This case is very important in that it is one of the first judgments where damages have been awarded for breach of competition rules in UK. It relates to MasterCard’s alleged anticompetitive card fees (credit and debit cards). The award was for £68,582,245 plus interest which is a significant sum, but there are numerous other claims likely to emerge. In addition to the recently filed UK consumers class action against MasterCard, Esso Petroleum is also suing MasterCard and Visa at the High Court in London. Other retailers have been observing the outcome of this case.

This case is worthy of in-depth review but the client alert concentrates on two main aspects; the dismissal of Article 101(3) defence and the treatment of the passing-on ‘defence’, which are likely to be the subject of further judicial review.

MasterCard is seeking permission to appeal against the recent UK competition court ruling that awarded J Sainsbury £68.6 million (plus interest) in damages based on alleged infringement of Article 101 of the Treaty on the Functioning of the European Union (TFEU) and of the Chapter I prohibition under the Competition Act 1998. This is due to the application of MasterCard’s UK multilateral interchange fees (MIF) in the absence of a bilateral agreement. MasterCard’s UK MIF was part of the MasterCard Scheme Rules.

Case background

In 2012 Sainsbury filed its lawsuit against MasterCard UK seeking damages for the amounts it paid in merchant service charges for processing purchases made with MasterCard UK credit and debit cards (when referring to credit cards below we include debit cards) since December 2006. In short, Sainsbury’s contended that, in the absence of the UK MIF, the merchant service charge charged to merchants by acquiring banks in the UK would be lower, because the level of the interchange fees would be lower.

The case was transferred to the specialist Competition Appeal Tribunal (CAT), which ruled, on 14 July 2016, that by setting fees on card transactions in the UK, MasterCard had restricted competition. CAT concluded that MasterCard’s “UK MIF was a restriction of competition by effect”, infringing Article 101(1) of the TFEU, and was not exempt under Article 101(3) of the TFEU.

The CAT did not consider that the agreement setting the UK MIF was a restriction of competition by object. One of the reasons given for this is that the agreement was not secret. The CAT concluded that: “It is also worth bearing in mind that price-fixing cartels (the classic ‘by object’ restriction) are almost invariably secret. The MasterCard Scheme Rules, including the provisions regarding the MIF, are not secret.”

J Sainsbury was awarded damages of £68,582,245 (plus interest) to be paid within 28 days. This is the first time that CAT has issued a major final ruling.

MasterCard contended that Sainsbury’s was party to the infringement and, consequently, any claim by Sainsbury’s in relation to the infringement was barred. The CAT found that MasterCard’s illegality defence failed, confirming the long-established view that being a party to an illegal contract does not mean such claimant cannot claim damages. This principle was established in the case of Inntrepreneur Pub Co (CPC) v Crehan [2006] UKHL 38.

Issue of association of undertakings

MasterCard argued that it decided on the amount to set the UK MIF alone and not by agreement with the banks, and that the banks accepted the price possibly because they knew it was calculated on the basis of costs and assumed, without trying to negotiate an individual lower rate, it was the best available deal.1

If this argument had been accepted there would have been no agreement between associations of undertakings and Article 101(1) TFEU would not have been breached; however, it was rejected.

Arguments were not properly considered under Article 101(3) TFEU (ex-Article 81(3) of the Treaty establishing the European Community (TEC))

The criteria for assessment under Article 101(3) TFEU (ex-Article 81(3) TEC) exempt agreements between undertakings, decisions by associations of undertakings and concerted practices, which are prohibited under Article 101(1) TFEU (ex-Article 81(1) TEC). As such Article 101(1) TFEU may be declared inapplicable provided the following four cumulative conditions are met:

  1. The agreement must contribute to improving the production or distribution of goods, or to prompting technical or economic progress.
  2. Consumers must receive a fair share of the resulting benefits.
  3. The restrictions must be indispensable to the attainment of these objectives.
  4. The agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

The CAT considered whether an exemption could be claimed under Article 101(3) but the CAT dismissed it in a surprisingly brief manner without full analysis. This seems at odds with the European Commission’s view that collective interchange fees provide benefits for merchants and consumers and provide legal certainty. Regulation (EU) 2015/751 on interchange fees for card-based payment transactions imposes a cap on interchange fees on the basis that “competition between payment card schemes to convince payment service providers to issue their cards leads to higher rather than lower interchange fees on the market, in contrast with the usual price-disciplining effect of competition in a market economy”.

