United Kingdom Supreme Court

The outline facts

(i)                Issuers (who are generally banks and other financial institutions) issue debit and/or credit cards to their cardholder customers; and

(ii)             Acquirers (also generally banks or other financial institutions) provide payment services to merchants.

(i)                Issuers and acquirers join the Visa and/or Mastercard schemes, and agree to abide by the rules of the schemes.

(ii)             A cardholder contracts with an issuer, which agrees to provide the cardholder with a Visa or Mastercard debit or credit card, and agrees the terms on which they may use the card to buy goods or services from merchants.

(iii)           Those terms may include a fee payable by the cardholder to the issuer for the use of the card, the interest rate applicable to the provision of credit, and incentives or rewards payable by the issuer to the cardholder for holding or using the card (such as airmiles, cashback on transactions, or travel insurance).

(iv)           Merchants who wish to accept payment cards under the scheme contract with an acquirer, which agrees to provide services to the merchant enabling the acceptance of the cards, in consideration of a fee, known as the merchant service charge (“the MSC”). The acquirer receives payment from the issuer to settle a transaction entered into between cardholder and merchant, and passes the payment on to the merchant, less the MSC.

(v)              The MSC is negotiated between the acquirer and the merchant. Typically, it is set at a level that reflects the size and bargaining power of the merchant, the level of the acquirer’s costs (including scheme fees payable to Visa and Mastercard, and any interchange fees payable by the acquirer to issuers), and the acquirer’s margin.

(vi)           The scheme rules require that, whenever a cardholder uses a payment card to make a purchase from a merchant, the cardholder’s issuer must make a payment to the merchant’s acquirer to settle the transaction.

(vii)         The Visa and Mastercard scheme rules make provision for the terms on which issuers and acquirers (who are members of the scheme) are to deal with each other, in the absence of any different bilateral agreement made between them. These terms include issuers and acquirers settling transactions at the face value of the transaction (“settlement at par” or, as it is sometimes referred to, “prohibition on ex post pricing”) and also provide for the payment of an interchange fee on each transaction.

(viii)      Under both the Visa and Mastercard schemes, the default interchange fee (ie the MIF) which is payable by the acquirer to the issuer on each transaction is expressed either as a percentage of the value of the transaction, or as a flat figure in pence for each transaction. Different MIFs apply to different types of transaction (such as contactless payments, or payments made where the card is not present, including internet payments). Different MIFs also apply to transactions depending on whether the issuer and acquirer are based in the same state/region or different states/regions.

(ix)           Under the Visa and Mastercard schemes, issuers and acquirers are not required to contract on the basis of the MIF. Under the rules, they are free to enter into bilateral agreements with different terms. In practice, however, issuers and acquirers do contract on the basis of the MIF, as both trial judges below found.

(i)                On one side of the market, issuers compete with each other for the business of customers to whom they will issue cards (“the issuing market”).

(ii)             On the other side of the market, acquirers compete with each other for the business of merchants to whom they seek to offer acquiring services (“the acquiring market”).

The legal framework

Article 101(1)

“The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

(a)       directly or indirectly fix purchase or selling prices or any other trading conditions;

(b)       limit or control production, markets, technical development, or investment;

(c)       share markets or sources of supply;

(d)       apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e)       make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”

Article 101(3)

“The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

-           any agreement or category of agreements between undertakings,

-           any decision or category of decisions by associations of undertakings,

-           any concerted practice or category of concerted practices,

which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:

(a)       impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b)       afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.”

“Principles to be applied in determining questions

(1)       The purpose of this section is to ensure that so far as is possible (having regard to any relevant differences between the provisions concerned), questions arising under this Part in relation to competition within the United Kingdom are dealt with in a manner which is consistent with the treatment of corresponding questions arising in [EU] law in relation to competition within the [European Union].

(2)       At any time when the court determines a question arising under this Part, it must act (so far as is compatible with the provisions of this Part and whether or not it would otherwise be required to do so) with a view to securing that there is no inconsistency between -

(a)       the principles applied, and decision reached, by the court in determining that question; and

(b)       the principles laid down by the Treaty and the European Court, and any relevant decision of that Court, as applicable at that time in determining any corresponding question arising in [EU] law.

(3)       The court must, in addition, have regard to any relevant decision or statement of the Commission. …”

The regulatory history

The Court of Appeal decision

The issues

(i)                Did the Court of Appeal err in law in finding that there was a restriction of competition in the acquiring market contrary to article 101(1) TFEU and equivalent national legislation? (“the restriction issue”)

(ii)             Did the Court of Appeal find, and if so did it err in law in finding, that Visa and Mastercard were required to satisfy a more onerous evidential standard than that normally applicable in civil litigation, in order to establish that their MIFs were exempt from the prohibition on restrictive agreements pursuant to article 101(3) TFEU, because of the economic benefits to which they contributed? (“the standard of proof issue”)

(iii)           Did the Court of Appeal err in law in finding that in order to show that consumers receive a fair share of the benefits generated by the MIFs, for the purpose of satisfying the test for exemption under article 101(3) TFEU, Visa was required to prove that the benefits provided to merchants alone as a result of the MIFs outweighed the costs arising from the MIFs, without taking any account of the benefits received by cardholders as a result of the MIFs? (“the fair share issue”)

(iv)           Did the Court of Appeal find, and if so did it err in law in finding, that a defendant has to prove the exact amount of loss mitigated in order to reduce damages? (“the broad axe issue”)

Issue (i) - The restriction issue

“126.  … despite the fact that MIFs have provided a default level of Interchange Fee for many years … bilateral agreements … are unknown in the UK market. That demonstrates the very considerable strength of the market forces which keep the Interchange Fee at the level of the default: no party has persuaded another to move away from the default and no party has volunteered to do so for some perceived benefit.

