$7.2bn credit fee deal on cards

2012-10-14 18:22

New York - Visa, Mastercard and a group of retailers plan to ask a judge this week to approve a landmark settlement of a lawsuit over credit card fees, setting the stage for a battle with Walmart and hundreds of other merchants who say it is a bad deal.

Announced in July, the $7.2bn settlement is intended to resolve seven years of antitrust litigation between merchants and credit-card companies and their banks over so-called “swipe fees” that retailers pay to process credit-card transactions.

Merchants alleged the card companies and banks worked together to inflate rates for these interchange fees, costing  billions of dollars each year.

If approved, the settlement would apply to the nearly 8 million merchants that take Visa and MasterCard’s  cards.

But in the months since it was filed, a number of major retailers and trade groups have said they would rather have no deal than the one that court-appointed lawyers negotiated on their behalf. On Friday, 10 of the 19 trade groups and stores that led the litigation against the card companies said they would ask US District Judge John Gleeson to reject the settlement.

If approved, the deal would be the largest federal antitrust settlement in US history. In addition to a $6.05bn payment and $1.2bn in temporary fee reductions, the deal calls on card companies to allow merchants to charge customers extra for using certain cards.

It would also release Visa and Mastercard from a wide range of antitrust claims and new lawsuits over interchange fees.

“This is a remarkably and fatally flawed deal,” said Jeff Shinder of law firm Constantine Cannon, who argues that the settlement forces merchants to give up valuable legal rights.  

Four of the major trade groups now opposing the deal have replaced their court-appointed counsel with Shinder, a veteran antitrust lawyer who has already represented clients in two other multi-billion dollar antitrust settlements with Visa and Mastercard.

Shinder also represents Wal-Mart Stores, the world’s largest retailer, which was not part of the original lawsuit, but would be bound by the settlement if approved.

Retail and restaurant heavyweights such as Target, Starbucks and Lowe’s Cos, and other national restaurant and retailer groups have also signaled they plan to fight the deal.

That is an unusual show of force against a proposed class-action settlement, legal experts said.

“You don’t usually see a lot of objectors in class actions and you don’t usually see them of this size and significance,” said Jay Tidmarsh, a professor at Notre Dame School of Law.

The settlement also has the support of some big-name retailers, including Kroger, the largest US grocery chain operator, and its No 2 rival, Safeway.

Among questions the settlement’s supporters raise are whether objecting merchants are trying to create a legal stalemate to pressure Congress for credit-card fee legislation.

Representatives for Kroger and Safeway said the settlement would let them communicate with customers directly for the first time about swipe fees. They said consumer awareness of swipe-fee costs could motivate them to switch to less costly payment methods, such as cash.

“We think it will begin to produce real competition in the payments business and potentially lower costs for all consumers,” Melissa Plaisance, Safeway’s senior vice-president of finance, said of the settlement.

Those who favour the settlement - the individual plaintiffs and a shrinking number of the stores that originally brought the suit - say that without a deal, stores will have to continue to operate in a broken interchange system for years longer.

Attorneys appointed by the court to represent and negotiate on the merchants’ behalf are scheduled to formally submit the settlement by October 19 for preliminary approval.

Even without the high-profile objectors, the legal process for approving the proposed settlement was expected to stretch well into 2013. If the objectors succeed in convincing the lawyers, or Gleeson, to reject the deal in its current form, that process could go on even longer.

What merchants such as Walmart say they really want is transparency into how swipe-fee rates are set by banks and credit card companies, and they do not think this deal delivers, said Mallory Duncan, general counsel for the National Retail Federation, which opposes the settlement.

The legal standard for approving class action settlements is that it be “fair, reasonable and adequate”.

To Shinder, the deal falls short.

“Because of the scope of the (litigation) release, which by its express terms gives defendants more than they could ever win at trial, this settlement is worse than losing,” Shinder said.

He explained that, if merchants lost, they would be back to square one, but at least they could go back to court and try again.

Craig Wildfang, one of the lawyers appointed by the court to represent US merchants affected by the settlement, said merchants got “95% of what they wanted” from the settlement and that objectors were asking for relief that only Congress or bank regulators could provide.

The lawyers who favour of the deal, along with Visa and Mastercard and the individual plaintiff stores, say they are confident the settlement will be approved.