2nd Circ. Nixes $7.2B Antitrust Settlement

(CN) — Citing inadequate representation, the Second Circuit on Thursday vacated a $7.2 billion settlement agreement in a massive antitrust class action against Visa and MasterCard over credit-card swipe fees.

The settlement would have ended a decade of litigation involving 12 million merchants who claim Visa and MasterCard used their uncontested market power to set supra-competitive "swipe fees" and "interchange fees."

Businesses must accept credit cards in order to make sales, but they have little bargaining power to induce Visa or MasterCard to lower the cut they take.

Merchants are forbidden from refusing cards with higher interchange fees, or from applying a surcharge to customers who want to pay with credit.

In addition, cards offering "rewards" cut into merchants' bottom lines by charging merchants a higher swipe fee, but they are not allowed to discriminate between rewards cards and credit cards that do not offer rewards.

"Plaintiffs have paid and continue to pay significantly higher costs to accept Visa-branded and MasterCard-branded credit and debit cards than they would if the banks issuing such cards competed for merchant acceptance," one of the consolidated complaints claims.

The parties reached a settlement agreement to provide merchants who accepted Visa and MasterCard from 2004 to 2012 with $7.25 billion in monetary relief.

Merchants who accepted the cards from 2012 onward would receive no money under the settlement, but the card issuers agreed to change their network rules to allow surcharges for the use of a credit card.

Under the terms of the agreement, Visa and MasterCard cannot modify their surcharge rules until July 2021. In return, the merchants agreed to waive any claim they have against the issuers for any policy in place as of November 2012, in perpetuity, as long as Visa and MasterCard leave in place the surcharge rules modified by the settlement agreement.

"In sum, regardless what Visa or MasterCard do with their network rules after July 20, 2021, no merchant will ever be permitted to bring claims arising out of the network rules that are unaffected by this settlement agreement, including most importantly, the honor-all-cards rule or existence of default interchange fees," Judge Dennis Jacobs said, writing for a three-judge panel of the Second Circuit. (Emphasis in original.)

The Second Circuit found this release overbroad and absolutely not in the merchants' best interests, especially given that the second class of merchants cannot opt-out.

The New York-based appeals court said there was undoubtedly a conflict between the first class of merchants who sought monetary relief, many of whom are no longer in business, and the second class, which was eligible only to demand rule changes in the way they accept credit card payments.

The conflict is magnified by the fact that class counsel, which represented both classes, stands to gain $545 million in fees from the settlement, which would be the largest-ever cash settlement in an antitrust class action.

"We expressly do not impugn the motives or acts of class counsel," Jacobs said. "Nonetheless, class counsel was charged with an inequitable task."

The panel said it was concerned that counsel traded the interests of one class for another in the settlement proposal.

"The only unified interests served by herding these competing claims into one class are the interests served by settlement: (i) the interest of class counsel in fees, and (ii) the interest of defendants in a bundled group of all possible claimants who can be precluded by a single payment," Jacobs said.

The settlement's release permanently immunizes the credit card companies from any claims regarding its honor-all-cards and default interchange rules, even from a business that opens after July 2021 when defendants' obligation not to change the surcharge rule ends.

These merchants would effectively receive nothing from the settlement, but woul still be bound by the release.

"Merchants operating after July 20, 2021 give up claims of potential value and receive nothing that they would not otherwise have gotten. Since there was no independent representation vigorously asserting these merchants' interests, we have no way to ascertain the value of the claims forgone," the 46-page opinion states.

Since the class plaintiffs were inadequately represented by unified counsel, the settlement is a nullity, the Second Circuit concluded.

The appeals court reversed approval of the settlement and remanded the case.

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