Major Visa, MasterCard settlement voided: Now what?

The unraveling of the multi-billion-dollar class action lawsuit filed by 12 million retailers against Visa Inc., MasterCard Worldwide and their issuing banks, has created a new kind of cashless experience for retailers, leaving millions of claimants with nothing to show after a decade of litigious activities. In a unanimous decision issued Jun. 29, 2016, a three-judge panel in New York's 2nd U.S. Circuit Court of Appeals declared the 2013 settlement null and void.

The settlement was hammered out to resolve disputes over interchange fees and card brand rules. It was reduced from $7.25 billion to $5.7 billion after several major retailers opted to pursue their own claims against the card brands.

Judges Pierre Leval, Dennis Jacobs and Ralph Winter assailed plaintiffs' attorneys for being overpaid and underincented due to conflicts of interest that prohibited them from effectively representing clients. "Class representatives had interests antagonistic to those of some of the class members they were representing," stated Judge Dennis Jacobs in the opinion. "The fault lines were glaring as to matters of fundamental importance."

Judge Jacobs added that the panel did not intend to impugn the dignity or integrity of class counsel, but wanted to point out structural flaws that doomed proceedings from the start. The judges introduced previous, precedent-setting class actions that failed to appropriately represent the interests of all defendants, due to the magnitude of class populations.

Round two begins

"From day one, this class action settlement has been a train wreck that reflects a growing disconnect between payment service providers and retailers," said a payments industry source familiar with the filing. "Retailers complain; card brands cave in without attempting to defend their value proposition; attorneys have been the only winners so far, but the debacle is far from over."

The court ruling leaves many unanswered questions among retailers and payments industry stakeholders alike. Following are several of the open issues yet to be addressed:

• Impact on claimants: Payments analysts have suggested that many of the big-box retailers that had challenged Visa and MasterCard see the legal proceedings as a long game. However, many of the small and midsize merchants that had been expecting interchange fee reimbursements lack the economies of scale to wait indefinitely for payouts.

• Impact on new legal actions: Home Depot Inc. and Wal-Mart Stores Inc. were among the 8,000 claimants that opted out of the 2013 settlement in order to pursue their own legal efforts. If the voided settlement action leads to a trial, some or all settlement may choose to participate in the broader class action.

• Impact on payments, retail relationships: A statement by the counsel representing The National Retail Federation reflects the trade association's increasingly strident tone toward card brands. "This is not just a business-to-business dispute," said Mallory Duncan, NRF General Counsel. "These fees drive up the price of retail merchandise, costing the average family hundreds of dollars a year."

• Impact on card-issuing banks: Small and midsize community banks and credit unions had initially objected to the terms of the settlement, claiming that they lacked economies of scale to participate in both administrating and reimbursing millions of retail customers involved in the settlement. Larger banks expect to carry a heavier burden of the payout. JPMorgan Chase & Co had initially expected to pay for a fifth of the entire settlement; Bank of America Corp. was previously responsible for approximately one tenth of the payout.

• Impact on card brands: Now that legal actions against card brands are beginning anew, there has been little comment by Visa and MasterCard. American Express Co. and Discover Financial Services had previously objected to the 2013 settlement.

• Impact on counsel: Backlash against the original settlement by the legal community, retailers and card brands suggests that new proceedings will be structured differently than the previous class action suit approved by Brooklyn U.S. District Judge John Gleeson and settled in December 2013. Attorneys that participated in the original class action have received $544.8 million in fees, according to New York Circuit Judge Dennis Jacobs.

• Impact on regulatory environment: The ability for merchants to add surcharges to payment card transactions is currently legal in some states. The original settlement gave merchants the ability to "pass their card acceptance costs on directly to their customers." Additionally, it locked in the Durbin Amendment's specified minimum purchase and discounting provisions. Legal analysts expect the issue to be re-addressed in new class actions against the card brands. Further legal guidance on this issue is expected.

The case is In Re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 2nd U.S. Circuit Court of Appeals, No. 12-4671. More information on the background and legal ramifications of the retail class action suit and subsequent decision to dismiss and start over can be found at: www.paymentcardsettlement.com/Content/Documents/Defendants-Appellees%20Brief%20As-Filed.pdf .

Editor's Note:

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.