Mastercard, Visa fees ruling heartens retailers, but hard issues remain

10 July 2018 10:22am

6 July 2018. By Simon Zekaria.

A blow for Mastercard and Visa in London’s Court of Appeal this week will give strength to UK retailers wrestling for damages for what they consider anticompetitive fees charged by the card-payment operators.

Mastercard and Visa are well versed in litigation over their so-called interchange fees — payments made between a retailer’s bank and cardholder’s bank when a card transaction is made.

Since EU regulators found against the fees in decisions more than a decade ago, retailers have lined up, both in the UK and abroad, to file lawsuits and get redress. The claims focus on historic card fees, before they became subject to EU caps in 2015.

But Wednesday’s ruling by Terence Etherton — the second most senior judge in England and Wales — drew a line in the sand over claims brought by J Sainsbury, Wm Morrison, Asda and Argos — four of the UK’s best-known supermarkets and goods retailers.

In a judgment running to more than 400 paragraphs, he took on the onerous task of unifying a jumble of contradictory rulings on the fees from different judges and courts in recent years.

In 2016, Judge Gerald Barling at the Competition Appeal Tribunal, or CAT, a specialized antitrust court, awarded Sainsbury’s 68 million pounds ($90 million today) in damages after ruling Mastercard’s fees unlawful.

In 2017, retailers including Asda and Argos lost their claims against Mastercard at the UK’s High Court before Judge Andrew Popplewell. Those same retailers also sued Visa but reached an out-of-court settlement, leaving Sainsbury's to pursue its fight against Visa alone. Visa won after High Court Judge Stephen Phillips ruled that its fees weren’t illegal. But he also ruled that Visa had failed to convince judges that its fees could be set at a level that deserved an exemption from antitrust enforcement.

— Setback and conclusions —

On the face of it, this week’s appeal court ruling cannot be read as anything other than a resounding setback for the card giants.

First, in dismissing almost all of Mastercard’s and Visa’s appeals against the retailers’ claims, the court gave a singular message: the fees were unlawful and infringed competition law. In doing so, Etherton confirmed arguments from Barling and Popplewell that the fees breached the rules, and said Phillips had erred.

Other conclusions went against Mastercard and Visa, too. The court said Popplewell had gotten other legal arguments wrong on market effects of the fees, and Popplewell and Phillips made errors in assessing the exemption of fees from antitrust enforcement. In addition, Etherton ruled, retailers don’t bear the burden of proving a lawful level for the interchange fee; that falls to the card operators.

The court also said the CAT had been right not to have reduced damages to Sainsbury’s on the grounds of “passing on” — an argument by Mastercard that Sainsbury’s had passed on some or all of the increased fees to its own customers and so should have a reduced entitlement to damages.

— Fee level and damages —

But while the ruling jolted the payment card operators, it also left knotty legal questions over lawful fee levels and damages unresolved, instead sending these for assessment by the CAT.

A High Court judge sitting at the tribunal will assess what a is a maximum lawful level that can be applied to interchange fees so that they are deemed exempt from antitrust challenges, and will determine what damages the supermarkets should receive from the card operators.

Both of these issues are fraught with complexity.

In assessing the lawful level of the fees, the court will have to assess whether economic benefits outweigh the negative effects of restrictions on competition, making a certain level of fee exempt from the rules.

In his ruling, Etherton suggested that a 0.2 percent charge for debit cards and 0.19 percent for credit cards — figures accepted by Sainsbury's at an earlier trial — would be a lawful level for the fees. But the CAT will take its own view.

On damages, the calculation of losses will be determined by assessing the impact of the fees on consumer prices, a task that will prove difficult and contentious.

Visa and Mastercard will now begin honing their arguments on fee level and damages to argue down their potential exposure to big payouts.

— Higher court? —

While the fee level and damages questions are still in the balance, the retailers involved took a great step forward this week. The Court of Appeal ruled out a retrial at the CAT: The tribunal won’t hear new evidence, except in relation to damages in two claims. The parties will have to rely on “generic evidence” from the other two cases that was equally applicable to both the card operators and to all retailers.

But will that be the end of the story?

For Mastercard and Visa, years of litigation show how significant the interchange fee is to their businesses. Card transactions worldwide involve the fee, and as economies move away from cash to card use, these payments increasingly appear not as a choice, but as part of the fabric of commerce.

At issue is a fierce debate: is the fee a forced measure fixed by the card operators to the detriment of businesses and shoppers? Or is it, as Mastercard and Visa say, a crucial mechanism to operate the payment system and fund beneficial card services, security and technology, such as contactless.

While the European Commission held that the fees inflated the cost of card use for retailers and shoppers, it didn’t outlaw the interchange fee, saying it might be “indispensable” to creating efficiencies that outweigh its restrictions on competition.

Yet new claims from retailers over the fees pop up on an almost monthly basis. The debate has also resulted in a collective action being filed against Mastercard on behalf of 46 million UK consumers.

With the debate still raging, this week’s judgment, while highly significant, is not a full stop. That will likely take many more years and a Supreme Court ruling to achieve.

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