Card Networks and Merchants Reach New Settlement Terms

Financial Services Law

Will the second time be the charm? Two credit card networks and merchants representing the class suing them reached a revised agreement to put an end to a 13-year-old antitrust class action concerning the interchange fees merchants must pay and the card network rules imposed on merchants.

Although the second proposed settlement attempts to circumvent the problems the court found with the first, merchants may still be unhappy with the result.

What happened

The highly publicized and protracted legal battle—more than 40 putative class complaints were filed in 2005—centers on allegations by merchants that the card networks violated the antitrust laws by engaging in a conspiracy to fix interchange fees and impose restrictions on merchants to prevent them from steering customers to cheaper, alternative forms of payment.

In 2012, the parties sought approval for a $7.25 billion settlement of the litigation. Reduced to $5.7 billion after thousands of class member merchants opted out of the agreement, the settlement involved two classes of merchants: one class receiving monetary relief and a second class entitled to injunctive relief. The settlement agreement did not provide for any opt-out rights for the second class of merchants, and would have extinguished any future claims that the networks’ rules (as altered by the injunction) were anticompetitive.

U.S. District Judge John Gleeson signed off on the original deal over vociferous objections from numerous class members. The objectors argued that the settlement agreement failed to provide an adequate solution for merchants because it did not include any reduction in or limits on interchange rates or fees, and only very limited changes to the restrictive rules.

Also, merchants generally could not benefit from the limited injunctive relief because they were unwilling or unable due to state laws to pass swipe fees directly on to customers via surcharges. In addition, merchants protested that the settlement required them to give an overly broad general release of all claims against the card networks relating to fees and card network rules.

The U.S. Court of Appeals for the Second Circuit reversed approval in 2016, holding that the two classes of merchants had conflicting interests and could not be represented by the same counsel. The panel also disapproved of the release, which was deemed unduly broad in that it, among other things, continued in perpetuity.

Returning to the drawing board, and after several mediation sessions, the parties have now reached a second settlement valued at potentially $6.2 billion (but no less than $5.56 billion). While most of the funds to pay the claims already have been set aside, the card networks will add $900 million in additional funds (subject to reductions for opt-outs capped at $700 million) to pay the merchants’ claims.

If approved, the settlement would be the largest-ever class settlement fund in an antitrust action, according to the Memorandum in Support for preliminary approval of the settlement, and it “is subject to none of the problems that led the Second Circuit to reject” the prior settlement.

The new settlement attempts to circumvent the problem of the inadequate representation of the injunctive relief class by removing injunctive relief from the settlement at this time. Approval of the proposed settlement is not contingent on the resolution of the claims of the injunctive relief class. It remains unclear when, and on what terms, any injunctive relief will be agreed on. Another change is that the release will now be in effect for only five years from the date the settlement receives final court approval and is somewhat narrower in that the future effect or continuation of rules-related claims is left to the injunctive relief settlement.

Noting that every stage of the litigation has been “fiercely contested” and “already consumed enormous resources of the parties and the courts for more than 13 years,” the Memorandum in Support requested that the court grant preliminary approval of the deal.

Why it matters

In this second iteration, the parties have attempted to solve some of the problems found in the first settlement by limiting the agreement to money damages only and allowing the injunctive relief class separately to negotiate a settlement, and by limiting the duration of the general release to five years. However, the many merchants that objected or opted out of the first settlement are likely to reject this one, as it fails to address the enormous financial burden merchants carry from interchange fees or contain any promise to change network rules as they apply to merchants.