Hearing Will Be a Milestone in Interchange Litigation, But Maybe Not the End

Eight years from their genesis, the lawsuits challenging bank card interchange now collectively known as MDL 1720 are scheduled to reach a milestone Thursday when U.S. District Judge John Gleeson convenes a so-called fairness hearing in his Brooklyn, N.Y., courtroom. The hearing’s purpose is for Gleeson to determine whether he should give final approval to the settlement of the litigation reached by lawyers for the merchant plaintiffs and the defendants—Visa Inc., MasterCard Inc., and a handful of banks.

The settlement is big—at $7.25 billion reportedly the biggest private settlement in U.S. history—but few have been as controversial. The plaintiffs are grouped into a class representing about 8 million merchants that accepted Visa and MasterCard cards from 2004 through 2012. But approximately 7,800 merchants representing over 25% of Visa-MasterCard credit card volume, mostly big retailers such as Wal-Mart Stores Inc., Target Corp., and others, have opted out of their chance to receive a portion of the approximately $6.05 billion in damages that the defendants have agreed to pay.

Visa and MasterCard also have agreed to provide temporary interchange relief valued at about $1.2 billion and loosen some of their rules, particularly their tight controls on surcharging card transactions. In fact, the rules part of the settlement already is in effect. In return, the merchants will indemnify Visa and MasterCard from future merchant lawsuits challenging interchange and various network rules.

Attorneys for the opposition merchants, which have coalesced into various groups, will try to persuade Gleeson to reject the settlement. Various other parties, including more than 40 states, have gone on record against the settlement. Most of the objections center on the immunity the settlement would give the card networks from legal challenges.

“RILA has and will continue to argue that the proposed settlement does nothing to address the anti-competitive behavior of the card companies and that the proposed surcharging relief is illusory and impractical for the national retailers that RILA represents,” a spokesperson for the Retail Industry Leaders Association, an Arlington, Va.-based trade group of big-box stores, tells Digital Transactions News by email. “Even if it were to work, which it doesn’t, simply asking consumers to pay for the card companies’ anticompetitive behavior does nothing to solve the underlying market failure. I believe the retail industry has a strong case against the card companies that isn't adequately reflected in the proposed settlement and we will continue to pursue meaningful reform until it is achieved.”

But Mitch Goldstone, a settlement supporter and one of the original plaintiffs, says that while the objectors tend to be large companies, they represent a tiny fraction of the millions of merchants that could benefit from the agreement.

“That 25% number [the threshold at which the defendants could have rejected the settlement but elected not to] is fictitious because it should be based on every merchant having an equal vote,” says Goldstone, president and chief executive of ScanMyPhotos.com in Irvine, Calif. “I anticipate the opposition will reach for any piece of plywood from their sinking ship. Thursday is going to be a historic date.”

Settlement opponents aren’t calling their cause a sinking ship, but Gleeson last November gave preliminary approval to the deal announced by the two sides four months earlier. At the time, however, he noted that the final approval required by law called for a higher standard. He then set a schedule for merchants to object or opt out of the damages, and hired a private firm to handle merchant inquiries and claims from those that wanted a share of the pot.

A spokesperson for the Washington, D.C.-based Electronic Payments Coalition, a lobbying group that usually speaks for the networks and banks on interchange issues, emailed a brief statement to Digital Transactions News saying, “We remain highly confident that final approval will be granted and that the epic battle over interchange fees will finally come to an end.”

Various lawyers familiar with the case contacted by Digital Transactions News declined to comment about what Gleeson will do after the hearing concludes. He could issue a decision from the bench, or he might issue a decision later.

Even if Gleeson gives final approval, the settlement seems unlikely to end the longstanding disputes between merchants and card networks over interchange. The opt-out merchants could appeal Gleeson’s approval. Some of them, including Target Corp., have already sued the card networks in a separate action in U.S. District Court in Manhattan. Visa and MasterCard, meanwhile, in the past few months have filed lawsuits in apparent attempts to undercut the legal arguments that opt-out merchants would use in court against them.

Thursday’s hearing is set to start at 9:30 a.m. Eastern time. There will be no testimony from witnesses, only arguments from lawyers. Attorneys for the class plaintiffs, led by K. Craig Wildfang, a partner with Robins, Kaplan, Miller & Ciresi L.L.P. in Minneapolis, will lead off in the first hour. Then settlement opponents will get three hours. Several attorneys are expected to make arguments, including Jeffrey L. Shinder, managing partner at New York City-based Constantine Cannon LLC, which is representing 10 of 19 original plaintiffs. After that, supporters will get 90 minutes for rebuttal.

Somewhere in there will be about an hour for lunch, so it’s going to be a long day in court. “All are reminded that it's okay not to use all of the time allotted,” Gleeson wrote in an order outlining the hearing’s schedule.