Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Case T-111/08, Mastercard. A priceless Art. 101(3) assessment

with 5 comments

A while ago we wrote a post on The Slow Death of Article 101(3) TFEU, where we said that in recent European Commission, practice, only once the challenged agreeement was not deemed to be a restriction by “object”, and that only in that case the Commission had carried out a serious Article 101(3) assessment. This was the Mastercard Interchange fees case, and last May the General Court rendered its Judgment on it (btw, we have no interest whatsoever on this case).

Over time we have realized that the longer and more serious a post is, the less you guys read it (and this one will be quite lenghty). So, of the many complex and interesting issues raised by this case, we will only comment on a general point regarding the Court’s assessment of the interchange fee arrangements under Art. 101(3). Given that almost no Decision or Judgment delves into 101(3) analyses these days, the General Court’s assessment is priceless for anyone interested in exploring how this key provision is to be interpreted. In this sense,  it’s surprising that the Judgment hasn’t received more attention.

I confess that I undertook the reading of the Judgment with a clear confirmation bias: I was looking for evidence that would support my point that it’s incredibly difficult to successfully argue that a given agreement can benefit from the legal exemption provided by 101(3). To my (positive) surprise, I found out that despite applying the “manifest error of assessment” standard of review, the General Court actually did carry out an assessment of the evidence put forward by Mastercard which is well more detailed than what I expected (see paragraphs 207-237). Right or wrong, it was acceptably thorough, specific, and even revealed that the Court had managed to understand the so-called Baxter model put forward by the applicants.

The Court’s application of the first condition of Article 101(3) nonetheless raises some interesting and debatable issues that relate to the fundamentals of Art.101(3), which are partly discussed below. I take responsibility for the opinions below, but I have taken a free ride benefitted from educative discussions with two of my favorite legal minds: Luis Ortiz (who has authored the best study on how Art. 101(3) is to be applied) and Eric Gippini (whose great Friday Slot interview is available here) (to make sure, they don’t necessarily agree with the views developed below)

Click here if you’re interested in reading more (spoiler alter: dense stuff ahead)

On the positive economic effects that can be taken into consideration within 101(3)a):

In para. 220-221 the Court states that

even on the assumption that it can be inferred from that evidence that the MIF contributes to increasing the output of the MasterCard system, that is not sufficient to establish that it satisfies the first condition laid down under Article 81(3) EC.

It must be observed that the primary beneficiaries of an increase in MasterCard system output are the MasterCard payment organisation and participating banks. However, as the case-law cited in paragraph 206 above shows, the improvement, within the meaning of the first condition of Article 81(3) EC, cannot be identified with all the advantages which the parties obtain from the agreement in their production or distribution activities“.

Does this imply that the fact that the parties to an agreement are the “primary” (not sole) beneficiaries of an agreement mean that the first condition in Art. 101(3) is not met?  The case-law is certainly clear on the fact that the objective efficiencies considered in 101(3) cannot be identified with the subjective benefits that the parties obtain (ie the parties cannot be the “sole” beneficiaries of those efficiencies). No problem with that. But there’s a nuance here: the fact that the parties are the “primary” beneficiaries should not preclude the assessment of the efficiencies that others may obtain.  According to previous –and reasonable- case law  there has to be a certain equilibrium between the benefits obtained by consumers and those obtained by undertakings part to the agreement (see e.g. para 295 of Case T-29/92, SPO). In my view, who the “primary” beneficiary is should not be relevant provided that there is not a manifest disequilibrium.

 (Note: in this case there is also a controversy as to whether banks qualify as “parties” to the agreement or as third parties. The Commission and the Court consider that there’s a commonality of interests between MasterCard and banks that makes the agreement qualify as a “decision of an association of undertakings, which is arguable).

In para. 222 the Court also adds that an increase in Mastercard’s output might increase Mastercard’s market power and that, in addition to giving rise to efficiencies, the arrangements at issue could also be used by banks in order to extract rents. But: if output restrictions are deemed restrictive of competition, shouldn’t output increases be deemed procompetitive?  Moreover, in the case at issue it might be simplistic to only equate output expansion with more sales and profits. In a two-sided market characterized by strong network effects the MIFs are intended to expand network effects ant to internalize the positive externalities at play. Under these circumstances, the output expansion should –at least theoretically- be to the benefit of all.

On the quantification of demand-side efficiencies

The Commission’s decision stated that MasterCard had not provided “empirical evidence”  to support its contention that the MIFs gave rise to efficiencies. Query: how could one objectively quantify this? The Commission didn’t know either, which is why after adopting the decision it launched a call for tenders for a study on ‘Costs and benefits to merchants of accepting different payment methods’ (an implicit recognition that no one had a clue about how to do this??).  In the face of the impossibility of measuring objectively the benefits that merchants obtain from the greater diffusion of a given system, the Court endorsed the Commission’s implicit view that the risk of MIFs giving rise to not-objectively-quantifiable competitive problems trumps the possibility of obtaining non-objectively-quantifiable benefits.

No one challenges that (as provided for in Art. 2 of Reg.1/2003) the burden of proof is on the Commission to prove that the agreement is restrictive, and on the undertakings to prove that it benefits from the legal exception. But if the Commission can argue that there are “non-objectively quantifiable” restrictions to satisfy its burden, shouldn’t companies be able to claim that there are “non-objectively quantifiable”  benefits flowing from the agreement? This unevenness in the applicable standards of proof risks an effective shift of the burden of proof from the Commission to the undertaking.

