The EU Court of Justice confirms the prohibition of MasterCard’s multilateral interchange fees

The EU Court of Justice confirms the prohibition of MasterCard’s multilateral interchange fees

di Giovanni Scoccini, pubblicato in Concurrences

On September 11, 2014 the Court of Justice handed down its judgment [1] in the multilateral interchange fees (MIFs) case dismissing MasterCard’s final appeal against the European Commission’s decision [2] that ordered MasterCard to withdraw its MIFs.

Interchange fees are balancing payments made by the bank of a retailer to the cardholder’s bank for card-based payment transactions. MasterCard’s MIFs applied to all cross-border card payments in the EEA and to domestic card payments in Belgium, Ireland, Italy, the Czech Republic, Latvia, Luxemburg, Malta and Greece.

The EU Commission prohibited MasterCard’s MIFs because the setting of multilateral interchange fees in the payment system operated by MasterCard constituted a decision by an association of undertakings which led to a restriction of competition between participating banks providing merchants with services enabling them to accept MasterCard and/or Maestro debit, charge and credit cards. The Commission held that the MIFs were not necessary for the operation of the services of MasterCard and did not create sufficient pro-competitive efficiencies to allow them to be exempted from the prohibition under Article 101.3 TFEU.

In 2012, MasterCard lost an initial appeal against the decision at the EU’s lower-tier General Court [3]. After that, it took its fight further up to the Court of Justice, which in its latest judgment upheld the General Court’s judgment and, ultimately, the Commission’s assessment.

The core pleadings of MasterCard before the Court of Justice were:
1. after its IPO on the New York Stock Exchange, the MasterCard payment system could no longer be considered to amount to an association of undertakings among the banks. According to appellant, MasterCard was a commercial entity separate from its banking customers and pursuing its own commercial interests;

2. the Commission did not prove that the MIFs had restrictive effects on competition;

3. the MIFs should have been considered to be objectively necessary for the operation of the MasterCard system; and

4. the Commission should have concluded that the MIFs satisfied theconditions set out in Article 101.3 TFEU.

As to the first pleading, the Court of Justice upheld the finding of the General Court that – even after the IPO – the banks participated collectively and in a decentralised manner in all essential elements of the decision-making power in relation to the MIFs. The MIFs reflected the banks’ interests, because there was, on that point, a commonality of interests between MasterCard, its shareholders and the banks.

Therefore, it held MasterCard was still an association of undertakings even after the IPO. The Court of Justice stated in accordance with its settled case-law that undertakings cannot evade the rules of competition by relying solely on the form in which they coordinate that conduct.

As to the second pleading, the Court of Justice upheld the decision that the MIFs constitute a restriction of competition by effect. Therefore, contrary to the rules in relation to restrictions by object, it was not possible to rely on mere suppositions or assertions that the anti-competitive effects of the MIFs are obvious: it was necessary to analyse the effects of such fees. In this respect, the General Court carried out a detailed examination and correctly held that the MIFs had restrictive effects in that they limited the pressure merchants could exert on acquiring banks. Merchants lost their power when negotiating the costs they were charged for card-based payment transactions because of a reduction in the possibility of prices dropping below a certain threshold.

In order to assess the effects of the MIFs, the General Court hypothesized a counterfactual scenario. In this scenario it considered whether, in the absence of the MIFs, MasterCard could have imposed a rule on the banks prohibiting ex post pricing in the absence of a bilateral agreement between them.
However, according to the Court of Justice the General Court made a mistake because it did not in any way address the likelihood, or even plausibility, of this counterfactual scenario. Despite this error, the Court of Justice did not annul the judgment because the operative part was well founded on other legal grounds. The General Court was entitled to rely on its analysis of the restrictive effects of the MIFs on the same ‘counterfactual hypothesis’ of the prohibition of ex post pricing. This because no party claimed before the General Court that MasterCard would have preferred to let its system collapse rather than adopt the other solution, that is to say, the prohibition of ex post pricing.

