The Federal Court has ordered Visa to pay a record $18M penalty for breaching exclusive dealing laws by preventing banks and third party providers from rolling out dynamic currency conversion (DCC) services to new merchants during 2010.

The penalty is the highest non-cartel penalty in Australian history and third highest penalty awarded under the general competition provisions of the Competition and Consumer Act 2010 (Cth) (CCA). The case is noteworthy because:

  • The ACCC abandoned its high profile misuse of market power case against Visa, amidst heated debate over the future of the provision.
  • The Court was particularly strident in its denunciation of Visa’s conduct, labelling the penalty a ‘clarion call to large multinational corporations’.
  • The judgment provides a valuable insight into how courts will apply the much-debated CFMEU decision on pecuniary penalties to a complex prosecution only weeks before the High Court is scheduled to hear an appeal from the judgment.

Background

Dynamic currency conversion

When a person uses their Visa card in a store or at an ATM, the bank which issued the card (issuer) debits the cardholder’s account, and the bank which accepted the card (acquirer) dispenses cash from the ATM or pays the merchant which transacted with the cardholder. The issuer then has to settle the transaction with the acquirer, which is facilitated by Visa.

When a person uses a Visa card overseas, a currency conversion must generally be performed so that the issuer can pay the acquirer the appropriate amount in the relevant currency. This currency conversion be done in two main ways:

  • Visa currency services — the transaction can be converted by Visa, which sets ‘buy’ and ‘sell’ exchange rates that apply to settlements between issuers and acquirers. Visa earns revenue on these transactions both by applying fees to multi-currency transactions and gains made through its foreign exchange trading.
  • Independent DCC services — a DCC provider can provide the acquirer with a service which allows them to convert the transaction into the issuing bank’s currency at the point the card is used, before the transaction is settled via the Visa network. A margin is generally imposed by the acquirer, but the transaction is treated as a single currency transaction by Visa and some additional fees are not charged.

By 2010, the use of third party DCC services was growing in Australia and Visa’s multi-currency revenue from fees and foreign exchange activities was at risk of erosion.

The ACCC’s case

The ACCC commenced proceedings against Visa in February 2013, alleging that a number of Visa entities had breached the misuse of market power and exclusive dealing provisions of the CCA by taking two steps that were directed at DCC services:

  1. changing its operating rules to impose a ban on the extension of DCC services to new merchants — while this ban was lifted after several months, when introduced it was not known whether it would be permanent or temporary; and
  2. imposing an ongoing ban on the use of DCC services at ATMs, which continues to apply in Australia.

Settlement

On the eve of the trial of the proceedings, the ACCC and Visa settled the proceedings by reaching agreement on the scope of liability to be admitted by Visa:

  • One of Visa’s subsidiaries admitted that it had contravened s 47 of the CCA in relation to the new merchant ban,
  • The parties put forward an agreed statement of facts, and
  • The ACCC and Visa made joint submissions on penalty to be imposed. This included evidence as to the maximum penalty available, in this instance based on “10% annual turnover” limb of section 76 of the CCA. We understand this is the first time a Court has explicitly relied upon this this limb when setting a penalty

On the basis of the agreed facts, the Court found that:

  • as a result of the ban on new merchants, it became a condition on the supply of payment card services to financial institutions that they would not acquire, except to a limited extent, currency conversion services from DCC providers which were in competition with Visa Worldwide, or its related entities; and
  • the conduct had the likely effect of substantially lessening competition in the market for currency conversion services on the Visa payment card network in Australia.

After considering the agreed facts and joint submissions, the Court imposed a penalty of $18M, which it described as being “towards the top of the mid-range of penalties available.” In doing so, it had particular regard to:

  • the need to ensure the penalty would act as a deterrent for a large company such as Visa,
  • the effect of the conduct on DCC providers,
  • the fact that the conduct was deliberate and approved at the highest levels of Visa, and
  • the fact that that senior Visa executives were aware of potential regulatory concerns.

