Credit Cards, Counterfactuals and Antitrust Damages

The English courts in Sainsbury’s v. MasterCard and Morrisons v. MasterCard came to opposite conclusions on the illegality of MasterCard’s multilateral interchange fees (MIFs). While both courts posited bilateral counterfactuals, the Competition Appeal Tribunal (CAT) in Sainsbury’s held that this was a realistic counterfactual and that MasterCard had infringed Article 101(1); while the High Court in Morrisons found that the bilateral counterfactual was not realistic because MasterCard would not survive if faced with competition from Visa’s higher interchange fees. The courts also used very different methods to calculate the counterfactual interchange fee. There is now considerable legal uncertainty facing claimants and MasterCard. Here a critical assessment of the reasoning underpinning the two judgments is undertaken. The central thesis is that the counterfactual approach is flawed because of the constrained nature of and procedural constraints arising in litigation. Read full article purchase published article Read full article Purchase published article

The Law and Economics of Pass-on
in Price Fixing Cases


Sainsbury’s v. MasterCard establishes the pass-on “defence” in English/UK law. The Competition Appeal Tribunal set out a two-part test which it erroneously distinguished from the economists’ notion of pass-on. It then went on the develop key elements of legal test for pass-on in price fixing cases. This article critically assesses the Tribunal’s judgment within a law and economics framework. It provides a rounded interpretation of pass-on as both a defence and offence, the different evidentiary standards and principles used, and the potential for inconsistency which could see defendants liable to claims more than the overcharges.

Sainsbury’s Supermarkets v MasterCard1 is the first definitive judicial decision that establishes the pass-on “defence” in English competition law. Despite this welcome clarification, the Competition Appeal Tribunal’s (CAT) reasoning is far from clear and has led to confusion. This article clarifies the Tribunal’s legal test, apart from incorrectly distinguishing economic and legal pass-on, only applies when pass-on is pleaded as a “defence”. It is expressly not applicable when pass-on is used by indirect purchaser to support an action for damages. The differing evidentiary standards adopted by the Tribunal led it to reject MasterCard’s pass-on defence while accepting that 50% of the same overcharge had been passed on to Sainsbury’s customers when awarding interest. While there may be good legal and procedural grounds for adopting this bifurcated approach; it also lacks coherence since it exposes MasterCard to potential damages 1.5 times greater than the overcharge.


A Statistical Analysis of
UK Antitrust Enforcement​


The UK Office of Fair Trading (OFT) has been a highly rated competition law enforcer. Yet its antitrust performance activities fall far short of this image. Here a critical assessment is made of the OFT’s antitrust enforcement activities, and the claim that there is quantitative survey evidence that the OFT has had a “significant deterrent effect”. It concludes that this evidence is flawed and not credible.

The UK Office of Fair Trading (OFT) has attracted high ratings relative to the competition enforcement agencies of other countries.1 This contrasts with view of official bodies who have examined the OFT’s enforcement activities. They have concluded that over the last decade it has misallocated its resources, taken too long to conclude investigations often with no or a minor infringements found, and has under-enforced the law.2 In 2005 the National Audit Office (NAO)3 and House of Commons’ Public Affairs Committee (PAC)4 found major failings in the way cases were handled by the OFT, and recommended that it clear the large backlog of unresolved cases. The NAO’s progress report5 in 2009 concluded that things had improved considerably although there remained concerns. In March 2011, the UK Government published a consultation document6 which reiterated the view that the OFT was under-enforcing the law in comparison with other EU competition agencies. The OFT has challenged this analysis7, but the upshot has been the UK Government’s decision to merge the OFT with the Competition Commission to create a new Competition and Markets Authority (CMA).

