The CAT’s liability judgment in the Umbrella Interchange Fee case is not for the faint of heart. The former CAT President’s reasoning spans to around 170 pages and, as is often the case, contains passages of lucidity, some withering attacks on arguments he dislikes and also the occasional digression.
Perhaps the most interesting issue for the purposes of this blog is the question of whether MIFs are a by object infringement. The CAT notes that there has been no finding in prior cases (of which there are “literally thousands” [18]) that the default interest rate rule is an infringement by object [239][i]. The disagreement between panel members on this somewhat retro debate about object and effect is an intriguing part of the judgment and one with potentially far-reaching consequences. The judgment also covers issues including the correct approach to counterfactuals, the “bindingness” of prior decisions in competition cases and why the position is slightly different in competition law claims compared to standard litigation. In addition, there are around 40 pages on market definition, a cause for disagreement among the panel members, but I will skip over that.
The judgment will be of concern to the defendants. Counterfactual arguments put forward by Visa and Mastercard are unanimously rejected by the CAT. The litigation approach of Mastercard is criticised as a potential abuse of process. And it seems there is just about a majority view that MIFs should be considered a “by object” infringement (at least until the time the Interchange Fee Regulation came into force). This finding in particular could have a significant impact on the ease of proving liability in private damages claims against Mastercard and Visa.
The trial dealt only with Article 101(1) and did not consider Article 101(3). So it remains open to Visa and Mastercard to defend MIFs by showing efficiencies – but based on the reasoning in the judgment, the defendants’ prospects on that front look poor (see further below).
Quite aside from the facts of the case at hand, the judgment also shows how quickly UK competition law may start to diverge from EU competition law post-Brexit on fundamental debates like whether to assess an agreement or concerted practice by object or by effect.
How the Court of Appeal grapples with these questions, assuming (as the former CAT President appears to assume) that there is an appeal, is something to watch with interest.
Battle between counterfactuals
In a trial dubbed a “battle between counterfactuals” [235], the former CAT President and his fellow panel members dismissed the various options put forward by Visa and Mastercard and considered the “No MIF” counterfactual to be the appropriate point of reference for an effects analysis.
A degree of levity can be useful in such a long judgment, and the former CAT President offered up a few memorable quips to keep the reader engaged. In rejecting the Pure Bilaterals Counterfactual for example, he concluded: “Put brutally, if this was a one-horse race, the Pure Bilaterals Counterfactual would come last and I would decline to use it.” The Tribunal even considered it an abuse of process for Mastercard to have advanced that counterfactual – though this was more to do with how Mastercard had opposed the Bilaterals Counterfactual in previous litigation before the appellate courts than a self-standing rebuke about the weakness of the argument.
In relation to Visa’s Unilateral Interchange Fee Model counterfactual (or UIFM), the Tribunal rejected this as it left the mischief at issue (i.e. the imposition of a fee) in place.
The judgment also clarifies the distinction between counterfactuals for determining liability and counterfactuals for determining quantum [229-231].
I do not propose to assess each counterfactual and the reason why it was dismissed. Many lawyers will have spent many hours on these topics and I would not do justice to the no doubt painstaking thinking that has been undertaken. Ultimately, it seems counterfactuals are often used (whether by design or default) in a way that adds confusion rather than clarity. That is certainly the feeling one gets on reading sections of the judgment with headings such as “Confusion of different counterfactuals” and “over-engineering”. But no matter how you view them, in addition to being fertile ground for clever arguments, counterfactuals are undoubtedly a necessary component of any effects analysis or quantum analysis.
The former CAT President stated his own preference was to seek to avoid over-complication where possible. In a typically academic flourish he suggested applying “Occam’s razor” as the best analytical approach [144] – this is the view that more straightforward explanations are in general better (see more extensive explanation here). That approach informed his dismissal of the counterfactuals put forward by the Schemes.
Are MIFs anti-competitive “by object” and do commitments or the Interchange Fee Regulation change that?
