American Express Follows Visa and MasterCard in Allowing a Surcharge on Credit Card Transactions

Ronald A. Clifford, Esq.

The U.S. District Court in Brooklyn, New York, made history last December by approving on a final basis, the largest anti-trust class action lawsuit ever filed.  That record breaking lawsuit was the culmination of several suits filed by a number of parties against Visa and MasterCard, which suits were eventually combined into a class action suit.  Among other things, the class action suit against Visa and MasterCard claimed an anti-trust violation of the two card companies, and several issuing banks, by their purported collective efforts to artificially set interchange fees.  When a merchant accepts a credit card as a form of payment for goods or services, that merchant is often charged a fee by the underlying credit card company, which fee is a percentage of the total amount charged.  This is called an interchange fee.  That interchange fee has historically been 1-3% of the transaction.

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Retailers’ Appeal of the Credit Card Fee Settlement Gets Deferred

Ronald A. Clifford, Esq.
December 27th, 2012

Immediately after the $7.25 billion Visa/Mastercard settlement received preliminary approval, retailers all over the country such as Wal-Mart Stores Inc., Target Corp., the National Association of Convenience Stores (NACS) and others voiced their objections and filed notice to appeal U.S. District Judge John Gleeson’s order. The plaintiffs state that the settlement violates their rights by preventing them from opting out; they are specifically challenging a part of Gleeson’s order that would release Visa and MasterCard from new legal claims over any related issues.

To recap what the settlement entails, the $7.2 billion deal seeks to resolve seven years of litigation regarding allegations that credit card companies and banks were fixing credit card fees (swipe fees). Stores are charged a fee every time one of their customers makes a purchase using a card, which translates to roughly $30 billion in swipe fees per year.

Recently, a U.S. Appeals court refused to hear the expedited appeal of the preliminary approval. The 2nd U.S. Circuit Court of Appeals in New York denied one of the objecting Merchants, The Home Depot, and said all other objecting parties’ briefs should not be filed until the U.S. District Court for the Eastern District of New York has issued final approval of the settlement, which is expected to be scheduled sometime in 2013.

Not all merchants oppose the deal, but dozens of retailers, including the world’s largest retailer (Wal-Mart), firmly hold that the deal offers meaningless relief for merchants; however, their quest to take down this settlement has been put on hold for now.

$7.25 Billion Anti-trust Credit Card Fee Settlement Receives Preliminary Approval

Ronald A. Clifford, Esq.
November 21st, 2012

Despite the objections of more than half of the plaintiffs, merchants, and trade associations, New York federal Judge John Gleeson granted preliminary approval to the $7.25 billion class action settlement, first announced in July, between merchants and Visa, MasterCard and a large number of banks on Nov. 9, 2012.  Pending final approval, this deal would be the largest federal antitrust settlement in U.S.history. The proposed class alleged that the bank defendants fixed the prices of interchange fees paid by merchants when customers use Visa and MasterCard credit cards.

Terms of Settlement

The settlement arranges a $6.05 billion fund and allocates that Visa and MasterCard modify their rules. It provides for an eight-month reduction in interchange fees (worth $1.2 billion), which Visa and MasterCard have agreed to. Furthermore, Visa, MasterCard, and the banks will have to pay approximately $6 billion of the cash settlement amount. This settlement also allows merchants to put a surcharge on credit card purchases so long as the fee is capped and that a disclosure is provided for these extra charges.

Plaintiff Objections

Ten of the nineteen named plaintiffs filed objections to the preliminary approval on Nov. 2, stating that this settlement will not only impede the production of competition in this dysfunctional competition-lacking market, but will worsen the market for merchants as well. They argued that the restrictions in this settlement will hinder their limited ability to surcharge Visa and MasterCard transactions. The plaintiffs further disputed that the this settlement “…is a thinly disguised attempt by Visa and MasterCard and the bank defendants to improperly get immunity from merchant claims going forward, immediately and forever” and that “[it] improperly sacrifices the interests of generations of future merchants…”

IPOs

This case began in 2005, when class actions were brought by merchants against the defendants. The merchants asserted that the banks controlled the Visa and MasterCard’s board of directors along with the interchange fee amounts. Visa and MasterCard announced their initial public offerings (IPOs), redeeming and reclassifying the stock held by their banks and transferring new shares to the banks. The merchants then argued that the agreements preceding the IPOs were in violation of the federal antitrust laws, which eventually led to a settlement, while both plaintiffs’ and defendants’ motions for summary were pending.

