In the face of objections from some of the nation’s largest retailers, a New York federal judge has approved a massive settlement between a putative class of approximately 12 million merchants and Visa, MasterCard, and multiple banks over the issue of payment card interchange fees. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Case No. 05-md-01720 (E.D.N.Y. Dec. 13, 2013). The merchants contend that the defendants violated federal antitrust laws by implementing default interchange fees that effectively fix prices and by adopting rules that limit the ability of merchants to recoup these fees or steer consumers to lower-fee cards. The case was settled for $7.25 billion and the imposition of certain injunctive relief.
Interchange fees are charged to merchants when a Visa or MasterCard branded card is used to make a purchase, and these fees are ultimately received by the card issuer. In the absence of a specific agreement between a merchant and an issuing bank, the rules establish default interchange fee levels that may vary based on the type of card a consumer uses, with higher fees charged for certain “premium” or “rewards” cards. Card network rules traditionally have also limited the ability of merchants to steer customers to less expensive cards. Instead, these rules require merchants to honor all cards issued under the network’s brand (including those with higher fees), and prohibit merchants from discounting, surcharging, or taking other actions to steer customers to lower priced cards. The overall result, according to the plaintiffs, constituted price fixing and otherwise restrained trade.
The settlement agreement provides for two cash funds totaling approximately $7.25 billion (which the court asserts is the largest cash settlement ever in an antitrust case) to be distributed to merchants after reduction for opt-outs and the payment of fees and expenses. It also provides for certain prospective relief – notably the right of merchants to apply surcharges to recoup interchange fees. Other provisions included a requirement that Visa and MasterCard negotiate interchange fees with merchant buying groups and that they permit merchants to decide whether to accept or not accept cards separately for each business owned by the merchant, provided that the businesses are operated under different trade names. Some other provisions in the settlement agreement track remedies already agreed to by Visa and MasterCard in a suit brought by the government.1
Many members of the merchant class, including large retailers such as Wal-Mart and Target, objected to the settlement. On the merits, they contended that the settlement will not fix the problems that initially led to the antitrust suit because it does not eliminate the default interchange rules or some of the other key rules attacked in the complaint. The merchants also contended that surcharges are of limited value because (among other reasons) they are forbidden by law in 10 states and they remain forbidden for all merchants that accept cards that do not permit surcharging, like American Express. The court rejected this argument primarily due to what it deemed the objectors’ lack of appreciation for the risks of taking the case to trial. According to the court, the plaintiffs faced non-trivial issues in proving standing, class certification, and damages, as well as a substantial challenge in proving that various rules that arguably might be deemed procompetitive are, in fact, unlawful under the rule of reason.
Objecting merchants also opposed the settlement agreement’s release provision, which they argued effectively provides permanent immunity to Visa and MasterCard for the default interchange fees and the remaining anti-steering rules. Some of these merchants particularly decried the fact that this release would apply even to those that opted out of the litigation under the provisions of Rule 23(b)(2), contending that this result denied the merchants their right of due process. The court responded rather summarily, finding that the case was the proper subject of a Rule 23(b)(2) class because the selected relief effectively had to be granted as to all class members uniformly.
The approval of this settlement is not necessarily the final word on all of the relevant issues. On the same day the court approved the settlement, several major retailer objectors filed notice of their intent to appeal. Moreover, a group of consumers filed suit on December 16, seeking damages for violations of the Sherman Act against several of the bank defendants in the settled case. Salveson et al. v. JPMorgan Chase & Co. et al., Case No. 13-cv-05816 (N.D. Cal.). The plaintiff consumers allege that the banks conspired to fix interchange fees through the default fees and card network rules, and that the alleged conspiracy has resulted in $54 billion in illegal charges per year to consumers.
1 In 2010, the Antitrust Division of the Department of Justice filed suit against Visa, MasterCard, and American Express relating to card company rules. The case was settled through a consent decree that requires the card companies to permit merchants to provide customers with discounts (though not surcharges) based on the mode of payment and the brand and type of card. The decree also permits merchants to communicate freely with customers concerning interchange fees and steer them toward less expensive cards. See Final Judgment as to Defendants MasterCard International Incorporated and Visa, Inc., July 20, 2011, available at http://www.justice.gov/atr/cases/f273100/273170.htm. American Express has not agreed to these remedies, and the lawsuit is continuing against that company.