News and Publications

Court of Appeal rules in favour of merchants: MasterCard and Visa ‘MIFs’ are unlawful restrictions on competition

Posted: 24/08/2018

But have the floodgates been opened?

In a landmark case, the Court of Appeal has handed down judgment on a consolidated appeal, which clarifies three earlier inconsistent judgments (two by the Commercial Court and one by the Competition Appeal Tribunal (CAT). The Court of Appeal, in a mammoth 97 page judgment, has held that in setting default multilateral interchange fees (MIFs) MasterCard and Visa have infringed article 101(1) of the Treaty on the Functioning of the European Union (TFEU) ie they are an unlawful restriction on competition.

However, there are two important questions still at issue, which have now been referred back to the CAT for consideration in light of the principles the Court of Appeal has set out:

  • whether or not MasterCard and/or Visa were entitled to an exemption under article 101(3) TFEU; and
  • if not, what damages are payable to the merchants.  

So, crucially, the quantum of damages has still to be decided. 


The structure of both Visa and MasterCard’s payment schemes is such that, when a cardholder makes a purchase using a payment card, the card issuer pays the transaction price to an acquiring bank, which in turn settles the transaction with the merchant. In the UK, the issuer deducts a standard MIF from the transaction price before passing it on to the acquirer. The acquirer then deducts a fee (the merchant service charge (MSC) before passing the balance on to the merchant. The MSC normally includes the MIF plus a scheme fee payable by the acquirer and an acquirer’s margin.

Various well known merchants, namely Sainsbury’s, Asda, Argos and Morrisons (Arcadia was also originally a party) brought claims against Visa and MasterCard asserting that the MIFs infringed article 101(1). Unfortunately however, the three judgments were inconsistent. All the cases were appealed, and in the interests of providing clarity and consistency, the Court of Appeal heard the three appeals together. 

The issues 

The main issues to be determined in the appeal were:

  • The article 101(1) issue: do the MasterCard and Visa payment schemes’ rules setting default MIFs restrict competition under article 101(1) in the acquiring market?
  • The ancillary restraint ‘death spiral’ issue: was the setting of a default MIF objectively necessary for the MasterCard and Visa payment scheme’s survival (ie if one set a MIF, could the other only remain competitive by doing likewise)?
  • The article 101(3) exemption issue: if the MIF infringed article 101(1), should MasterCard and/or Visa be entitled to rely on the exemption in article 101(3) (ie that restrictive agreements may generate objective economic benefits that outweigh the negative effects of the restriction of competition)?

    To fall under the article 101(3) exemption, an agreement must satisfy four cumulative conditions: 1) it must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress; 2) consumers must receive a fair share of the resulting benefits; 3) the restrictions must be indispensable to the attainment of these objectives; and 4) the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

  • The quantum issue: should any damages to which the merchants might be entitled, be reduced or eliminated because they passed all or part of the MIFs on to their customers (eg by way of higher prices)? 

The decision

Finding in favour of the merchants and allowing the appeals, the Court of Appeal found as follows:

Article 101(1) (ie restriction of competition) issue
The Court of Appeal held that the MasterCard and Visa schemes’ rules which provided for a default MIF were indeed, in the absence of bilateral interchange fees, an infringement of article 101(1). 

In coming to that finding, the Court of Appeal followed the EU Commission’s decision in MasterCard v Commission of the European Union [2014] 5 CMLR 23, and held that the correct counterfactual to test the restrictive effects of the payment schemes was a no default MIF and a prohibition on ex post pricing. In the Commission case, it had been found that MasterCard’s MIFs resulted in higher prices and limited the pressure that merchants could place on acquirers in respect of the MSC, resulting in a reduction in competition between acquirers.

The ancillary restraint ‘death spiral’ issue
The doctrine of ancillary restraint provides that a provision of an agreement, which has the effect of restricting competition, does not constitute an infringement if it is objectively necessary for the implementation of the ‘main operation’ of the agreement, provided that main operation does not itself infringe article 101(1). A restrictive provision will only be objectively necessary if the main operation would be impossible to carry out in the absence of the restriction. The Court of Appeal held that a default MIF could not be justified under this doctrine.

In considering whether it was possible for MasterCard and Visa to rely on the ancillary restraint doctrine, the Court of Appeal confirmed that the correct test was whether a default MIF was essential to the survival of this type of operation (ie payment scheme). The answer in this case was negative, as was evidenced by payment schemes in other countries, which did not impose MIFs. 

The article 103(1) exemption issue
On the article 103(1) exemption, the Court of Appeal found that MasterCard had failed to satisfy the first condition of article 101(3) that the restrictive agreement must contribute to improving the production of goods or to promoting technical or economic progress (known as the ‘benefits requirement’). 

To satisfy this condition, MasterCard needed to show the causal link between the restriction and the net benefits, engaging in a balancing exercise between advantages caused by the MIFs and disadvantages inherent in the restriction. This had to be supported by a robust analysis and cogent factual and empirical evidence, not merely economic theory. MasterCard failed to produce such evidence. Moreover in Visa’s case, it was held that important factual and empirical evidence, which had been produced, was ignored or overlooked.

All three cases are now to be referred to the CAT for reconsideration of the exemption issues in light of the Court of Appeal’s guidance.

The quantum issues
On damages, the Court of Appeal upheld the CAT’s decision not to reduce Sainsbury’s damages for pass-on (ie on the basis that Sainsbury’s had passed on the MIFs it was charged to its customers eg by way of increased pricing). 

It also found that should MasterCard and/or Visa wish to argue that there was a lawful level of MIF, for the purpose of assessing damages, the burden of proving that level fell on them, not the merchants. To find otherwise would place a heavy burden on merchants incompatible with the enforcement of competition legislation through private claims in national courts.

It confirmed that the correct analysis would be to apply articles 101(1) and 101(3) to determine whether or not the default MIF, as charged, is in whole or part unlawful, and then to assess damages on the unlawful amount.

All three cases are to be referred back to the CAT for an assessment of damages along with reconsideration of the article 101(3) exemption issues (as the CAT has specialist expertise to deal with these matters in accordance with the Court of Appeal’s guidance). The Court of Appeal also took the view that all three cases should, so far as possible, be heard at the same time by the same tribunal (with a High Court judge sitting as chair) to prevent further inconsistent decisions.


The clarity provided by the Court of Appeal’s decision is long awaited and very welcome, particularly for high street retailers, many of whom are struggling in the declining retail market.

Notwithstanding that we still await the CAT’s decisions on the article 101(3) exemption and on damages, based on the principles set out by the Court of Appeal, this decision may finally bring some relief to those merchants who have claims against MasterCard and/or Visa, and those who have been subjected to MIFs and are looking to bring claims. 

Nonetheless, whether claims against card companies are statute barred remains a critical issue: the Court of Appeal was not considering limitation issues in this judgment. Advice on limitation issues will therefore be the first area to require a legal assessment by merchants considering the viability of claims. 

For now, it remains to be seen whether the floodgates have opened to an influx of claims against card issuers. Many will be watching with interest.

Arrow GIFReturn to news headlines

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP