Merchants Look Forward to Their Day in Court After Judge Brodie Rejects the Interchange Settlement

Merchants are looking forward to making their case now that a judge has rejected a proposed settlement of their two-decades-long litigation with Visa Inc. and Mastercard Inc. over transaction costs.

Late Tuesday morning, Margo K. Brodie, U.S. District Court Judge for the Eastern District of New York, issued a written order nullifying the proposed settlement. A summary of the order in the court docket says, “…[T]he court finds that it is not likely to grant final approval to the settlement and accordingly denies plaintiffs’ motion for preliminary settlement approval.”

All parties involved in the litigation were directed to “submit proposed redactions” by noon Friday and explain why the redactions are warranted. The order will remain sealed until Friday.

While the next steps in the case won’t be known until the order is unsealed, merchants expect the matter to go to trial, an outcome merchant spokespeople welcome. They note Brodie indicated such an outcome during a June 13 hearing.

“Going to trial is what we expect and what we absolutely want,” says Doug Kantor, general counsel for the National Association of Convenience Stores. “One of the goals of the litigation is to show the bad acts of the card industry when it comes to card pricing [for merchants].”

Under the terms of the agreement Brodie has now rejected, Visa and Mastercard would freeze for at least five years the posted credit card interchange rates that were effective Dec. 31, 2023. The networks also agreed to lower their rates by at least four basis points for no fewer than three years.

In addition, each network was to ensure its average effective credit card interchange rate, including posted rates and negotiated rates, was at least seven basis points lower than the average effective rate for the 12-month period ending March 31, 2024. That provision would have remained in effect for five years.

Brodie’s rejection of the deal suggests she felt it did not address the central issue of the litigation, which is the way interchange rates are set by Visa and Mastercard, says Kantor.

“Card issuing banks are engaging in cartel pricing,” Kantor says. “A trial has huge value because it shows the public and merchants the situation is worse than thought and that card-issuing banks do business in violation of antitrust laws.” 

Another flaw in the settlement, according to the merchant group, is that it would allow Visa and Mastercard to increase credit card network fees as much as they want at any time, thereby offsetting any interchange relief for merchants.

But other factors could have played a role in Brodie’s reasoning, as well. One reason could have been her discomfort with Visa’s and Mastercard’s honor-all-cards rule, says Eric Grover, principal of Intrepid Ventures. The longstanding rule requires merchants to accept all the cards branded by a network if it accepts any of them.

“I’d heard Brodie was particularly troubled by the honor-all-cards rule,” Grover, says by email. “If that’s true, she would seem to have abandoned longstanding antitrust doctrine of protecting consumer welfare. A world where merchants cherrypicked which credit card issuers’ Mastercard and Visa credit cards they accepted would hardly be pro-consumer.”

Grover adds that, while he is not surprised by Brodie’s decision, it runs counter to the fact that both sides effectively reached a compromise after years of litigation. “The nature of settlements is that nobody gets everything they want,” Grover says.

Indeed, representatives of the payments industry were dismayed by the court’s order, arguing the proposed settlement would have been especially beneficial to small merchants.

“This agreement would [have] helped small businesses more than a haphazard, experimental piece of legislation,” says a spokesperson for the Electronic Payments Coalition, which lobbies on behalf of card issuers.

Pending the next development in the litigation, the center of gravity in the interchange matter may now shift to the Credit Card Competition Act, which merchants support and the card industry opposes. Backers say the bill, co-sponsored by Sens. Richard Durbin, D-Ill. and Roger Marshall, R-Kans., would control acceptance costs by requiring additional network choices for processing.

“The news [about Brodie’s order] does nothing to change the fact independent research has found the proposed Durbin-Marshall mandates [would] primarily benefit the largest corporate mega-stores, and the Congressional Research Service has questioned whether small businesses would see any benefit at all,” notes the EPC spokesperson.