On Friday, December 13th, a Brooklyn federal judge approved a $7.25 billion settlement of an eight-year-old antitrust class action brought against Visa and MasterCard for an alleged conspiracy to fix credit card swipe fees. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 05-MD-1720 (JG)(JO) (E.D.N.Y. Dec. 13, 2013, R. 6124).
In approving the settlement, Judge John Gleeson overruled objections made by dozens of department stores, supermarkets, wholesalers, restaurants, retailers, trade groups, and many others. At least three sets of objecting plaintiffs have already appealed Judge Gleeson’s ruling to the Second Circuit, two appeals being filed the same day that the court issued its decision.
The Swipe Fees at Issue.
The lawsuit alleged that Visa’s and MasterCard’s interchange rules governing their credit card transactions at over 21 million of the nation’s “merchants” violated federal antitrust laws by artificially inflating the interchange fees (or “swipe fees”) paid by merchants for each transaction. Plaintiffs alleged that the combined effect of Visa’s and MasterCard’s mandatory minimum swipe fees (“default interchange rule”), “honor all cards rules,” and “anti-steering rules,” was to eliminate competition among card-issuing banks to lower swipe fees below the mandatory minimum, thus unlawfully fixing the swipe fees at that minimum level.
In general terms, a normal credit card purchase works like this: a purchaser pays a merchant for goods and services with a credit card. That transaction is routed first to the “acquiring bank,” which processes the transaction and then transmits it to Visa or MasterCard. The card company then transmits the purchase to the bank that issued the credit card (“issuing bank”). The issuing bank then pays the merchant the price of the purchase, less the applicable swipe fees. Some fees are higher than others, depending on the type of card (i.e. the richness of the accountholder’s reward benefits, as in the case of a Visa Signature or MasterCard Word Elite card), and other factors. The default interchange rule required a minimum swipe fee for all card purchases.
The other swipe fee rules included the “honor-all-cards rule” and “anti-steering rules,” which, according to plaintiffs, ensured payment of the mandatory minimum fee. The honor-all-cards rules required merchants to accept all cards, regardless the swipe fees associated with each card, which merchants were required to absorb. Under the anti-steering rules, merchants could not recoup those higher fees by surcharging higher-fee card purchases, or by “steering” customers to lower-fee payment methods (i.e. checks, cards issued by the merchant) by discounting the price on purchases made by those methods. Though merchants and issuing banks could agree on their own swipe fees (no easy task, considering the number of merchants, banks, and negotiating factors), issuing banks had no incentive to charge below the default mandatory minimum. The net result of the fees regime, according to plaintiffs, was a fixed price for merchants to pay for Visa and MasterCard transactions, in violation of federal antitrust laws.
While the suit was pending, a few major developments significantly changed the swipe-fee landscape, which factored heavily into Judge Gleeson’s fairness analysis. Between 2006 and 2008, MasterCard and Visa went public, converting from bank-member ownership to independent companies with no bank governance. Their rules, therefore, were no longer largely controlled by issuing banks, and the banks thus lost some of their fee-setting influence.
Further, in 2010, Congress, with the Durbin Amendment to the Dodd-Frank Act, removed the no-merchant-discount restriction under the anti-steering rules. 15 U.S.C. §1693O-2(b)(3)(A)(i). Thus, merchants could discount purchases made with their own cards, allowing them in the end to avoid or recoup some of the higher swipe fees.
In 2011, to resolve DOJ investigations aided by plaintiffs, Visa and MasterCard agreed to allow merchants to discount purchases based on the type of card used – i.e., a credit or debit card, high-reward or low-reward card. These consent decrees gave merchants more ability to steer purchases to lower-fee or no-fee transactions.
Also in 2011, the DOJ declined to take any enforcement action against Visa and MasterCard regarding the remaining no-surcharge rules, thus raising doubts as to whether the court in the pending case would find that those rules violated antitrust laws.
