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In this case comment, David Bridge, Kenny Henderson, Jessica Foley, Devina Shah and Imtiyaz Chowdhury who all work within the Dispute Resolution team at CMS, comment on the decision handed down earlier this month by the UK Supreme Court in this matter of Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC and others [2020] UKSC 24:

On 17 June 2020, the Supreme Court handed down a significant judgment in the long-running, combined cases of Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC and others; Sainsbury’s Supermarkets Ltd and others v Mastercard Incorporated and others. The combined cases were brought by several retailers against MasterCard and Visa in relation to the multilateral interchange fees (“MIF”) charged by the card payment scheme operators.  The five-justice panel unanimously upheld the Court of Appeal’s decision in favour of the retailers on all grounds bar one, finding that MasterCard and Visa’s MIF arrangements were a restriction of competition.

Background – the “MIF” issue

The essence of the four-party payment card schemes operated by both MasterCard and Visa is that when a cardholder buys goods or services using either a MasterCard or Visa payment card, the bank that issued the card to the cardholder (the issuing bank) pays the transaction price to the acquiring bank (which provides its services to the retailer with whom the cardholder transacted), which in turn settles the transaction with the retailer. In most countries, including the UK, the issuing bank deducts a fee from the transaction price before passing it on to the acquiring bank. This fee is known as a MIF because the fee is a standard one applied across a national market between all issuing and acquiring banks participating in the card payment schemes. The acquiring bank then deducts a further fee (the merchant service charge (“MSC”)) before passing the balance on to the retailer. Issuing and acquiring banks can agree to a different fee, but the MIF applies absent such arrangement.

Issuing banks compete with each other for the business of cardholders, while acquiring banks compete for the business of retailers. The scheme operators (MasterCard and Visa) set the rules of the scheme and allow institutions to join it as issuers or acquirers. They do not generate any revenue from either the MIFs or the MSC, rather, the issuing and acquiring banks pay fees to MasterCard and Visa as part of participating in their card payment schemes.

These combined cases concerned whether MasterCard’s and Visa’s MIFs restricted competition amongst the acquiring banks participating in the payment card schemes. All three cases concerned the UK MIFs, and one also considered MasterCard’s EEA and Irish MIFs.

MIFs have a long history of being scrutinised from a competition perspective.  In 2007, the European Commission found that the MIF charged by MasterCard in the European Economic Area amounted to an infringement of Article 101(1) of the TFEU. The Commission’s decision was upheld by the Court of Justice of the European Union in 2014 (the “CJEU Decision”).

The Supreme Court Decision

The Supreme Court considered four key issues, as set out below, followed by the Court’s decision on each:

The Restriction Issue: The Court considered whether it was bound by the CJEU Decision and if the Court of Appeal was wrong to hold that MIFs restricted competition, contrary to Article 101(1) of the TFEU and the Competition Act 1998.

The Court found that the CJEU Decision was binding because its “essential factual basis” was mirrored in these appeals.  The MIFs that were the subject of the schemes in question were materially indistinguishable from those that had been considered restrictive of competition by the CJEU. Specifically, they were determined by collective agreement; they set a minimum price floor for the MSC; the non-negotiable MIF element of the MSC was set by collective agreement rather than competition; the counterfactual was no default MIF with settlement at par; there would be no bilaterally agreed interchange fees in the counterfactual; and in the counterfactual the MSC would be lower because it would be determined by competition.

The Court further held that even if the CJEU Decision was not binding, it would have followed the CJEU Decision in finding a restriction on competition. The Court’s reasoning was that the collective agreement to set the MIF effectively fixes a minimum price floor for the MSC, which retailers cannot negotiate; it is “immunised from competitive bargaining”.

The Supreme Court therefore dismissed the appeal on the Restriction Issue.

The Standard of Proof Issue: The Court considered whether the Court of Appeal had effectively required Visa and MasterCard to meet a more onerous evidential standard than that which is normally required in civil litigation, in respect of their argument that the MIFs were exempt under Article 101(3) of the TFEU.

Four conditions must be satisfied for Article 101(3) to apply. The restriction must: (1) improve the production or distribution of goods or promote technical or economic progress; (2) allow consumers a fair share of the resulting benefit; (3) not impose on the participating undertakings any restrictions which are not indispensable to the attainment of these objectives; and (4) not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

The Court of Appeal had found, in seeking to satisfy these conditions, the appellants had to provide “robust and cogent” evidence to prove the application of Article 101(3) and there was a legal requirement for facts and empirical data, as required by European Union law. MasterCard and Visa argued that this was an “unduly onerous” standard of proof.

The Court dismissed this argument. In doing so, the Court recalled the notion on which Article 101(3) is founded, namely that notwithstanding the existence of a restriction on competition and its likely negative effect on competition and consumers, “efficiencies and benefits” may nevertheless arise from the conduct and justify the exemption. Weighing negative effects against benefits is an “inherently empirical” exercise and a “complex assessment”.  The Court held that cogent empirical evidence is necessary in order to carry out that evaluation exercise.  Although the standard of proof is a matter of domestic law, the nature of the evidence must take account of these substantive requirements of Article 101(3).  In this regard, the Supreme Court agreed with the Commission (which intervened in support of the retailers) that a test advanced by the schemes (the ‘merchant indifference test’ or MIT) was not a “silver bullet” for obtaining exemption; they must still back up their reliance on the MIT with “robust analysis and cogent empirical evidence”.

