In spite of dozens of objectors, representing literally thousands of retailers nationwide, U.S. District Court Judge John Gleeson of Brooklyn, New York granted preliminary approval of what will become a landmark settlement agreement between retailers, payment networks and nine major credit card issuers Nov. 9. After seven years of litigation when retailers claimed card issuers and banks conspired to fix interchange fees charged to merchants that processed credit cards, resulting in millions of dollars in lost profits, the $7.25 billion settlement—possibly the largest anti-trust settlement in U.S. history—was originally announced July 13, much to the chagrin of major retailers.
Wal-Mart Stores Inc., although not party to the original class-action suit, claimed the settlement does not stop card issuers from continuing to raise interchange fees in the future, but would instead prevent merchants from taking future legal action. Ten of 19 original plaintiffs in the lawsuit, in fact, asked Gleeson to reject the settlement. Like Wal-Mart, the retailers and trade groups against the settlement say it will not only allow swipe fees to continue to rise, which will increase costs for retailers as well as consumers, but will prevent legal challenges should future price-fixing occur.
Lawyers representing dozens of retailers, such as Target Corp. and Home Depot Inc., attended the packed courtroom Nov. 9 to tell the judge the settlement was miniscule compared to the $30 million merchants pay in interchange fees each year. They also persisted that by protecting Visa and MasterCard from future litigation over similar claims, the companies would be free to pursue additional anti-competitive price-fixing.
“It’s a morass of legal flaws, and rather than bringing about reform it would only entrench the anticompetitive behavior of the card companies while putting them beyond the reach of the law,” Mallory Duncan, a lawyer representing the National Retail Federation, which consists of more than 9,000 retailers across the country, told the Associated Press.
Home Depot attorney Stephen Neuwirth expressed particular concern that companies could not opt out of the settlement.
“It’s so obvious Visa and MasterCard were prepared to make a large payment because of the scope of the releases being given,” he told Businessweek.. “It’s all one quid pro quo and merchants like the Home Depot are being denied the chance to opt out of that quid pro quo and say this is a bad deal.”
Interchange fees, or swipe fees, are what merchants pay Visa, MasterCard, other card issuers or banks to swipe a credit or debit card. U.S. merchants typically pay about 2 percent of a credit card transaction. Merchants have argued that even though accepting credit cards increases their overall profits, interchange fees are too high. Banks, however, persist the fees are vital to cover their business costs, including fraud prevention and recovery. Banks argue that reducing interchange fees will result in increased fees charged to credit card customers, but retailers say their high fees force them to raise prices for merchandise and services to consumers.
Debit card interchange fees were regulated in 2010 when the Durbin Amendment, an addendum to the Dodd-Frank Wall Street Reform and Consumer Protection Act, was passed. Debit Card issuers can no longer charge merchants a 2 percent fee to swipe a card, but instead 21 cents plus .05 percent of the transaction. The intent of the law was to lower costs to merchants, which would then pass along their savings to consumers. Instead, however, banks have responded by increasing checking account fees in order to recoup their losses. Consumers have all but said goodbye to free checking accounts and rewards checking accounts offered by major banks.
The class-action settlement is in response to merchants’ claims that banks and issuers have fixed interchange fees rather than opening them to a competitive market. In the suit, merchants asked fees be reduced from around 2 percent to just .5 percent. Through the settlement, Visa and MasterCard have agreed to allow merchants to add a surcharge on to customer’s total bills if they use a credit card—a practice previously banned under merchants’ contracts. The amendment would take effect within 60 days of the settlement’s preliminary approval. In addition to the $7.2 billion in cash to be divided between almost 8 million merchants, Visa and MasterCard have also offered $1.2 billion in temporary interchange-fee relief that would begin shortly after the class members have been given the opportunity to opt out of receiving monetary damages through the settlement.
Even 10 of the 19 original plaintiffs—who dropped out of the deal after the settlement terms were announced in July— in the case plan to continue fighting for expanded competition.
“This is the beginning of a long process, and we’re not remotely deterred by what has happened today,” attorney Jeff Shinder, who represents the 10 original plaintiffs who rejected the settlement, told Reuters.
The suit’s defendants expressed satisfaction with Gleeson’s preliminary ruling, however.
“We view Judge Gleeson’s ruling today as further indication that this historic settlement is a fair and balanced resolution to the epic swipe fee battle,” sasid Trish Wexler, spokewoman for the Electronic Payments Coalition. “After seven years of negotiation, two years of mediation and compromise on both sides, the judicial process continues to work effectively and we have taken another important step toward settling the dispute between retailers and the payment card industry.”
Representatives from Visa and MasterCard were also pleased with Gleeson’s decision. MasterCard’s general councel and chief franchise integrity officer Noah Hanft said although some merchants have differing opinions, his company is confident Gleeson will grant final approval in the coming months.
“The provisions of the settlement, including the flexibility for merchants to impose checkout fees, new negotiating tools for merchants and the scope of the release was reached with the assistance of the court and was supported by the merchant class representing millions of large and small retailers, and prominent trade groups across the country,” Hanft said.
Visa’s general counsel Josh Floum also believes the settlement will be granted final approval, and that is fair and resonablefor all parties involved in the long-standing litigation.
“We look forward to bringing closure to this issue and working in partnership with retailers and our financial institution clients to accelerate the growth of convenient, secure and reliable electronic payments,” Floum said.
Gleeson told objectors in his courtroom, however, that final approval on the settlement will only be granted after several issues are carefully scrutinized, and noted the legal standard for final approval will be much higher than what was used for preliminary approval.
“I don’t mean to suggest for a moment that there are not a number of issues that are going to require significant scrutiny,” Gleeson said. “I’m not persuaded that the deficiencies are the obvious deficiencies that ought to derail preliminary approval.”
A lawyer for the remaining plaintiffs in the case, including Payless ShoeSource Ince, Photos Etc. Corp., Discount Optics, Leon’s Transmission Service Inc. and three others, said the objectors were either misinformed or had competing agendas. Attorney Patrick Coughlin told the court some large merchants, including Wal-Mart and Target, oppose the settlement because they are currently developing a competing payment network, the Merchant Customer Exchange.
“That’s what I believe is at the root of some of the large merchants that form the basis of the objections,” Coughlin told Gleeson during the proceedings, adding that the opposition was “literally orchestrated by a small group.”
