Credit Management March 2018

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LEGAL MATTERS CARD GAMES Multilateral Interchange Fees are commercially justifiable. AUTHOR – Peter Walker DEBIT cards are a means by which you may transfer some numbers from your bank account to the bank account of a seller, such as a supermarket. That is the simple perception, although credit card transactions involve a more complicated journey. The numbers, however, take a more complex electronic journey from your bank to that of the recipient. There is therefore a cost, and some supermarkets have protested, resulting in litigation about alleged unlawful agreements restricting competition. Judges have unfortunately made conflicting decisions, which have been reviewed recently by a judge, Phillips J, in the Commercial Court, but, although you may agree with the result, it is questionable whether his reasoning is helpful. In Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC [2017] EWHC 3047 (Comm) he started by explaining that Sainsbury’s and other merchants accepted payments, those transfers of numbers, by means of debit and credit cards, such as those issued by Visa through a bank or other financial institution ‘an Issuer’. This was part of a scheme involving an Acquirer, also a bank or other financial institution. The Acquirer charged those merchants their fees for their part in the transactions. That is known as a Merchant Service Charge ‘MSC’, which covers, for example, the fee paid by the Acquirer in this instance to Visa. Other charges covered by the MSC are the Interchange Fees payable by the Acquirers to the Issuers, and there were the Acquirers’ own fees ‘the Acquirer Margin’ negotiable between the Acquirers and the Merchants. In the UK the Interchange Fee is generally what is known as the Multilateral Interchange Fee set by Visa, rather than an alternative Bilateral Interchange Fee negotiated separately by two parties. The Multilateral Interchange Fee accounted for 90 percent of the MSC that Sainsbury’s had to pay. It challenged the Fee by reference to competition law, particularly Article 101 of the Treaty of the Functioning of the European Union 2012/C326/01, which directly affects the laws of the UK. Although Brexit could well change that, there is the equivalent section 2 of the Competition Act 1998 affecting the UK. The judge, however, concentrated on Article 101 of the Treaty. MARKET INCOMPATIBILITY It prohibits certain agreements as being incompatible with the internal market. They include those which ‘have as their object or effect the prevention, restriction or distortion of competition within the internal market.’ The price fixing of purchasing or selling prices or the fixing of other trading conditions is therefore banned. Undertakings must not ‘limit or control production, markets, technical developments, or investments’. They may not ‘share markets or sources of supply’ so undertakings may not place anyone at a disadvantage by the application of dissimilar conditions ‘to equivalent transactions with other trading parties’. The conclusion of contracts must not ‘be subject to supplementary usage’ which ‘have no connection with the subject matter…’. Any agreements prohibited by the Article ‘shall be automatically void’. There are differences between Article 101 of the Treaty and section 2 of the Competition Act 1998. The Treaty refers to the internal market, but the Act is limited to the UK. The accomplishment of Brexit should not in consequence affect the general principles prohibiting, for example, ‘the prevention, restriction or distortion of competition within the United Kingdom’. These principles in the context of Multilateral Interchange Fees ‘MIF’ were part of an earlier case initiated by Sainsbury’s. They were considered in the Competition Appeal Tribunal (Sainsbury’s Supermarkets Ltd v Mastercard Inc [2016] Case No 1241/5/7/15 (T)). The Tribunal judges had to decide whether those fees had been set at an artificially high level. They were 90 percent of the Merchant Service Charge ‘MSC’ chargeable to Sainsbury’s. The judges also had to rule whether the MIF was a restriction on competition. There is, however, a possible exemption under Article 101(3). This includes an agreement, The Recognised Standard / www.cicm.com / March 2018 / PAGE 20
LEGAL MATTERS AUTHOR – Peter Walker concerted practice, and the like contributing ‘to improving the production or distribution of goods or to promoting technical progress, while allowing consumers a fair share of the resulting benefit.’ The agreement must not ‘impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives. It must furthermore afford such undertakings ‘the possibility of eliminating competition in respect of a substantial part of the products in question.’ There was another complication because the claimant was related to Sainsbury’s Bank plc, a participant in the Mastercard scheme. The claimant through this relationship could be regarded as a party to the alleged infringement, so the claim should then be barred because of illegality, i.e. ‘ex turpi causa non oritur actio’. That Latin phrase means that no right of action arises from a base cause. The Tribunal rejected this defence for various reasons including that, ‘Sainsbury’s Bank (and Sainsbury’s) does not bear ‘significant responsibility’ for an infringement of Article 101 TFEU by MasterCard in relation to the setting of the UK MIF.’ That was just part of the report of the case, which is around 300 pages long. The members of the Tribunal concluded that the agreement for Multilateral Interchange Fees was a restriction of competition under Article 101, and was not one of the allowed exceptions. There should instead have been a negotiated agreement between the two parties for a Bilateral Interchange Fee. Sainsbury’s was therefore awarded over £68 million. A DIFFERENT RESULT That would surely resolve Sainsbury’s case against Visa, but some other retailers challenged Mastercard, so Popplewell J had to consider that dispute in Asda Stores Ltd v Mastercard Inc. [2017] EWHC 93 (Comm). The retailers again questioned that Multilateral Interchange Fees charged by Mastercard were anti-competitive in breach of Article 101 of the Treaty. This was important to them, because since 2006 they had paid some £437 million in those Fees. Popplewell J consequently reviewed the decision of the Tribunal members in Sainsbury’s Supermarkets Ltd v Mastercard Inc. They had adopted what is called a counterfactual, a logical expression meaning in this context that a judge or judges should consider what would happen if the parties instead had made a voluntary bilateral exchange agreement, i.e. a contract negotiated between two of them rather than the multilateral interchange fees imposed by the Card company. This was unrealistic, because there would have to be a sufficient volume of retailers wishing to do so, and there was no evidence of there was such a volume. There was furthermore competition from the Visa scheme. Popplewell J ruled that, although the Multilateral Interchange Fees breached Article 101, the agreement benefited from the exemptions in Article 101(3). Participants, such as supermarkets, in such schemes benefited, because they had a commercial advantage over those competitors who would not accept payment cards. There was still room for disagreement for Phillips J in Sainsbury’s Supermarkets Ltd v Visa Europe Services LLC, but he should follow the decision in the Asda High Court case rather than the Tribunal Members’ ruling in Sainsbury’s v Mastercard. TROUBLE IN STORE Phillips J noted that there were some differences in the card schemes. Mastercard similarly to Visa operated an open four-party scheme. Issuers offered both debit and credit cards and Mastercard stipulated the rules for the Multilateral Interchange Fees. Unlike Visa it offered a range of premium credit cards. American Express, Diners Club and some others operated three-party schemes, where, for example, American Express issued the cards and settled transactions with Merchants direct. After this explanation, Phillips J analysed the competitive aspect of Interchange Fees in the four-party scheme. Issuers of cards competed against each other, but so did Acquirers who were competing for the business of the Merchants. He noted that academics differed in their views about Interchange Fees. The European Commission furthermore had intervened to require Visa to reduce its levels of Multilateral Interchange Fees (24 July 2002 (OJ L 318/17)). This exemption expired at the end of 2007. Visa later reached other agreements with the Commission. There was another development in Regulation (EU) 2015/75 on Interchange Fees for card-based payment transactions. Whatever the regulations, Phillips J pointed out that he had to consider whether the Fees were anti-competitive and in breach of Article 101. An agreement caught by the Article would reduce competitive intensity in the relevant market. He consequently rejected the reasoning in Asda v Mastercard concerning the anti-competitive nature of the agreement for Multilateral Interchange Fees. In any event, an agreement having the effect of restricting competition does not infringe Article 101 if it is objectively necessary for the main operation, i.e. in this case the entire scheme. The main operation itself must not infringe Article 101. This time Sainsbury’s lost the case. It is very complicated whether or not you agree with the decision of Phillips J – his conclusion that Multilateral Interchange Fees, in principle acceptable, seem to be commercially justifiable subject to safeguards. The judges of the Court of Appeal will have their say on this topic, and I appeal for a clarification of the reasoning. The Recognised Standard / www.cicm.com / March 2018 / PAGE 21
Page 1 and 2: CREDIT MANAGEMENT THE CICM MAGAZINE
Page 3 and 4: MARCH 2018 www.cicm.com CONTENTS 32
Page 5 and 6: For more information call 01206 322
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Page 9 and 10: BoE warns of new threat to SMEs SME
Page 11 and 12: INSOLVENCY The special manager The
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Page 15 and 16: MAKE YOUR CASE MODERN collection ag
Page 17 and 18: ADVERTORIAL Are you Risk Ready? Tom
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Page 25 and 26: The Real Alternative for High Court
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Page 31 and 32: www.portfoliocreditcontrol.com PROU
Page 33 and 34: COUNTRY FOCUS AUTHOR - Adam Bernste
Page 35 and 36: Supplement special The CICM British
Page 37 and 38: Recognising the best in credit mana
Page 40 and 41: The CICM British Credit Awards 2018
Page 50 and 51: The Recognised Standard / www.cicm.
Page 52 and 53: CREDIT TO THE EXPERTS SHARING SUCCE
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