The passing-on ‘defence’

In determining MasterCard’s passing-on defence the CAT had to consider whether damages suffered by Sainsbury’s were reduced because Sainsbury’s had been able to pass on the extra cost incurred as a result of the UK MIF to its customers (credit card users).

The CAT recorded that there had been no case under English law substantively dealing with this. They rejected in full the MasterCard passing-on defence on the grounds that “no identifiable increase in retail price has been established, still less one that is casually connected to the UK MIF. Nor can MasterCard identify any purchaser or class of purchasers of Sainsbury’s to whom the overcharge has been passed who would be in a position to claim damages.”

Furthermore, the CAT goes on to consider that “the pass-on ‘defence’ ought only to succeed where, on the balance of probabilities, the defendant has shown that there exists another class of claimant, downstream of the claimant(s) in the action, to whom the overcharge has been passed on. Unless the defendant (and we stress that the burden is on the defendant) demonstrates the existence of such class, we consider that a claimant’s recovery of the overcharge incurred by it should not be reduced or defeated on this ground.”

While MasterCard will be disappointed that the passing-on defence did not work in this case, it will be able point to this judgment in support of the position that consumers/credit card users did not suffer any loss as a result of the interchange fee. This will help them fight class actions such as the claim filed on 8 September 2016 under the Consumer Rights Act 2015 by the representative of a class of UK consumers, Mr Walter Merricks CBE.

U.S. law on pass-on defence

The CAT ruling on the pass-on defence is generally consistent with the way U.S. courts treat the pass-on defence—at least as far as U.S. federal law is concerned. Since 1968, when the U.S. Supreme Court decided Hanover Shoe, Inc. v United Shoe Machinery Corp., 392 US 481 (1968), defendants have been unable to avoid federal antitrust liability by claiming that direct purchaser plaintiffs suffered no injury as a result of having passed on overcharges to their downstream customers. In light of Hanover Shoe, and to ensure that antitrust defendants would not be subject to double liability, the U.S. Supreme Court, in Illinois Brick Co. v Illinois, 431 US 720 (1977), held that downstream customers do not have standing to bring suit against the violators of federal competition law.

U.S. states, however, have their own competition laws. Notably, about half of the states have passed ‘Illinois Brick repealer statutes’ that permit either consumers or attorneys general to prosecute claims on behalf of indirect purchasers. In these states, where the absence of a pass-on defence could lead to double damages for antitrust defendants, it is still possible that the pass-on defence can be applied. For example, the California Supreme Court, in Clayworth v Pfizer, 233 P3d 1066 (Cal. 2010), held that the pass-on defence does not generally apply to claims under California’s antitrust statute, the Cartwright Act, but ruled that “if damages must be allocated among the various levels of injured purchasers, the bar on consideration of pass-on evidence must be lifted; defendants may assert a pass-on defense as needed to avoid duplication in the recovery of damages.”

Due to the CAT’s general rejection of the pass-on defence, stakeholders subject to UK competition law will need to grapple with similar issues going forward; in particular, stakeholders will need to address whether downstream customers should be able to bring suit against defendants and, if so, whether risks of double recovery warrant an exception that allows the pass-on defence to be used in certain cases.

  1. Interestingly, evidence was given that the Swedish banks took a different view and did negotiate bilateral deals. This was done with the support and under the supervision of the Swedish competition authorities to complement a bilateral agreement system.

Client Alert 2016-244