An Appeals Court’s Decision Puts Interchange in Play, With an Unpredictable Outcome

The sweeping 4-year-old settlement between 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 Thursday, 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, told Digital Transactions News Thursday in the hours after the three-judge panel’s decision was announced. Boomstein works with merchant clients on payments issues.

The massive settlement was on rocky ground from the start, observers say. “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.

The deal had capped a bitterly contested legal fight that had started more than 10 years ago with a string of antitrust cases brought by merchants against Visa Inc., MasterCard Inc., and a handful of major banks alleging price-fixing in the setting of credit card interchange. Those cases were ultimately consolidated in federal district court in Brooklyn, N.Y., and a merchant class certified.

In July 2012, lawyers for both sides announced the settlement, which included an original award to merchants of $7.5 billion in damages, at the time the biggest such award in the annals of antitrust. In December 2013, the district court judge approved the deal, though a number of dissatisfied merchants and retail trade groups vowed an appeal.

Almost immediately, merchants began opting out of the monetary award to preserve their rights to bring cases of their own. Some 8,000 merchants, including some of the largest chains in the country, dropped out, reducing the settlement total to $5.7 billion by 2014. “Scores” of merchants are now suing the defendants in the case in their own, independent actions, according to Mallory Duncan, senior vice president and general counsel at the Washington, D.C.-based National Retail Federation trade group.

Now that the appeals court has thrown the whole deal and its tortured history into a cocked hat, the crucial matter of interchange looms large once again, albeit with a question mark that leaves merchants, banks, and networks with fresh uncertainty about a critical cost of card acceptance (networks set the interchange rates merchants pay, but card-issuing banks collect the interchange income). Besides voiding the settlement, the appeals court vacated the original merchant class certification and sent the matter back to the district court in Brooklyn.

Merchants, for their part, are hopeful they’ll ultimately get a better outcome than that offered by the Brooklyn court case. “Hopefully, merchants will now get an opportunity to get a settlement that provides some real relief from the abusive treatment they’ve received from the card networks by addressing the problems with how the networks set fees and constrain merchants.,” says Mark Horwedel, chief executive of the Merchant Advisory Group, a Minneapolis-based trade group for major retailers, petroleum marketers, and airlines.

But there’s no telling just now whether the next chapter in this odyssey will produce a result either side will like. For one thing, the appeals court made clear the widely disparate interests of the merchants involved means there can no longer be a single merchant class in the case, a factor that will likely complicate future settlement negotiations.

“There will be a new judge, new arguments on certifying different classes of merchant plaintiffs, maybe a fresh round of settlement discussions with distinct classes of merchants, and quite possibly a high-stakes antitrust trial(s),” notes Eric Grover, principal at Minden, Nev.-based payments-advisory firm Intrepid Ventures.

One thing is highly probable, however, according to Grover, and that is that there will be another deal. Neither side will want the decision to be left to a jury. “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.