Do we ponder only relevant-market efficiencies or also out-of-market efficiencies?

Mastercard also argued that the Decision failed to assess the benefits that cardholders obtained from the MIF.

The Court acknowledges that “the appreciable objective advantages to which the first condition of Article 81(3) EC relates may arise not only for the relevant market but also for every other market on which the agreement in question might have beneficial effects“. This is a most interesting stance. Whereas it is indeed supported by previous case law(e.g. Compagnie Maritime Belge), it is at odds with the Commission’s guidelines on 101(3) (see para. 43 and footnote 57).

However, the Judgment says that “as merchants constitute one of the two groups of users affected by payment cards, the very existence of the second condition of Article 81(3) EC necessarily means that the existence of appreciable objective advantages attributable to the MIF must also be established in regard to them“. Ok, so this means that since no quantifiable advantages benefitted merchants, there was no need to verify whether any such advantages benefitted cardholders.

I don’t agree (and I frankly don’t understand what the second condition of the provision has to do with this reasoning). The ECJ has in previous cases ruled that there is nothing in the wording or spirit of Article 101(3) that permits an interpretation in the sense that an exemption is subject to the condition that those benefits should occur in the same markets affected by the restrictions (see, in the context of geographic markets, the ECJ’s Publishers’s association Judgment, para. 29).

The right ideal solution here would be to strike a balance between all interests in play (pondering favorable and detrimental effects of the agreement across markets and across customer groups). The problem, once again, is that undertaking such assessment in an objective and fair manner is probably unfeasible (and that favoring a given market or customer group over others can be very unpopular too).

Bottomline

The MasterCard case is most interesting because the difficulties inherent to the application of Art. 101(3) are aggravated by the special features that characterize two-sided markets. How do you measure in 101(3) terms the effects derived from the internalization of network effects in two-sided markets? I don’t think anyone has a clue, just as no one has a clue on how to adequately ponder innovation-related arguments either (but let’s leave that for a later post).

Most of the problems outlined above perhaps cannot be blamed on the General Court. To a great extent they derive from the wording and the “funnel structure” of Art. 101 which – particularly in cases like this one- can certainly be problematic.

P.S. In the unlikely case that you’ve reached the end of this post and that you still want to read more on demand-side efficiencies, we recommend a couple of pieces, available here and here.

Written by Alfonso Lamadrid

31 October 2012 at 3:51 pm

Posted in Case-Law

5 Responses

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  1. But MasterCard is not, and probably never was, about competition law in the first place. And it has even less to do with antitrust economics. Subsequent developments show that it is all about price regulation…

    Madrid Lawyer

    31 October 2012 at 5:31 pm

  2. The previous link to Luis’ publication was wrong; it’s fixed now! I was referring to chapters 5 and 6 of this book: http://www.hartpub.co.uk/books/details.asp?isbn=9781841135281

    Alfonso Lamadrid

    5 November 2012 at 10:17 pm

  3. interesting post; yet I do not share your criticism of the GC’s approach on the localization of benefits; As far as I remember in Compagnie Maritime Belge, it was roughly the same group of users that benefited and suffered from the restrictions, albeit on different markets; applying this case-law here would have meant that the advantage for John (cardholder) justify paul (merchant) being subject to higher MIF… Tricky question…

    As long as Paul must, under the second condition, receive a fair share of the advantages, I don’t see why the GC is wrong in saying that it is necessary to demonstrate, within the framework of the first condition, that it benefits from the MIF. If it is not done the second condition would never be met.

    I would actually agree with Madrid lawyer. This is all about regulation. Following MasterCard’s approach would have meant that the level of MIFs is a no go area for competition authorities. Is that really desirable when one considers the importance payment cards in our economy? or the limited constraint merchants can exercise on MIFs?

    Actually, it appears the GC, by an obiter dicta, set up the criteria that a MIF should match so as to be compatible article 101 (3):

    (223) “inasmuch as it is not possible to establish precisely the extent of the advantages that can be deemed to justify some financial compensation from merchants for the costs incurred by issuing banks, it is reasonable to conclude that it was for the applicants – in order to prove that the MIF satisfied the first condition laid down in Article 81(3) EC – to identify the services provided by the banks issuing debit, charge or credit cards capable of constituting objective advantages for merchants. It was also for them to establish that there was a sufficiently clear correlation between the costs involved in the provision of those services and the level of the MIF. As regards the last point, it must be noted that those costs cannot be determined without taking into account other revenues obtained by issuing banks on the provision of those services or by including costs which are not directly linked to them.”

    anonymous

    14 November 2012 at 1:14 pm

  4. A mere update: it appears that the ECJ agreed with the GC that there had to be objective advantages for both merchants and cardholders (looking forward to your comments on the ECJ’s Mastercard judgement of 11 September 2014 as you have previously promised). The ECJ also established that merchants had to enjoy the MIF ‘as well as’ cardholders, and not necessarily ‘to the same extent’ as them. I don’t know if Article 101(3) is slowly dying, but let’s hope not, as cases like Mastercard (especially considering the two-sided market in question) set intriguing examples for NCAs around the world that closely follow the EU jurisprudence and practice.

    competitiongal

    7 October 2014 at 2:16 am

  5. Thanks for the comment, and message received: I haven’t had the time to do it, but will make sure to comment on the Judgment in the coming days. Thanks again for the update!

    Alfonso Lamadrid

    7 October 2014 at 3:27 pm


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