On 14 July 2016, the UK’s Competition Appeal Tribunal (CAT) awarded Sainsbury’s Supermarkets Ltd (Sainsbury’s) £68.6 million in damages, plus interest, following its successful claim against MasterCard.
The judgment is an important development in competition law damages jurisprudence. For third parties harmed by infringing conduct, it demonstrates that significant damages can be achieved by bringing private enforcement action through courts.
However, this case also illustrates that considerable economic evidence is likely to be required to establish the “pass on” defence that the direct customers passed on the increased costs to their downstream customers. In general terms, this is good news for claims by direct purchasers and bad news for claims by indirect purchasers.
This case is just one of a number of damages claims which MasterCard is currently defending. Given the CAT’s judgment that MasterCard’s multilateral interchange fees (MIFs) do infringe competition law, that Sainsbury’s did not pass on the MIF through higher prices to consumers and that therefore Sainsbury’s is entitled to recover damages, it seems likely that similar conclusions will be reached in the other claims against MasterCard. As such, it appears that MasterCard is likely to have to pay out a significant amount in damages over the coming year.
In December 2012, Sainsbury’s brought an action in the High Court (which was later transferred to the CAT), claiming damages for loss suffered as a result of the imposition of MIFs from December 2006 onwards.
The MIFs were imposed on Sainsbury’s as part of the MasterCard payment scheme, which involved Issuing Banks being licensed by MasterCard to provide cards to customers; and Acquiring Banks being licensed by MasterCard to provide merchants (such as Sainsbury’s) with the equipment and authority needed in order for them to accept card payments. The MasterCard scheme rules provided a default level of fees to be paid by Acquiring Banks to Issuing Banks, which Sainsbury’s argued would ultimately be borne by merchants.
Sainsbury’s claimed that this payment scheme was an agreement or decision of an association of undertakings which infringed competition law. In particular, Sainsbury’s claimed that the MIFs were an unlawful restriction of competition by object and effect.
Sainsbury’s claimed overcharge damages, which it calculated based on the merchant service charge it paid to an Acquiring Bank when processing customers’ payments and which it said incorporated the MIFs. Sainsbury’s claimed that it had paid too much in merchant service charges as the MIFs were set at too high a level.
In its defence, MasterCard argued that:
- the setting of the MIFs did not infringe the competition rules;
- Sainsbury’s claim should be barred for illegality (ex turpi causa), on the basis that Sainsbury’s Bank participated in the allegedly unlawful MasterCard payment scheme as an Issuing Bank; and
- any increase in fees paid by Sainsbury’s would have been passed on to customers and therefore Sainsbury’s had not itself suffered any actual loss.
In its judgment of 14 July 2016, the CAT unanimously found in favour of Sainsbury’s. The CAT held that:
- the setting of the MIFs constituted an agreement or agreements between undertakings (i.e. between MasterCard and the Acquiring Bank and Issuing Bank licensees within the MasterCard payment scheme), and a decision by an association of undertakings;
- while the setting of the MIFs was not a restriction of competition by object, it was a restriction of competition by effect. The CAT found that, absent the MIFs, Issuing Banks and Acquiring Banks would have reached bilateral agreements as to the level of interchange fee payable on transactions, and these fees would likely have been set at a lower level than the MIFs;
- MasterCard’s ex turpi causa defence that Sainsbury’s had been a party to the illegality failed. While the CAT found that the criteria for ex turpi causa were not met in any event, the CAT also found that Sainsbury’s Supermarkets and Sainsbury’s Bank were not part of the same undertaking for competition law purposes; and
- MasterCard’s “pass on” defence also failed. The CAT found that, on the facts, Sainsbury’s had not passed on the MIF through higher prices to consumers.
In calculating the damages to award, the CAT calculated the overcharge on the basis of the difference between what Sainsbury’s (i) actually paid with the MIFs and (ii) would have paid had the infringement not been committed.
The CAT calculated that this equated to c.£102.8 million in credit card transactions and c.£760,400 for debit card transactions. However, these figures were subsequently adjusted to take into account that the wider Sainsbury’s group had benefitted from the MIFs through Sainsbury’s Bank receiving the MIFs as an issuing bank, reflecting the principle that a claimant should not be overcompensated. As such, the CAT awarded Sainsbury’s a lower figure of £68.6 million plus interest.
Impact for other on-going claims?
MasterCard is facing a number of damages claims by high street retailers in respect of its MIFs. As such, this judgment does not bode well for MasterCard. Certain aspects of the judgment are fact-specific, such as the finding that Sainsbury’s had not passed on MIF to customers (for example, by charging customers a fee for paying by credit card). Nevertheless, the substantial findings on liability and the CAT’s clear statements that the setting of MIFs constitute restrictions of competition by effect and are unlawful may impact on those other claims.
For example, MasterCard is currently in the High Court facing multimillion pound damages claims from WM Morrison Supermarkets and 11 other retailers. On 7 July, the trial was suspended as it became clear that the CAT’s judgment was imminent and that MasterCard had received a confidential version of the draft judgment. The High Court action has yet to resume and it remains to be seen whether MasterCard will now look to settle these claims out of court, rather than face another full trial.
The silver lining for MasterCard, however, is the impact that this judgment may have on the consumer class action it faces. It was announced in July 2016 that a £19 billion “opt out” consumer class action will soon be brought against MasterCard before the CAT. While the claim will be a follow-on claim to the European Commission’s 2007 infringement decision and there will be no need to prove liability, the prospects for this claim are not looking good. The claim will be substantially based on the argument that the MIFs were passed on to consumers through higher retail prices. However, although the question of whether a given merchant passed on fees to customers will be fact specific, the CAT’s rejection of MasterCard’s pass on defence in this case will make it more difficult for consumers to succeed (fully at least) in claiming that they were overcharged as a result of those MIFs.
Impact for the pass on defence?
The CAT’s judgment is the first under English law to deal directly with the pass on defence, and will provide a useful source of reference for future damages claims.
While MasterCard was unable to establish on the evidence that pass on had taken place, the judgment does reiterate that pass on is a valid legal argument when determining the amount of loss suffered in competition damages claims (even if it is not strictly a ‘defence’). This position broadly follows the EU Antitrust Damages Directive, which states that EU Member States must ensure that a defendant can invoke the pass on defence. Although the Damages Directive has not yet come into force, in the UK or elsewhere in Europe other EU jurisdictions are also allowing defendants to run a pass on defence. For example, on 8 July 2016, the Dutch Supreme Court confirmed that pass on is a valid defence under Dutch law.