Row over credit card fees drags on as court strikes down huge settlement

By Dimitra Stefanidou

An American court has sensationally struck down a $7.25 billion settlement due from Visa and Mastercard for fixing credit card fees after some merchants claimed its terms were unfair.

The huge cash payment was due as the result of a successful class action filed by millions of merchants and trade associations against the two payment giants for acting against antitrust rules. In what was seen as one of the most important cases relating to antitrust law in the United States, both companies were found to be in the wrong for charging merchants large fees for being able to accept payment by credit cards.

The preliminary order

The settlement was originally proposed by United States District Judge John Gleeson in 2012. However, the settlement was not accepted by a number of merchants. They appealed and the preliminary order was cancelled.

Their concerns were that the settlement order violated their lawful right to opt out of certain provisions of the proposal. As Jeff Shinder, a lawyer representing the plaintiffs explained, “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”.

As a result, a large number of merchants (about 25% of the plaintiffs) didn’t participate in the settlement, reducing its value from $7.2 billion down to $5.7 billion.

The ruling of the U.S. Court of Appeals

And so the plot continues to thicken. On June 30 the U.S. federal appeals court turned down the proposed settlement, even in its reduced form, paving the way for a the long-term litigation by MasterCard and Visa which has been pending for more than a decade. At this stage the court felt the settlement did not equally satisfy the interests of the parties.

More specifically, the group of the merchants that didn’t accept the settlement would be excessively restricted in enacting their lawful rights. And in addition, they would not be able to oppose the defendants with further legal action. Even worse, merchants who didn’t even participate in the litigation would have restricted rights towards Mastercard and Visa in future transactions.

Unacceptable incentives

The court also felt that the two parties shouldn’t have been represented by the same legal counsel as their interests were obviously conflicting, accusing the lawyers of “unacceptable incentives”. According to the court if the settlement was accepted lawyers would have earned the astronomical amount of about $544.8 million as fees.

With the settlement dead in the water merchants believe that they will be able to pressure the credit card companies to restructure or eliminate the card payment charges, or interchange fees, that they oppose.

Reaction of the defendants

After the ruling rejecting the settlement, Mastercard says it is reviewing its next steps. There has been no response from Visa.

It is highly possible that any new arrangements the two companies put in place will be less favourable than the old system, including strict rules on interchange fees and other terms. This is likely to have a significant economic cost for them as payment processors.