Credit Card Interchange Is Back in Play

A sweeping 4-year-old settlement between the bank card networks and banks on the one hand and merchants on the other, which the U.S. Court of Appeals for the Second Circuit overturned June 30, covered a lot of ground. But the case the agreement grew out of had as its central focus credit card interchange, and now that perennial source of merchant discontent is once again in play in ways neither side can predict.

“Everything is up in the air,” Anita Boomstein, an attorney with New York City-based Hughes Hubbard & Reed LLP, said shortly after the three-judge panel’s decision was announced. Boomstein works with merchant clients on payments issues.

The Manhattan-based appellate court’s decision sent the case back to U.S. District Court in Brooklyn, N.Y., where new presiding Judge Margo K. Brodie held an Aug. 11 hearing to begin sorting out the next steps for the complex litigation that began in 2005.

In a 41-page opinion studded with sometimes scathing language, the appeals court reversed the approval that U.S. District Judge John Gleeson, who had overseen the case since its beginning, had granted in 2013 to what at the time was the largest settlement ever reached in an antitrust case.

The agreement provided for more than $7 billion in monetary relief for merchants, temporary credit card interchange relief, and relaxation of some network rules concerning surcharging and other matters. Opt-outs by 8,000 merchants dissenting from the settlement ultimately reduced the monetary relief to $5.7 billion.

The appeals court’s three-judge panel, which heard arguments on the settlement a year ago, concluded lawyers and class representatives in the case had shortchanged one set of plaintiffs in favor of another in their efforts to reach an agreement and collect legal fees.

The agreement divided the plaintiffs into two groups, one of which included merchants that accepted Visa and MasterCard cards from 2004 to 2012 and another that accepted the cards from 2012 onward. The former group was eligible to claim monetary relief, and its members were free to opt out and pursue their claims individually, an option scores of them exercised.

Relief for the latter group, whose members could not opt out, involved so-called injunctive relief, or various network rule changes, including changes that would allow merchants to surcharge for card transactions.

But this provision also extracted releases from these plaintiffs that foreclosed their ability to bring actions at any time in the future against the defendants on any other network credit card rules.

The appeals court found the interests of the two groups too disparate to have been properly represented in negotiations by the same set of attorneys and class representatives. Noting, for example, that the district court had approved some $544.8 million in fees for plaintiffs’ lawyers, and that the fees were tied to the first group’s monetary recovery, the panel pointed out that the lawyers could have traded away benefits for the second group to gain more monetary relief for the first group.

In a concurring opinion, appellate court judge Pierre N. Laval said the settlement forced the injunctive-relief merchants “to give up forever” their potentially valid claims without giving them the opportunity to reject the deal by opting out of the class.

“This is not a settlement; it is a confiscation,” Laval wrote.

Merchant groups hailed the ruling while the card networks expressed disappointment.

“It was our strategy all along to prevail on the settlement, we’re happy to have been vindicated,” says one of the merchants’ attorneys, Jeffrey I. Shinder, managing partner at Constantine Cannon LLP in New York.

Speaking to analysts July 21, Visa chief executive Charles Scharf said, “We continue to believe the settlement was fair and reasonable for all stakeholders.” He added that the deal’s terms did not automatically expire, so Visa has not reversed its rule change permitting credit card surcharging.

Some observers opined that the massive settlement was on rocky ground from the start.

“This case was badly flawed, and it looked like the [lower] court just wanted the problems to go away forever,” says Steve Mott, principal at BetterBuyDesign, a Stamford, Conn.-based consulting firm.

But there’s no telling yet whether the next chapter in this odyssey will produce a result either side will like. One thing is highly probable, and that is that there will be another deal, according to Eric Grover, principal at Minden, Nev.-based payments-advisory firm Intrepid Ventures.

“None of the parties want a jury trial, whatever they think their case’s merits, because of the possibility of a catastrophic outcome,” he says.

—John Stewart and Jim Daly