Therefore, the Court of Justice confirmed that interchange fees have restrictive effects on competition. This does not mean that interchange fees are illegal as such. Restrictions of competition that are necessary to the main operation that is not anti-competitive in nature do not fall within the prohibition of anticompetitive agreements laid down in Article 101.1 TFEU.

With regard to the third pleading, the Court of Justice rejected the argument of the appellant that MIFs should be considered objectively necessary for the operation of the MasterCard system. On this point, the Court of Justice upheld the judgment of the General Court. The General Court held that even though the absence of the MIFs may have adverse consequences for the functioning of the MasterCard system, this does not mean in itself that the MIFs must be regarded as being objectively necessary, if it is apparent from an examination of the MasterCard system in its economic and legal context that it is still capable of functioning without it.

Therefore, the MIFs infringed the prohibition on anticompetitive agreements laid down in Article 101.1 TFEU. In order to avoid the illegality, any concerted practice which proves to be contrary to the provisions of Article 101.1 TFEU, may be exempted under Article 101.3 TFEU only if it satisfies the conditions in that provision.

In response to the fourth pleading, the Court of Justice confirmed that the MasterCard’s MIFs could not be exempted from the application of the competition rules on the basis of efficiencies.

Under Article 101.3 TFEU, the prohibition contained in Article 101.1 TFEU may be declared inapplicable in the case of practices which contribute to improving the production or distribution of goods or which promote technical or economic progress, while allowing consumers a fair share of the resulting benefits. This so long as the practices, only impose restrictions which are indispensable to the attainment of these objectives and do not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products concerned. Because the MIFs were unnecessary for the operation of the MasterCard system, the assessment under Article 101.3 could only have been conducted by considering the advantages arising specifically from the MIFs and not from the MasterCard system as a whole.

In this case, given that the card-based payment service is a two-sided system because it is offered to both cardholders and merchants, the MIFs could be exempted only if they had brought a fair share of their advantages to both these categories. In particular, to the category that suffered the restrictive effect of the conduct.

On this point the Court of Justice confirmed the judgment that there was no proof of the existence of objective advantages flowing from the MIFs that merchants, who were the ones that had to bear the burden of the MIF, enjoyed.

Therefore the Court of Justice confirmed that the MIFs are in violation of Article 101 TFEU because they did not satisfy the exemption conditions. The judgment of the Court of Justice has clarified that MIFs have restrictive effects irrespective of their level, because card payment schemes can also function without them. The adoption of MIFs is permitted only if their restrictive effects are balanced by benefits the MIFs produce for both consumers and merchants. The burden of the proof that these benefits exist and are proportionate to the level of the MIFs is on the payment organization and its members. This self-assessment appears to be very complex because it is necessary to evaluate the overall effects of the MIF on a two-sided market. Should the payment organization and its members fail to prove the satisfaction of the conditions laid down in Article 101.3 TFEU the MIFs in their entirety are to be considered illegal, because they fall within Article 101 TFEU. In this context the legislative proposal for a Regulation of Interchange Fees [4] has to be welcomed. It will bring legal certainty in a sector that has been under the scrutiny of antitrust national authority for many years and where now the level of private antitrust enforcement is considerable.

[1] Judgment of the Court of Justice (Third Chamber) of 11 September 2014 in the Case C-382/12 P, MasterCard and Others v European Commission, [2014] ECR I-0000.

[2] Decision C(2007) 6474 final of 19 December 2007 relating to a proceeding under Article 81 [EC] and Article 53 of the EEA Agreement (Cases COMP/34.579 – MasterCard, COMP/36.518 – EuroCommerce, COMP/38.580 – Commercial Cards).

[3] Judgment of the General Court (Seventh Chamber) of 24 May 2012 in Case T-111/08 MasterCard, Inc. and others v European Commission.

[4] Proposal for a Regulation of the European Parliament and of the Council on interchange fees for card-based payment transactions, COM/2013/0550 final/

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