--Judge says critics' arguments not persuasive enough to derail
preliminary approval
--Opponents argue the deal grants overly broad releases to Visa
and MasterCard
--Supporters say opponents are trying to drum up support for
legislation that would permanently limit swipe fees
(Updates with names of banks in paragraph two, additional
comment from attorneys and new details throughout.)
By Andrew R. Johnson
A federal judge on Friday granted preliminary approval of a
$7.25 billion class-action settlement of litigation against Visa
Inc. (V), MasterCard Inc. (MA) and several large banks over the
protests of numerous merchants and trade groups that argue the deal
is flawed.
The deal, announced in July, would allow the card companies and
banks, including Bank of America Corp. (BAC) and J.P. Morgan Chase
& Co. (JPM), to put to bed litigation that has lingered since
2005 over the fees merchants pay on each credit-card transaction,
known as the interchange or swipe fee. Retailers had argued the
defendants conspired to set such fees at arbitrarily high levels
and bound merchants to rules preventing them from recouping the
costs they pay to accept credit cards.
But in recent months a slew of merchants, including Wal-Mart
Stores Inc. (WMT), Target Corp. (TGT) and Home Depot Inc. (HD), and
trade groups such as the National Retail Federation and National
Association of Convenience Stores, which is a named plaintiff in
the litigation, have launched an attack on the settlement. They
argue releases from future litigation granted to Visa and
MasterCard under the settlement are overly broad and that changes
to the card companies' rules, including the ability to surcharge
customers who pay with credit cards, have too many strings
attached.
U.S. District Court Judge John Gleeson said during a hearing in
Brooklyn Friday that arguments raised by opponents of the deal
haven't been persuasive enough to "derail preliminary approval,"
calling concerns voiced so far "overstated."
Attorneys representing opponents of the settlement after the
ruling vowed to continue fighting the deal.
"We're not remotely daunted by today's result," said Jeff
Shinder, an attorney with Constantine Cannon LLP, during an
interview. Mr. Shinder represents the National Association of
Convenience Stores, National Grocers Association and other named
plaintiffs that have since come out against the deal. He said he
expects "opposition is going to grow and intensify" as a result of
Friday's ruling.
During the hearing before a packed courtroom, Mr. Shinder said
the settlement "threatens to make a bad situation considerably
worse."
Visa and MasterCard applauded the judge's decision.
"Our belief that the agreement will eventually receive final
approval was strengthened today," Visa said in a statement. "As we
have said from the beginning, this settlement is a fair and
reasonable compromise for all parties."
Noah Hanft, general counsel for MasterCard, said in a statement
that the settlement "represents a solution reached after years of
litigation and months of negotiation."
Judge Gleeson last month stated in an order that the deal
appeared to meet the threshold for preliminary approval. However,
he noted the bar for preliminary approval is significantly lower
than for final approval, which wouldn't come until next year.
Under the settlement, up to eight million merchants could
receive payments totaling $6.05 billion. In addition, the
settlement also calls for Visa and MasterCard to temporarily reduce
swipe fees by an amount equal to $1.2 billion and would allow
merchants for the first time to charge an extra fee to customers
who pay with credit cards.
Visa and MasterCard don't lend or issue cards to consumers;
rather, they operate networks that help process transactions for
banks that issue cards and those that work with merchants. They
also set the swipe fees that are collected by card-issuing banks as
revenue.
Merchants will have the ability to opt out of the monetary
damages portion of the settlement but are not able to opt out of
the rule changes, a point of contention for critics who say it will
be difficult to bring claims against the companies over potential
misconduct in the future. Releases granted to Visa and MasterCard
are effective now as a result of preliminary approval but would
become void if final approval isn't granted.
The proposed settlement also has drawn opposition from
competitors of Visa and MasterCard. American Express Co. (AXP),
which isn't part of the litigation but faces separate class-action
suits over its merchant fees, is worried the settlement would
hinder its ability to bring antitrust claims against the card
networks in the future, Philip Korologos, an attorney with Boies,
Schiller & Flexner LLP who represents Amex, said during the
hearing.
First Data Corp., a payment processor that handles transactions
for merchants, voiced similar concerns.
The ability to surcharge along with other rule changes is set to
take effect in 60 days.
Supporters of surcharging have argued the practice, which is
allowed in some countries but prohibited by Visa and MasterCard in
the U.S., would allow merchants to recoup the costs they pay for
accepting cards. However, critics of the settlement argue that
requirements retailers would have to abide by in order to surcharge
would make it too difficult to put the practice in place.
The settlement would require merchants to notify the payment
networks that they plan to have a surcharge, post signs notifying
customers of surcharges and prevent them from surcharging more than
what they pay to accept cards. Critics of the settlement also note
that 10 states have laws prohibiting the practice, so merchants
wouldn't be able to charge an extra fee at locations in those
states.
"There's so many limits on it and so many issues with it that
it's hard to see" how merchants will take advantage of it, Mr.
Shinder said.
Attorneys who negotiated the deal on behalf of the proposed
class of merchants defended the settlement, arguing that it
includes substantial reforms for merchants.
"The injunctive relief is meaningful," Laddie Montague, an
attorney with Berger & Montague PC, said, adding the rule
changes will allow merchants to put "downward pressure on the
interchange rates."
Montague and other supporters accused trade groups and some
merchants of spreading misinformation about the deal in order to
drum up additional opposition.
"It's a lot of smoke, and there's very little fire," said
Richard Alan Arnold, an attorney with Kenny Nachwalter PA, who
accused settlement opponents of engaging in a "propaganda
campaign." Mr. Arnold represents several retailers, including
Kroger Co. (KR) and Safeway Inc. (SWY), that reached a separate but
similar settlement with Visa, MasterCard and the banks.
Judge Gleeson said he plans to appoint an expert counsel to
analyze the potential financial benefits of surcharging to
determine its value to merchants.
Supporters have accused opponents of trying to garner support
for legislation that would permanently lower swipe fees. Similar
legislation took effect in October 2011 per a provision to 2010's
Dodd-Frank financial overhaul law called the Durbin amendment. The
Durbin amendment cut in half the fees that merchants pay to accept
debit cards, but it didn't affect credit-card swipe fees.
"The objections from retailer lobbying groups are largely
politically motivated, in hopes of influencing Congress to give
them even more political handouts," Trish Wexler, a spokeswoman for
the Electronic Payments Coalition, which represents Visa and
MasterCard, said in a statement.
MasterCard's shares closed up 0.6% at $464.66 on Friday, and
Visa's shares closed up 0.6% at $142.93.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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