MASTERCARD INTERNATIONAL INC BANKING INQUIRY PRESENTATION Competition Law Analysis of the MasterCard

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MASTERCARD INTERNATIONAL INC BANKING INQUIRY
PRESENTATIONCompetition Law Analysis of the
MasterCard Scheme18 April 2007
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Overview

• Consider application of Competition Act to the
  MasterCard scheme
• Whether section 4(1)(b) is applicable?
• Is MasterCard an association of firms?
• Technical Committees request to deal with joint
  venture argument
• Key elements of section 4(1)(b)
• Price-fixing jurisprudence
• the Supreme Court of Appeals Ansac decision
• international cases
• conclusion

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Preliminary issues

• Unless conduct is specifically proscribed by the
  law, parties are at liberty to do as they please
  within the confines of the law
• MasterCard is of the view that interchange is not
  a price. However, given the fact that some
  competition authorities have looked at it as a
  price, MasterCard has decided to look at the
  price fixing provisions of the Competition Act

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Section 4(1)(b)

• (1) An agreement between, or concerted practice
  by firms, is prohibited if it is between parties
  in a horizontal relationship i.e a relationship
  between competitors and if-
• (a) or
• (b) it involves any of the following restrictive
  horizontal practices
• (i) directly or indirectly fixing a purchase or
  selling price or any other trading condition
• (ii) dividing markets by allocating customers,
  suppliers, territories, or specific types of
  goods or services, or
• (iii) collusive tendering.

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Essential features of section 4(1)(b)

• Agreement or concerted practice
• Between firms or association of firms
• Association of firms argument fell away following
  MasterCards IPO
• This was done in part to dispel any existing
  regulatory perception that MasterCard was the
  alter ego of the banks
• In a horizontal relationship (between
  competitors)

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MasterCard not in a horizontal relationship

• MasterCard scheme determined by MasterCard
  independently of banks and without any agreement
  between MasterCard and customer banks
• MasterCards setting of default terms not at the
  instance or request of banks
• MasterCard does not constitute an association of
  banks

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MasterCards governance structure post IPO

• MasterCard broadened ownership of its stock to
  include
• Public investors
• A new MasterCard charitable foundation
• Former members
• Voting shares Class A Shares
• Public Shareholders 83
• MasterCard Foundation 17
• Former members 0
• Former members hold 41 of Class B non voting
  shares
• They also hold M class shares which give limited
  minority protections
• No former member can hold class A shares

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Does MasterCard compete with its customers?

• MasterCard does not, at any time, compete with
  either issuers or acquirers
• In particular, MasterCard does not
• issue cards or determine cardholder fees
• acquire transactions or determine merchant fees
• Some of MasterCards competitors are the
  following
• Visa, American Express, Diners Club and Bankserv

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Absence of horizontal relationship excludes
section 4(1)(b)

• The absence of a horizontal relationship excludes
  a section 4(1)(b) inquiry
• An additional argument that excludes the
  application of Section 4(1)(b) is the joint
  venture argument made below
• The structure of the joint venture argument,
  which is supported by the Ansac decision, is in
  line with international jurisprudence
• In particular, the structure of Section 4 is
  consistent with the manner in which some
  international cases deal with the joint venture
  argument, especially US cases

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Joint venture argument Ansac decision

• The competition authorities unanimously believed
  that section 4(1)(b) created per se prohibitions
• Accordingly, no defence was possible to a per se
  violation
• Accordingly, the competition authorities were
  precluded from considering any efficiency
  justifications for the conduct in question

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The Ansac decision

• Confirmed that section 4(1)(b) prohibitions
  constitute per se violations
• However, SCA held that competition authorities
  must still review any relevant evidence in order
  to characterise or determine whether the conduct
  in question falls within the ambit of per se
  prohibitions
• It does not follow that price-fixing has
  necessarily occurred whenever there is an
  arrangement between competitors that results in
  their goods reaching a market at a uniform
  price.

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Observations from the Ansac decision

• Competitors may embark upon a legitimate joint
  venture without transgressing the section 4(1)(b)
  prohibitions even though they may fix a price
• To determine whether the kind of price-fixing
  proscribed by the Act has occurred, it is
  necessary to enquire beyond the mere terms of the
  competitors arrangement
• The competition authorities must distinguish, in
  particular, between those price-fixing
  arrangements that are designed to avoid
  competition and ancillary price-fixing
  arrangements which do not

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The role of US jurisprudence in the Ansac
decision

• SCAs decision seems to support the consideration
  of the efficiency defence in what it calls the
  purpose and effect analysis of the agreement in
  question
• In particular, the SCAs decision cites US cases
  in support of its conclusions
• It is therefore necessary to consider some
  relevant US cases below

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Broadcast Music Inc v Colombia Broadcasting
System Inc (1979)

• This case involved the collective licensing of
  music rights by the ASCAP which facilitated the
  creation of a product which could not be created
  individually by the respective authors and
  composers
• The TV industry challenged this on the basis that
  it constituted price fixing
• However, the court held that the blanket licences
  were neither plainly anti-competitive, nor did
  they lack any redeeming virtue, nor were they
  a naked restraint of trade with no purpose
  except stifling of competition

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BMI contd...

