Flaux, said counsel to Visa was wrong to argue that all multilateral interchange fees (MIFs) will infringe article 101(1) as a result of the Court of Appeal’s ruling today. “We do not discount the possibility that some evidence might conceivably enable other schemes to distinguish different MIFs from those upon which the [ECJ] was adjudicating.”

The Court of Appeal held that the correct counterfactual for the interchange fee schemes was a world without default interchange fees, and a prohibition on ex post pricing, where the schemes would not be permitted to reap the interchange fee charge in another way.

The ruling dismissed the Competition Appeal Tribunal’s counterfactual that assumed in the absence of multilateral interchange fees, acquirers would agree bilateral interchange fees. “We cannot see any proper basis for the CAT’s conclusion on this issue,” the judgment said.

The ruling said it was unnecessary to engage in a complete review of the evidence before the CAT to reach the conclusion that the tribunal lacked an evidentiary foundation to conclude that significant bilateral interchange fees would have been agreed in the absence of the multilateral fee.

The court also rejected Justice Popplewell’s reasoning on whether the schemes infringed article 101(1) of the Treaty of the Functioning of the European Union. Justice Popplewell had held that MasterCard’s interchange fee scheme was an ancillary restraint of competition and that a realistic counterfactual was having interchange fee rates set at zero. He said the “death spiral” argument should be applied to the zero MIF counterfactual, which argues that the setting of a default MIF is objectively necessary for the schemes’ survival on the basis that a rival scheme would be able to continue to impose unlawful interchange fee rates.

The Court of Appeal said Popplewell was wrong to conclude that the possibility of a “death spiral” should be considered in relation to article 101(1) and also in relation to whether the default interchange fees were objectively necessary.

The court further held that in the Asda, Argos and Morrison case against MasterCard, Popplewell should have concluded, on the basis of the evidence before him, that the scheme was not exempt under article 101(3). The court said the benefits requirement – that the restrictive agreement must contribute to improving the production of goods or promoting economic progress – was not satisfied.

In his ruling, Popplewell had noted the lack of factual evidence from card issuers on the exemption issue. The Court of Appeal, however, said it was “unimpressed” by the defendants’ arguments that such evidence would have been difficult if not impossible to obtain, given that interchange fee income is not an isolated pot of money.

“Issuing banks receive the MIF income and must know what they do with it in broad terms,” the judgment said.

The Competition Appeal Tribunal will now rule on whether the fees are exempt under article 101(3) and determine the amount of damages, but the tribunal will not hear new evidence on these points.


Stewarts partner Kate Pollock, counsel to Asda, Argos and Morrisons, said the retailers are “delighted that the Court of Appeal has unequivocally recognised” that the fixing of interchange fees by MasterCard and its network members over many years is an unlawful infringement of competition law.

“Our clients have won against MasterCard on all the points of substance in their appeal and the court of appeal has decisively and comprehensively reversed the ruling of the Commercial Court judge below. Our clients now look forward to a swift and final resolution of this matter,” she said.

David Scott is partner at Scott+Scott, which represents several retailers against Visa and MasterCard. He said that “we are very pleased with the Court of Appeal’s decision. Both Visa and Mastercard have imposed these exorbitant fees on merchants for far too long.”

Given the card companies’ practices, as well as the European Commission’s repeated investigations into the imposition of these fees, Scott said he had no doubt that the Court of Appeal would ultimately rule in favour of the merchants. “We look forward to recouping our clients’ losses now that the Court of Appeal has resolved the issue,” he said.

Sainsburys said it is “pleased” with the court’s declaration that both MasterCard and Visa domestic interchange fees are restrictive of competition. “We will consider the judgment carefully and remain confident in the next hearing at the Competition Appeal Tribunal.”

MasterCard said it is currently reviewing the courts judgment and considering its next steps. “We continue to firmly believe that retailers derive real value from our network and we are committed to helping our retail partners grow their businesses,” the spokesperson said.

Visa declined to comment.

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