On September 11, 2014, the EU Court of Justice (CoJ) issued its judgments in the MasterCard and the Groupement des Cartes Bancaires appeals. Both cases raised critical issues for assessing competition on two-sided payment schemes.
Groupement des Cartes Bancaires focused on whether the European Commission (EC) erred in finding that the tariff measures at hand constituted a restriction of competition by object. InMasterCard, the question was put differently: whether the EC provided sufficient proof of the anti-competitive effects of the multilateral interchange fee (MIF).
This note explains some of the key findings made by the CoJ in MasterCard. It focuses, in particular, on how the CoJ judgment may:
- Give the EC additional leverage in prosecuting MIFs (or fees with similar features) as restrictions of competition by object
- Make it harder for industry to defend MIFs (or fees with similar features) as: (i) necessary for a two-sided scheme to operate; and/or (ii) generating efficiencies that outweigh their alleged negative effects
A Restriction of Competition by Effect … for Now
In its decision against MasterCard, the EC had chosen to prosecute the MIF at issue as a restriction of competition by effect. However, the EC also noted that “[t]he fact that the MIF typically determines a floor for the price which merchants must pay for accepting payment cards is […] an indication that MasterCard’s MIF may by its very nature have the potential of fixing prices.” Arguably, the EC had an appetite to adopt a hard stance against MIFs, but acknowledged that the facts of the case were complex and that prosecution under a restriction by object approach would be shaky from a legal standpoint (as Groupement des Cartes Bancaires recently demonstrated). Confident in its analysis that the MIF under review had the effect of appreciably restricting competition, the EC chose not to reach “a definite conclusion” as to whether the MIF was a restriction of competition by object.
The CoJ’s judgment in MasterCard may give the EC new impetus to reach such a definite conclusion. The EC may perceive the CoJ’s endorsement of its effects-based analysis to be a solid precedent on the basis of which it can prosecute MIFs (or fees with similar features) as restrictions of competition by object. However, as noted in our previous briefing, Groupement des Cartes Bancaires (issued, arguably not coincidentally, on the same day as MasterCard) affirmed that the concept of restriction of competition by object should be interpreted restrictively and be based on such experience that an examination of the conduct’s actual effects on the market is redundant. Does the EC now have enough experience with MIFs (or fees with similar features) to conclude that an examination of their actual effects would be redundant? It is far from clear that this is the case. Despite its victory before the CoJ, the EC would, therefore, be well-advised to think twice before prosecuting MIFs (or fees with similar features) under a stand-alone by object approach.
A Higher Threshold for the Objective Necessity Defense
Under EU competition law, if it is established that a restriction is (i) objectively necessary for the implementation of a main operation and (ii) proportionate to the objectives of the main operation, the compatibility of the restriction with competition rules must be examined in tandem with that of the main operation. Thus, if the main operation does not fall within the scope of the prohibition laid down in Article 101(1) TFEU, the same holds true for the restriction.
In its decision against MasterCard, the EC rejected the argument that the MIF was objectively necessary for the operation of the scheme. It noted in particular that there should be a distinction between restrictions that are: (i) objectively necessary for the implementation of the main operation; and (ii) desirable in terms of the main operation’s commercial success.
The CoJ confirmed the hard stance taken by the EC. It ruled that the crucial question is whether it is possible to carry out the main operation in the absence of the restriction in question. The fact that absent the restriction the main operation may be more difficult to implement, or less profitable, does not render the restriction objectively necessary.
The CoJ further noted that its interpretation did not amalgamate the objective necessity test for the purpose of determining the “ancillary nature” of a restriction with the indispensability test under Article 101(3) TFEU. According to the CoJ, the two tests pursue different objectives:
- The objective necessity test looks at whether a main operation – that is not caught by Article 101(1) TFEU – would be implemented, if the secondary restriction of commercial autonomy did not exist
- In contrast, the indispensability test looks at whether a restriction of commercial autonomy that is prohibited under Article 101(1) TFEU (because it is liable to have an appreciable adverse impact on competition) may, nevertheless, be exempted under Article 101(3) TFEU because it is indispensable to (i) the improvement of production or distribution or (ii) the promotion of technical or economic progress, while allowing consumers a fair share of the resulting benefits
The CoJ’s stance on the objective necessity defense in MasterCard departs from previous case-law which applied a more generous interpretation: in Métropole télévision the GC had held that “[i]f, without the restriction, the main operation is difficult or even impossible to implement, the restriction may be regarded as objectively necessary for its implementation” (emphasis added). Following the CoJ’s ruling, the evidentiary threshold for use of the objective necessity defense is set so high that the defense will be available in hardly any circumstances.
Efficiency Arguments in Two-Sided Markets: Double Hard to Prove
The CoJ examined whether an error in law was committed in finding that MasterCard’s MIF is not exempted under Article 101(3) TFEU due to the efficiencies it brings about. The CoJ noted that, when it comes to two-sided systems, it is necessary to take into account the objective advantages flowing from the restrictive measure both on the market in respect of which the restriction has been established, and the market which includes the other group of users associated with that system. The case at issue therefore required to take into account the objective advantages flowing from the MIF both on the acquiring market (i.e. for merchants), and the issuing market (i.e. for cardholders).
The CoJ noted that there was no proof of objective advantages flowing from the MIF and which benefited merchants. It highlighted that, as the restrictive effects were found on only one market of the two-sided system (i.e. the acquiring market), the advantages flowing from the MIF on the other market (i.e. the issuing market) could not, in themselves, compensate for such restrictive effects. According to the CoJ, the fact that the users on the two markets of the two-sided system were not substantially the same reinforced this argument.
The implications of the CoJ’s findings as regards efficiencies in two-sided systems are exceeding the contours of the payments sector and may be relevant for a number of ongoing antitrust investigations. While, arguably, there is no need for the users of the two sides of the system at issue to enjoy the same share of benefits, proof of appreciable objective advantages for each side is required – making it harder altogether to argue for the efficiency defense in two-sided systems. Such a conservative approach to the efficiency defense in two-sided markets raises concerns. As efficiencies are hard to assess, much less measure, at the initial stages of a scheme, incentives benefiting one side of the market – and potentially causing economic disadvantage to the other side – are often necessary to create the market space to begin with. Evening up the advantages between the two sides may take time. Therefore, the CoJ’s position is casting a shadow on incentives used by scheme owners to create a market where supply and demand are balanced (e.g. where there is enough adoption on the one side to make the scheme sufficiently attractive to the other side).
Too Many Cooks Spoil the Broth?
The CoJ’s judgment comes at a time when the Council of the EU is discussing a draft Regulation proposing to cap MIFs at specific levels. While the aim is for the draft Regulation to be adopted in the course of 2015, its exact scope (e.g. consumer and/or commercial cards, open and/or closed payment schemes, cross-border and/or national card payments, etc.) is still under debate. Given that regulation and antitrust enforcement are complementary rather than mutually-exclusive in the EU, it remains to be seen how exactly the CoJ’s endorsement of the EC’s findings may affect the proposed regulatory intervention, but also how the regulatory intervention (once completed) may affect ongoing antitrust enforcement actions against MIFs by the EC and national competition authorities. The CoJ’s judgment in MasterCard is by no means the end.