• Consequently, the court accepted that a blanket
  licence was not a naked restraint but a
  necessary consequence of the integration
  necessary to achieve these efficiencies, and a
  necessary consequence of an aggregate license is
  that its price must be established
• The court also considered that the US Department
  of Justice had reviewed ASCAPs blanket licences
  previously and concluded that they were not per
  se violations of the Sherman Act
• The Court accordingly concluded that
• Not all arrangements among actual or potential
  competitors that have an impact on price are per
  se violations of the Sherman Act or even
  unreasonable restraints Joint ventures and other
  cooperative arrangements are also not usually
  unlawful, at least not as price-fixing schemes,
  where the agreement on price is necessary to
  market the product at all

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National Bancard Corporation v VISA USA, Inc
(NaBanco)(1986)

• Whether the method of setting and determining the
  interchange fee for transactions processed
  through VISAs systems constituted prohibited
  price-fixing
• The Court followed the BMI decision and held
  that
• The interchange fee was a mechanism through which
  VISA could ensure the universality of its card
• It was not a price-fixing mechanism designed to
  eliminate competitors
• The interchange fee was an efficiency creating
  agreement among members of the joint venture
  enterprise (although MasterCard does not concede
  that post-IPO setting of interchange constitutes
  an agreement with its customers)
• That the interchange fee could be viewed as an
  internal accounting procedure between joint
  venturers that shifts a portion of the revenues
  from the merchant-signing member to the
  card-issuing member

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The recognition of a joint venture type
arrangement

• The District Court had made the following
  pertinent remarks
• Thus VISA is a joint venture in that terms
  most meaningful sense, ie whether or not
  composite entities compete with one another in
  any meaningful sense in the marketplace under
  examination. Unwarranted emphasis on the
  formalistic aspects of the relationship of VISA
  and its members institutions ignores the subtle
  but more significant interdependency of the
  members and their indivisibility with VISA
• The Court of Appeals also accepted that the
  evidence established that
• VISA is a joint venture type enterprise in
  which the interchange fee acts as an internal
  control mechanism that yields pro-competitive
  efficiencies that its members could not create
  acting alone, and helps create a product that its
  members could not produce singly

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Additional factors flowing from NaBanco

• The following additional factors may be
  considered by the competition authorities in
  characterising conduct under section 4(1)(b)
• whether, as well as being necessary to market the
  joint venture, the conduct allows the joint
  venture to be an effective competitor
• whether the conduct potentially creates
  efficiency-enhancing integration such that it
  produces a product which none of its members
  could produce individually
• whether the joint venture members share profits
  or losses, or co-mingles any of its management
  functions whether the interchange fee is
  mandatory or may be bypassed through bilateral
  negotiations between issuing and acquiring banks
  

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The European Commissions decision in Visa
Multilateral Interchange Fee (2002)

• Default interchange fee exempted under Article
  81(3) of the EC Treaty
• Payment card schemes represent considerable
  economic and technical progress
• Interchange is designed to ensure that there is
  maximum use of the Visa system
• Default interchange fee more efficient than
  bilateral agreements between banks
• Interchange fee does not eliminate competition
  between issuers or between acquirers

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Texaco Inc v Dagher et al (2006)

• Texaco Inc and Shell Oil Co had formed a joint
  venture whereby the joint venture set a single
  price for both brands
• The question before the Supreme Court was whether
  the joint determination of price for the joint
  venture was per se illegal
• The court was of the view that the price fixing
  that occurred was not price fixing in the
  antitrust sense
• It therefore reinforced the view that the pricing
  decisions of a legitimate joint venture are not
  per se unlawful
• This decision is similar to Ansac

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Conclusion

• MasterCard is not in a horizontal space with its
  customers and its scheme is therefore not subject
  to the Competition Acts prohibitions set out in
  section 4(1)(b)
• In addition, its scheme is a legitimate joint
  venture that entitles it to set interchange fees
  for the success of the joint venture
• The setting of default terms is not
  anti-competitive, but pro-competitive
• This characterisation is envisaged by the SCAs
  Ansac decision
• The US jurisprudence from which Ansac draws
  inspiration supports the conclusion that the
  setting of default terms is a legitimate joint
  venture type activity