Interchange fees - retailers’ claims boosted by the Court of Appeal

The Court of Appeal has recently clarified the law on whether interchange fees may be deducted from the payment a customer’s credit or debit card issuer will make to a retailer’s acquirer, following a transaction paid for by card.

Sainsbury’s and other retailers had previously objected that by making customers’ banks levy interchange fees on card transactions, Visa and MasterCard were interfering with the marketplace, as they said such banks would otherwise have competed to reduce the fees or even eliminate them, to make their own cards more attractive to retailers, who could then attract more customers.

The Competition Appeal Tribunal (CAT) agreed in 2016 with the first challenge, brought by Sainsbury’s. Damages of £68 million were awarded against MasterCard.  But confusion arose when Sainsbury’s lost a claim against Visa in the Commercial Court. Worse followed when other retailers who were also bringing a case against Visa lost that, but on different grounds.

All the losing parties in all three cases appealed. The Court of Appeal heard the appeals together, for consistency. In a judgment which is very helpful to retailers, it held in July 2018:

1. It is anti-competitive to impose interchange fees on customers’ banks, so this is potentially illegal
2. Interchange fees at lower than the current levels would still not be justifiable.

Implications

To justify deducting interchange fees (and to avoid liability to compensate retailers) the scheme operators now have to convince the CAT in a further hearing that the fees contribute to economic progress, despite their adverse effect on competition.  The CAT’s investigation is unlikely to be held before 2019.

Meanwhile, retailers’ potential compensation claims seem to be legally stronger (and for higher amounts) than was previously thought.

Commercially, the question is whether a retailer which brings or threatens compensation proceedings would be willing to offer settlement at a sum which it would also be attractive to Visa or MasterCard to settle for, so as to remove their exposure to a larger claim succeeding.

If so, it would make sense for retailers to accompany a pre-action claim letter with a separate settlement offer, put without prejudice save as to costs, to test the appetite of each defendant for fighting or settling.

For more information, please contact one of the authors below.