Sainsbury’s v MasterCard [2016] CAT 11: Default MIFs held restrictive by effect on a two‑sided platform; bilateral-interchange counterfactual, a structured pass‑on/illegality framework, and a pragmatic approach to damages and interest

Introduction

This landmark Competition Appeal Tribunal (CAT) judgment—the first “stand‑alone” competition case tried in the CAT following transfer from the High Court—addresses the lawfulness of MasterCard’s UK domestic multilateral interchange fees (MIFs) for card transactions over the period 19 December 2006 to 9 December 2015. Sainsbury’s Supermarkets Ltd claimed damages under Chapter I of the Competition Act 1998 and Article 101 TFEU on the basis that MasterCard’s UK MIFs unlawfully inflated the floor of merchant service charges (MSCs) by constraining acquirers’ pricing, thereby restricting competition on the acquiring market. MasterCard denied infringement, relied heavily on the two‑sided nature of payment systems, argued objective necessity and Article 101(3) exemption, advanced an ex turpi causa defence, and challenged causation and quantum (including pass‑on and interest).

At the heart of the case are foundational issues in modern competition law: how to assess restrictions by effect on a two‑sided platform; how to construct a realistic counterfactual; whether default MIFs are ancillary or necessary to the scheme; whether the Merchant Indifference Test (MIT) is an appropriate benchmark under Article 101(3); how pass‑on and mitigation should operate in English law; and the role of “undertaking” for attributing illegality within corporate groups.

Summary of the Judgment

• Agreement: MasterCard’s UK MIFs constituted an agreement between undertakings (MasterCard and its licensees) via scheme rules. It was unnecessary to decide definitively post‑2009 whether they were also “decisions by an association of undertakings.”
• No “object” infringement: The MIFs were not restrictions “by object” (Cartes Bancaires applied). Their purported purpose included balancing scheme interests; the default nature and transparency of the rules cut against “object” categorisation.
• Restriction by effect (core holding): The UK MIFs appreciably restricted competition, primarily on the acquiring market, by setting a floor under MSCs and preventing acquirer price competition. The CAT analysed effects across all three interlinked markets (acquiring, issuing, inter‑scheme) given the two‑sided platform, but the principal harm arose in acquiring.
• Counterfactual: In a no‑MIF world, bilateral interchange fees (IFs) would have been agreed at lower levels, with meaningful acquirer differentiation. CAT set the bilateral IFs at 0.50% for credit and 0.27% for debit, compared with Sainsbury’s blended actual MasterCard rates of c. 0.90% (credit) and 0.36% (debit).
• No objective necessity: The scheme could operate without a default MIF. A prohibitive “ex post pricing” rule was not needed; scheme rules already prevented unilateral “self‑help” deductions absent agreement.
• No Article 101(3) exemption: The UK MIF as set was not indispensable to any efficiencies; MIT was rejected as an appropriate tool in this case; any potentially exemptible MIF would be at levels lower than the bilateral IFs and, crucially, should not impede bilateral negotiation.
• Illegality/ex turpi causa: Defence failed. Sainsbury’s Bank’s participation as an issuer did not bar Sainsbury’s claim: no turpitude (innocent rather than negligent/intentional breach), no single economic unit for these purposes, no attribution, and no “significant responsibility” for the distortion (Crehan).
• Damages: Overcharge was the difference between the actual MIFs paid and the bilateral IFs (credit c. £102.79m; debit c. £0.76m). After netting off “benefits” (80% of the unlawful element of MIF revenues received by Sainsbury’s Bank: c. £34.21m), the recoverable overcharge was £68,582,245 plus interest (tax and some residual timing issues reserved).
• Pass‑on: The economic tendency to pass through costs is not enough. The legal pass‑on defence requires identifiable downstream price increases causally linked to the overcharge and a real class of downstream claimants. That was not established.
• Interest: Applying Sempra Metals, CAT awarded compound interest on 50% of the overcharge (reflecting a pragmatic view of economic pass‑through without recognising a legal pass‑on defence), split as: 20% at cash deposit rates and 30% at new‑debt rates. WACC was rejected as too theoretical on the facts.

