A federal court rejects Visa and MasterCard’s proposed swipe fees settlement
June 30, 2016 03:41 PM
(Bloomberg) -- Visa Inc. and MasterCard Inc. fell Thursday after a federal appeals court rejected a $5.7 billion settlement of claims that the firms improperly fixed credit card swipe fees, potentially renewing years of litigation with millions of U.S. merchants.
The payment networks were the worst performers in the 68-company S&P 500 Information Technology Index, with Visa sliding 3.6% and MasterCard falling 4.2%.
The ruling is a blow to the world’s biggest payments networks, which sought an end to bitter court battles over fees that exceed $40 billion annually. The lawsuit, brought on behalf of 12 million merchants nationwide, was filed a decade ago after earlier disputes over the fees. The rejection of the deal raises the prospect that it will have to be renegotiated or the case may go to trial.
“If history is any guide, the new litigation could take years,” Jason Kupferberg, a Jefferies Group analyst, wrote in a note to clients.
Dozens of big retailers who opposed the accord cheered the decision, in which the appeals court said provisions barring merchants from suing over fees were unfair. The U.S. Court of Appeals in Manhattan also said that lawyers who represented retailers nationwide didn’t do enough to protect their interests.
"We are thrilled," Jeffrey Shinder, a lawyer who represented about 60 retailers including Wal-Mart Stores Inc. (No. 4 in the Internet Retailer 2016 Top 500 Guide), Amazon.com Inc. (No. 1) and Gap Inc. (No. 20), said in a phone interview. "Top to bottom, the court accepted our arguments and got it right. It’s a happy day for competition, for merchants, and for consumers."
Mallory Duncan, general counsel at The National Retail Federation, which also opposed the settlement, said the card firms could face even more pressure from retailers to change their fee structures now that the deal is upended.
"Hopefully this opens up the door for lots of other people to consider taking on the real challenge here, which is the anti-competitive activity of the card networks," he said.
The appeals court judges found that the settlement unfairly forced merchants to give up their rights to sue in the future over conduct relating to the fees, even if they didn’t benefit from the deal. Those restrictive provisions would apply to all merchants going forward, according to the court. While all merchants were promised the ability to pass along swipe fees as surcharges under the settlement, some states ban that practice.
"This is not a settlement; it is a confiscation," U.S. Circuit Judge Pierre Leval said in one of two opinions. The judge said he was particularly troubled by the broad litigation release that "binds in perpetuity, without opportunity to reject the settlement, all merchants who in the future will accept Visa and MasterCard, including those not yet in existence."
Seth Eisen, a spokesman for MasterCard, said in an e-mailed statement, that the company is "disappointed by today’s ruling."
“We believe we presented a clear case to the court that the settlement was fair and appropriate based on more than four years of negotiation and the close involvement of the district court," he said. "We are reviewing the decision to determine our next steps.”
Connie Kim, a spokeswoman for Visa, declined to comment. The credit card firms could seek to appeal to the full court, and possibly to the U.S. Supreme Court.
Large retailers including Wal-Mart, Amazon and Target Corp. (No. 22 in the 2016 Top 500), as well as major airlines, health insurers and other consumer businesses, had criticized the deal. On Thursday, the Retail Industry Leaders Association, a trade group that represents more than 200 merchants, called the ruling a victory for all merchants and consumers. The group had formally opted out and objected to the deal two years ago.
“The settlement orchestrated by the card networks and banks would have undermined merchants’ legal rights forever and would have allowed Visa and MasterCard to impose higher and higher swipe fees,” Deborah White, the group’s executive vice president, said in a statement.
In the majority opinion, judges said the settlement created "unacceptable incentives" for some attorneys who negotiated it, and lawyers "stood to gain enormously if they got the deal done." Lawyers for plaintiffs were granted $544.8 million in fees based on the deal, according to the court.
Lawyers for the plaintiffs and for opponents to the settlement said it’s unclear what will happen when the matter goes back before a lower-court judge. U.S. District Judge Margo K. Brodie scheduled an Aug. 11 status conference in Brooklyn.
U.S. District Judge John Gleeson approved the accord on Dec. 13, 2013, saying he was satisfied with the settlement, which was estimated to be the largest-ever U.S. antitrust deal. Gleeson stepped down from the bench earlier this year.
"I don’t know what’s going to happen," when the case goes to Brodie, Duncan said. "It’s going to be her call, whether she wants attorneys to try to salvage the settlement or suggest they take it to trial."
Once owned by groups of major banks, Visa and MasterCard had defended themselves for decades against legal claims that they operated price-fixing schemes. Swipe, or interchange, fees are set by card companies and paid by merchants when consumers use credit or debit cards.
The settlement was announced in July 2012. Once worth as much as $7.25 billion, it was valued at about $5.7 billion as of August 2013 after reductions for about 8,000 merchants that dropped out of the damages portion of the lawsuit.
K. Craig Wildfang, one of the lead lawyers who negotiated the deal on behalf of merchants, said he and his colleagues are "disappointed" by the outcome and are trying "to evaluate it to see what the next steps might be."
The case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 12-4671, U.S. Court of Appeals for the Second Circuit (Manhattan).