'Right or Reject'

Merchants ask judge to allow flawed swipe fee settlement to be redrafted or thrown out

Mallory Duncan, Henry Armour

Mallory Duncan, Henry Armour

BROOKLYN, N.Y. --  The National Retail Federation (NRF) asked Judge John Gleeson of the U.S. District Court for the Eastern District of New York in Brooklyn on Thursday to "right or reject" the proposed $7.25 billion settlement of an antitrust lawsuit over credit-card interchange or "swipe" fees in a longstanding antitrust class action filed by merchants against Visa, MasterCard and the largest banks. He said the measure needs to be rewritten to do more to bring the soaring fees under control and that retailers who don't support it should be allowed to completely opt out.

"The proposed settlement is next to worthless," NRF senior vice president and general counsel Mallory Duncan said. "It does nothing to reduce swipe fees or keep them from rising in the future, it offers retailers pennies on the dollar for the damage that has already been done, and it tries to tie merchants' hands from ever suing again. This is actually worse than no settlement at all because it further entrenches the monopoly held by the card companies."

He added, "This proposal has not been agreed to by the retail industry by any stretch of the imagination. Thousands of retailers have flatly rejected the settlement, including many of the nation's best-known brands. This is a backroom deal being pushed by the card industry and trial lawyers more concerned about their fees than protecting retailers or consumers."

And NACS president and CEO Henry Armour delivered testimony reiterating the convenience store association's opposition to the terms of the proposed settlement from the day that it was announced in July 2012:

NACS and the majority of the named plaintiffs have filed objections to the settlement. NACS has opted out of the monetary portion of it. We have also filed a response to correct inaccuracies in a recent declaration from class counsel.

From the beginning of this litigation, our principal concern has been to obtain meaningful reforms of the credit card market to restrain the undue market power being used to set fees.

Anti-competitive practices have resulted in our industry paying more in card fees than it makes in pre-tax profits every year since 2006. The vast majority of our industry is made up of small businesses. In fact, 60% are single-store operators. Because our industry pays such huge fees, $11.2 billion in 2012, NACS has had thousands of conversations with our members about interchange fees and discussed the problems and potential solutions in depth.

This settlement, unfortunately, ignores the views of NACS, the majority of named plaintiffs and other merchants including NACS' 30-member board of directors made up of small and large retailers from around the country. We raised our concerns early and often, and we have now been joined by merchants far and wide. The primary rules relief in the settlement, surcharging, is completely unworkable because of negative consumer reactions to surcharging, state laws that prohibit it and the level-the-playing field provisions. Most telling is the fact that since February when retailers have had the ability to surcharge under the settlement there has been virtually no movement in that direction. That is compelling evidence that the ability to surcharge has no value to the class.

Further this settlement has the potential to make things much worse by giving the Defendants an incredibly broad release of claims for future bad conduct.

This settlement is worse than losing at trial.

Losing would not bar the courthouse door to merchant challenges to future unfair card industry practices including current bad practices being applied to new technologies like mobile payments. The settlement provides nothing of any real value beyond the money. And the scope of the release will allow the defendants to raise rates and recoup the money before it is even distributed to merchants, which is precisely what happened in the Visa check case.

We strongly urge the court to reject this settlement.

NRF argued in a brief filed this spring that the proposal "gives the credit card networks carte blanche to set and manipulate interchange rates" while giving retailers nothing in return.

Close to 8,000 merchants representing at least 25% of Visa and MasterCard volume have opted out of the $7.25 billion originally offered by the settlement. But the unusual structure of the proposal blocks them from opting out of other terms and conditions, including a ban on future lawsuits over the issue. NRF attorney Andrew Celli argued that retailers should instead be given the ability to fully opt out of the settlement.

Celli also called on Gleeson to "right or reject" the proposal. He said the judge should give lead plaintiffs' counsel K. Craig Wildfang "invigorated and empowered" leverage to redraft the settlement and "make the deal fair" or reject it entirely if that cannot be accomplished.

"As it stands, the settlement rewards the perpetrators and traps the victims," Celli said. "But it is not hopeless. It can be made fair. You have the power to make it so."

The NRF opposes the settlement because it fails to reform the price-fixing system under which Visa and MasterCard set swipe fees followed by banks that issue their credit cards, or to introduce transparency that would lead to competition to lower the fees. Rather than lowering the fees, the card companies have proposed passing them along to consumers as a surcharge, even though most major retailers have rejected surcharges and at least 10 states bar surcharges by law. The $7.25 billion was intended to compensate retailers for price-fixing over nearly nine years but amounts to less than three months' worth of swipe fee charges, and small retailers would receive as little as a few hundred dollars.

Rather than being brought by the retail industry as a whole, the suit was filed in 2005 by six trade associations and 13 retail companies, most of them individual stores or small chains. The settlement was drafted without input from other retailers, and was ultimately rejected by a majority of the plaintiffs, including all of the associations. NRF is not a party to the lawsuit, but has led the retail industry's opposition to the settlement because NRF member companies would be dragged into its terms as part of the class action.