MasterCard Estimates Settlement of Big Interchange Cases Could Cost It $500 Million

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With trial 10 months away, a 6-year-old group of merchant lawsuits challenging the interchange practices of Visa Inc., MasterCard Inc., and a number of banks on antitrust grounds may be lurching toward settlement.

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MasterCard disclosed this week that it estimates its potential cost to settle claims from merchants suing individually at $500 million. The estimate is the first hint of the expenses that card networks and banks might have to assume to rid themselves of lawsuits brought by merchants over what they say is high interchange and network rules preventing them from encouraging customers to use cheaper forms of payment.

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MasterCard chief executive Ajay Banga briefly mentioned the estimate Wednesday in his comments to analysts during the company’s third-quarter earnings conference call. Banga said MasterCard had made “substantial progress” in talks with individual merchants, but not much headway with those seeking class-action status for their lawsuits.

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The individual cases were brought by a handful of mostly national retailers, including Kroger, Supervalu, Walgreen, and CVS. Other merchants are seeking class-action status. All of the cases are being litigated in U.S. District Court in Brooklyn, N.Y., where attorneys are awaiting a decision from Judge John Gleeson about the class-action request. If granted, the class requests would cover every merchant that has accepted Visa and MasterCard cards since 2004, possibly 5 million or more businesses.

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In its third-quarter report, MasterCard said it and the other defendants had talked to the individual merchants in court-recommended mediation sessions. MasterCard said that its $500 million estimate “does not reflect the class plaintiffs’ settlement demands, which remain unacceptable given the cash component is significantly higher than MasterCard’s estimate of a reasonably possible loss and the terms include unacceptable changes to MasterCard\'s business practices.”

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MasterCard also said its estimate does not represent a calculation of its potential loss should it lose if the merchants’ complaints go to trial. Some observers have claimed that the networks and banks could be on the hook for billions of dollars in damages should they be found liable for the alleged counts, which are subject to trebling under antitrust law.

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Through a spokesperson, Visa would not comment when asked if it has made an estimate of its potential settlement expenses. Visa’s financial report for its fourth fiscal 2011 quarter ended September 30 lists $2.93 billion in restricted cash held in escrow for litigation.

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Visa, MasterCard, and some of their former bank owners struck a settlement-sharing agreement last February. MasterCard’s report says a number of outcomes are possible, but “in the event of a global settlement involving the Visa parties, the member banks and MasterCard, MasterCard would pay 12% of the monetary portion of the settlement.” Based on MasterCard’s $500 million estimate, that share implies the possibility of a nearly $4.2 billion settlement with the individual merchants .

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If a settlement were struck with the plaintiffs involving only MasterCard and MasterCard-issuing banks, the network itself would pay 36% of the costs, according to the filing.

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Minneapolis attorney K. Craig Wildfang, lead attorney for the class plaintiffs, said he would not comment about the MasterCard disclosure. But Mitch Goldstone, president and chief executive of one of the named class plaintiffs, ScanMyPhotos.com in Irvine, Calif., said he believes the Occupy Wall Street anti-corporate demonstrators and their sympathizers are having an effect on the defendants.

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“I’m having the best level of comfort since 2005 that this could be resolved very quickly,” Goldstone says. “Those [Occupy Wall Street participants] are the people that are going to be jurors next fall. The banks know it.”

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Trial is set to start Sept. 12, 2012.