This article is in re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation [All Cases], No. 05-MD-1720,E.D.N.Y. More information on individual plaintiffs, objecting named plaintiffs and the bank defendants can be found in case documents.

Appeals

NACS (National Association of Convenience Stores) and many other merchant groups are looking to appeal the Nov. 9 decision. The merchant community is concerned that the settlement fails to bring desperately needed transparency and competition to the current electronic payments market, and that the settlement continues to violate the antitrust laws and merchants’ rights to due process. The Merchant groups still have a shot to make their case, as only legal defects int he proposal were heard at the preliminary approval hearing; the overall fairness factors of the proposal will not be fully considered until a later date.

Alternatives for Merchants

In case this settlement does eventually receive Judge Gleeson’s final approval, alternatives such as Google Checkout exist, which offers to process online merchants’ card transactions for as little as 1.9% of sales over $100,000 per month. Microsoft is also working on its own innovation, Microsoft Wallet, to compete with Google. Another company, LevelUp, has developed its own system that allows them to forego interchange fees altogether, focusing costs on managing customer acquisition and loyalty programs that are tied to its payment system. All of these systems focus on pushing costs one way or another to get to the bottom line.

Depending on the Credit Transaction Level I, II, and III, a Vendor and Customer May Qualify for a Lower Interchange Rate

Scott E. Blakeley, Esq.
November 9th, 2012

Depending on the detail of the information that is passed on with the credit transaction (in the Business to Business setting there exists three levels), the transaction may qualify for a lower interchange rate. The lower interchange rate given from the credit card companies to the vendor can then be passed on from the vendor to the customer via a transparent surcharge if the settlement agreement is approved and adopted. This will effectively reduce prices for the customer. Below are the three levels and the information necessary to reach each level.
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How the Credit Card Settlement Will Affect the 10 States That Have Prohibitive Laws Regarding Surcharging?

Scott E. Blakeley, Esq.

In light of the pending Credit Card Settlement Agreement, that if approved would allow vendors to pass on any surcharges from the credit card companies to customers, 10 states still have codified statutes that prohibit surcharging.

The 10 prohibitive states are California, New York, Florida, Texas, Kansas, Oklahoma, Maine, Connecticut, Massachusetts, and Colorado. Many of the states on the list are major players in the national economy.

The language from the California version of the code states:
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A Hypothetical Timeline for the Credit Card Settlement Agreement and the Ramifications that Will Ensue

Scott E. Blakeley, Esq.
October 29th, 2012

For the settlement agreement to become effective the court, in which the case sits, must give a preliminary approval regarding the agreement. With that said, it is essential to understand the time constraints and proper dates associated with the effective agreement. A hypothetical scenario follows below and can be helpful in understanding the time constraints associated with the agreement.

If the settlement were to go into effect on Oct. 1, 2012, then there is a 180 day period for the interested parties and participants to opt in or out of becoming part of the binding agreement. This period is called the exclusion period. The 180 day period runs from Oct. 1, 2012 to March 30, 2013, at which point the class will vote to ratify the agreement if at least 75% of the dollar amount in the class joins to do so.
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Giving the Customer and the chosen Credit Card Company Advanced Written Notice of An Intent to Impose a Surcharge Within 30 days

Scott E. Blakeley, Esq.
October 22nd, 2012

If the settlement agreement in the Credit Card Companies case is approved by the court and agreed to by the class then vendors will be able to pass surcharges incurred in using a credit card for a transaction on to its customers.

However, prior to passing on any surcharge, the vendor must, within 30 days prior to the surcharge fee being passed to the customer, give advanced notice of intent to impose a surcharge to the Credit Card Company chosen for the transaction and to the customer.

The notice must show that the vendor intends to impose surcharges, which shall identify whether the merchant intends to impose surcharges at the brand level or the product level. The notice must also provide clear disclosure to the merchant’s customers of the merchant’s surcharging practices, at the point of interaction or sale with the customer, in a manner that does not disparage the brand, network, issuing bank, or the payment card product being used.
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