Payments Intelligence Extract: Why Mastercard has won the battle, but not the war

10th July 2017
Callum Godwin
Callum Godwin

The defeat of Arcadia & Ors undoubtedly strikes a blow for the entire European merchant community, but merchants who have made or are considering making subsequent claims shouldn’t be disheartened.

On 30th January 2017, Justice Popplewell delivered his Commercial Court judgment that Arcadia & Ors were unsuccessful in their claim against Mastercard. This was somewhat of a shock following the successful Sainsbury’s case against Mastercard in the Competition Appeal Tribunal just 6 months earlier (July 2016).

Why did Arcadia & Ors Fail?

Arcadia used an altogether more ambitious stance than Sainsbury’s did; Sainsbury’s accepted that it would have been willing to pay a certain level of interchange, while Arcadia & Ors argued that all interchange fees were illegal and sought repayment of these fees in their entirety. However, it is not necessarily the case that this ambitious approach in itself was the reason for the claim’s failure. In fact, the outcome of the Arcadia & Ors ruling was ultimately the result of their failure to adequately address three main economic issues.

What are these main issues?

1. Ancillary restraint counterfactual

Also known as the ‘migration’, ‘death spiral’, ‘object necessity’, or ‘asymmetric’ argument, the ancillary restraint counterfactual was an argument used by Mastercard to claim that it would have ceased to exist in the absence of being able to set a multilateral interchange fee (MIF). Mastercard argued that all of its card-issuing partners would have migrated to Visa. Of course, for this logic to hold, Visa would have to be legally and realistically able to charge MIFs even if Mastercard could not. Justice Popplewell stressed that it was beyond his remit to rule on the legality of Visa’s MIFs, so what this ultimately boils down to is whether or not the Visa and Mastercard schemes are ‘materially identical’. The burden of proof was on the merchants, and they were unable to show this due to a lack of evidence submitted to the court. From this, the judge ruled that issuers would have migrated if the differential between Visa and Mastercard’s interchange fees was more than 0.2%, which placed a limit on the merchants’ potential claim value.

2. System output

In order to qualify for an exemption under Article 101(3), Mastercard had to prove that the MIF was essential to the delivery of the benefits of the card system. In order to do this, Mastercard used its system output argument – that the MIF increased output in the card system by incentivising issuers to offer free banking/cardholder rewards to consumers, and that this increased output benefited merchants because of the network effects inherent to card systems. The merchants did not counter adequately, and the judge ruled in favour of Mastercard on this point.

3. Baseline

Despite losing the ancillary restraint and system output arguments, Arcadia & Ors would still have received a substantial payout if they had successfully argued that the counterfactual for the exemptible MIF was lower than the MIF actually paid. Mastercard identified a number of benefits of the card system attributable to the MIF, including the avoided cost of cash, being able to offer free in-store credit, and the competitive advantage merchants gain over rivals that do not take cards. Justice Popplewell accepted all of these, and concluded that the total exemptible (or putatively legal) MIF for UK Mastercard credit cards was 1.01%: slightly higher than the MIFs Mastercard actually charged. As a result, the merchants did not receive a pay-out as there was deemed to be no overcharge. In contrast, the baseline determined by Justice Barling in the Sainsbury’s vs Mastercard case was much lower at 0.50% for UK credit cards (using a different, cost-plus methodology). This was lower than the MIFs actually paid, and hence Sainsbury’s received a £69 million payout.

Figure 1 : Relevant baselines in the Sainsbury’s/Arcadia & Ors cases and current

How does this judgment affect future claimants?

The judgment demonstrates that interchange litigation isn’t the latest payment protection insurance (PPI) scandal, as many parties seem to have believed. The schemes have deep pockets and are very well represented, so cases will not be easy. That said, we believe several of the economic arguments delivered in the Arcadia & Ors case by the merchants could have been stronger. If these were addressed in future cases then we believe it could increase the likelihood of a successful recovery for merchants.

Will I still be able to achieve a standstill agreement?

Mastercard has inevitably delighted in its victory and is less likely to agree to standstill agreements. This means that merchants may have to issue claims in order to “stop the clock” in order to protect the period of liability which is six years in the UK (except in Scotland where it is five). It is also important to note that because interchange regulation was introduced on December 9th 2015, the earlier parts of the claim may be more valuable, meaning “stopping the clock” is important to maximise the claim.

Will I still be able to receive an out-of-court settlement?

Perhaps. However, you need to be careful that any out-of-court settlement is not highly favourable to the schemes. Some merchants have already agreed out of-court settlements – shortly after the result of the Arcadia & Ors vs Mastercard case was published, the same group of merchants announced that they had settled out of court with Visa. Sainsbury’s was the sole merchant in this group to continue its claim. The result of the Sainsbury’s vs Visa case (expected before June 2017) should be an indicator of the viability of future claims.

Will Arcadia & Ors appeal?

We understand that both Mastercard (vs. Sainsbury’s) and Arcadia will appeal the decisions against them and that they are currently awaiting permission from the Court of Appeal, which is expected to be granted. Furthermore, it is likely that the Arcadia & Ors and Mastercard’s appeals may be heard together. This would make a lot of sense, given the similarities of the cases and issues. However, it will depend on the respective grounds for appeal. This could address the issue of conflicting outcomes, although both cases were based on very different evidence.

Furthermore, in the event of an appeal, no new evidence would be allowed if it was reasonably available at the time of the original case, highlighting the importance of a strong economic argument from the outset.

How does this affect European merchants?

Merchants with European operations outside the UK should not think that these cases are irrelevant for them. A UK court is able to hear claims covering transactions based in other EU member states. Indeed, the Arcadia & Ors case covered domestic Irish card volumes as well as domestic UK and intra-European Economic Area (EEA) transactions. Additionally, Deutsche Bahn (which own Arriva in the UK) has filed its claims within a UK court. Please see our interview with Cuatrecasas law firm for more information about international claims.


The failure of the Arcadia & Ors case came as a shock to most commentators and a huge disappointment to all merchant advocates. However, we do not think that this should necessarily deter future claims and should merely act as a warning sign to would-be claimants.
CMSPI maintains that substantial payouts are possible if economic arguments are well delivered. To do this, the judges in both cases have made it clear that payments expertise is vital.

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