Payment card interchange fee and merchant discount antitrust litigation

Last updated

The payment card interchange fee and merchant discount antitrust litigation is a United States class-action lawsuit filed in 2005 by merchants and trade associations against Visa, Mastercard, and numerous financial institutions that issue payment cards. The suit was filed because of price fixing and other allegedly anti-competitive trade practices in the credit card industry. In February 2019, U.S. District Court Judge Margo K. Brodie approved a settlement in the case that amounted to $5.54 billion. [1] After four more years of litigation, in March 2023, the Court of Appeals for the Second Circuit affirmed the District Court’s final approval order, with a modification reducing service awards, and allowing the claims process to move forward. [2]

Contents

In December 2023, claim forms began mailing to millions of business owners in the class who accepted Visa and/or Mastercard payment cards during the 15-year class period from January 1, 2004, to January 25, 2019. [3] The claims period was extended from May 31 to August 30, 2024, and further extended to February 4, 2025.

In March 2024, an important agreement was reached by Visa and Mastercard to reduce what are known as "swipe fees" for merchants in the United States. This change, set to last five years, is expected to save retailers about $30 billion. It marks the end of a long-standing legal battle over antitrust issues involving these two major credit card issuers. [4] As part of the settlement, the companies agreed to lower their processing fees at all US merchants by at least four basis points for the next three years, ensuring these reduced rates stick for a total of five years.

Moreover, the deal includes a provision that the reduced fees must be at least seven basis points lower than the current average. An independent auditor will review this aspect to confirm compliance. [5]

The agreement now awaits the green light from the U.S. District Court for the Eastern District of New York, which, if approved, will be a significant step towards addressing anti-competitive practices in the credit card processing industry. [6]

Claims

Plaintiffs allege that Visa, Mastercard, and other major credit card issuers engaged in a conspiracy to fix interchange fees, also known as swipe fees, that are charged to merchants for the privilege of accepting payment cards, at artificially high levels. In their complaint, the plaintiffs also alleged that the defendants unfairly interfere with merchants from encouraging customers to use less expensive forms of payment such as lower-cost cards, cash and checks. [7]

Settlement

On November 27, 2012, United States District Judge John Gleeson entered an order granting preliminary approval to a proposed settlement. Speaking of the settlement Gleeson said, “I don’t mean to suggest for a moment that there are not a number of issues that are going to require significant scrutiny. I’m not persuaded that the deficiencies are the obvious deficiencies that ought to derail preliminary approval.” Gleeson's approval was important because it allows the potential seven million or more members of the class to begin the process of opting in or out of the settlement. [7]

Judge John Gleeson John Gleeson.jpg
Judge John Gleeson

Terms

The settlement provides for the cash equivalent of a 10 basis-point reduction (0.1 percent) of swipe fees charged to merchants for a period of eight months. This eight-month period would probably begin in the middle of 2013. The total value of the settlement will be about $7.25 billion. [7] [8] This amount could be decreased based on the number of plaintiffs who opt-out. [9]

A part of the settlement that allows merchants to charge fees to customers paying via credit card in order to recoup swipe fees took effect on January 27, 2013. Debit cards and transactions in the ten states that prohibit credit-card surcharges will not be affected. Many large retailers, such as Wal-Mart and Target have opted not to impose surcharges. [10] In the event of a return, surcharges are refunded along with the purchase price of the merchandise. [11] The National Association of Convenience Stores, also known as the NACS, complained that this measure "merely make[s] retailers the collection agents for the banks." [12] The National Retail Federation said, "that card company fees are the problem and the surcharge story is a volume that belongs on the fiction aisles. The real threat to retailers and their customers continues to be price-fixed hidden fees that can only be cured by transparency and competition." [13]

Opponents object to provisions that would bar future lawsuits and even prevent merchants from opting out of significant portions of the proposed settlement. Stephen Neuwirth, a lawyer representing Home Depot, said, “It’s so obvious Visa and MasterCard were prepared to make a large payment because of the scope of the releases being given. It’s all one quid pro quo and merchants like the Home Depot are being denied the chance to opt out of that quid pro quo and say this is a bad deal.” [7]

