Appeals Court Overturns ‘Swipe Fee’ Settlement with Merchants

The business-to-business (B2B) world has welcomed, for the most part, yesterday’s decision by the U.S. Court of Appeals for the Second Circuit in Manhattan to toss a $7.2 billion settlement between merchants and a group comprised of Visa, MasterCard and other financial institutions.

After nearly 10 years of litigation, the court rejected the settlement of claims in a lower court, concluding the plaintiffs were inadequately represented in violation of their due process rights, court documents state.
The settlement had split Visa and MasterCard merchants into two classes: merchants that accepted Visa or MasterCard from Jan. 1, 2004 to Nov. 28, 2012; and merchants that accepted or will accept Visa or MasterCard on or after Nov. 28, 2012. A substantial number of merchants, including some of the lead plaintiffs in the class action, fall into both classes because they accepted Visa and MasterCard on both sides of the cutoff date, according to Bruce Nathan, Esq., and Andrew Behlmann, Esq., of Lowenstein Sandler LLP of New York.

“The B2B business community is probably happy about this decision because it gives some hope the (swipe) fees might go down,” said Rudet Fountain, executive vice president of NACM. In general, firms selling to other firms are often the least able to pay for these fees as they don’t have the margins major retailers do. They also want more control over the costs.

The payment card interchange fee and merchant discount antitrust litigation involved about 12 million merchants against Visa and MasterCard, as well as other issuing and acquiring banks, alleging the credit card firms improperly fixed credit-card interchange or “swipe” fees. These fees to Visa and MasterCard amount to an average of a $30 billion annual profit since the case began.

Objections to the settlement have also stemmed from its releasing Visa, MasterCard and the other financial institutions such as card-issuing banks from any further suits on the same subject—this is the only part of the settlement merchants can’t opt out of.

“However, as the Second Circuit noted, the value of that relief was tempered significantly by the fact that several states (such as New York and Texas) prohibit merchants from surcharging credit card transactions,” Behlmann said. Moreover, in some states, these prohibitions are limited to consumer transactions and don’t impact B2B payments, while surcharge prohibitions in other states like Texas are silent as to their applicability, creating uncertainty about how they apply in the B2B context.

“At this point, Visa and MasterCard are no longer expressly required to permit surcharging credit card transactions, but their network rules permitting surcharging will remain in place unless amended,” he said. “In light of the fact that numerous merchants have already put surcharge programs into effect, it appears unlikely that Visa or MasterCard will return to the prior rules prohibiting surcharging.”

It’s also likely some or all of the credit card companies and the other banks will appeal the case to the U.S. Supreme Court, which would “… prolong the appeal process for another year or more before any further litigation or settlement proceedings can take place in the District Court,” Behlmann said.

- Nicholas Stern, editorial associate

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