…

129.    In my judgment it would require clear evidence to support a finding that [bilateral agreements] would emerge in a default settlement counterfactual when they do not arise in the actual default Scheme … it is clear that there is no such evidence in these proceedings. On the contrary, the evidence was unanimous and unequivocal to the opposite effect …”

“156.  ...They [the MIFs] imposed a floor below which the MSC could not fall, because acquirers had to pay at least that much to issuers and had to recoup it from the merchants, which in turn led to higher prices charged by acquirers to merchants through the MSC than if the MIF were lower or zero. Such a floor restricts competition because it interferes with the ability of acquirers to compete for merchants’ business by offering MSCs below such floor. It is no different in kind from a collective agreement by manufacturers to maintain inflated wholesale prices, which prevents wholesalers competing on the retail market below those prices.”

“156.  … the situation is exactly the same at any lower level of MIF, including a zero MIF or its equivalent, a no-MIF/default SAP [settlement at par] counterfactual. At that lower level, the default settlement rule still provides a default level of Interchange Fee, and therefore (because of the lack of competitive pressure to depart from that default) both a floor and a ceiling for that fee. The only difference is the level. Popplewell J rejected that argument in the Asda Judgment, stating at para 160 that ‘in a no MIF counterfactual the alleged vice is not the same as the actual: there is no floor.’ However, a zero MIF or no-MIF/default SAP counterfactual most certainly does give rise to a ‘floor’, both in economic terms and as a matter of logic, particularly in the context of a two-sided market: it prevents the possibility of market forces driving the MIF to a negative level (equivalent to a premium on settling the transaction price). As I have mentioned above, that is not merely a theoretical possibility, as all the expert economists recognised ...”

Is the court bound by Mastercard CJ?

The Mastercard Commission Decision

“The MIF in MasterCard’s scheme restricts competition between acquiring banks by inflating the base on which acquiring banks set charges to merchants and thereby setting a floor under the merchant fee. In the absence of the multilateral interchange fee the merchant fees set by acquiring banks would be lower.”

“MasterCard’s MIF constitutes a restriction of price competition in the acquiring markets. In the absence of a bilateral agreement, the multilateral ‘default’ rule fixes the level of the interchange fee rate for all acquiring banks alike, thereby inflating the base on which acquiring banks set charges to merchants. Prices set by acquiring banks would be lower in the absence of this rule and in the presence of a rule that prohibits ex post pricing. The MasterCard MIF therefore creates an artificial cost base that is common for all acquirers and the merchant fee will typically reflect the costs of the MIF. This leads to a restriction of price competition between acquiring banks to the detriment of merchants (and subsequent purchasers).”

“… The decisive question is whether in the absence of the MIF the prices acquirers charge to merchants at large would be lower. This is the case, because the price each individual bank could charge to merchants would be fully determined by competition rather than to a large extent by a collective decision among (or on behalf of) the banks.”

“At the oral hearing Visa’s expert also argued that it was hard to imagine how a multilaterally set interchange fee could possibly restrict competition between acquiring banks. Competition among acquirers could not be stronger with ‘at par’ clearing than with a MIF, just as it would be hard to assume that breweries would compete more keenly if one scraps excise taxes.”

“455.  MasterCard puts forward that the interchange fee does not favour a particular acquirer or type of acquirer over other acquirers/types of acquirers. ‘The interchange fee is a common identical cost, borne by all acquirers, that does not influence price competition between acquirers in terms of determining the level of MSCs’. Visa’s expert raised a similar argument at the oral hearing by comparing the MIF to an excise tax.

…

457.    … even if one were to qualify a MIF as a kind of ‘excise tax’ this is no reason why the MIF should fall outside article 81(1) of the Treaty [now article 101(1) TFEU]. The collective act of competing undertakings to raise charges for consumers is subject to the prohibition of article 81(1) of the Treaty.

458.    If the concept of a restriction of competition within the meaning of article 81(1) of the Treaty had to be interpreted as MasterCard suggests, then article 81(1) of the Treaty would be entirely deprived of its effet utile. The MasterCard MIF not only creates an (artificial) common cost for acquirers and thereby sets a floor for the fees each acquirer charges to merchants. Acquirers also know precisely that all of their competitors pay the very same fees. The price floor and the transparency of it to all suppliers involved (that is to say the knowledge of each acquirer about the commonality of the MIF for all other acquirers in the MasterCard scheme) eliminate an element of uncertainty.

459.    In the absence of MasterCard’s MIF, the prices acquirers charge to merchants would not take into account the artificial cost base of the MIF and would only be set taking into account the acquirer’s individual marginal cost and his mark up.

460.    Statements of retailers demonstrate that they would be in a position to exert that pressure if acquirers were not able to refer to interchange fee as the ‘starting point’ (that is to say, as the floor) for negotiating the MSC. This is because without a default that fixes an interchange fee rate in the absence of a bilateral agreement, merchants could shop around to contract with the acquirer who incurs the lowest interchange costs.⁵¹⁷ Acquirers who bilaterally agree to pay relatively high interchange fees to issuers would ultimately not remain competitive, as other acquirers could undercut their merchant fees by refusing to enter into bilateral agreements with issuers or by agreeing on relatively lower interchange fees. The uncertainty of each individual acquirer about the level of interchange fees which competitors bilaterally agree to pay to issuers would exercise a constraint on acquirers. In the long run this process can be expected to lead to the establishment of inter-bank claims and debts at the face value of the payment that is without deducting any interchange fees. A multilateral rule that by default sets a certain interchange fee rate in the absence of bilateral negotiations prevents this competitive process. In the absence of such a rule (and in the presence of a prohibition of ex post pricing) acquiring banks would eventually end up setting their MSCs merely by taking into account their own marginal cost plus a certain mark up.”