Opposition

According to court filings, Target, Wal-Mart, Home Depot, Neiman Marcus, Saks, and 1,200 other plaintiffs oppose the settlement. A group of large merchants including Kroger, Walgreens, and Safeway have reached a separate agreement with the defendants over swipe fees. [7] The NACS, for example, harshly criticised the settlement and is urging its members to opt out. Tom Robinson, chairman of NACS and president of Robinson Oil, said, "This proposed settlement allows the card companies to continue to dictate the prices banks charge and the rules that constrain the market including for emerging payment methods, particularly mobile payments. Consumers and merchants ultimately will pay more as a result of this agreement — without any relief in sight." [8] Josh Floum, general counsel for Visa, responded, “Our belief that the agreement will eventually receive final approval was strengthened today. As we have said from the beginning, this settlement is a fair and reasonable compromise for all parties.” [7]

Class members can opt out of the monetary part of the settlement in addition to objecting in court. Visa, MasterCard, and issuing banks can scuttle the settlement if merchants that account for 25 percent or more of credit card spending in the United States since January 1, 2004, to the approval of the settlement. [9]

The NACS is strongly encouraging its members to opt out. Hank Armour, president and CEO of NACS said, "It is important to note that if you do nothing, it will be presumed by the court that you accept the terms of the proposed settlement. Even if you submitted a declaration objecting to the proposed settlement last fall, you must respond to the notice and submit something in writing again if you want to opt-out of or object to the proposed settlement." The NACS has created a website dedicated to encouraging merchants to opt out that provides detailed instructions on how to do so. [14]

The Retail Industry Leaders Association (RILA), whose members include many prominent retailers such as Best Buy and Wal-Mart, opted out of the proposed settlement and urged its members to do the same. Deborah White, a senior RILA official, said, "RILA and the overwhelming majority of our members agree that the proposed class action settlement is a bad deal for retailers." RILA members are legally required to opt out on their own. [15]

Prior to this settlement, merchants won a major victory against payment processors and card issuers with the passage of the Dodd-Frank financial reform bill. Dodd-Frank required the Federal Reserve to write rules for swipe fees on debit card purchases. [16] Richard Durbin, the senator from Illinois who was the main proponent of those rules, has called the proposed settlement on credit card swipe fees, "gives Visa and MasterCard free rein to carry on their anti-competitive swipe-fee system with no real constraints and no legal accountability. This is not a settlement I would agree to. I hope that the remaining merchant plaintiffs will review the proposed settlement carefully and think hard about whether it will be good for the future of our credit- and debit-card systems.” Barney Frank, a representative from Massachusetts and a primary supporter of legislation to repeal rules on debit card swipe fees said he supports the settlement and stated, "A free-market approach in this area will be better for the economy and all concerned parties.” [9]

Appeal

Immediately after the preliminary approval of the settlement by Judge Gleeson in November 2012 a group of plaintiffs appealed to have it invalidated. The plaintiffs argued that the settlement violated their rights by not allowing them to opt out of some provisions. The inability to opt out of litigation releases that bar future suits was an important point of contention. Jeff Shinder, a lawyer for the plaintiffs said, "The proposed settlement violates the due process rights of millions of merchants by denying them the ability to opt out of the injunction, and this fundamental issue of law should be addressed now before notice goes out to merchants." [17]

In January 2013, the United States Court of Appeals for the Second Circuit ruled that any appeals against the settlement that received preliminary approval in November 2012 would not be heard until objections to the settlement are filed and considered by the trial court in September 2013. The practical effect of this ruling was to allow settlement notices to be sent to eligible merchants. [14]

In June 2016, the United States Court of Appeals for the Second Circuit overturned the settlement on the ground that class counsel could not adequately represent merchants who has a significant interest in the monetary relief provided by the settlement and merchants who could only benefit from the prospective injunctive relief. [18]

In April 2013, the three law firms appointed to lead the plaintiffs in this case asked for $720 million in fees. If approved this would be one of the largest awards of legal fees in American history. They argued that such high fees were reasonable given the amount of the settlement and the risks and complexity of the case. This dollar amount represents about 4.5 times what would normally be billed at an hourly rate for the work performed. Approval of these fees partially depends upon approval of the settlement. The law firms in question are Robins, Kaplan, Miller & Ciresi; Berger Montague; and Robbins Geller Rudman & Dowd LLP. Any fees awarded will be split among about 40 different law firms. The distribution of fees is normally decided by lead counsel. [19]

Independent expert

In December 2013, U.S. District Court Judge John Gleeson approved a settlement in the case that amounted to $7.25 billion. [20] The settlement lowers interchange fees for merchants and also protects credit card companies from being sued over the issue again in the future. [21] That settlement was reversed. Currently one for US$6.24 billion is scheduled to go before the district court on November 7, 2019. [22]