The Fair Share Issue: The Court of Appeal had found that for the purpose of showing that retailers receive a fair share of the benefits generated by the MIFs (in connection with the Article 101(3) test), Visa could not take into account the benefits received by cardholders as a result of the MIFs.  The Supreme Court agreed with the Court of Appeal’s decision (albeit by slightly different reasoning) and held that in circumstances where there is a “two-sided market” (in this case, the cardholders and the retailers), the advantages to consumers on one side of the market (the cardholders) caused by the restriction on competition (e.g., the promotion of the use of cards) cannot be used to compensate the disadvantages caused to consumers on the other side of the market (the retailers). The Court found that the “fair share” requirement under Article 101(3) was not met because the retailers were not fully compensated for the harm inflicted on them by the restriction.  The Court had regard to the Opinion of Advocate General Mengozzi, issued in advance of the CJEU Decision, who observed that it is not the purpose of competition law to permit anti-competitive practices to harm consumers in one market for the sake of providing benefits to those in another.

The Broad Axe Issue: The Court helpfully clarified the law on pass-on in considering this fourth issue, which was the only ground of appeal on which the payment scheme operators prevailed. The question of “pass-on” considers whether an overcharge caused by a restriction of competition is passed downstream through the distribution chain.  The Court considered whether a defendant has to show the exact amount of loss the claimant has mitigated in order to reduce the damages claimed against it.

The pass-on issue was considered in detail by the Supreme Court, which invited further written submissions from the parties on the burden of proof. MasterCard and Visa submitted that the legal burden was on the claimant to prove its loss in the form of lost profits, that no question of mitigation of loss arises, and that there is no burden on the defendants in relation to the quantification of the retailers’ claims resulting from the pass-on of the overcharge.

The Court opened its reasoning on pass-on by noting that it is a question of fact in each case, which the national court must resolve on the evidence adduced before it. The normal rules of English law on mitigation of damages apply, including the effect of pass-on.  The Court recalled the general principle that damages caused by tort are compensatory and held that the retailers were entitled to plead, as the prima facie measure of their loss, the pecuniary loss measured by the overcharge in the MSC and that they do not have to plead and prove a consequential loss of profit.

The Supreme Court agreed with the CAT that a retailer had four principal options in the way that they responded to an increased input cost: (1) suffer a reduction in profit; (2) reduce discretionary spend; (3) reduce other input costs; and/or (4) raise its prices.  The compensatory principle requires the Court to take into account whether the retailer had adopted either option (3) or (4).

The Court went on to conclude that the retailers do not have the legal burden of proving their loss of overall profits caused by the overcharge, which would be an “insurmountable burden” and, if there was an exclusive focus on the claimant’s profits, this could result in the claimant being undercompensated if the overcharge had caused it to forgo discretionary expenditure to develop its business which did not promptly enhance its profits.

The Court held the legal burden was instead on the defendants to prove that the retailers have mitigated their loss. As to the degree of precision required, the Court held that whilst the compensatory principle applies, legal disputes should be dealt with at proportionate cost.  Accordingly, the Court and the parties may have to “forgo precision”, if the cost of achieving that precision is disproportionate. Therefore, MasterCard and Visa were not required to provide a greater degree of precision in the quantification of the “pass-on” than just because there is a legal burden on them, as defendants, in relation to the mitigation of loss.

Therefore, MasterCard and Visa succeeded on this ground of appeal.

The Cross-Appeal: The Supreme Court also considered the cross-appeal made by some of the respondent retailers regarding the remittance by the Court of Appeal to the CAT of the issue whether the exemption under Article 101(3) applied.  Although the Court of Appeal held in its judgment that MasterCard’s claim for exemption under Article 101(3) should have been dismissed, it remitted the three sets of proceedings on this point to the CAT to consider whether MasterCard should have succeeded (either in whole or in part) under Article 101(3). In allowing the Cross-Appeal, the Supreme Court held that the Court of Appeal’s decision effectively meant that MasterCard was entitled to re-open this issue, which was wrong and offended the principle of public policy and justice that there should be finality in litigation.

Comment

This partial conclusion to the long-running MIF litigation is of obvious significance to the parties directly involved. There is still, however, the matter of determining the quantum of damages payable to the retailers.   Given the amounts at stake, and the potential ramifications for other retailers affected, we expect that issue to be the subject of hard-fought litigation going forward.

The judgment is also significant for other parties with issued or threatened claims against MasterCard and Visa. The findings on Articles 101 and 101(3) will have some application to other claims in two-sided markets.

Of broadest precedential significance is the Court’s ruling on pass-on, which is largely pro-defendant. First, it ruled that there is no asymmetry in the level of precision required in showing overcharge on the one hand, and pass-on on the other hand. The “broad axe” principle applies equally to both exercises. Second, defendants can seek to reduce damages awards by contending that claimants have mitigated by reducing other input costs unrelated to an anticompetitive overcharge. This could significantly broaden claimants’ disclosure obligations. The success of those arguments remains to be tested as the courts may require evidence of a clear causal connection between the anticompetitive overcharge and the claimant’s decision to reduce unrelated input costs.