Merchants, two major card brands and issuing banks are back in court eight years after the largest antitrust settlement in U.S. history in which Visa Inc. and MasterCard Worldwide agreed to pay $3.4 billion to settle merchant claims the card companies conspired to raise interchange fees.
Oral arguments on motions for summary judgment filed July 7, 2011, were heard Nov. 2 in the U.S. District Court for the Eastern District of New York. Complainants in the class action antitrust lawsuit include such retail giants as Wal-Mart Stores Inc., Sears Brands LLC, Rite Aid Corp., D'Agostino Supermarkets Inc. and Payless Shoesource. The merchants assert the card companies and banks are conspiring to prevent merchants from offering lower fees for, or alternatives to, card processing.
In what is often referred to as the "Wal-Mart case," the 2003 settlement covered the card companies' behavior up to Jan. 1, 2004. According to Lloyd Constantine, lead counsel for the retailers in that case, terms of the settlement have saved retailers and consumers more than $87 billion.
If the card companies are found to be engaged in anti-competitive behavior this time, damages could be in the tens of billions of dollars, one plaintiff attorney, who talked with The Green Sheet on condition he not be quoted by name, said. "Interchange fees are in the tens of billions of dollars per year going back to Jan 4, 2004," he said. "The law allows for treble damages."
Litigators argued motions for summary in Brooklyn, N.Y., before U.S. District Judge John Gleeson. The U.S. District Court for the Eastern District of New York is the same venue where the original antitrust action was brought against the card companies. Taken together, this litigation, originally filed in 1996, has reportedly generated more than 82 million pages of documents and testimony from nearly 500 witnesses.
In the oral arguments, plaintiff attorney Craig Wildfang, who represents the class, told the court there are four reasons to grant the plaintiffs' summary judgment: the defendants are in violation of the Sherman Antitrust Act; the defendants have an unfair market power advantage; the defendants' agreements on interchange fees harm competition; and the defendants cannot justify their alleged behavior in a manner that outweighs the harm the interchange fee rules cause.
Wildfang claimed the card companies and the banks are "acting in concert" to prevent merchants from offering incentives to use cheaper methods of payment.
Attorney Paul E. Slater, who represents retailers QVC Inc. and Supervalu Inc., told Judge Gleeson, "Visa rules prevent a merchant from charging more to a customer who uses a Visa card or charging less to a customer who uses a MasterCard. In other words, [restraint] stops the merchant from using price signals to direct the consumer at the point of sale to the lower cost item."
The card companies contend interchange rules are legal and "reasonably necessary." Attorney Peter E. Greene, representing JPMorgan Chase & Co., compared the card company rules to rules set by sports leagues.
"The evidence points out that those rules are necessary to avoid the need for the time consuming and otherwise costly individual bilateral agreements that would have to be negotiated at the time of exchange with each transaction, and they also advance the goal of universal acceptance, which is really the key to the competitive success of the Visa and MasterCard system," Greene said.
Attorney Robert Vizas, representing Visa, told the court the increasing use of debit cards and the decline in credit card use since the earlier settlement prove the market is competitive. "If you can increase your output, that is at least equally evidence of a competitive as opposed to an anti-competitive product," he said.
The card companies also argued that since merchants don't directly pay interchange fees, they have no standing to bring their claims. They also maintain that since the card companies went public, the banks no longer have a controlling interest on the company boards, so the banks no longer control interchange fees. Judge Gleeson reserved his ruling on the summary judgment motions.
In a February 2011 agreement among the defendants, Visa said it would accept responsibility for two-thirds of any settlement, and MasterCard would carry responsibility for approximately one-eighth of an agreement. MasterCard Chief Executive Officer Ajaypal Banga told investors in early November 2011 his company is trying to settle the lawsuit and has put aside $500 million in the event there is a negotiated settlement of the current claim.
Banga said his company has made progress negotiating a settlement with individual merchants in the case but has made little progress with negotiations conducted with attorneys representing the general merchant class. Visa and MasterCard settled a U.S. Justice Department complaint in 2010 and agreed to allow merchants to offer incentives to customers to use cheaper payment methods.
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