Against this background, the OFT was required by the Government in 2006 to set out its priorities8 and to measure its performance.9 The OFT agreed with the Government (HM Treasury) to demonstrate that its enforcement generated at least five times its taxpayer funded costs in direct financial benefits to consumers and the economy.10 The OFT also commissioned two independent surveys – in 200711 and in 201112 – on the general deterrent effect of its enforcement activities. These have been used to claim that each OFT investigation deters at least five, and possibly more, prospective infringements. This finding has been seized on by other competition agencies, e.g. the European Commission.13 Others have put the claim more boldly. Davies and Ormosi assert, contentiously, that “It is widely acknowledged that the beneficial deterrent effects of competition enforcement are likely to be considerable, probably far outweighing the measurable benefits of the actual caseloads of” competition authorities.14

The focus of this paper is the OFT’s antitrust enforcement activities surrounding the prosecution of anticompetitive agreements (Chapter 1 prohibitions or their equivalent Article 101TFEU) and abuse of dominance (Chapter II prohibitions or their equivalent Article 102 TFEU) under the Competition Act 1998 (CA98). The OFT other enforcement responsibilities – merger clearance, market studies, and consumer protection – are not considered. Specifically, the discussion below undertakes a statistical analysis of the OFT’s antitrust enforcement activities over the decade 2000 to 2012, and an assessment of its survey research which it has claimed shows that its enforcement has had a significant general deterrent effect.

The discussion is organised as follows. Section II outlines a basic theory of deterrence. This is followed (Section III) by a statistical analysis of the OFT’s enforcement activities over the last decade. Section IV critically assesses the OFT’s survey evidence purporting to provide evidence of a significant general deterrent effect.


Market Power and Counterfactuals
in New Zealand Competition Law

This article reviews recent decisions and controversies surrounding the counterfactual test under section 36 of the New Zealand Commerce Act 1986. In 2010, the New Zealand Supreme Court in 0867 affirmed the counterfactual as the test to determine whether there has been a “use” of market power (the equivalent of monopolization under the Sherman Act, or abuse of dominance under Article 102 of the TFEU) for a proscribed purpose. The discussion traces the development of the section 36 counterfactual, and concludes that it is flawed and potentially under inclusive. It also compares it to the use of the counterfactual under the identical section 46 of the Australian Competition and Consumer Act 2010, which is used more flexibly.


Margin Squeeze – An overview of
EU and national case law


This foreword reviews the law and economics of an anti-competitive margin squeeze adopted by European and national competition authorities together with a critical assessment of the European Court of Justice’s Telia/Sonera judgment in early 2012.

Unilateral practices, Foreword, Margin squeeze, Abuse of dominance, Judicial review, Remedies (antitrust), Sanctions/Fines/Penalties, Interim measures, Rebates, Dominant position, Market power, All business sectors

Note from the Editors: although the e-Competitions editors are doing their best to build a comprehensive set of the leading EU and national antitrust cases, the completeness of the database cannot be guaranteed. The present foreword seeks to provide readers with a view of the existing trends based primarily on cases reported in e-Competitions. Readers are welcome to bring any other relevant cases to the attention of the editors.

Cento Veljanovski, e-Competitions, N° 46442,


1. A margin or price squeeze occurs when the difference between the wholesale price of an input supplied by a dominant entity and the downstream price does not give an efficient downstream firm a reasonable profit margin.

2. This foreword reviews the law and economics of an anti-competitive margin squeeze by European and national competition authorities together with a critical assessment of the European Court of Justice (ECJ) Telia/Sonera [1] judgment in early 2012.


Third Party Litigation Funding in Europe


Based on interviews of all UK based third party litigation funders the paper provides new empirical evidence on the nature, extent and type of third party funding of litigation. It also examines the emergence of new group or class action third party funders in Europe focused primarily on follow-on cartel damage claims. The discussion is then expanded to the broader issues such as the justification for third party funding, its impact and a critical assessment of the arguments against such funding.