“Note that in the Commission’s view in the absence of a default MIF banks may or may not enter into bilateral agreements on interchange fees. The existence of such bilaterally agreed interchange fees is no pre-requisite for the viability of the MasterCard payment card scheme. In the absence of a default MIF prices are established on both sides of the MasterCard scheme as set out in section 7.3.4.1, ie: each bank determines its service levels and prices in a manner that maximises its individual profits.”

Mastercard GC

“28.     According to the Commission, the members of the MasterCard payment organisation collectively exert market power vis-à-vis merchants and their customers. Thus, the MIF had the effect of inflating the base of the MSC, while the latter could be lower if there were no MIF and if there were a prohibition of unilateral pricing a posteriori of transactions by the issuing banks (‘prohibition of ex post pricing’). It follows from this that the MIF examined by the Commission in the contested decision led to a restriction of price competition between acquiring banks to the detriment of merchants and their customers (recitals 410, 411 and 522 to the contested decision). …”

“142.  … the applicants submit, in essence, that the fact that the MIF had an impact on the level of the MSC does not affect competition between acquirers, because the MIF applies in the same way to all acquirers and operates as a cost that is common to all of them. Thus, the prohibition of ex post pricing would effectively impose a MIF set at zero which, from a competitive aspect, would be equivalent to and just as transparent as the current MIF, the only difference being the level at which it is set.”

“143.  This line of argument cannot be accepted. Since it is acknowledged that the MIF sets a floor for the MSC and in so far as the Commission was legitimately entitled to find that a MasterCard system operating without a MIF would remain economically viable, it necessarily follows that the MIF has effects restrictive of competition. By comparison with an acquiring market operating without them, the MIF limits the pressure which merchants can exert on acquiring banks when negotiating the MSC by reducing the possibility of prices dropping below a certain threshold.”

Mastercard CJ

“AG6 - In the decision at issue, the Commission considered that the decisions setting the MIF, which it characterised as decisions of an association of undertakings within the meaning of article 81(1) EC, restrict competition between acquiring banks and thereby infringe that article and article 53 of the EEA Agreement, in that they amount in fact to setting a minimum price for the MSC …

…

AG54 - In the present case, the Commission examined the competitive process that would have developed on the acquiring market in the absence of the MIF at recitals 458 to 460 to the decision at issue and concluded that, in the absence of the MIF and with a prohibition on ex post pricing, the prices charged to merchants by acquirers ‘would only be set taking into account the acquirer’s individual marginal cost and his mark up’. …”

“193.  In particular, while the General Court clearly explained in para 143 of the judgment under appeal that the MIF had restrictive effects in that they:

‘[limit] the pressure which merchants can exert on acquiring banks when negotiating the MSC by reducing the possibility of prices dropping below a certain threshold’, in contrast with ‘an acquiring market operating without them’,

the General Court did not merely presume that the MIF set a floor for the MSC but, on the contrary, proceeded to carry out a detailed examination in paras 157 to 165 of the judgment under appeal in order to determine whether that was in fact the case.”

“195.  … the appellants cannot criticise the General Court for having failed to explain how the hypothesis applied had less restrictive effects on competition than the MIF, given that the only difference between the two situations lies in the pricing level of the MIF. As the Commission rightly points out, the judgment under appeal is not based on the premiss that high prices in themselves constitute an infringement of article 81(1) EC. On the contrary, as is apparent from the very wording of para 143 of the judgment under appeal, high prices merely arise as the result of the MIF which limit the pressure which merchants could exert on acquiring banks, with a resulting reduction in competition between acquirers as regards the amount of the MSC.”

Visa and Mastercard’s arguments

“In the absence of MasterCard’s MIF, the prices acquirers charge to merchants would not take into account the artificial cost base of the MIF and would only be set taking into account the acquirer’s individual marginal cost and his mark up.”

“78.     Second, as regards the acquiring market in Hungary, even assuming that the MIF Agreement had inter alia as its objective the fixing of a minimum threshold applicable to the service charges, the Court has not been provided with sufficient information to establish that that agreement posed a sufficient degree of harm to competition on that market for a restriction of competition ‘by object’ to be found to exist. It is, however, for the referring court to carry out the necessary verifications in that respect.

79.       In particular, in the present instance, subject to those verifications, it is not possible to conclude on the basis of the information produced for this purpose that sufficiently general and consistent experience exists for the view to be taken that the harmfulness of an agreement such as that at issue in the main proceedings to competition justifies dispensing with any examination of the specific effects of that agreement on competition. The information relied on by the Competition Authority, the Hungarian Government and the Commission in that connection, that is to say, primarily, that authority’s decision-making practice and the case law of the Courts of the European Union, specifically demonstrates, as things currently stand, the need to conduct an in-depth examination of the effects of such an agreement in order to ascertain whether it actually had the effect of introducing a minimum threshold applicable to the service charges and whether, having regard to the situation which would have prevailed if that agreement had not existed, the agreement was restrictive of competition by virtue of its effects.”

