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A $7.25 billion antitrust settlement between credit card companies and 12 million merchants was nixed by the Second Circuit last week. For over ten years, merchants had pursued a class action antitrust suit against Visa and MasterCard, alleging that they abused their market power to force unfair fees on businesses that accepted credit cards.
The proposed settlement would have provided those merchants billions in relief, while also preventing those merchants from bringing future challenges to the credit card companies' policies in perpetuity, leading the Second Circuit rule that the settlement was unreasonable and inadequate and that many of the merchants had been inadequately represented.
For consumers, credit cards are a major convenience. But for merchants, they can add an extra layer of cost, as they shell out fees to credit card companies with every swipe.
Businesses cannot refuse cards with higher fees, nor can they pass along those fees to customers who pay with plastic. That leaves merchants with little bargaining power and, according to the class action, has allowed Visa and MasterCard conspire to impose excessive fees in violation of the Sherman Act. The suit specifically focused on interchange fees, the fees a card's issuing bank charges the acquiring bank and which are deducted from the purchase price, and the merchant discount fee that the acquiring bank charges the merchant.
After ten years of litigation, 400 depositions, 32 days of expert deposition testimony, and 80 million pages of discovery, the parties finally agreed to settle.
Under the settlement agreement, merchants would be divided into two groups. The first group, under Federal Rule of Civil Procedure 23(b)(3), covers merchants who accepted Visa or MasterCard between 2004 and 2012. The second, under Rule 23(b)(2), covers all merchants who accepted or will except those cards from November 2012 "onwards forever." The first class would split the $7.25 billion; the second would obtain injunctive relief.
But the settlement was hardly a windfall for all the merchants. For injunctive relief, the (b)(2) class of merchants would gain the ability to pass Visa and MasterCard charges on to consumers through a surcharge at the point of sale. The "value and utility of this relief is limited," Judge Dennis Jacobs wrote for the three-judge panel, because several states make that practice illegal.
Further, in exchange for Visa and MasterCard not modifying their surcharge rules until 2021, the (b)(2) class of merchants would agree to waive any claims against any future surcharge policy in perpetuity. "In sum," the Second Circuit wrote, despite any changes the companies may make after 2021, "no merchant will ever be permitted to bring claims arising out of the network rules that are unaffected by this settlement agreement." Merchants would not be allowed to opt out.
The court found that the interest of the first class of merchants was in conflict with that of the second. One included merchants who had since gone out of business, who could gain a significant financial benefit from the settlement; the second class included businesses whose rights could be largely restrained in the future, for a much more limited benefit.
That conflict, according to the Second, was only exacerbated by the massive attorney's fees that come with a multi-billion dollar settlement. Under the settlement, class counsel stood to gain $545 million -- the largest ever cash antitrust class action settlement.
"The only unified interests served by herding these competing claims into one class," the court wrote, "are the interests served by settlement: (i) the interest of class counsel in fees, and (ii) the interest of defendants in a bundled group of all possible claimants who can be precluded by a single payment."
While the court claimed that it did not mean to "impugn the motives or acts of class counsel," the conflict at the heart of the settlement deprived the second class of merchants of adequate representation, in violation of Rule 23(a)(4) and the Due Process Clause, the Second found.
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