Third-party litigation funding (TPLF) is where an investor otherwise unconnected with a legal action finances all or part of a claimant’s legal costs. If the case fails, the funder loses its investment and is not entitled to receive any payment. If the case succeeds, the investor takes an agreed-upon success fee. While not entirely new, the emergence of TPLF has recently been put in the spotlight with the entry of dedicated firms investing in commercial litigation in the U.K., Europe, and further afield. This study aims to shed light on the reality of TPLF. It is based on interviews with the leading dedicated TPLF investors based in the U.K.,1 and dedicated TPLF group action investors in Europe.2 It explores the development and rationale of TPLF in Europe, with a focus on the position in England and Wales,3 and the emerging funding of group actions in Europe.4

Part I of the discussion below provides some background to the development of TPLF in Europe. Part II is an overview of the TPLF funders in England and Wales based on interviews conducted in the second half of 2011. Part III examines group litigation funding in Europe. Part IV discusses the justification for and likely impact of TPLF, together with some of the policy issues. Part V looks at the anecdotal criticisms of TPLF that have been made by U.S. commentators and compares them to hard evidence.


Mergers, Counterfactuals and
Proof after Metcash


The standard of proof required in merger cases has become the centre of considerable controversies and confusion following the Australian Federal Court’s decision in Metcash. This paper reviews the use of counterfactuals and the inherent contradictions in adopting the real chance standard of proof. It also critically examines the different approaches of the judgments in Metcash, and the more formal approach by the New Zealand High Court in the Warehouse decision. This is assessed using probability theory. The discussion points to the adoption of the balance of probabilities as the requisite standard of proof, and a watering down of the counterfactual in preference to a more direct approach to merger assessments. The discussion also critically assesses the use of counterfactuals in monopolisation and anticompetitive practices cases under Australian and New Zealand competition laws.

Following the Full Federal Court’s decision in ACCC v Metcash Trading1 and the judgment of Emmett J at trial2 uncertainties have arisen over the counterfactual test in merger cases. This comes hard on the heels of controversy surrounding the counterfactual in market power abuse cases3

In the light of these developments I have been asked to comment on the issues that arise from the use of counterfactuals in Australian, New Zealand, UK, and European competition laws. Specifically, for my assessment of the importance and/or difficulty of using counterfactual analysis in sections 45 (agreements, understanding and arrangements), 47 (exclusive dealing) and 50 (mergers and acquisitions) of the Competition and Consumer Act 2010 to assist in determining whether the actions of the firm or firms had “the effect or are likely to have the effect of substantially lessening competition in a market”.. Also my thoughts on the use of counterfactuals in section 46 (taking advantage of market power).4

The paper is organised as follows. Section I sets out the nature of counterfactuals, and the issues that arise generally with their use, and in particular in competition law. Section II looks more closely at the future “before and after” counterfactual in merger review under s 50, and the standard of proof. Section III examines s. 46 counterfactuals. Further, Annex A reviews approaches to merger review in New Zealand, the UK, the European Community and the USA.


Deterrence, Recidivism and
European Cartel Fines


Based on an analysis of cartel prosecutions since 2007, this article assesses the way the European Commission has built up its fines in practice. The fines are compared with those imposed by the European Commission over the period from 1999 to 2006. The main findings are that, while fines have increased significantly, this trend is due not to harsher fines but to less generous reductions under the Commission’s leniency program. In some areas, the European Commission has not followed its own guidelines—fines are generally lower than set out, the way recidivism is penalized is incoherent, and many aspects of the fining process are unexplained or redacted. Estimated fine-to-sales ratios together with new research on overcharges and detection rates suggest that fines may be closer to those for optimal deterrence than previously thought.


The European Commission’s cartel fines have deterrence at their heart. This is made crystal clear in the 2006 Penalty Guidelines1 In comparison to the 1998 guidelines and other statements by senior Commission officials. The 2006 Penalty Guidelines state (Point 4):

‘Fines should have a sufficiently deterrent effect, not only in order to sanction the undertakings concerned (specific deterrence) but also in order to deter other undertakings from engaging in, or continuing, behaviour that is contrary to Articles 81 and 82 of the EC Treaty (general deterrence)’.