Judge Gleeson retained Alan Sykes as an independent expert in order to help the judge evaluate the proposed settlement. Gleeson said he appointed Sykes would "advise the court with respect to any economic issue that may arise in connection" with final approval of the settlement. Gleeson mentioned appointing an independent expert during the hearing on preliminary approval in November 2012. He informed the parties in March 2013 that he was considering Sykes, a professor at New York University's law school. According to a resume published by the court, Sykes previously taught at Stanford and the University of Chicago and has published several books and scholarly articles on economics and trade. No party objected to the appointment of Sykes. While parties routinely make use of experts to support their positions, judges rarely exercise this option. [23]

Parties and counsel

In addition to Visa and MasterCard most of the largest credit card-issuing American banks such as JPMorgan Chase, Bank of America, CitiBank, Wells Fargo, and Capital One are defendants in the case. [8] Named class plaintiffs include the National Association of Convenience Stores, the National Grocers Association, the National Restaurant Association, the National Community Pharmacists Association, and 15 others. [8]

Co-lead class counsel include Laddie Montague, Merrill Davidoff, and Michael Kane of Berger Montague; Craig Wildfang, Thomas Undlin, and Ryan Marth of Robins Kaplan Miller & Ciresi; Patrick Coughlin, Bonny Sweeney, David Mitchell, Alexandra Bernay, and Carmen Medici of Robbins Geller Rudman & Dowd. [19]

Counsel for Visa include Robert Vizas, Robert Mason, Mark Merley, and Matthew Eisenstein of Arnold & Porter. Counsel representing MasterCard include Keila Ravelo, Wesley Powell, and Matthew Freimuth of Willkie Farr & Gallagher; Kenneth Gallo, Joseph Simons, Andrew Finch, and Gary Carney of Paul Weiss Rifkind Wharton & Garrison. [19]

Case name and venue

This case is formally known as In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation. The docket number is 05-md-01720. The United States District Court in the Eastern District of New York in Brooklyn is the venue. [7]

The case is more commonly known as Swipeopoly, [24] in reference to the alleged Visa and Mastercard duopoly over the payments network. Other variations include the Swipeopoly [25] Settlement and the Swipe Fee Scandal.

See also

Related Research Articles

<span class="mw-page-title-main">Debit card</span> Card used for financial transactions, usually without a credit line

A debit card, also known as a check card or bank card, is a payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either the front or the back. Many new cards now have a chip on them, which allows people to use their card by touch (contactless), or by inserting the card and keying in a PIN as with swiping the magnetic stripe. Debit cards are similar to a credit card, but the money for the purchase must be in the cardholder's bank account at the time of the purchase and is immediately transferred directly from that account to the merchant's account to pay for the purchase.

<span class="mw-page-title-main">EFTPOS</span> Type of Electronic Funds Transfer system

Electronic Funds Transfer at Point Of Sale, abbreviated as EFTPOS; is the technical term referring to a type of payment transaction where electronic funds transfers (EFT) are processed at a point of sale (POS) system or payment terminal usually via payment methods such as payment cards. EFTPOS technology was developed during the 1980s.

<span class="mw-page-title-main">Visa Inc.</span> American multinational financial services corporation

Visa Inc. is an American multinational payment card services corporation headquartered in San Francisco, California. It facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit cards, debit cards and prepaid cards.

<span class="mw-page-title-main">Mastercard</span> American multinational financial services corporation

Mastercard Inc. is an American multinational payment card services corporation headquartered in Purchase, New York. It offers a range of payment transaction processing and other related-payment services. Throughout the world, its principal business is to process payments between the banks of merchants and the card-issuing banks or credit unions of the purchasers who use the Mastercard-brand debit, credit and prepaid cards to make purchases. Mastercard has been publicly traded since 2006.

Discover is a credit card brand issued primarily in the United States. It was introduced by Sears in 1985. When launched, Discover did not charge an annual fee and offered a higher-than-normal credit limit. A subsequent innovation was "Cashback Bonus" on purchases.

<span class="mw-page-title-main">Laser (debit card)</span> Irish debit card scheme, 1996–2014

Laser was a debit card scheme in Ireland between 1996 and 2014.

<span class="mw-page-title-main">Maestro (debit card)</span> Debit card from Mastercard

Mastercard Maestro is a brand of debit cards and prepaid cards owned by Mastercard that was introduced in 1991. Maestro is accepted at around fifteen million point of sale outlets in 93 countries.

