$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.

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