“That case concerned the question whether an agreement between a number of Hungarian banks introducing a uniform MIF for both Visa and Mastercard credit card transactions in Hungary should be characterised as having the object of restricting competition. It was therefore quite a different question from that which the CJEU had considered in Mastercard CJEU, in that it concerned alleged infringements by object rather than effect, and a single agreement covering both Visa and Mastercard, rather than one scheme’s rules applicable only to its own system.”

Should the court follow Mastercard CJ?

Conclusion on the restriction issue

Issue (ii) - The standard of proof issue

(i)        there is a specific requirement for robust and cogent evidence, which is a more onerous standard than that under the normal domestic civil standard of proof on the balance of probabilities; and

(ii) there is a legal requirement that matters required to be considered have to be proved by facts and empirical data.

“In the context of exemption the requirement for ‘substantiation’ is no more than a requirement for evidence, and the suggestion that it needs to be empirical and convincing means no more than that it must be based on evidence, not speculation, and be sufficient to convince the court to the requisite standard of proof which is the balance of probabilities. If the epithet ‘robust’ is intended to add more and connote an enhanced standard of proof, it is difficult to discern any legal basis for such an approach, …” (at para 305)

In the Visa exemption judgment, Phillips J referred to the agreement between the parties that it was for Visa to establish on the balance of probabilities that its UK MIFs at a particular level are or were exempt. He went on to address the relationship of that standard of proof with the requirement under EU law (citing the Mastercard Commission Decision at para 690) that the claim that a restrictive agreement creates efficiencies must be founded on detailed, robust and compelling analysis and that assumptions and deductions be based on empirical data and facts.

“In my judgment the distinction being drawn is between: (a) real links to real efficiencies, capable of being observed and demonstrated on the facts by evidence (in other words, requiring empirical data); and (b) theoretical or logically assumed links and efficiencies based on broad economic or logical analysis, opinion or anecdotal evidence, perhaps sound in theory but possibly failing to take into account one or more of the many factors which arise in highly complex interactions in the real economy. I see no difficulty in this court determining whether the former has been proved on the balance of probabilities. That test is capable of accommodating varying requirements as to what is expected to meet the standard: contract terms must be ‘certain’, allegations of fraud must be ‘distinctly proved’ and it is often said that ‘cogent’ evidence is required to rebut certain presumptions. In the case of article 101(3), it is recognised that robust analysis and cogent evidence will be required to establish, on the balance of probabilities, that a restrictive agreement in fact and in the real world (as opposed to in theory) gives rise to pro-competitive effects.” (at para 24)

Phillips J went on to state (at para 25) that in his view this analysis did not differ significantly from that of Popplewell J.

“77.     Pursuant to article 2 of the Modernisation Regulation [Council Regulation (EC) No 1/2003 on the implementation of Treaty competition rules (OJ 2003 L1, p 1)] the burden of proving that these cumulative conditions are satisfied is upon the schemes. Recital 5 to the [Modernisation] Regulation makes it clear, however, that the standard of proof is for the national law, so that the usual civil standard of the balance of probabilities applies.”

It then adopted para 24 of the Visa exemption judgment of Phillips J and continued:

“80.     We agree with Phillips J (at para 25 of that judgment), that this analysis does not differ significantly from that of Popplewell J at para 305 of his judgment, but to the extent that there are any differences, we prefer the analysis of Phillips J. In so far as Ms Dinah Rose QC, leading counsel for Visa, sought to argue that Phillips J adopted too prescriptive an approach and that any evidence should suffice provided it meets the civil standard of proof, we do not accept that argument. We consider that Phillips J was right that regard should be had to the requirement of the Commission and the CJEU for cogent and convincing arguments and evidence (see GlaxoSmithKline Services Unlimited v Commission of the European Communities (Case T-168/01) EU:T:2006:265, [2006] ECR II-2969; [2006] 5 CMLR 1623 … para 235, which was applied and followed in the General Court’s decision in MasterCard at para 196).

81.       Although the standard of proof is a matter of English law, the nature of the evidence which will satisfy that standard must be informed by European Union law and Commission decisional practice since, ultimately, whether a party is entitled to exemption involves the application of a European treaty. Furthermore, in that context, it is important to maintain a consistency of approach across member states as to the requirements of article 101(3).”

Other passages in the judgment of the Court of Appeal (paras 85, 86 and 249) demonstrate that it considered that EU law requires cogent factual and empirical evidence to satisfy article 101(3). In particular, the Court of Appeal (at paras 84 and 85) derived from the Commission Guidelines on the application of what is now article 101(3) TFEU (2004/C 101/8) (“the Guidelines”) and the EU jurisprudence on article 101(3), first, a need for the relevant benefits to be causally linked to the relevant restriction and, secondly, for that causal link to be established “by facts and evidence supported by empirical analysis and data and not just economic theory”. It added (at para 86):

“Thirdly, as para 54 of the Guidelines makes clear, the causal link must be sufficiently direct to be capable of proof and an indirect effect will not generally be sufficient, precisely because cogent evidence of the link based on empirical analysis and data and not merely economic theory is required.”

“In order to ensure an effective enforcement of the Community competition rules and at the same time the respect of fundamental rights of defence, this Regulation should regulate the burden of proof under articles 81 and 82 [now articles 101 and 102] of the Treaty. It should be for the party or the authority alleging an infringement of article 81(1) and article 82 of the Treaty to prove the existence thereof to the required legal standard. It should be for the undertaking or association of undertakings invoking the benefit of a defence against a finding of an infringement to demonstrate to the required legal standard that the conditions for applying such defence are satisfied. This Regulation affects neither national rules on the standard of proof nor obligations of competition authorities and courts of the member states to ascertain the relevant facts of a case, provided that such rules and obligations are compatible with general principles of Community law.”

