Mastercard liable for interchange fee overcharges

In July 2016, Sainsbury's were awarded around £70 million in damages after successfully arguing that the multilateral interchange fee set by MasterCard for its payment scheme was anti-competitive by effect and so infringed competition law. A raft of satellite litigation is already underway and more claims are likely to follow, including a proposed consumer class action brought by Walter Merricks, former Chief Ombudsman of the Financial Ombudsman Service. As we explore below, organisations accepting payment by MasterCard or Visa will have potential claims.

BACKGROUND

MasterCard operate a global payment scheme and members of its network include banks and other entities authorised to accept/issue MasterCard credit and debit cards. When a customer buys goods from a merchant with a MasterCard payment card, his bank (the 'Issuing Bank') forwards payment to the merchant's bank (the 'Acquiring Bank') less an 'interchange fee'. The interchange fee is either agreed bilaterally between the parties or is set by the MasterCard Scheme, which is the default fee under the MasterCard Scheme Rules (the multilateral interchange fee, or 'MIF'). The Acquiring Bank then forwards the transaction amount to the merchant less a charge for its services. The interchange fee and additional charge to the merchant form part of what is known as the 'Merchant Service Charge'. MIFs can have different territorial scope and the MasterCard Scheme includes an intra-EEA MIF and domestic MIF (such as the UK MIF).

Following a decision by the European Court of Justice that the setting of MasterCard's intra-EEA MIF was anti-competitive, Sainsbury's mounted a claim against MasterCard alleging that the setting of the UK MIF was also anti-competitive. Sainsbury's argued that the setting of the UK MIF had as its object and/or effect the appreciable prevention, restriction or distortion of competition between acquiring banks in the UK (by inflating the base on which acquiring banks set charges to merchants, thereby setting a 'floor' to the Merchant Service Charge).

THE JUDGMENT

In a detailed 309-page judgment, the Competition Appeal Tribunal (the 'CAT') found the MIF imposed in the UK by MasterCard was anti-competitive by effect and infringed Chapter 1 of the Competition Act 1998 and Article 101 of the TFEU. The CAT found that, in a counterfactual scenario, the likely level of MIF that would have been set on an open, competitive market would have been 0.50% in respect of credit card transactions and 0.27% in respect of debit card transactions. Anything above this was unlawful.

The CAT ordered that MasterCard pay Sainsbury's the sum of £68,582,245 relation to credit cards and £760,406 in respect of the overcharge in relation to credit and debit cards respectively, plus compound interest. Damages were calculated by reference to the level of overcharge – i.e. by comparing the actual MIF paid with the MIF that could lawfully have been charged on actual sales figures for each year of the claim period.

The claim period ran to 9 December 2015 being the date on which the Payment Card Interchange Fee Regulations 2015 came into force, implementing an EU Directive. The MIF charged by credit card companies was regulated from this point forward and to this provided a temporal end-point for Sainsbury's (and any other) claims for overcharges in relation to MIFs.

PASSING ON

The CAT thought it was impossible to conclude exactly how Sainsbury's dealt with the costs that constituted the UK MIF. They took the view that Sainsbury's would have passed on to customers what it could and would also have made whatever costs-savings it could in order to return the expected profit.

However, the CAT considered that the pass-on 'defence' ought only to succeed where, on balance, the defendant has shown that there exists another class of claimant (downstream of the claimant in the action such as the end-customer) to whom the overcharge has been passed on. Unless the defendant demonstrates the existence of such a class, the CAT considered that a Claimant's recovery of the overcharge incurred by it should not be reduced or defeated on this ground. MasterCard were not able to identify a class of purchasers of Sainsbury's to whom the overcharge had been passed and who would be in a position to claim damages.

IMPLICATIONS FOR MERCHANTS

Organisations who accept payment by credit and debit card are, in the same way as Sainsbury's, acting as 'merchants' and so bear the cost of the Merchant Service Charge.

The decision of the CAT confirms liability against MasterCard in respect of MIF charged above 0.5% in respect of credit card transactions and 0.27% in respect of debit card transactions in the UK. It would be extremely unlikely for the MIF to be anti-competitive against Sainsbury's but not as against other merchants. Therefore, insofar as organisations have paid a MIF set at a rate that is higher, they may have a significant claim for damages, including a potential entitlement to compound interest going back six years.

To the extent that the overcharge was passed on (for example, through a surcharge to customers) it may be irrecoverable in part or in full. However, this would need to be fully explored to understand the true value of any potential damages claim.

As Visa operated a similar payment scheme to MasterCard, organisations also have potential claims against Visa. A number of retailers and other organisations are already pursuing claims against both Mastercard and Visa to recover these overcharges.

Sainsbury's have made an application for permission to appeal which is likely to be heard in October.

ACTION TO TAKE NOW

In order to fully assess the merits and scale of potential claims, organisations should ask themselves:

1. Have we accepted payment by Debit or credit card in the period prior to 9 December 2015, and if so over what period?

2. If it has accepted such payments, for each of the years from 2010 to December 2015 in respect of (1) MasterCard Credit Card; (2) MasterCard Debit Card; (3) Visa Credit Card; and (4) Visa Debit Card:

• The total value of sales;
• The total MIF paid;
• Whether it passed on this costs by way for example of a surcharge on any payments accepted by card and if so, the total value of any surcharges received.

Organisations who believe they may have been overcharged should ideally take steps now to protect the full amount of their potential claims, such as entering into standstill agreements, whilst any appeal is resolved.

We would be delighted to assist you with your investigations into these potential claims. If you would like further information or advice about this alert please contact Virginia Cooper at Virginia.Cooper@bevanbrittan.com or 0370 194 7991 or Olivia Carter at Olivia.Carter@bevanbrittan.com or 0370 194 7703.

In the event that several clients wish to take advice on this issue, it may be possible to form a collective with appropriate costs sharing arrangements. We would be happy to facilitate any such arrangements.