Analysis

Precedents and regulatory decisions cited and their influence

• EU Commission and Courts on MIFs and two‑sided markets
  • Commission Decision (19 Dec 2007) held MasterCard’s intra‑EEA MIF infringed Article 101(1) by effect. Although this case concerned the UK domestic MIF (not intra‑EEA), the CAT applied the EU Courts’ principles while treating the Commission’s factual findings as non‑binding (Crehan).
  • General Court and CJEU in MasterCard (2012, 2014):
    • Confirmed two‑sided platform relevance in effects analysis; constraints from other systems may matter (CJEU para 177).
    • Drew sharp distinction between the counterfactual for ancillary restraints and for effects analysis; an “ex post pricing” prohibition cannot be assumed into the Article 101(1) counterfactual (paras 161–167).
  • Cartes Bancaires (C‑67/13 P): Clarified the narrowness of “by object” category; CAT applied this in holding UK MIFs were not “object” restrictions.
  • Visa I (2001) and Visa II (2002); OFT Decision (2005): Provided foundation for understanding scheme structure and market delineation (upstream system/ downstream issuing & acquiring), and informed the CAT’s identification of harm and relevant markets.
• Effects analysis and counterfactual
  • O2 (Germany) (T‑328/03): Established the general approach to effects analysis and construction of the counterfactual within the actual economic and legal context.
• Objective necessity/ancillary restraints
  • MasterCard CJEU: A restriction is ancillary only if the main activity would be impossible without it; mere difficulty or reduced profitability is insufficient. Applied to reject “objective necessity” for the UK MIF.
• Illegality/ex turpi causa
  • Crehan: EU law does not bar a party to an anticompetitive agreement from damages unless it bears significant responsibility; courts should consider bargaining power and context.
  • Napp: Distinction between intentional/negligent and innocent infringements; relevant to “turpitude.”
  • Akzo Nobel, Siemens, Provimi, KME: Guidance on “undertaking,” decisive influence and attribution; CAT used these to limit group attribution.
• Damages, mitigation and pass‑on
  • British Westinghouse: A claimant must give credit for benefits arising from reasonable mitigation; but collateral gains (res inter alios acta) do not reduce damages. CAT held general cost‑efficiency drives are collateral, not causal mitigation of the MIF overcharge.
  • 2 Travel Group: Helpfully framed the approach to “recklessness” and knowledge in competition contexts (cited on standards of culpability).
  • Sempra Metals: Established recoverability of compound interest as damages on proper proof; CAT used a pragmatic, evidence‑based approach to the rate (cash/new debt) and scope (50% of overcharge).
  • Ablyazov, Equitas: On pleading and proving interest losses; CAT reconciled these by grounding its award in the factual financing profile of Sainsbury’s.