Similarly, article 2 which bears the heading “Burden of proof” provides:

“In any national or Community proceedings for the application of articles 81 and 82 of the Treaty, the burden of proving an infringement of article 81(1) or of article 82 of the Treaty shall rest on the party or the authority alleging the infringement. The undertaking or association of undertakings claiming the benefit of article 81(3) of the Treaty shall bear the burden of proving that the conditions of that paragraph are fulfilled.”

There is, accordingly, a clear allocation of the burden of proof, while questions as to the standard of proof are left to the law of the member state concerned, provided that the national rules are compatible with general principles of EU law. Visa and Mastercard submit, therefore, that EU law expressly reserves the question of the standard of proof to national law, subject to the principles of effectiveness and equivalence.

“30.     Although article 2 of Regulation No 1/2003 expressly governs the allocation of the burden of proof, that regulation does not contain any provisions on more specific procedural aspects. Thus, in particular, that regulation does not contain any provision in relation to the principles governing the assessment of evidence and the standard of proof in national proceedings for the application of article 101 TFEU.

31.       That conclusion is confirmed by recital 5 of Regulation No 1/2003, which expressly states that the regulation does not affect national rules on the standard of proof.

32.       According to settled case law, in the absence of EU rules on the matter, it is for the national legal order of each member state to establish them in accordance with the principle of procedural autonomy, provided, however, that those rules are not less favourable than those governing similar domestic situations (principle of equivalence) and that they do not make it excessively difficult or impossible in practice to exercise the rights conferred by EU law (principle of effectiveness) …”

“Insofar as such presumptions stem from article 101(1) TFEU, as interpreted by the court, and consequently form an integral part of applicable EU law, they do not fall within the scope of the principle of the autonomy of national procedural law and are therefore binding on national authorities when they apply EU competition rules.”

As Mr Nicholas Khan QC, on behalf of the Commission, put it in his oral submissions, Eturas illustrates how the nature of the evidence by which a finding of infringement can be secured or rebutted may be a question of EU law. In the same way, the nature of the evidence by which an undertaking may establish that a restriction on competition is exempted by virtue of article 101(3) may also be a question of EU law.

“50.     The purpose of the first condition of [article 101(3)] is to define the types of efficiency gains that can be taken into account and be subject to the further tests of the second and third conditions of [article 101(3)]. The aim of the analysis is to ascertain what are the objective benefits created by the agreement and what is the economic importance of such efficiencies. Given that for [article 101(3)] to apply the pro-competitive effects flowing from the agreement must outweigh its anti-competitive effects, it is necessary to verify what is the link between the agreement and the claimed efficiencies and what is the value of these efficiencies.

51.       All efficiency claims must therefore be substantiated so that the following can be verified:

(a)       The nature of the claimed efficiencies;

(b)       The link between the agreement and the efficiencies;

(c)       The likelihood and magnitude of each claimed efficiency; and

(d)       How and when each claimed efficiency would be achieved.” (Original emphasis)

This procedure requires the party seeking exemption to identify, substantiate and evaluate the claimed efficiencies and to verify their causal link with the anti-competitive conduct as a pre-condition to the balancing process which could not otherwise take place. There is a requirement for detailed, empirical evidence and analysis in order that this evaluative exercise can be carried out.

“It is therefore for the Commission, in the first place, to examine whether the factual arguments and the evidence submitted to it show, in a convincing manner, that the agreement in question must enable appreciable objective advantages to be obtained …” (See also paras 249, 263, 304, 307)

“Given that for [article 101(3)] of the Treaty to apply the pro-competitive effects flowing from the agreement must outweigh anti-competitive effects, it is necessary to verify what the link between the agreement and the claimed efficiencies and what the value of these efficiencies are.”

The Commission did not dispute that payment card schemes such as Mastercard’s may represent, as such, economic and technical progress. However, it considered that the decisive question was whether the Mastercard MIF specifically contributed to that progress (at recital 679). In addressing Mastercard’s “balancing of demand” arguments the Commission referred to the assumption underlying the Mastercard MIF that there was a perceived imbalance between the issuing and the acquiring business in the scheme. The Commission observed (at recital 686):

“Also, an ‘imbalance’ between issuing and acquiring cannot be assumed on the basis of cost considerations only but has to comprise an analysis of revenues as well. A cost imbalance is as such no sufficient evidence to explain why MasterCard’s MIF is always paid by the acquirer to the issuer, irrespective of the concrete market situation. If receipts (interests, money exchange fees, penalty fees, etc) or other monetary benefits (resulting from cost savings such as reduction of staff, paperwork etc) from payment card issuing provide sufficient commercial incentives for banks to invest in incremental card issuing, a transfer from acquiring to issuing may be superfluous and even counterproductive as the revenue transfer dampens card acceptance due to the increase of costs on the merchants’ side. Robust empirical evidence is therefore required to establish the necessity for and the direction of a fallback interchange fee.” (Original emphasis) (See also recital 720)

“It is on the undertakings in the first place to present to the Commission the evidence intended to establish that the agreement in question fulfils the conditions laid down by [article 101(3)] of the Treaty. In the context of the first condition it has to be ascertained that the restrictive effects are offset by efficiencies. In this context the undertakings concerned must demonstrate whether a MIF generates the positive effects which the underlying model claims to achieve, here: an increase of system output and possible related efficiencies. To the extent that objective efficiencies cannot be established empirically, they cannot be balanced with the restrictive effects. Some form of convincing empirical evidence on the actual effect of a MIF on the market is therefore required.”

