An Historical Primer to the Largest Anti-Trust Settlement in History and the Changes That Will Affect Credit Card Companies

Scott E. Blakeley, Esq.
October 19th, 2012

In 2011, VISA and MasterCard accounted for more than 80% of United States credit and debit purchases. Despite the frequency with which customers use credit cards as a method of payment, certain policies implemented by credit card companies have made vendors reluctant to accept this form of payment. Traditionally, credit card companies have prohibited vendors from surcharging customers who use their cards. This places the burden on vendors to absorb interchange or “swipe fees.” Interchange fees, which are between 1% and 3% of the overall purchase, are incurred every time a vendor processes a credit card transaction, which amounts annually to roughly $40 billion to VISA to MasterCard.
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The Required Notice of Intent to Surcharge

Ronald A. Clifford, Esq.
September 14th, 2012

Upon preliminary approval of the class action lawsuit proposed settlement between vendors and VISA and MasterCard, vendors will obtain the right to surcharge their customers for interchange fees incurred as a result of a credit card transaction. However, vendors should be aware of timing and notice requirements regarding the same.

As a starting point, the right to surcharge will begin sixty days after preliminary approval of the proposed settlement by the District Court.  However, before the vendor begins taking advantage of the right to surcharge, certain notices must be provided to the vendor’s customer and VISA and/or MasterCard, and these notices must be given within certain time limits of the beginning of the surcharging.

The settlement agreement provides that a vendor who wishes to surcharge must, within thirty days prior to the surcharge to the customer, give advanced notice of intent to impose a surcharge to the relevant credit card company chosen for the transaction and to the customer.

The notice must provide clear disclosure to the vendor’s customers of the vendor’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.

Further, the information on the vendor’s surcharging practices at the point of interaction must include: (i) the amount of any surcharge that the vendor imposes, (ii) a statement that the surcharge is being imposed by the vendor, and (iii) a statement that the surcharge that the vendor imposes is not greater than the applicable Visa or MasterCard Credit Card Cost of Acceptance, which is in effect a calculated average interchange rate.

Lastly, the vendor should provide clear disclosure of the dollar amount of the surcharge on the transaction receipt provided by the vendor to the customer.

A Historical Primer to the Largest Anti-Trust Settlement in History

Ronald A. Clifford, Esq.
September 13th, 2012

As most vendors are aware, credit card companies impose a fee on vendors for most credit card transactions between the vendor and its customer, commonly referred to as the interchange or swipe fee.

In 2011, VISA and MasterCard accounted for more than 80% of United States credit and debit purchases.  Traditionally, credit card companies have prohibited vendors from passing the interchange fee to their customers.  This places the burden on vendors to absorb interchange fees.  Interchange fees, which usually equal between 1% and 3% of the transaction, amount annually to roughly $40 billion for VISA to MasterCard transactions alone.

For the past fifteen years, vendors have initiated actions against credit card companies in an attempt to modify and eliminate what they believe to be anti-competitive policies.  In 2003, VISA and MasterCard paid a combined $3 billion to settle lawsuits by stores over their “honor all cards policies,” which forced retailers who accepted credit card payments to accept debit card payments from the same company.  More recently, in 2010, Congress passed the Durbin amendment to the Dodd-Frank financial overhaul law, which was aimed at ensuring that interchange fees were reasonable and proportional to the costs incurred.  However, although this amendment cut interchange fees on debit card transactions in half, it left credit card interchange fees untouched.

The greatest victory for vendors may have come in the form of a recently proposed settlement agreement of a class-action lawsuit against VISA, MasterCard and several major banks issuing their cards (including JP Morgan Chase Co. and Bank of America).  Preliminary approval of the settlement by the District Court should take place between fall of 2012 and early 2013.  Since 2005, more than fifty lawsuits have been filed by vendors and numerous trade associations against VISA and MasterCard.  These suits, which have been consolidated in the U.S. District Court in Brooklyn, New York, argue that in the past VISA and MasterCard partook in anticompetitive behavior by conspiring over interchange fees.  Specifically, it is argued that VISA and MasterCard engage in price-fixing to maintain high interchange fees as well as unfairly ban vendors from compelling customers to use cheaper methods of payment, such as cash or check.