Legal reasoning

• Agreement
  • MasterCard’s scheme rules bound issuers and acquirers to use the default MIF absent a bilateral IF. That assent was sufficient to constitute an agreement between undertakings. The rules created rights and obligations between licensees inter se, enabling issuers to deduct the interchange from settlement.
• No restriction by object
  • Although a MIF sets a price parameter, it is a default and was adopted transparently within a complex, two‑sided scheme aimed at balancing user groups and inter‑scheme competition. Applying Cartes Bancaires, the CAT held that the MIF was not, by its very nature, harmful enough to dispense with effects analysis.
• Restriction by effect on a two‑sided platform
  • Relevant markets: The CAT scrutinised the acquiring, issuing and inter‑scheme markets; although two‑sidedness mattered, the principal adverse effect was on the acquiring market (floor under MSCs). Considering the inter‑linkages avoided an unduly siloed analysis.
  • Theory of harm: The MIF inflated a common component of acquirers’ costs, limiting price competition downstream to merchants; with HACR and scheme obligations, merchants could not bargain for lower default interchange.
  • Counterfactual:
    • No assumption of an “ex post pricing” rule (per CJEU). But the scheme rules and general law already prevented unilateral “self‑help”: absent a default MIF or bilateral IF, the issuer could not deduct interchange.
    • Issuers would then negotiate bilaterally with acquirers to secure IFs, because a zero‑IF world would risk issuer exit. Acquirers would use IF structure to differentiate their merchant offering (volume discounts, card‑type differentiation, etc.).
    • Rates: Using contemporaneous cost studies (Edgar Dunn) and factual evidence, the CAT set bilateral IFs at 0.50% (credit) and 0.27% (debit), compared with Sainsbury’s blended actual MasterCard rates (credit c. 0.90%; debit c. 0.36%).
    • Visa/Maestro: CAT rejected MasterCard’s “scheme collapse” narrative and read the Maestro switch evidence in context (acceptance gaps, pricing structure mis‑alignment, incentives), finding the MIF gap was one factor among many; it did not demonstrate an inevitable issuer exodus on price alone.
• Objective necessity
  • Per CJEU, necessity requires that the scheme would be impossible without the restriction. Evidence showed the scheme could operate without a default MIF, via bilateral IFs and existing settlement rules. The UK MIF was not an ancillary restraint.
• Article 101(3) TFEU
  • The UK MIF did not generate efficiencies or fair consumer share that could not be achieved by less restrictive means (e.g., bilateral IFs). The MIT was rejected as a tool for exemption in this context because it ignores the cost side of issuing that benefits merchants and is not a metric merchants actually use; more broadly, MIT looks only to one side of the platform.
  • Any exemptible MIF must function as a defensible, non‑distortive pivot price across both sides and not act as a floor that suppresses bilateral outcomes.
• Illegality (ex turpi causa) and “undertaking”
  • No turpitude: At most an “innocent” infringement by Sainsbury’s Bank (and by MasterCard), not negligent or intentional; the breach lacked the quality to engage the ex turpi defence.
  • Undertaking/attribution: Sainsbury’s and Sainsbury’s Bank did not constitute a single economic unit for this purpose; even if they had, decisive influence or participation in the infringement is needed for attribution, not mere membership of an “undertaking.”
  • Significant responsibility: Sainsbury’s Bank’s bargaining power over the MIF was negligible (often only an affiliate issuer under a sponsor), so the Crehan bar to recovery did not apply.
• Damages, mitigation, pass‑on and benefits
  • Overcharge: For Sainsbury’s, difference between actual MIFs paid and bilateral IFs: credit c. £102.79m; debit c. £0.76m.
  • Mitigation (British Westinghouse): Ordinary business cost‑saving drives were collateral, not causally linked to the MIF overcharge; no reduction to damages.
  • Pass‑on (legal): Economic tendency to pass costs through is insufficient. The defence requires proof of identifiable downstream price rises causally linked to the overcharge and presence of downstream claimants—neither shown. The CAT’s approach foreshadows the structure in the Damages Directive (burdens and avoiding multiple liability).
  • Benefits: The unlawful element of issuer MIF revenue received by Sainsbury’s Bank (c. £42.76m across known years) was set off at 80% (reflecting the extent rewards were targeted to Sainsbury’s), yielding a deduction of c. £34.21m.
• Interest (Sempra Metals)
  • The CAT awarded compound interest on 50% of the overcharge (its pragmatic assessment of the economic landscape without recognising a legal pass‑on defence). Within that 50%:
    • 20% at cash deposit rates (lost cash returns);
    • 30% at new debt rates (avoided borrowing costs).
  • WACC rejected as too theoretical and misaligned with the actual financing impacts here (no reliable proof of optimal capital structure; overcharge immaterial to gearing; sale‑and‑leasebacks unrelated).