As well as applying this streamlined analytical approach to counterfactual assessment, as the CAT has done, I would suggest there is also some benefit in applying it to the debate on whether MIFs are “by object” infringements and whether the Interchange Fee Regulation (or the inter-regional MIFs Commitments Decisions) impact that in any way.
The basic rule for determining whether a restriction on competition is “by object” relates to whether the agreement by its very nature reveals a sufficient degree of harm to competition which gets rid of the need for an effects based examination (see [243], Irish Beef, Cartes Bancaires etc). Claimants in competition damages actions (much like competition authorities in public enforcement) would generally prefer to establish liability on a “by object” basis wherever possible as it requires less work. Prior cases about MIFs had never really nailed down whether MIFs were “by object” infringements. But the “by object” approach was something the claimants had argued for here – see [240].
Treatises have been written on “by object” v “by effect” (see Saskia King’s excellent thesis here for example). The debate probably peaked over a decade ago at the time of Cartes Bancaires. But it is fair to say that arguments on this subject have never entirely gone away. BGL is a relatively recent UK case where object and effect arguments played a role.
Now that the UK is outside of the EU, we do not have a single court overseeing a consistent approach to what falls inside and what falls outside the “object box”. Under section 60A of the Competition Act 1998, pre-Brexit case law remains relevant. But the interchange liability judgment is an example of a case with a divergence of opinions on this question even within the CAT – in this context a UK move away from EU interpretations certainly seems to be a risk.
The former CAT President considered it to be obvious that MIFs were an object infringement under Article 101(1). At [245] he provided several reasons:
- No choice. The MIFs were not a default price that market participants could opt out of. The relevant consumers had no choice in the matter.
- Inelastic demand. The market elasticity of demand was such that default price could be increased effectively at will by the Schemes who could do so without reference to any objectively justifiable criteria.
- Creates a floor. MIFs represent a price below which the overall Merchant Service Charge cannot fall, even in an otherwise competitive market such as the acquiring market.
- No other purpose. MIFs “short-circuit the competitive process” and serve no purpose that cannot be achieved through free market interaction between the Scheme and Issuers (in the Issuing Market) and between the Scheme and Acquirers (in the Acquiring Market).
- It is an “illegitimate and indefensible “baked in” network effect in the Scheme’s ecosystem that undercuts and does not promote competition”.
Strong stuff. While Trial 1 expressly did not deal with Article 101(3) (since that is for Trial 3), it is difficult to see an efficiencies defence overcoming the scepticism of the former CAT President that is apparent from the above reasoning.
While the Interchange Fee Regulation was a point to be considered, he did not consider it changed the fact that under Article 101(1), MIFs were by object infringements. If MIFs were properly characterised as a by object infringement before the entry into force of the Interchange Fee Regulation – then this would be no less true after its coming into force.
The former CAT President drew an analogy with a contract term struck down as “unfair” by the Unfair Contract Terms Act and the fact that this contract did not cease to be unfair because it has been so struck down. See [246] and [247].
However, the other panel members, Mr Tidswell and Mr Waterson, disagreed. The usual way of narrowing the “object” box under Article 101(1) is to talk about “economic context”. This “economic context” argument appears to have persuaded Mr Tidswell and Mr Waterson.
Mr Tidswell did not buy the Schemes’ arguments about Cartes Bancaires and Budapest Bank as being reasons that changed the analysis from object to effect. Instead, and without citing specific authority, he considered the wording of the Interchange Fee Regulation itself:
- Recital 14 of the Interchange Fee Regulation states “The application of this Regulation should be without prejudice to the application of Union and national competition rules.”
- However there was also language in the Interchange Fee Regulation that said using card-based payment transactions instead of payments in cash could be beneficial for merchants and consumers, provided that the fees for the use of the payment card schemes are “set at an economically efficient level, whilst contributing to fair competition, innovation and market entry of new operators.”
- Recital 20 referred to the caps which were based on the Merchant Indifference Test.