<span class="mw-page-title-main">Visa Debit</span> Debit card

Visa Debit is a major brand of debit card issued by Visa in many countries around the world. Numerous banks and financial institutions issue Visa Debit cards to their customers for access to their bank accounts. In many countries the Visa Debit functionality is often incorporated on the same plastic card that allows access to ATM and any domestic networks like EFTPOS or Interac.

A merchant account is a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions. In some cases a payment processor, independent sales organization (ISO), or member service provider (MSP) is also a party to the merchant agreement. Whether a merchant enters into a merchant agreement directly with an acquiring bank or through an aggregator, the agreement contractually binds the merchant to obey the operating regulations established by the card associations. A high-risk merchant account is a business account or merchant account that allows the business to accept online payments though they are considered to be of high-risk nature by the banks and credit card processors. The industries that possess this account are adult industry, travel, Forex trading business, multilevel marketing business. "High-Risk" is the term that is used by the acquiring banks to signify industries or merchants that are involved with the higher financial risk.

An acquiring bank is a bank or financial institution that processes credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept credit card payments from the card-issuing banks within a card association, such as Visa, MasterCard, Discover, China UnionPay, American Express.

<span class="mw-page-title-main">Dankort</span>

The Dankort is the national debit card of Denmark. Today it is often combined with a Visa card or Mastercard and functions as a Visa or Mastercard debit card abroad and in stores that don't accept Dankort.

<span class="mw-page-title-main">Interchange fee</span> Fee paid between banks for card-based transactions

Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank pays a customer's bank.

The Cabcharge account payment system was established in 1976 to provide taxi passengers a way to pay for taxi fares by non-cash means. The payment system is owned and operated by A2B Australia, an Australian Securities Exchange listed public company. In the UK and Singapore, Cabcharge is operated by subsidiaries of ComfortDelGro, whom it used to co-own Australian systems of.

<span class="mw-page-title-main">National Association of Convenience Stores</span>

The National Association of Convenience Stores (NACS) is a trade association representing the convenience and fuel retailing industry. Founded in 1961, NACS has thousands of member companies, primarily in the United States but also in about 50 other countries. NACS conducts market research, hosts conferences and trade shows, and conducts political and legal advocacy. NACS is particularly concerned with the regulation of motor fuels, high credit card swipe fees, and labor law.

The BancNet (BN) Point-Of-Sale System is a local PIN-based electronic funds transfer (EFTPOS) payments solution operated by BancNet on behalf of the member banks and China UnionPay (CUP). The BN point of sale (POS) System allows merchants to accept the automated teller machine (ATM) cards of any active BancNet member bank as payment for goods or services and obliges BN to settle the transaction as early as the following banking day through a direct deposit to a settlement account with any member bank. Acceptance of CUP cards is limited to SM Prime Holdings, Inc.'s Department Store, Supermarket, Hypermarket, Super Sale, Watson's, Sports Central, SM Appliance, Toy Kingdom, and select Surplus Stores.

<span class="mw-page-title-main">Credit card</span> Card for financial transactions from a line of credit

A credit card is a payment card, usually issued by a bank, allowing its users to purchase goods or services or withdraw cash on credit. Using the card thus accrues debt that has to be repaid later. Credit cards are one of the most widely used forms of payment across the world.

Card schemes are payment networks linked to payment cards, such as debit or credit cards, of which a bank or any other eligible financial institution can become a member. By becoming a member of gets the possibility to issue cards or acquire merchants operating on the network of that card scheme. UnionPay, Visa and MasterCard are three of the largest global brands, known as card schemes, or card brands. Billions of transactions go through their cards on a yearly basis.

<span class="mw-page-title-main">Surcharge (payment systems)</span>

A surcharge, also known as checkout fee, is an extra fee charged by a merchant when receiving a payment by cheque, credit card, charge card or debit card which at least covers the cost to the merchant of accepting that means of payment, such as the merchant service fee imposed by a credit card company. Retailers generally incur higher costs when consumers choose to pay by credit card due to higher merchant service fees compared to traditional payment methods such as cash.

The Durbin amendment, implemented by Regulation II, is a provision of United States federal law, 15 U.S.C. § 1693o-2, that requires the Federal Reserve to limit fees charged to retailers for debit card processing. It was passed as part of the Dodd–Frank financial reform legislation in 2010, as a last-minute addition by Dick Durbin, a senator from Illinois, after whom the amendment is named.