A footnote to the third sentence of recital 695 (footnote 840) reads:

“Again, it should be noted that an increase in system output does not constitute an objective efficiency if the benefits of increased card usage only accrue to banks, while customers and merchants are worse off due to higher retail prices and increased merchant fees. Hence, evoking the maximisation of system output also requires a convincing analysis that consumers benefit from this.”

“Contrary to MasterCard’s perception the Commission’s position is not that only the level of a MIF is a decisive criterion for assessing whether that MIF fulfils the first condition of [article 101(3)] of the Treaty. Rather, the existence of objective appreciable efficiencies is assessed in relation to the MIF as such, the effects it produces on the market and the manner in which it is set. In particular, the Commission verifies on the basis of the evidence submitted whether the model underlying a MIF is based on realistic assumptions (which is not the case here), whether the methodology used to implement that model in practice is objective and reasonable (which is not the case for the two methodologies used by MasterCard) and whether the MIF indeed has the positive effect on the market to the benefit of both customer groups which the model claims.”

The Commission was not subscribing here to the view that convincing proof of efficiencies can be provided by economic modelling and assumptions alone. On the contrary, the Commission made abundantly clear the need for empirical evidence in the immediately preceding recital:

“There is no presumption that MIFs in general enhance the efficiency of card schemes just as there is no presumption that they do not fulfil the conditions of [article 101(3)] of the Treaty and are therefore illegal. A MIF may be used by banks to achieve efficiencies as well as to extract rents. The Commission’s conclusion on the efficiencies of a MIF will depend on the concrete evidence brought forward by the parties.” (recital 730)

and the immediately following recital:

“Any claim that a MIF creates efficiencies within the meaning of [article 101(3)] of the Treaty must therefore be founded on a detailed, robust and compelling analysis that relies in its assumptions and deductions on empirical data and facts. MasterCard has not provided such analysis and empirical evidence, …” (recital 732)

“232.  So far as concerns the allegation relating to the lack of data capable of meeting the standard of economic proof demanded by the Commission, even if that were established, it does not mean that the burden of proof is eased, or even reversed, as the applicants seem to suggest. It must be observed that such a difficulty might be regarded as having resulted from the arguments developed by the applicants during the administrative procedure.

233.    Thus, inasmuch as it is not possible to establish precisely the extent of the advantages that can be deemed to justify some financial compensation from merchants for the costs incurred by issuing banks, it is reasonable to conclude that it was for the applicants - in order to prove that the MIF satisfied the first condition laid down in [article 101(3), TFEU] - to identify the services provided by the banks issuing debit, charge or credit cards capable of constituting objective advantages for merchants. It was also for them to establish that there was a sufficiently clear correlation between the costs involved in the provision of those services and the level of the MIF. As regards the last point, it must be noted that those costs cannot be determined without taking into account other revenues obtained by issuing banks on the provision of those services or by including costs which are not directly linked to them.”

This is entirely consistent with and supports our view that, in identifying what evidence may be required to discharge the burden on an undertaking claiming exemption under article 101(3), the Commission and the EU courts are not adjusting the standard of proof.

“235.  Next, the court notes that the examination of an agreement for the purposes of determining whether it contributes to the improvement of the production or distribution of goods or to the promotion of technical or economic progress, and whether that agreement generates appreciable objective advantages, must be undertaken in the light of the factual arguments and evidence provided by the undertakings (see to that effect, in connection with a request for exemption under article 81(3) EC, judgment in GlaxoSmithKline Services Unlimited v Commission of the European Communities (C 501/06 P, C 513/06 P, C 515/06 P and C 519/06 P) EU:C:2009:610, para 102).

236.    Such an examination may require the nature and specific features of the sector concerned by the agreement in question to be taken into account if its nature and those specific features are decisive for the outcome of the analysis (see judgment in GlaxoSmithKline Services, EU:C:2009:610, para 103).”

“Thus, inasmuch as it is not possible to establish precisely the extent of the advantages that can be deemed to justify some financial compensation from merchants for the costs incurred by issuing banks, it is reasonable to conclude that it was for the applicants - in order to prove that the MIF satisfied the first condition laid down in [article 101(3)] - to identify the services provided by the banks issuing debit, charge or credit cards capable of constituting objective advantages for merchants. It was also for them to establish that there was a sufficiently clear correlation between the costs involved in the provision of those services and the level of the MIF. As regards the last point, it must be noted that those costs cannot be determined without taking into account other revenues obtained by issuing banks on the provision of those services or by including costs which are not directly linked to them.”

“In addition to a consistent application of the competition rules to interchange fees, regulating such fees would improve the functioning of the internal market and contribute to reducing transaction costs for consumers.”

and in recital 14:

“The application of this Regulation should be without prejudice to the application of Union and national competition rules. It should not prevent member states from maintaining or introducing lower caps or measures of equivalent object or effect through national legislation.”

In enacting the IFR, the Commission and the European Parliament were concerned with regulation and were not specifically addressing issues of EU competition law.

