Sainsbury's Supermarkets Ltd v Mastercard Incorporated & Ors

Factual and Procedural Background

This judgment concerns appeals arising from three related cases addressing whether default multilateral interchange fees ("MIFs") set by the MasterCard and Visa payment card schemes infringe article 101 of the Treaty on the Functioning of the European Union 2012/C326/01 ("TFEU"). The cases involve claims brought by major retail companies against MasterCard and Visa, challenging the lawfulness of MIFs charged within their four-party card payment systems.

The appeals originate from decisions of the Competition Appeal Tribunal ("CAT") and the Commercial Court. The CAT found that MasterCard's MIFs were anti-competitive, whereas the Commercial Court judges, for different reasons, held that the MIFs charged by MasterCard and Visa were not prohibited anti-competitive agreements. These conflicting decisions necessitated resolution by the Court of Appeal.

The cases revolve around the operation of four-party payment card schemes, where issuers, acquirers, merchants, and cardholders interact under scheme rules that include default MIFs payable by acquirers to issuers. The key legal questions concern the impact of these MIFs on competition in the acquiring market, the applicability of the ancillary restraint doctrine, and the availability of exemption under article 101(3).

Procedurally, the appeals involve claims for damages for infringements of article 101 TFEU and corresponding domestic legislation, with the CAT awarding damages to one claimant and subsequent appeals challenging various aspects of liability, exemption, and quantum.

Legal Issues Presented

1. Whether the schemes' rules setting default MIFs restrict competition under article 101(1) in the acquiring market, by comparison with a counterfactual without default MIFs where settlement occurs at par (i.e., zero MIF).
2. Whether the "ancillary restraint death spiral" argument is valid, i.e., whether the setting of default MIFs is objectively necessary for the survival of the schemes, considering competition from rival schemes.
3. Whether the default MIFs are exempt from prohibition under article 101(3), including the burden and standard of proof applicable to the parties.
4. The correctness of the CAT's assumption that bilateral interchange fees would be agreed between issuers and acquirers in the absence of default MIFs.
5. Quantum issues, including the burden of proof regarding lawful MIF levels and whether damages should be reduced to reflect any passing on of overcharges to customers.
6. Procedural issue concerning the appropriate forum for trial and reconsideration of outstanding issues.

Arguments of the Parties

Appellants' (Merchants) Arguments

• Default MIFs impose a price floor in the acquiring market, restricting competition by limiting merchants' ability to negotiate lower fees with acquirers.
• In a counterfactual world without default MIFs, more competition would exist as merchants could exert greater pressure on acquirers, potentially leading to lower fees.
• The death spiral argument is invalid as it permits inefficient businesses to justify anti-competitive restrictions to avoid being outcompeted.
• MasterCard failed to prove a sufficient causal link between MIFs and benefits such as increased card usage; economic theory alone is insufficient without robust empirical evidence.
• Pass-through of MIF income to cardholders is incomplete and unproven, undermining claims that MIFs confer net benefits on merchants.
• The burden of proving lawful MIF levels for damages assessment should not rest on merchants, as this would impose an unrealistic evidential burden.

Defendants' (MasterCard and Visa) Arguments

• MIFs are not prices for services but transfers of value within a two-sided market; zero MIF is economically equivalent to settlement at par, and some default settlement rule is necessary.
• Bilateral agreements between issuers and acquirers would not emerge in the counterfactual due to the "free rider" problem and market dynamics.
• The MIFs do not restrict competition because acquirers compete on margins and services beyond the MIF component.
• The death spiral argument justifies the necessity of MIFs for scheme survival; asymmetrical counterfactuals where one scheme is constrained but the other is not are realistic.
• MasterCard and Visa have adduced evidence supporting the benefits of MIFs, including incentivising card usage through rewards and innovation.
• The burden of proof for exemption and lawful MIF levels lies with the schemes, not merchants.
• Pass-on arguments lack evidential basis and should not reduce damages awarded to merchants.

