A federal appellate court on Thursday overturned the $7.25 billion antitrust settlement entered into by Visa and MasterCard with retailers over swipe fees.
The Second Circuit Court of Appeals, sitting in Manhattan, said it reversed the district court’s approval of the settlement on a finding that the class plaintiffs were inadequately represented. It also vacated the class certification.
The antitrust class action was brought on behalf of 12 million merchants against the two largest credit card-issuing networks claiming that they paid excessive fees for accepting a Visa or MasterCard due to alleged conspiracy among the defendants. After nearly 10 years of litigation — the first complaint was filed in 2006 — the parties settled their claims, and on Dec. 13, 2013, a federal district court in Brooklyn approved the settlement. An appeal was filed and the Second Circuit held a hearing on Sept. 28, 2015.
In Thursday’s opinion, the appellate court said that numerous objectors and opt-out plaintiffs argued that the class action was improperly certified and that the settlement was unreasonable and inadequate. In vacating the district court’s approval of the settlement, the appellate court said it determined there was a violation of a rule determining members of the settlement class, as well as a violation of the Due Process Clause. That clause of the Fourteenth Amendment of the Constitution refers to fair procedures as a safeguard from arbitrary actions in connection with the deprivation of “life, liberty or property.”
The settlement between the parties divided the plaintiffs into two classes — one that covers merchants that accepted Visa and MasterCard between Jan. 1, 2004 to Nov. 28, 2012 and the second that covers merchants that accepted or will accept Visa and MasterCard from Nov. 28, 2012 onward. The former class would be eligible to receive up to $7.25 billion in monetary relief and the ability to opt out, while the latter would get injunctive relief in connection with changes to Visa’s and MasterCard’s network rules, but no ability to opt out.
In a nutshell, the appellate court determined that the “conflict is clear” between merchants in the two classes, with the former wanting to maximize cash compensation for past harm and the latter wanting to maximize restraint on network rules to prevent harm in the future. The court noted that class counsel represented both classes, even though cases decided by the U.S. Supreme Court provides support for separate representation when there is a class divided between holders of present and future claims.
The court also considered other arguments in connection with interchange fees and antisteering rules at the point of sale, which prohibit a merchant from influencing customers to use one type of payment over another or even another credit card with a lower interchange fee.
The court remanded the case back to the district court for further proceedings.
Mallory Duncan, general counsel and senior vice president for the National Retail Federation, said, “This ‘settlement’ was never a settlement on behalf of the retail industry, but rather a backroom deal that failed to represent the interests of retailers…It would have given merchants pennies on the dollar for the price-fixing they have suffered at the hands of the big credit card companies and would have done nothing to end price-fixing or to lower swipe fees going forward. Now it’s time to seek real reform of these still-skyrocketing fees whether it be in court or in Congress.”
Deborah White, executive vice president and general counsel for the Retail Industry Leaders Association, said, “Quite simply, the settlement orchestrated by the card networks and banks would have undermined merchants’ legal rights forever and would have allowed Visa and MasterCard to impose higher swipe feeds with impunity. Today’s decision is a victory for all merchants and consumers.”
RILA, which opted out and objected to the settlement in 2014, has argued that the settlement “failed to address the anticompetitive practices that were the genesis for the lawsuits,” as well as denying merchants their right to challenge these practices ever again in court.