In Mr Tidswell’s view, the Interchange Fee Regulation caps for domestic and intra-regional fees were an important difference between the economic context that pre-dated the Interchange Fee Regulation and the context that post-dated the Interchange Fee Regulation.
He concluded that MIFs that have apparently been set by reference to those caps have been set by reference to a level which might promote fair competition, including efficiency, innovation and market entry, so that such MIFs “might objectively be said to have a legitimate purpose” and therefore should be subject to an “effects” analysis, rather than being determined to be “by object” restrictions.
Mr Tidswell adopted similar reasoning in relation to the Commitments Decisions for inter-regional interchange fees. He again relied on wording from these documents (eg “evidence [..] could make merchants, taken together, indifferent between accepting a cash payment and a card payment” ([304] and [305])) to find the appropriate approach was an analysis of effects.
Mr Waterson agreed. The result was a majority decision that MIFs should be assessed as an infringement of Article 101(1) by effect from the time of the Interchange Fee Regulation and the interregional MIFs Commitments Decisions.
Here it seems that the former CAT President’s reading of the Interchange Fee Regulation as being “without prejudice” to the application of competition law is the more straightforward. The Interchange Fee Regulation has no impact on his “by object” approach.
The approach of Tidswell and Waterson is more convoluted. They can be seen as either having ignored the “without prejudice” provision in Recital 14 of the Interchange Fee Regulation. Or you could consider they found the Interchange Fee Regulation to be “without prejudice” only to the overall application of competition law – since they ultimately found MIFs to be an infringement by effect under Article 101(1) even after Interchange Fee Regulation came into force (see [303]). But on any view, in their analysis the Interchange Fee Regulation clearly does “prejudice” the decision of whether to apply normal competition law principles on object and effect to the assessment of MIFs. Prior to the regulation they saw MIFs as assessable as an infringement by object. Subsequent to the regulation they saw MIFs as assessable only as an infringement by effect.
The former CAT President’s view seems to me to be the simpler way of analysing MIFs: MIFs restrict competition and the Interchange Fee Regulation does not change that – so there is an infringement by object under Article 101(1). To the extent MIFs can be justified (and they may well be capable of justification) they should be justified through the rules put in place for an efficiencies defence (i.e. Article 101(3)).
Mr Tidswell goes to great lengths to suggest he is not conducting an Article 101(3) efficiencies defence or rule of reason type approach. Certainly his view that the Interchange Fee Regulation takes MIFs outside the object box is one that may be slightly more palatable to those who put the Interchange Fee Regulation in place than the position of the former CAT President.
Nevertheless all members of the CAT panel seem to agree in saying that MIFs set at the rate of the Interchange Fee Regulation caps are in breach of Article 101(1) (whether by object or effect) and the jury is out on whether they will be justifiable under Article 101(3).
The Court of Appeal will need to deal with this in the likely appeal. One also wonders how the European Court of Justice would have viewed it given so much time was spent considering these kinds of issue around a decade ago in cases such as Cartes Bancaires.
Conclusion
The Tribunal is savvy enough to know that its judgment is likely to be appealed (see [256]).
Competition purists may be minded to side more with the former CAT President than with the majority view of Mr Waterson and Mr Tidswell on the question of whether MIFs are “by object” infringements under Article 101(1) or whether this object/effect analysis changes depending on whether the conduct predates or postdates the inter-regional MIF Commitments Decisions and the Interchange Fee Regulation.
Had the UK still been in the EU, one also wonders whether the Court of Justice might have taken the more orthodox and straightforward analytical view of the former CAT President.
Mastercard and Visa will need to think carefully about their appeals. It would not be entirely unreasonable for the Court of Appeal to support the more straightforward “by object” analysis adopted by the former CAT President rather than the creative “by effect” (post-regulation) conclusion reached by the majority. A clear Court of Appeal finding on this would make proving unlawful conduct in standalone private damages actions against the Schemes much simpler.
*****
[i] The European Commission did refer to Mastercard’s MIFs as an object infringement here: 40049_4093_3.pdf.
Leave a Reply