It also took into account as ameliorating factors Visa’s compliance history, its cooperation with the ACCC’s investigation, its efficient conduct of the proceedings, the fact that the case ultimately settled and evidence of Visa’s contrition and acceptance of wrongdoing. However, in a statement which is likely to shift practice in settled penalty proceedings, Justice Wigney specifically noted that no senior executive of Visa gave evidence about contrition.

Implications

The terms of settlement in Visa, and the Federal Court’s decision on the appropriate penalty, are significant for three reasons.

ACCC abandons a key misuse of market power case

As part of the settlement, the ACCC dropped two important parts of its case — that part of its case relating to Visa’s ongoing ban on the use of DCC services at ATMs, and its allegation that Visa had misused its market power.

In a press release, the ACCC justified its decision to drop the misuse of market power case, in part, on the basis of ‘the significant legal hurdle and complexity presented by proceedings under section 46 of the CCA.’ Importantly, Visa’s admission was framed on the basis that its conduct satisfied the effects test — the same test which the ACCC is seeking to have added to the misuse of market power provision.

By settling the case on these terms the ACCC avoided the prospect of succeeding in a high profile misuse of market power case, which would have undermined the case for reform of a provision which the Commission has characterised as ‘deficient’. The settlement might also be used as evidence of the workability of the effects test in the context of misuse of market power proceedings.

Strong statements on contraventions by large companies

The Federal Court’s decision also continues a trend of strong judicial rhetoric around the need for sizable penalties in competition cases involving large companies. Justice Wigney observed that deterrence ‘is likely to be a particularly significant, if not the most significant, consideration in fixing pecuniary penalties for these types of contraventions’. The Court noted that Visa was ‘a large corporation with financial capacity to pay a significant penalty’ and, in fixing the penalty, observed that it ‘should send a clarion call to large multinational corporations that have operations in Australia that … Australia will not tolerate conduct that contravenes its competition laws’.

In recent years a number of judges have questioned whether penalties are being set at an appropriate level to deter large companies. Most notably Justice Gordon, prior to her elevation to the High Court, openly queried whether maximum penalties for breaches of the CCA’s consumer protection provisions were sufficient. Visa suggests that courts may use the additional latitude afforded by CFMEU to impose increased penalties, particularly where they take a different view on deterrent effects to a regulator driven, in part, by a desire to settle.

Insights into the Court’s approach to settled penalties

Finally, the decision in Visa provides a valuable insight into the practical application of the CFMEU decision — from a member of the Full Court which decided that case — weeks before the High Court hears an appeal.

As we noted in our earlier blog post, the Full Court’s decision generated some uncertainty over the way in which parties and courts should approach the settlement of civil penalty proceedings and led to suggestions that settlements would be stymied. Justice Wigney took the opportunity in Visa to point out that: ‘the sensible and reasonable settlement reached in this matter puts paid to the somewhat dire warnings that followed the decision [in CFMEU] to the effect that the inability of the parties to put an agreed penalty figure or range to the Court would stifle settlement of matters such as this.

The decision in Visa shows that parties can gain some comfort about the likely penalty in a case which has settled based on agreement as to the available maximum, agreed evidence on the factors going to the level of the penalty which is put before the Court and submissions on where the case sits within a theoretical range from no penalty to the statutory maximum. Parties may also be able to gain an insight into likely outcomes through the use of comparable cases. However, as the Court here noted, in most complex competition cases (including Visa) no such comparator exist.

Ultimately, the appropriate penalty is determined instinctively by the Court. In Visa, the Court departed slightly from the parties’ ‘mid-range’ submission, setting the penalty at ‘towards the top of the mid-range of penalties available’. In this case, that difference of opinion probably resulted in a variance of $1‒2 million from what the parties would likely have sought in a pre-CFMEU world. In a different case, it is easy to see how that variance could be larger.