“In this respect, there is a need to ascertain that the concrete model underlying a MIF is based on realistic assumptions, that the model is plausibly implemented through an objectively verifiable methodology and that the MIF indeed yields the objective efficiencies on the market which are claimed by the parties. The methodology underlying a MIF should be transparent to the final users of a scheme. However, if a card scheme wishes to pre-determine the fees merchants pay through a MIF, it must be aware that the burden of proof to demonstrate the fulfilment of the four conditions under [article 101(3)] lies upon the scheme and its members.” (at pp 6-7)

Conclusion on the standard of proof issue

Issue (iii) - The fair share issue

The judgments at first instance

The judgment of the Court of Appeal

The parties’ arguments on the present appeal

The Mastercard Commission Decision

“740.  There is no reason to assume from the outset that an interchange fee paid by acquirers to issuers increases the utility of the payment card system to [both] groups of consumers alike. The Commission does not dispute that merchants may benefit through enhanced network effects from the issuing side, but this does not necessarily offset their losses which result from paying inflated merchant fees. In setting a MIF the member banks of a card scheme must guarantee a fair share of the benefits to [all] customers, not only to those that are on the side of the scheme which receives the MIF. In a scheme where the MIF is paid by the acquirer to the issuer, the efficiencies must in particular counterbalance the restrictive effects to the detriment of merchants (and subsequent purchasers). MasterCard has not submitted evidence in this respect.

741.    The Commission has therefore reviewed the methodologies which MasterCard uses as ‘starting point’ for setting the level of the Intra-EEA fallback interchange fees. It … can be left open in this case whether cardholders sufficiently benefit from MasterCard’s MIF. The Commission’s concerns under the second condition of article 81(3) of the Treaty in this decision relate to the customer group which bears the cost of the MIF, that is the merchants.

742.    While merchants may benefit through enhanced network effects from the issuing side, this does not necessarily offset their losses which result from paying inflated merchant fees.” (Emphasis added)

The Commission concluded at recital 743 that “without further evidence - which Mastercard failed to submit - it cannot safely be assumed that … Mastercard is creating objective efficiencies that benefit all customers, including those that bear the cost of its MIF (merchants and subsequent purchasers)” (emphasis in original).

The Guidelines

“… [T]he condition that consumers (⁵⁵) must receive a fair share of the benefits implies in general that efficiencies generated by the restrictive agreement within a relevant market must be sufficient to outweigh the anti-competitive effects produced by the agreement within that same relevant market (⁵⁶). Negative effects on consumers in one geographic market or product market cannot normally be balanced against and compensated by positive effects for consumers in another unrelated geographic market or product market. However, where two markets are related, efficiencies achieved on separate markets can be taken into account provided that the group of consumers affected by the restriction and benefiting from the efficiency gains are substantially the same (⁵⁷).” (Emphasis added)

That analysis also underpins the discussion of the second condition in paras 85-86 of the Guidelines.

Mastercard GC

Mastercard CJ

“AG154.  The point of law underlying that complaint is therefore whether, in order for the exemption provided for in article 81(3) EC to be applicable in such a context, it is necessary that the fair share of the profit resulting from the advantages arising from the agreement, as provided for in article 81(3) EC, be reserved for the direct consumers of the services provided on the market on which the restrictive effects for competition are produced - in this case, in particular, merchants - or whether it can be considered that the restrictive effects harming those consumers may be compensated by the advantages produced for consumers of the services provided on a related market, namely, in this case, cardholders.”

“AG155.  It should be borne in mind, as a preliminary point, that the second condition in article 81(3) EC requires that, in order for a restrictive agreement to benefit from the exemption provided for in that provision, consumers must be allowed a fair share of the resulting benefits.

AG156.  In that regard, it should be observed, first, that the consumers referred to in that provision must be considered to be the direct or indirect consumers of the goods or services covered by the agreement. Secondly, it is apparent from consistent case law that, in order for an agreement restrictive of competition to be capable of being exempted under article 81(3) EC, the appreciable objective advantages created by that agreement must be of such a character as to compensate for the disadvantages which they cause for competition. It may be inferred from that case law that, in order for a restrictive agreement to be able to benefit from the exemption, the advantages resulting from that agreement must ensure that consumers are compensated in full for the actual or probable adverse effects that they must bear owing to the restriction of competition resulting from the agreement. In other words, the benefits arising from the restrictive agreement must counterbalance its negative effects.” (Emphasis added)

“AG157.  To my mind, however, that compensation must apply to consumers who are directly or indirectly affected by the agreement. It is the consumers that suffer the harm caused by the restrictive effects of the agreement at issue that must, in principle, be allowed, as compensation for that harm, the fair share of the benefit resulting from the agreement referred to in article 81(3) EC.”

“AG158.        In fact, if it were possible to take into consideration the advantages resulting from an agreement for one category of consumers of certain services in order to counterbalance the negative effects on another category of consumers of other services on a different market, that would amount to allowing the former category of consumers to be favoured to the detriment of the latter category. However, distributive logic of that type seem[s] to me, in principle, to have no connection with the practical scope of competition law. Competition law is intended to protect the structure of the market, and thus competition, in the interest of competitors and, ultimately, consumers in general. Conversely, it is not intended to favour one category of consumers to the detriment of a different category.” (Emphasis in original)

“240.  In particular, as regards the argument … that the General Court did not take into account the advantages flowing from the MIF for cardholders, it must be held that … the General Court was, in principle, required, when examining the first condition laid down in article 81(3) EC, to take into account all the objective advantages flowing from the MIF, not only on the relevant market, namely the acquiring market, but also on the separate but connected issuing market.

241.    It follows from this that, should the General Court have found that there were appreciable objective advantages flowing from the MIF for merchants, even if those advantages did not in themselves prove sufficient to compensate for the restrictive effects identified pursuant to article 81(1) EC, all the advantages on both consumer markets in the MasterCard scheme, including therefore on the cardholders’ market, could, if necessary, have justified the MIF if, taken together, those advantages were of such a character as to compensate for the restrictive effects of those fees.”

