When customers paid by card, Visa and Mastercard’s default interchange fees put a floor under part of the charge that retailers paid their banks. The retailers said that competing banks would otherwise have had to negotiate that part of the price. The Supreme Court addressed the restriction, the evidence needed for an exemption, and how to estimate any loss passed on to customers.
The appeals were brought on claims by Sainsbury’s Supermarkets Ltd and by Asda Stores Ltd, Argos Ltd and others, and WM Morrison Supermarkets plc. The retailers said that default fees in the Visa and Mastercard schemes had inflated what they paid to accept card payments, and claimed damages for breach of competition law.
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How the fees worked
Visa and Mastercard do not issue cards or sign up retailers. Banks and other institutions join the schemes as issuers, who provide cards to customers, and as acquirers, who enable retailers to accept them. The retailer pays the acquirer a merchant service charge. On each card payment the issuer settles with the acquirer, but the scheme rules provide, unless those banks agree otherwise, for a multilateral interchange fee to be deducted in the issuer’s favour. For most of the claim period that fee was typically about 90 per cent of the merchant service charge. Acquirers passed it on in full. Bargaining with the retailer concerned only the acquirer’s margin.
Issuers and acquirers were free in theory to agree a different fee. The trial judges found that in practice they did not: an issuer had no reason to take less than the default, and an acquirer no reason to offer more. It was agreed that a four-party scheme needs some default settlement rule, but not a fee flowing from acquirer to issuer. Visa and Mastercard are paid by separate scheme fees, which were not in issue. Nor was the rule requiring a retailer that accepts a brand to accept all cards of the chosen category. The dispute concerned competition between acquirers for retailers’ business.
The earlier decisions
The claims were tried separately. The Competition Appeal Tribunal held that Mastercard’s United Kingdom fees restricted competition by their effect and awarded Sainsbury’s damages of around £68.5 million, later adjusted for corporation tax. Popplewell J would also have found a restriction, but dismissed the Asda, Argos and Morrisons claims because of an argument, later abandoned, that the schemes would collapse without the fees, and because he held them exempt. Phillips J held that Visa’s fees did not restrict competition. In a further judgment, which was not necessary to that decision, he said Visa had not proved an exemption.
The Court of Appeal held that the fees infringed article 101(1), rejected the exemption cases on the evidence relied on at the trials, but sent the exemption issues in all three claims back for reconsideration on the existing evidence. Visa and Mastercard appealed. Asda, Argos and Morrisons cross-appealed against reconsideration of their own claim.
Why the fees restricted competition
Article 101(1) prohibits agreements between undertakings which prevent, restrict or distort competition by object or effect. It was no longer disputed that setting the fees was such an agreement, or that the fees were not a restriction by object. The comparison was with the likely world without the default fee: settlement at the face value of the transaction, equivalent to a fee of zero. It was also common ground that banks would not then have made bilateral fee agreements.
The schemes argued that banks competed over their individual margins whatever the default fee. The Court rejected that argument. The collectively set fee removed an element of price from competition. The earlier EU Mastercard judgment bound the Court on materially equivalent facts.
Exemption
Article 101(3) can disapply the prohibition if four conditions are proved by the party seeking exemption. The restriction must improve production or distribution, or promote technical or economic progress; consumers must receive a fair share of the benefit; the restriction must be indispensable to those aims; and it must not eliminate competition in a substantial part of the products.
The evidence required
The schemes argued that the Court of Appeal had imposed a higher standard than the ordinary civil standard. The Supreme Court disagreed. Proof remains on the balance of probabilities. European Union law nevertheless governs the kind of evidence that can satisfy it. Exemption requires the harms and benefits to be weighed, so claimed efficiencies must be identified, causally linked to the restriction, and supported by cogent empirical evidence. Economic theory alone will not do. A “merchant indifference” or “tourist” test, asking whether the fee makes cards no more expensive for a retailer than other payment methods, may be a useful starting point. It does not remove the need for evidence of, for example, how much fee income issuers actually pass to cardholders and whether that increases card use.
A fair share for retailers
These schemes have two sides. Issuers compete for cardholders, and acquirers compete for retailers. The restriction affected the acquiring side. Visa said benefits to cardholders could be aggregated, so retailers might remain worse off if both groups together gained and retailers received some advantage.
The Court rejected that reading. Where harm falls on consumers in only one market, and the two groups are not substantially the same, benefits on the other side cannot by themselves meet the first condition. There must be appreciable objective advantages in the market where the restriction is felt, and advantages across both markets must compensate for the competitive disadvantages. If the second condition arises, the protected consumers are the retailers who bear the restriction, and they must be fully compensated. Competition law does not justify harming one group for another’s benefit. The Court offered this as guidance drawn from the European materials, while recognising that it lacks the authority of a Court of Justice ruling, and it declined to make a reference.
Passing on and the measure of loss
The remaining appeal concerned how precisely a scheme must prove that a retailer mitigated its loss, including by passing the overcharge on in its prices. Damages for breach of the statutory duty are compensatory. The retailers may take the overcharge within the merchant service charge as the starting measure of loss. They need not first prove a reduction in overall profits. A retailer might absorb the cost, cut other spending, press its suppliers, or raise prices. If the evidence shows that it reduced the loss, compensation must reflect that.
The legal burden of proving mitigation is on the defendant. The retailer, which holds the relevant information, has a heavy practical burden to produce it or risk adverse inferences. The Supreme Court held that the Court of Appeal was wrong insofar as it required the defendant to prove the exact amount passed on, or to prove it more precisely than a claimant must prove loss. Estimation under the compensatory principle, sometimes called the “broad axe”, is available whether pass-on is used to reduce a claim or to establish one. The Tribunal’s finding that Mastercard had not proved pass-on in the Sainsbury’s trial remained closed in that dispute, but the issue remained live in other claims. The later Damages Directive did not apply, because these claims were issued before 26 December 2014. Domestic rules still had to make the European right practically effective.
Finality in the Asda, Argos and Morrisons claim
The Court of Appeal had held that, on the trial evidence, Mastercard’s exemption defence against Asda, Argos and Morrisons should have failed. Mastercard had not obtained factual evidence from issuers about pass-through to cardholders, so it could not show that any benefit outweighed the retailers’ cost. Even so, the Court of Appeal sent that issue back and allowed evidence from the other trials to be used.
The Supreme Court held that this was impermissible. Mastercard had had a full and fair opportunity and had chosen to rely on economic theory. Where an appellate court concludes that the claimant should have won on that evidence, it should give judgment accordingly. Reopening the point conflicted with the principle of finality, including the rule that a party cannot later advance a case it could and should have put forward at trial. Success on the evidence called was not an unjustified windfall, and the separate trials resulted from deliberate choices, not a procedural accident.
Verdict: The schemes lost on restriction and exemption but succeeded on quantification: pass-on could be estimated without proof of the exact sum. Asda, Argos and Morrisons won their cross-appeal. Mastercard could not retry its failed exemption case against them. Their damages remained to be assessed if not settled. The separate Sainsbury’s exemption issues remained for reconsideration.
Source: Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC and others [2020] UKSC 24