After more than seven years of litigation, the vendors, VISA, MasterCard, and the issuing banks have agreed to the largest antitrust settlement in history.  The settlement is threefold.  First, VISA and MasterCard have agreed to pay $5.2 billion to vendors in reparations.  Second, they have agreed to reduce interchange fees for eight months by ten basis points.  This ten point basis reduction is valued at approximately $1.2 billion.  However, the most significant portion of the proposed settlement agreement stems not from the financial compensation of the plaintiffs, but from the agreed alterations to VISA’s and MasterCard’s policies regarding surcharging.  For the first time, vendors will be allowed to pass interchange fee to customers.

If the settlement agreement is preliminarily approved by the District Court, there is a 180 day opt in and opt out period where companies can choose to be part of the settlement class.  Sixty days into the opt in/out period, and within thirty days prior to surcharging, the vendor can begin surcharging its customers upon written notice of intent to surcharge being sent to the customer and the credit card company involved in the transaction.

Helping the Sale’s Force Make the Sale to Your Customer Emerging from Chapter 11 – More Credit Risk Than the Score Reveals? What Hostess’s Chapter 22 May Teach Us

Scott E. Blakeley, Esq.

My recent article entitled Helping the Sale’s Force Make the Sale to Your Customer Emerging from Chapter 11 – More Credit Risk Than the Score Reveals?, which addressed the risks credit professionals face when dealing with companies bogged down in Chapter 11 and Chapter 22 proceedings, now has a current case to apply. Hostess Brands, the makers of Wonder Bread and Twinkies, is the most recent company to make headlines with a second Chapter 11 filing is.
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Playing Catch Up With Prepetition Claim Can Be Costly For Vendor

Scott E. Blakeley, Esq.

A vendor’s favored account files Chapter 11, leaving the vendor with a large open account balance. The debtor requests the vendor sell postpetition, to assist in the reorganization. Selling a debtor in possession has certain opportunities and protections to a vendor, including an administrative claim should the debtor default on a postpetition sale. However, for an overzealous vendor who views postpetition sales as an opportunity to mark-up postpetition invoices to “catch up” and reduce its prepetition claim, with the debtor’s consent, may spell trouble. A bankruptcy court, In re Centennial Textiles, Inc., 227 B.R. 606 (Bankr. S.D.N.Y. 1998), recently considered a vendor’s liability
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Must Trade Creditors Continue Doing Business With Delinquent Customers Who File Bankruptcy, And What Protections Are Available?

Ronald A. Clifford, Esq.

The scenario is a familiar one. A vendor has a supply contract with a customer who is already in default. Then the customer files bankruptcy. The vendor doesn’t want to face further exposure during the bankruptcy (“post-petition”), but is equally concerned about being sued for breaching the contract or violating the automatic stay. What are the vendor’s rights?

In answering this question, the first step is to examine the terms of the contract to determine whether it is “executory” under § 365 of the bankruptcy code. If not, then the vendor has no contractual obligations to the customer (now the debtor). However, if the contract is executory then a vendor needs to tread extremely carefully. While a vendor cannot refuse to comply with the terms of an executory contract post-petition, there are cases that suggest unsecured trade creditors are entitled to insist on some protection, including cash in advance, in their post-petition dealings with debtors who already owe them money.
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Helping the Sale’s Force Make the Sale to Your Customer Emerging from Chapter 11 – More Credit Risk Than the Score Reveals?

Scott E. Blakeley, Esq.

What if a your customer, after filing one Chapter 11 bankruptcy, fails to recover and is forced to file a second Chapter 11 bankruptcy. Is a company eligible to file a second Chapter 11, also referred as a Chapter 22? The most recent companies to make headlines with a second Chapter 11 filing are Filene’s Basement/Sym’s, Anchor Blue, Jackson Green LLC, and Constar International.

Many of these reorganized debtors forced to file a second Chapter 11 are mired in industries with strong competition, and could not meet their debt obligations and were forced into Chapter 11 again by their creditors.

These companies defaulted on their confirmed plan of reorganization, and post-confirmation debts, followed by the filing of a second bankruptcy petition to obtain the automatic stay (an injunction that arises automatically upon the filing of the petition that enjoins creditors from collecting on their pre-petition claims) and a second opportunity to pare down their debts, and a likely orderly liquidation of the debtor’s assets.
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