Visa, MasterCard $ 7.25 b settlement with retailers is rejected

New York (Reuters): A federal appeals court last week threw out a $ 7.25 billion antitrust settlement that Visa Inc and MasterCard Inc had reached with millions of retailers that accused the card networks of improperly fixing credit and debit card fees.

The settlement had been the largest all-cash antitrust accord in US history, although its value shrank to about $ 5.7 billion after roughly 8,000 retailers “opted out”.

The 2nd US Circuit Court of Appeals in New York said the accord was unfair to retailers that stood to receive no payments, and in the court’s view, little or no benefit at all. It also decertified the case as a class action.

“This is not a settlement; it is a confiscation,” wrote Circuit Judge Pierre Leval, a member of the three-judge panel that unanimously struck down the settlement.

Thursday’s decision is a blow to the credit card industry, which hoped the settlement would end a decade of litigation brought on behalf of about 12 million retailers against Visa, MasterCard and banks that issue their cards.

It was intended to resolve claims that the card networks overcharged merchants on interchange, or swipe fees, when shoppers used credit or debit cards, and banned them from directing customers toward cheaper means of payment.

The settlement may need to be renegotiated, or else the case could go to trial.

“Swipe fees are an improper and unnecessary hidden tax on consumers,” said Jeffrey Shinder, a Constantine Cannon partner representing Amazon.com Inc, Costco Wholesale Corp, Wal-Mart Stores Inc and other opponents of the accord. “The structure of swipe fees is back on the table.”

Visa spokeswoman Connie Kim said the Foster City, California-based company is reviewing the decision.

MasterCard spokesman Seth Eisen said the company, based in Purchase, New York, is disappointed in the decision and will review its next steps.

US District Judge John Gleeson in Brooklyn had approved the settlement in December 2013, saying it offered “significant” damages and meaningful protections against future harm.

But thousands of retailers and several trade groups objected. Some said the payout should have been higher, while others said the accord would have made it too hard for retailers to sue Visa and MasterCard over fees and rules.

Mallory Duncan, general counsel of the National Retail Federation trade group, in a statement called the settlement a “backroom deal” that would have harmed consumers if left intact.

“This is not just a business-to-business dispute,” he said. “These fees drive up the price of retail merchandise, costing the average family hundreds of dollars a year.”

Card issuers American Express Co and Discover Financial Services also objected to the settlement.

Paul Clement, who led the appeal for retailers supporting the accord, did not immediately respond to requests for comment.

Card-issuing banks would have funded much of the settlement. JPMorgan Chase & Co and Bank of America Corp had estimated they were responsible for roughly one-fifth and one-tenth, respectively, of a payout. Both declined to comment.

The settlement had called for retailers that accepted Visa or MasterCard from January 2004 to November 2012 to share in as much as $ 7.25 billion, with the ability to opt out.

Retailers that accepted the cards from then on, meanwhile, were to get injunctive relief in the form of rule changes, expiring in July 2021, and could not opt out.

Writing for the appeals court, Circuit Judge Dennis Jacobs said the divergent interests of these groups meant they should not have been represented by the same law firms, which were awarded $ 544.8 million of fees.

While making clear he did not question the firms’ motives, Jacobs said the conflict sapped their incentive to zealously represent the retailers obtaining injunctive relief, and led to terms that benefited other retailers at their expense.

The case will return to the Brooklyn federal court. It is now overseen there by US District Judge Margo Brodie.

The case is In Re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 2nd US Circuit Court of Appeals, No. 12-4671.