European Commission's Arguments

• Supports merchants' position that default MIFs restrict competition by setting a price floor in the acquiring market.
• Rejects the death spiral argument as undermining article 101(1) and competition law principles.
• Emphasises the need for robust empirical evidence to establish a causal link between MIFs and any claimed efficiencies or benefits.
• Maintains that the burden of proof for exemption rests with the schemes and that the Merchant Indifference Test ("MIT") is a useful but not definitive benchmark.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court conducted a detailed and structured analysis of the competing decisions and arguments, guided principally by the jurisprudence of the Commission, General Court, and Court of Justice of the European Union ("CJEU") in the MasterCard cases.

Regarding article 101(1), the Court identified the correct counterfactual as a situation with no default MIF and a prohibition on ex post pricing (equivalent to settlement at par). It rejected the CAT's factual finding that bilateral interchange fees would have been agreed in the absence of default MIFs, holding that this was unsupported by evidence and contrary to expert testimony.

The Court held that default MIFs set a floor on merchants' service charges, restricting competition in the acquiring market by limiting merchants' ability to negotiate lower fees. This conclusion aligned with the CJEU's prior rulings and was binding on the Court. It rejected Phillips J's contrary view that there was "no magic in zero" and that a zero MIF was not inherently more competitive.

On the ancillary restraint doctrine, the Court clarified that objective necessity requires the restriction to be indispensable for the survival of the type of main operation (four-party card scheme), not the particular scheme at issue. It rejected Popplewell J's acceptance of the "death spiral" argument that assumed asymmetrical counterfactuals where one scheme is constrained and the other is not, holding such assumptions unrealistic and legally inappropriate.

Regarding exemption under article 101(3), the Court found Popplewell J's approach flawed. The judge had assumed without sufficient empirical evidence that default MIFs always increased card usage and benefited merchants. The Court emphasized the need for robust, cogent factual and empirical evidence to establish the causal link between MIFs and efficiencies, including pass-through of MIF income to cardholders and net benefits to merchants.

The Court accepted that Popplewell J failed to adequately address the "always card" point, whereby many transactions would have occurred with scheme cards irrespective of MIFs, thus imposing costs on merchants without corresponding benefits. It also found that the judge had overlooked or discounted significant evidence and failed to conduct the necessary balancing exercise under article 101(3).

Phillips J's second judgment was found to have overlooked important empirical and factual evidence supporting Visa's case on exemption, necessitating remission for reconsideration.

On quantum, the Court held that merchants do not bear the burden of proving the lawful level of MIF for damages assessment; rather, the burden lies with the schemes. It rejected Popplewell J's approach imposing this burden on merchants as incompatible with effective enforcement of competition law.

On pass-on, the Court explained that the CAT's findings were not inconsistent: the CAT correctly applied legal principles requiring defendants to prove pass-on, and the economic assumptions underlying interest calculations did not constitute a legal finding of pass-on. The Court upheld the CAT's approach.

Finally, the Court considered procedural issues and concluded that the cases should be remitted to the CAT for reconsideration of article 101(3) exemption and quantum issues, to be heard together by a High Court judge chairing the tribunal, to ensure consistency and specialist expertise.

Holding and Implications

The Court allowed the appeals of the merchants on the article 101(1) issue, holding that the default MIFs set by the MasterCard and Visa schemes restrict competition in the acquiring market. It set aside the CAT's finding that bilateral interchange fees would have been agreed absent default MIFs.

The Court rejected the death spiral ancillary restraint argument and held that default MIFs are not objectively necessary for the survival of four-party card payment schemes.

On exemption under article 101(3), the Court found that the evidence before the Commercial Court judges was insufficient to establish exemption, necessitating remittal for further consideration by the CAT with regard to robust empirical evidence and appropriate balancing.

On damages, the Court held that merchants do not bear the burden of proving lawful MIF levels for loss assessment; this burden lies with the schemes. The CAT's refusal to reduce damages for pass-on was upheld.

The Court directed that all three related cases be remitted to the CAT for reconsideration of article 101(3) exemption and quantum issues, to be heard together by a tribunal chaired by a High Court judge, to ensure consistent and expert resolution of outstanding matters.

No new precedent was established beyond clarifying the application of existing EU and UK competition law principles to the facts of these cases.