“However, as is recalled in para 234 of the present judgment, examination of the first condition laid down in article 81(3) EC raises the question whether the advantages derived from the measure at issue are of such a character as to compensate for the disadvantages resulting therefrom. Thus, where, as in the present case, restrictive effects have been found on only one market of a two-sided system, the advantages flowing from the restrictive measure on a separate but connected market also associated with that system cannot, in themselves, be of such a character as to compensate for the disadvantages resulting from that measure in the absence of any proof of the existence of appreciable objective advantages attributable to that measure in the relevant market, in particular, as is apparent from paras 21 and 168 to 180 of the judgment under appeal, where the consumers on those markets are not substantially the same.” (Emphasis added)

“In the present case, and without any distortion having been claimed in that regard, the General Court concluded in para 226 of the judgment under appeal that there was no proof of the existence of objective advantages flowing from the MIF and enjoyed by merchants. In those circumstances, it was not necessary to examine the advantages flowing from the MIF for cardholders, since they cannot, by themselves, be of such a character as to compensate for the disadvantages resulting from those fees. The General Court was therefore fully entitled to find, in para 229 of the judgment under appeal, that ‘the [appellants’] criticism that insufficient account was taken of the advantages of the MIF for cardholders is, in all events, ineffective’.”

“As regards the appellants’ argument that the General Court did not explain why the first two conditions in article 81(3) EC could not be satisfied on the basis only of the advantages the MIF produce for cardholders, it is sufficient to refer to paras 240 to 245 of the present judgment.”

Conclusions on the fair share issue

(1)              The “consumers” referred to in the second condition are the direct or indirect consumers of the goods or services covered by the measure: here, the merchants.

(2)              Those consumers must be compensated in full for the adverse effects that they bear owing to the restriction of competition resulting from the measure.

Issue (iv) - The broad axe issue

“The broad axe principle is applicable where the claimant has suffered loss as a result of the defendant’s culpable conduct but there is a lack of evidence as to the amount of such loss. There is no scope for the application of any such principle where the burden lies on the defendant to establish a pass-on of the unlawful overcharge in order to reduce the amount recoverable by the claimant.”

The broad axe issue which is said to arise out of this statement is: “Did the Court of Appeal find, and if so, did it err in law in finding, that a defendant has to prove the exact amount of loss mitigated in order to reduce damages?”.

“On the other hand, we accept Mr Hoskins’s submission that in each case it is a matter for the judge to decide whether, on the evidence before her or him, the defendant can show that there is a sufficiently close causal connection between an overcharge and an increase in the direct purchaser’s price. We see no reason why that increase should not be established by a combination of empirical fact and economic opinion evidence. It is not appropriate for us on these appeals to be more specific as to the nature and type of evidence capable of satisfying a trial judge that there is a sufficiently close causal connection.”

It is therefore clear that the Court of Appeal was not excluding any form of evidence as relevant to the establishment of pass-on, but was drawing a distinction between the degree of precision in quantification required of the defendant pleading pass-on in mitigation of loss and that which was required of the victim of the wrong in establishing its claim. The questions which arise are whether there is a requirement in European law or otherwise a basis in principle for that distinction.

The requirements of EU law

The nature of the claims

Mitigation and the burden of proof

The degree of precision required in establishing the extent of pass-on of an overcharge

“Member states shall ensure that the national courts have the power to estimate, in accordance with national procedures, the share of any overcharge that was passed on.”

“Member states shall ensure that neither the burden nor the standard of proof required for the quantification of harm renders the exercise of the right to damages practically impossible or excessively difficult. Member states shall ensure that the national courts are empowered, in accordance with national procedures, to estimate the amount of harm if it is established that a claimant suffered harm but it is practically impossible or excessively difficult precisely to quantify the harm suffered on the basis of the evidence available.”

Conclusion on the broad axe issue

Issue (v) - The remission issue: AAM’s cross-appeal

“257.  The judge should have concluded that, in the absence of any evidence as to the actual extent of the pass-through, Mastercard had failed to establish by robust analysis and cogent evidence, or otherwise, a sufficient causal link between the default MIFs and any net benefits, so that their claim for exemption under article 101(3) failed.

258.    … [T]he judge should have concluded, on the basis of the evidence before him, that the first condition of article 101(3), the benefits requirement, was not satisfied so that Mastercard had not established entitlement to an exemption under article 101(3).

259.    … [Further, in relation to the second condition for an exemption under article 101(3), the fair share requirement, on the evidence advanced at trial by Mastercard] had the judge carried out the necessary balancing exercise, he would inevitably have concluded that Mastercard could not satisfy the second condition either.”

“We take the view that, despite what we have said above, it is not certain that, had Popplewell J had the benefit of this judgment and thus been fully aware of the need for empirical data and facts in order to prove an exemption, MasterCard’s case on article 101(3) would have failed in its entirety. It is possible, bearing in mind the acceptance by Sainsbury’s and the CAT in the other two cases that there was a lawful level of MIF, that the judge would have found that there was some exemptible level of MIF, albeit a lower one than he in fact found. Altogether removing the article 101(3) issue from reconsideration could therefore result in an unjustified windfall for the AAM parties. It seems far more just to us that the issue should be reconsidered in all three cases, based on the same principles, by the same tribunal. There is no real injustice to the AAM parties in the course we propose, since the windfall to which we have referred would have arisen from the procedural mishap caused by the separation of three cases raising almost identical issues. If the CAT is now able to reach a consistent conclusion in all three cases on the exemption and quantum issues, that will produce a fair and just outcome for all the parties. It would be a triumph of form over substance if we were to hold that we were unable to reach a just solution simply as a result of a procedural accident.”

Conclusion on AAM’s cross-appeal