Judge Gives Preliminary OK to the Controversial Credit Card Interchange Settlement

To the dismay of retailers but the joy of the card networks and bank defendants, U.S. District Judge John Gleeson on Friday gave preliminary approval to the controversial settlement of credit card interchange litigation announced July 13.

The National Retail Federation, the leading retail-industry trade group and an outspoken foe of the agreement, quickly issued a statement saying it would “explore all legal options.” But the Electronic Payments Coalition, a lobbying group of card networks and banks, said it viewed Gleeson’s ruling “as further indication that this historic settlement is a fair and balanced resolution to the epic swipe-fee battle.”

Gleeson, whose court is based in Brooklyn, N.Y., indicated in late October that his cursory review showed that the settlement probably met the legal requirements for preliminary approval. He scheduled a hearing for Nov. 9 to get input from lawyers for the merchant plaintiffs and network and bank defendants. The judge said final approval requires a higher standard, and lawyers don’t expect final sign-off, if it comes at all, to occur before well into 2013.

Opponents argued that the plan didn’t even meet the lower threshold for a preliminary approval.

“Retailers, their customers and competition would suffer irreparable harm if this one-sided deal is allowed to move forward,” Mallory Duncan, general counsel of the Washington, D.C.-based NRF, said in the organization’s statement. “We will consult with our attorneys and act as soon as possible to correct this injustice.”

The NRF did not say exactly which legal remedies it would pursue. The NRF was not a plaintiff, but last week filed a brief in opposition to the settlement on behalf of itself, 17 retailing and restaurant companies, and two other trade associations.

MasterCard Inc. general counsel Noah Hanft said in a statement that the settlement “was reached with the assistance of the court and was supported by the merchant class representing millions of large and small retailers, and prominent trade groups across the country.” The statement said MasterCard remains confident that “the court will grant final approval in the coming months.”

Visa Inc. said “this settlement is a fair and reasonable compromise for all parties. It is the result of two years of negotiation between retailers, their legal counsel, the networks, financial institutions and two highly regarded mediators under the supervision of the court.”

Merchants and some trade associations sued Visa, MasterCard, and about a dozen banks in 2005 alleging credit card interchange is unfair under federal antitrust laws. With trial looming in September 2012, the parties reached a settlement that calls for the defendants to pay more than $6 billion in damages and temporarily lower credit interchange to the tune of $1.2 billion. The networks also are to grant relief from some of their rules, including an easing of restrictions on surcharging, and let merchants negotiate in groups in the interchange-setting process. In return, the merchants are to agree not to sue the networks over interchange and rules in the future.

The massive litigation has both individual and class merchant and trade-association plaintiffs. Some plaintiffs as well as a number of merchants, including Wal-Mart Stores Inc. and Target Corp., that were not directly involved said they couldn’t support the agreement. Opponents said the plan would protect what they view as anti-competitive interchange practices from further challenges by merchants, even from merchants that don’t yet exist. Opponents also questioned the value of the new surcharging freedoms, noting that 10 states prohibit the practice.

The NRF argued in its brief that the settlement should not be certified as a class action because “it attempts to force a one-size-fits-all solution onto a wildly diverse group of merchants,” the group’s statement says. The association also said the provision barring all retailers, including those who opted out of the settlement and businesses not yet formed, “is impermissibly broad under federal law.”

But the EPC said that the preliminary approval “will almost immediately give retailers the many benefits they demanded. Sixty days from today, the card networks will implement rule changes. Merchants will now have the ability to add checkout fees (a retailer surcharge) at the register and form buying groups.”

In a reference to the Durbin Amendment in 2010’s Dodd-Frank Act that imposed price controls on debit card interchange, the EPC called the objections by merchant groups “largely politically motivated, in hopes of influencing Congress to give them even more political handouts.”

According to the Bloomberg news service, one lawyer for merchants in favor of the settlement argued at Friday’s hearing that some big retailers oppose the deal because they’re forming a mobile-payments network called Merchant Customer Exchange, or MCX, that will compete with Visa and MasterCard.