Impact and significance

• Two‑sided platforms: The CAT set out a structured approach to assessing effects on a platform with interlinked user groups, considering acquiring, issuing and inter‑scheme markets while maintaining focus on where the harm bites (acquiring).
• Counterfactual method: The “no default MIF → bilateral IFs” counterfactual is now a reference model in UK interchange litigation; it is evidence‑led and sensitive to realistic merchant/acquirer dynamics and scheme rules.
• MIT recalibrated: The court’s rejection of MIT as an Article 101(3) yardstick in this factual context curbs attempts to reduce complex, two‑sided value to a single merchant‑side proxy.
• Objective necessity: A stringent standard (impossibility) applies; default rules that make life easier or even materially more profitable are not “necessary.”
• Pass‑on: The CAT’s rigorous view of the legal pass‑on defence raises the evidential bar. Defendants must prove downstream price effects causally tied to the overcharge and identify a real class of downstream claimants, helping to guard against both over‑ and under‑compensation.
• Illegality/undertakings: Group attribution is not automatic; decisive influence or participation matters. “Significant responsibility” (Crehan) remains a limit, but with real teeth: weak bargaining power and affiliate issuance undermine the defence.
• Damages and benefits: The set‑off for issuer‑side MIF revenues within a claimant group is an important, pragmatic mechanism to avoid over‑compensation where a retailer’s captive issuer benefited from the unlawful MIF.
• Interest awards: The rejection of WACC and the granular split across cash and new‑debt rates signals a preference for fact‑congruent measures of financing loss.
• Procedural: As the first stand‑alone CAT judgment, the case showcases the Tribunal’s handling of extensive factual and economic evidence and its willingness to anchor analysis in real‑world data and contracts.
• Industry: Triggers continuing scrutiny of default interchange fees and reinforces the role of bilateral arrangements; complements the later legislative caps (EU Interchange Fee Regulation and UK 2015 Regulations) that bounded card interchange for consumer cards.

Complex concepts simplified

• Four‑party scheme: Cardholder ↔ Issuer ↔ Acquirer ↔ Merchant, with MasterCard/Visa setting rules to enable payment and settlement flows.
• MIF (multilateral interchange fee): A default fee retained by issuers from the transaction value when they settle with acquirers; the largest component of the merchant service charge.
• Two‑sided platform: A business that serves two distinct user groups (cardholders and merchants) whose participation and value are interdependent—growing one side typically benefits the other; pricing affects both sides.
• MIT (Merchant Indifference Test): A theoretical benchmark equating the cost to merchants of accepting card rather than cash for a “one‑off” purchase. Not used by merchants in practice and not well‑suited to capture issuer costs benefiting merchants or platform interactions.
• Objective necessity/ancillary restraint: A restrictive term escapes Article 101(1) only if the main activity would be impossible without it (not merely harder or less profitable).
• “Undertaking” (EU law): An economic unit potentially comprising multiple legal entities. Liability may be attributed within the unit where there is decisive influence or participation; mere group membership is not enough.
• Pass‑on (economic vs legal):
  • Economic: A firm may, over time, recover some costs through prices, cost savings, or lower margins.
  • Legal defence: Requires proof of downstream price increases caused by the overcharge and a class of downstream claimants; general cost‑saving drives are collateral.
• WACC: A blended rate reflecting the cost of debt and equity. Useful for corporate finance, but not automatically the right measure of a claimant’s actual financing loss for litigation purposes.

Conclusion

Sainsbury’s v MasterCard is a cornerstone UK authority on assessing anticompetitive effects on a two‑sided platform and quantifying damages for interchange overcharges. It establishes that a default MIF can be restrictive by effect where it sets a floor under downstream prices and stifles acquirer competition, even on a two‑sided system. The Tribunal’s counterfactual—no default MIF with realistic bilateral IFs—offers a robust, evidence‑based template for future cases. The judgment also brings welcomed clarity to objective necessity (impossibility standard), Article 101(3) (rejecting MIT for this context), pass‑on (a demanding legal defence), illegality (no easy group‑level bar to claims), and interest (fact‑aligned over financial‑theory‑heavy measures).

On the facts, the CAT awarded Sainsbury’s £68.58 million plus compound interest after netting off issuer‑side benefits—a measured, principled outcome that achieves compensation without over‑compensation. Beyond the immediate financial result, the judgment provides a durable analytical framework for competition cases involving two‑sided platforms, pricing rules, and mass‑market transactional infrastructures.