Ohio v. American Express Co., 585 U.S. ___ (2018), was a United States Supreme Court case regarding the nature of antitrust law in relationship to two-sided markets. The case specifically involves policies set by some credit card banks that prevented merchants from steering customers to use cards from other issuers with lower transaction fees, forcing merchants to pay higher transaction fees to the banks. While Visa and MasterCard settled with the United States Department of Justice in 2010, American Express defended its practice by arguing that the anti-steering policies benefited its cardholders, the higher transaction fees helping to maintain member services. While the Department of Justice and several states prevailed during a District Court trial in 2015 citing harm to the merchants, the Appeals Court reversed the District Court's ruling in 2016 by ruling that the plaintiffs had not shown harm to both sides of the two-side market, a novel test in antitrust law. This decision led to some of the states to appeal to the Supreme Court. The case was heard by the Court in February 2018.

References

  1. "Court Announces $5.54-6.24 Billion Settlement Providing Payments to Merchants who Accepted Visa or Mastercard since 2004". U.S. District Court for the Eastern District of New York. PRNewswire. February 22, 2019.
  2. "Dkt No. 503_Second Circuit Opinion.pdf" (PDF). Payment Card Settlement. U.S. Court of Appeals for the Second Circuit.
  3. "Millions of U.S. Businesses Eligible for a Share of $5.54B Payment Card Settlement". Robbins Geller Rudman & Dowd LLP. PRNewswire. December 1, 2023.
  4. "U.S. Merchants Enter Into Landmark Class Action Settlement with Visa and Mastercard to Eliminate Anti-Competitive Restraints and Reduce Swipe Fees" . Retrieved March 26, 2024.
  5. "Credit Card Processing Fees Explained" . Retrieved March 7, 2024.
  6. "What We Know About Visa and Mastercard's Landmark $30 Billion Swipe Fee Settlement". Forbes. Retrieved March 26, 2024.
  7. 1 2 3 4 5 6 7 "Visa Mastercard fee deal falls too short retailers claim". Business Week. November 9, 2012. Archived from the original on November 12, 2012.
  8. 1 2 3 4 "Visa Mastercard 7.3 billion settlement over credit card fees". NBC News. July 14, 2012.
  9. 1 2 3 "Durbin Calls $6.6 Billion Visa Swipe-Fee Accord Bad Deal". Bloomberg.com. August 7, 2012.
  10. "New Credit Card Swipe Fee Rules Are Good News for Shoppers". Forbes .
  11. "Retailers May Begin Charging Swipe Fees on Credit Card Purchases".
  12. "'Call to Arms' Follows Swipe-Fee Settlement Appeal Delay". CSP.net. January 31, 2013. Archived from the original on June 28, 2013.
  13. Duncan, Mallory B. (March 2013). "Surcharge 'Propaganda' Distracts Real Swipe Fee Problem". Archived from the original on March 8, 2013.
  14. 1 2 "Swipe Fee Settlement Appeal Delayed Until This Fall - Business Focus - Convenience Store News". Archived from the original on February 23, 2013. Retrieved March 12, 2013.
  15. "Retail group opts out of Visa, MasterCard pact".
  16. Silver-Greenberg, Jessica (July 13, 2012). "MasterCard and Visa Will Pay Billions to Settle Antitrust Suit". The New York Times.
  17. Dye, Jessica (November 27, 2012). "Merchants appeal $7.2 billion card-fee settlement". CNBC. Archived from the original on April 10, 2013.
  18. "Visa, MasterCard Merchant Settlement Overturned". June 30, 2016.
  19. 1 2 3 "Lawyers in $7.25 Bin Credit Card Settlement Seek $720 Min in Fees".
  20. "Court approves controversial interchange fee settlement". Bank Credit News. December 17, 2013. Archived from the original on January 16, 2014. Retrieved January 14, 2014.
  21. "EPC: NRF appeal of interchange settlement a "political ploy"". Bank Credit News. January 10, 2014. Archived from the original on January 16, 2014. Retrieved January 14, 2014.
  22. "Visa, Mastercard $6.24B settlement gets preliminary okay from court". Seeking Alpha . February 22, 2019. Retrieved July 9, 2019.
  23. "Westlaw Today - Premium Legal News | Thomson Reuters".
  24. "Visa and Mastercard are profiting from higher swipe fees and growing debg, but their swipe-opoly is under fire".
  25. "Swipeology: $5.54 billion Visa Mastercard Interchange Fee Settlement/".

Further reading