Introduction

The case of Sainsbury's Supermarkets Ltd v Mastercard Incorporated & Ors ([2018] EWCA Civ 1536) represents a pivotal moment in the interpretation of European Union competition law as it applies to financial services, specifically payment card schemes. This commentary delves into the Court of Appeal's decision, examining its implications for the setting of default Multilateral Interchange Fees (MIFs) by payment processors like Mastercard and Visa.

The central issue revolves around whether the default MIFs imposed by Mastercard and Visa constitute a restriction of competition under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). The appellants, Sainsbury's and others, argue that these fees inflate the base on which acquiring banks set charges to merchants, thereby restricting price competition and harming consumers.

Summary of the Judgment

The Court of Appeal upheld the Competition Appeal Tribunal's (CAT) decision that the default MIFs set by Mastercard and Visa indeed constitute a restriction of competition under Article 101(1) TFEU. The court dismissed arguments that the MIFs were exempt under Article 101(3), particularly rejecting the "ancillary restraint death spiral" argument, which posited that without high MIFs, the payment schemes would collapse due to competitive pressures.

Consequently, the court remitted the cases back to the CAT for reconsideration of the Article 101(3) exemption and the assessment of quantum damages. Additionally, the court clarified the burden of proof in determining exemptible MIF levels and emphasized the necessity for robust empirical evidence to support claims of competitive efficiency gains.

Analysis

Precedents Cited

The judgment extensively references foundational cases in EU competition law:

• Remia BV & others v Commission [1985]: Established that not all agreements restricting competition are automatically prohibited if they contribute to efficiency.
• Metropole Television (6) and Others v Commission [2001]: Clarified the scope of the ancillary restraint doctrine, focusing on the necessity of restrictions for the implementation of a main non-restrictive transaction.
• SmithKline Beecham v Commission [2000]: Highlighted the importance of empirical evidence in assessing competition law exemptions.

These precedents influenced the court's approach to evaluating whether the default MIFs were necessary and proportionate, and whether they were exempt under Article 101(3).

Legal Reasoning

The court's reasoning is anchored in the interpretation of Article 101(1) and Article 101(3) TFEU:

• Article 101(1) TFEU: Prohibits agreements that may affect trade between Member States and have as their object or effect the prevention, restriction, or distortion of competition. The court found that the default MIFs restricted price competition by setting a floor under which acquiring banks could not negotiate lower service charges with merchants.
• Article 101(3) TFEU: Provides exemptions for agreements that contribute to improving production or distribution, or promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit. The court scrutinized whether the MIFs met these conditions, particularly focusing on whether they were indispensable and whether consumers received a fair share of the benefits.

The court emphasized that the "ancillary restraint death spiral" argument was flawed, as it incorrectly assumed that without high MIFs, the payment schemes would be unable to survive. The court maintained that such considerations fall under Article 101(3) exemptions rather than being a primary basis under Article 101(1).

Impact

Complex Concepts Simplified

Multilateral Interchange Fees (MIFs)

MIFs are fees set by payment card schemes like Mastercard and Visa that are charged by the issuer's bank to the acquirer's bank for processing transactions. These fees are typically a percentage of the transaction value and are meant to cover the costs and risks associated with issuing and managing the card.

Article 101(1) TFEU

This article prohibits agreements, decisions, or concerted practices that may affect trade between EU Member States and restrict competition within the internal market. Such restrictions can include price-fixing, market-sharing, and other anti-competitive practices.

Article 101(3) TFEU

Article 101(3) offers exemptions to the prohibitions in Article 101(1) if the agreements or practices contribute to improving production or distribution or promoting technical or economic progress, while allowing consumers a fair share of the benefits. The restrictions must be indispensable and must not eliminate competition in a substantial part of the market.

Ancilary Restraint Doctrine

This doctrine allows certain restrictive agreements if they are necessary to support a main non-restrictive agreement. For instance, certain joint ventures may require restrictions to protect the collaboration, provided these restrictions are proportionate and necessary for the main agreement's success.

Death Spiral Argument

The "death spiral" argument posits that without high MIFs, payment schemes would be unable to maintain profitability and, therefore, would collapse under competitive pressures. This collapse would contradict the necessity and proportionality required for exemptions under Article 101(3).

Conclusion

The Court of Appeal's decision in Sainsbury's Supermarkets Ltd v Mastercard and Visa underscores the stringent scrutiny that competition authorities and courts apply to fee structures within the financial services sector. By affirming that default MIFs can constitute a restriction of competition under Article 101(1) TFEU, the judgment compels payment processors to adopt more competitive and transparent fee models.

Furthermore, the rejection of the "death spiral" ancillary restraint argument clarifies the boundaries of permissible competition-limiting practices, ensuring that exemptions under Article 101(3) are not misapplied to justify anti-competitive behaviors. This case reinforces the necessity for financial institutions to provide robust empirical evidence when claiming efficiency benefits and underscores the judiciary's role in safeguarding market competition and consumer interests.

Overall, this judgment serves as a critical reference point for future cases involving financial service fees and contributes to the evolving landscape of competition law within the EU.