The accompanying Press Release (IP/06/857) states:

‘Fines are one of the means to ensure that companies do not engage in anticompetitive behaviour. To that end, fines must be set at a level that ensures sufficient deterrence. This implies that fines should not only punish past behaviour, but also that their level will deter that particular company, or any other, from entering into illegal behaviour in the future.’

In comparison to the 1998 guidelines2:

‘The three main changes – the new entry fee, the link between the fine and the duration of the infringement, and the increase for repeat offenders – send three clear signals to companies. Don’t break the anti-trust rules; if you do, stop it as quickly as possible, and once you’ve stopped, don’t do it again.’

In particular Commission will bear down heavily on repeat offenders:

‘The new Guidelines change this approach in 3 ways:
1) the Commission will take into account not only its own previous decisions, but also those of National Competition Authorities applying Articles 81 or 82;
2) the increase may be up to 100%;
3) each prior infringement will justify an increase of the fine. Multiple offenders will therefore be fined more heavily, in line with Commissioner’s Kroes’s repeated wish (see IP/05/61, IP/06/560, IP/06/698).’

In this paper the Commission’s words are compared with its deeds based on original research on data in the Commission’s decisions on cartel prosecutions between 2007 and 2010, and for comparative purposes prosecutions under the previous guidelines for the period 1998 to 2006.


Punishing European Cartels


Antitrust authorities across the world are waging war against domestic and international cartels. The European Commission in particular has intensified its prosecution activities and increased dramatically the fines it imposes on cartelists. This article undertakes a statistical overview of the Commission’s prosecution activities and fines over the last decade of pan-European (and in many cases global) cartels, principally under the current penalty guidelines which became effective on 1 September 2006.


Counterfactual Tests in Competition Law


This article looks at the growing use of the counterfactual approach in European and UK competition laws. The term counterfactual has not been a feature of European competition law, with the exception of merger control, to date. However, with the move to an effects-based approach, counterfactuals are being used occasionally, hesitantly and with mixed results. The article examines the use of counterfactuals in ‘behavioural’ competition law investigations based on a review of UK and EC competition guidelines, decisions, and several leading UK cases.

The term ‘counterfactual’ is neither a legal or economic one. Yet the word appears to be surfacing with increasing regularity in decisions of the competition authorities and judgments of the courts. The UK competition authorities have popularised the term in merger control with the move from the dominance to the Significantly Lessening Competition (SLC) standard under the Enterprise Act 2002. The other development that has given the term increased exposure is the growth of private damage actions, where a ‘but for’ counterfactual test has often been used. The term has also been applied in ‘behavioural’ competition law investigations and court cases.

Here the use of the counterfactual in competition law is examined. It is based on a review of UK and EC competition authority guidelines, and several leading UK cases.

The main conclusions of the discussion are:
• A counterfactual is an ‘analytical framework’ not a mandatory requirement with the possible exception of an Art 101(1)TFEU ‘infringement by effect’.
• A counterfactual asks a question, it does not give an answer. It requires the parties to set out explicitly their theory of competition and harm, but the decision maker is still required to select the most appropriate counterfactual and assess the evidence supporting it.
• Often a counterfactual simply reframes competing theories/propositions without adding much insight or necessarily being appropriate or contributing to good decision-making. The cases and decisions reviewed below have revealed difficulties with the counterfactual ranging from failure to set a credible theory of the competitive harm (or good), flawed models of the competitive process, inconsistencies with the facts, or reliance on assumed models of atomistic competition when dealing with network industries such as new sports channels and credit card schemes.
• There is a tension between the past decisional practice, case-law and the content of the recent effects or economics based European Commission (the Commission) competition law guidelines. These frequently set out different approaches to determining infringements such as benchmarks, checklists, and direct price and cost tests. The overlay of a counterfactual approach, with the term rarely used, to these is not explained, and these can be used as alternative or complementary approaches.

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