N.Y. Court Signs Off on New Deal Between Networks, Merchants

by Manatt, Phelps & Phillips, LLP
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A New York federal judge granted preliminary approval of the second attempt at a settlement between a class of more than 12 million merchants and two card networks, potentially putting an end to the long-running litigation over interchange fees and various card network rules that apply to merchants accepting their cards.

A new settlement was needed to rectify the impairments identified by the U.S. Court of Appeals, Second Circuit when it vacated the first settlement agreement in 2016.

What happened

The protracted legal battle, which began in 2005 when more than 40 putative class action complaints were filed against the card networks, centers on allegations by merchants that the card networks violated the antitrust laws by engaging in a conspiracy to fix interchange fees and impose restrictions on merchants to prevent them from steering customers to cheaper, alternative forms of payment.

In 2012, the parties agreed to a settlement of the litigation. The settlement involved two classes of merchants. The first class was eligible to receive monetary relief from the $7.25 billion fund (reduced to $5.7 billion after reductions for opt-out merchants and other expenses) put up by the card networks. The second class was entitled to injunctive relief under which merchants could, under certain conditions, impose a surcharge on cardholders when they used a network’s credit card. The agreement did not provide any opt-out rights for the second class of merchants and extinguished all future claims challenging the networks’ rules in a broad general release.

A New York district judge granted final approval to the original settlement, but numerous merchants objected and appealed the ruling to the Second Circuit Court of Appeals. The federal appellate court reversed approval and vacated the settlement, ruling that the two classes of merchants had conflicting interests and could not be represented by the same class counsel. The court also noted other impairments, particularly that the injunctive relief merchants could not opt out, and the overly broad general release required merchants to release all future claims, which continued in perpetuity.

Following the ruling by the Second Circuit, the parties returned to the drawing board, and after the appointment of separate class counsel and additional discovery and renegotiations, they presented U.S. District Judge Margo K. Brodie with what is believed to be the largest-ever settlement fund in an antitrust action. The card networks and other defendants agreed to pay up to $6.2 billion (but no less than $5.56 billion) for the merchants’ claims, an increase of $900 million over the original settlement.

To solve the problems related to the unduly broad general release highlighted by the Second Circuit, under the newly agreed-upon settlement, merchant class members of the damages class again have the right to opt out of the agreement, and the release of claims applies only to claims that have already accrued or that will accrue in the five-year period from the date of final court approval of the settlement and after all appeals have been resolved, and that are based on network rules that are the same as or “substantially similar” to rules in effect on the date of preliminary approval, January 24, 2019.

In an 88-page memorandum and order, Judge Brodie granted preliminary approval of the deal, finding it to be “fair, reasonable, and adequate” pursuant to Federal Rule of Civil Procedure 23(e) and the nine factors found in City of Detroit v. Grinnell Corp., a 1974 Second Circuit decision.

“The structural defect of unitary representation no longer exists,” the court wrote, with separate class counsel and separate class representatives. “The fundamental conflict identified by the Second Circuit no longer exists.”

Not only did the court find the representation by class representatives and class counsel adequate, but also Judge Brodie said the settlement was reached in arms-length negotiations and provided adequate relief for the class in light of the costs, risks and delay of trial and appeal; the complexity, expense and likely duration of the litigation; and the risks of establishing liability and damages, and of maintaining the class through the trial.

The plaintiffs faced several obstacles to success at trial, the court acknowledged, from the effect that the card networks’ initial public offerings would have on the theories of anticompetitive behavior to the impact of the Supreme Court’s recent decision in Ohio v. American Express Company, requiring the merchants to prove harm in a two-sided market.

At this stage of the proceedings, the plan of administration and distribution appears to be effective, the court said, and the proposal by class counsel to seek up to 10 percent of any settlement did not weigh against preliminary approval.

Turning to the release, Judge Brodie found that the new agreement solved the problems that had concerned the Second Circuit about the first deal. The new release “is limited in duration” and only bars “claims that have accrued within five years following the Court’s approval of the settlement and the exhaustion of all appeals,” the court noted. “[T]he Court is satisfied that the terms of the release comport with the Second Circuit’s standards.”

The court noted three sets of objections from merchants but determined that they were not “fundamental” conflicts with the deal itself and instead involved contractual issues as to the ownership of claims as between oil refineries and gas stations.

Concluding that the settlement agreement also satisfied the requirements of Rules 23(a) and (b)(3), the court granted preliminary approval of the deal.

It is important to note that this new settlement agreement applies solely to the money damages class. It does not contain any of the injunctive relief that was in the original settlement agreement, or a general release by the injunctive relief class (an aspect of the original settlement that was heavily criticized by the Second Circuit). It remains to be seen what the injunctive relief may look like now, with new class counsel negotiating its terms and state no-surcharge laws having been invalidated by the Supreme Court.

To read the memorandum and order in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, click here.

Why it matters

Now that the federal court has granted approval of the second settlement agreement, merchants again face the decision of whether to file objections to the settlement, and will have another opportunity to opt out of the class and pursue their claims individually in separate actions. Importantly, merchants who opted out of the first settlement have the choice to do so again or to remain a member of the class. However, class members should not expect to see a check any time soon—a final approval hearing was set for November 2019, and appeals are likely to delay payments well into the future.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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