Retailers Rebuke Visa/MasterCard Class-Action Settlement

File briefs in opposition to proposed $7.25 billion swipe fee deal

WASHINGTON -- In objections served today in the longstanding antitrust litigation against Visa, MasterCard and the largest banks pending in the U.S. District Court for the Eastern District of New York, a majority of the named class plaintiffs strongly rebuked the proposed $7.25 billion interchange or "swipe" fee settlement and urged the court to deny its preliminary approval.

The 10 named plaintiffs were joined by nearly 1,200 small businesses and recognized brands that share the view that the proposed settlement locks in the broken interchange system rather than imposing meaningful reforms.

"The proposed class action settlement is simply a bad deal for merchants. The volume and diversity of opposition to this flawed proposal is remarkable, and shows just how plainly unacceptable it is to those hurt most by Visa and MasterCard's anticompetitive practices," said Retail Industry Leaders Association president Sandy Kennedy.

"The proposed settlement strips merchants of their legal rights and will actually make the anticompetitive problems with credit and debit cards worse than they are today. And the settlement risks giving Visa and MasterCard a free hand to strangle newly emerging competition in the mobile payments market in the cradle," said National Community Pharmacists Association CEO B. Douglas Hoey.

The case is pending in the U.S. District Court for the Eastern District of New York.

The named class plaintiffs opposing the proposed settlement of the case, In Re Payment Card Interchange Fee & Merchant Discount Antitrust Litigation, are Affiliated Foods Midwest, Coborn's Inc., D'Agostino Supermarkets, Jetro Holdings LLC, NACS, NATSO, National Community Pharmacists Association, National Cooperative Grocers Association, National Grocers Association and National Restaurant Association.

The named class plaintiffs were joined in multiple briefs in the action from a growing chorus of members of the merchant class, including nearly 1,200 small businesses and recognized brands, including convenience/gasoline industry representatives such as Alon, Cumberland Farms, Kum & Go, Kwik Trip, RaceTrac Petroleum and Wawa, as well as other retailers such as Abercrombie & Fitch, American Signature, Ascena Retail Group, AutoZone, Best Buy, Big Lots Stores, Boscov's Department Store, Chico's FAS, CKE Restaurants, Costco Wholesale, Crate & Barrel, Dick's Sporting Goods, Dillard's, Dollar General, Expedia, The Gap, Giant Eagle, IKEA, J.C. Penney, Jo-Ann Stores, Limited Brands, Lowe's, Macy's, Michaels, Neiman Marcus, Papa John's, Petco, REI, Saks, ShopKo, Sports Authority, Starbucks, Target, Wal-Mart Stores, Wendy's and a variety of associations including the American Booksellers Association, and National Association of College Stores, National Retail Federation and Retail Industry Leaders Association.

"The vocal opposition from such a substantial and diverse portion of the merchant community demonstrates just how ineffective and unacceptable this proposed settlement is. The proposed settlement is simply a bad deal that further entrenches the anticompetitive practices of the Visa and MasterCard duopoly and denies merchants of their legal right to fight for real changes in court," said Dave Carpenter, president and CEO of J.D. Carpenter Cos. and chairman of NACS.

"The proposal pending before the court does nothing to keep these soaring fees from continuing to drive prices higher for American consumers, and would block merchants who believe in true swipe fee reform from ever having their day in court. While the remaining parties would like to treat preliminary approval as a routine procedural step, the court should recognize that this settlement is so legally flawed it cannot be tweaked into fairness," National Retail Federation (NRF) senior vice president and general counsel Mallory Duncan said.

"We question whose interests are being served here--merchants and their customers or the card companies and lawyers," he said. "Instead of improving the situation, the proposed settlement would cast in stone the very problems that need to be fixed. And while the settlement gives pennies on the dollar to merchants, it seeks $750 million for the lawyers involved. Sophisticated retailers who have scrutinized the tentative deal realize it provides relief for no one, and don't want this blatant endorsement of the credit card industry's abuses pushed on them or their customers."

Nine mostly small merchants supporting the settlement filed a motion with U.S. District Court Judge John Gleeson in Brooklyn, N.Y., on October 19 asking for preliminary approval of the proposal, and oral arguments are scheduled for November 9. Preliminary approval would begin a months-long process in which all retailers who accept Visa and MasterCard credit cards would be sent notices giving them the opportunity to either accept the settlement or opt out of part of it. Arguments on the merits of the settlement and whether it should be given final approval would not begin until sometime next year.

NRF argued in a brief that preliminary approval should be denied, saying the settlement cannot legally be certified as a class action because it attempts to force a one-size-fits-all solution onto an wildly diverse group of merchants. NRF also argued that a provision barring all retailers – including those who opt out of the settlement and even those who do not yet exist – from filing future lawsuits over swipe fees is impermissibly broad under federal law. The provision would allow the card industry to continue its anticompetitive practices and fee increases unchallenged.

NRF said the unusual structure of the settlement gives merchants who oppose it no mechanism to truly opt out. Rather than being able to opt out entirely, retailers would only be able to reject their share of the $7.25 billion offered as compensation for past price fixing, and would remain bound by flawed injunctive relief that would entrench current card industry practices rather than take steps to limit future fee hikes.

While the $7.25 billion figure has been touted as a record antitrust settlement, NRF and its members believe effective injunctive relief that would keep fees from rising going forward is more important. The amount represents less than three months' worth of swipe fee collections despite the eight-year period covered by the lawsuit.

The injunctive relief proposed in the settlement fails to reform the "cartel-like" system where Visa and MasterCard set a rigid schedule of swipe fees that all banks follow, said NRF. It does nothing to disclose the hidden fees or otherwise create transparency that would encourage competition that would lead to lower fees. Ostensibly, merchant bargaining groups could be recognized, but that is no change from current law. And while some merchants would theoretically be given the right to surcharge as a bargaining chip to hold down fees, the provision is subject a wide variety of card company restrictions, would be illegal in 10 states, and ignores the goal of merchants to reduce prices paid by their customers, not increase them.

NRF is not a party to the suit, but represents thousands of retailers who would be affected if the case is approved as a class action.

Swipe fees are a hidden charge banks collect each time a Visa or MasterCard card is swiped to pay for a purchase. Combined credit and debit card swipe fees tripled over the past decade to about $50 billion a year--driving up prices an estimated $427 for the average household--before debit swipe was capped by the Federal Reserve last year. Credit card swipe remains unregulated and averages about 2% of each transaction, amounting to about $30 billion a year, or $250 per household.

Click here to view the Objecting Plaintiffs' Opposition to Class Plaintiffs' Motion for Preliminary Approval of Proposed Class Settlement. And click here to view the Merchant Declarations.

Click here for previous CSP Daily News coverage of the swipe fee issue.