In addition to the cash settlement, Visa and MasterCard agreed to (i) allow merchants to surcharge purchases made with either brand’s cards, regardless the card type or the richness of the card’s rewards, (ii) negotiate in good faith with merchant buying groups (not unlike a collective bargaining situation, thus increasing merchant leverage over fees), (iii) allow larger merchants to accept Visa and MasterCard at fewer than all of its banner businesses, and (iv) lock-in the Durbin Amendment’s merchant-discounts provisions and the 2011 product-level discount consent decrees.
The new surcharge system under the agreement has four elements: (1) merchants may recoup the full average discount fee that the issuing bank charges the merchant, (2) merchants may surcharge all Visas and MasterCards, or distinct card groups (i.e. Visa Signature cards or MasterCard World Elite cards with higher swipe fees), (3) mandatory disclosure to purchasers of the amount of the surcharge and that it does not exceed the merchant’s acceptance cost, and (4) the “level-playing-field” provision, where merchants must surcharge all of its accepted card transactions (i.e. American Express and Discover purchases) if it decides to surcharge its Visa and MasterCard transactions.
The settlement was reached after years of negotiations, which became more frequent and intense in late 2011 and the first half of 2012. Judge Gleeson and Magistrate Judge James Orenstein presided over a number of lengthy settlement conferences, as did two outside mediators (retired Judge Edward Infante and Professor Eric Green). The parties filed a memorandum of understanding of the settlement in mid-July 2012, and the court thereafter conducted the notice and fairness procedures.
The Approval Decision.
In a 50-page opinion (issued three months after the September 13th fairness hearing), Judge Gleeson approved the settlement for the 12 million-member class, and overruled the objections that the deal’s cash components and rules changes were insufficient.
In determining fairness and ruling on the objections, the court considered the age of the case, the fact and expert discovery conducted, the fully briefed summary judgment motions, the prior settlement negotiations, prior industry developments regarding swipe fees, the class members’ reactions to the proposed settlement (i.e. number and nature of objections and opt-outs), plaintiffs’ chances of establishing liability and damages at trial, the value of the settlement compared to (i) those chances and risks, and (ii) defendants’ ability to pay, and the plan for allocating the settlement proceeds.
The court paid particular attention to (i) the seemingly high hurdles to plaintiffs’ establishing antitrust liability, and (ii) relatedly, the procompetitive benefits of the elimination of the no-surcharge rules. One liability hurdle, which was briefed in defendants’ summary judgment motions, was whether plaintiff merchants had proper antitrust standing. With limited exceptions, only direct purchasers have standing under federal antitrust laws, per Illinois Brick Co. v. Ill., 431 U.S. 720, 736 (1977). Downstream market participants (often called “indirect purchasers”) do not (though they may under some states’ antitrust statutes). Merchant plaintiffs were not necessarily the direct purchasers, the court wrote; rather, the “acquiring banks” (the link between the merchant and Visa / MasterCard in a card purchase) were arguably the only direct purchasers with proper standing. The merchant plaintiffs risked losing the case on this ground alone, the court said.
Another liability hurdle, also briefed on summary judgment, was that the mandatory minimums and honor-all-cards rules were arguably permissible, procompetitive checks on the heavy negotiation costs of individual interchange agreements, and because they incentivized issuing banks to compete for cardholders with more lucrative account rewards, lower finance charges, and by absorbing fraudulent purchases.The court noted that prior courts and commentators had upheld or validated the mandatory minimums and honor-all-card rules against antitrust challenges, citing their usefulness in avoiding negotiation of individual fees, and assuring universal acceptance of Visas and MasterCards.
Regarding the elimination of the no-surcharge rules, the court said, “…this rule change, which Class Plaintiffs and the Individual Plaintiffs fought very hard to obtain, and an indisputably procompetitive development that hast the potential to alter the very core of the problem this lawsuit was brought to challenge.” (p. 31). The objectors, on the other hand, argued that the rule change was “essentially worthless” because (i) ten states still prohibited surcharges, (ii) American Express still prohibits surcharging, and thus the great many merchants accepting American Express cards will not be able to surcharge Visa or MasterCard purchases under the level-playing-field provision, and (iii) the mandatory disclosure rules were unfair, and unsophisticated merchants would not understand, or implement them. The court overruled these objections as insufficient to strike down the settlement.