Visa, MasterCard Estimate Potential Fee Settlement at $4 Billion

Visa Inc. (V) and MasterCard Inc. (MA), the world’s biggest payment networks, put any potential settlement of price-fixing litigation by merchants at about $4 billion.

MasterCard “extrapolated an estimate of a reasonably possible loss of at least $500 million if there is a negotiated settlement with all plaintiffs,” MasterCard Chief Executive Officer Ajaypal S. Banga said on an earnings conference call with investors yesterday.

In February, Visa, MasterCard and the banks being sued by merchants over swipe fees, or interchange, agreed that San Francisco-based Visa would be responsible for two-thirds of any settlement and Purchase, New York-based MasterCard would be responsible for about one-eighth. Visa has a litigation escrow account with $2.7 billion in cash available, it said in a regulatory filing. Those figures put a potential settlement at $4 billion.

The opposing parties yesterday argued before U.S. District Judge John Gleeson in Brooklyn, New York, on why he should rule in their favor without the need of a trial in the antitrust litigation, begun in 2005.

Banga didn’t say that any settlement was imminent, either in the class action or in suits brought by individual merchants including Publix Super Markets Inc. (PUSH), the Lakeland, Florida-based supermarket chain, and Rite Aid Corp. (RAD), the Camp Hill, Pennsylvania-based drugstore chain.

‘Substantial Progress’

“While we’ve made substantial progress with the individual merchant plaintiffs, there has not been similar progress with the class plaintiffs,” he said. “At this time, it is not possible to put an upper limit on this loss due to the significantly higher demands by the class plaintiffs, which are unacceptable to MasterCard.”

The merchants estimate damages in the case “will range in the tens of billions of dollars,” according to their complaint.

Visa and MasterCard argued they and banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) can’t be accused of a conspiracy because the merchants don’t directly pay the interchange fees on payment-card purchases.

They also argued that the accusations are covered by a settlement in previous litigation and that the payment-card operators are now public companies, which set the fees themselves, rather than joint ventures of the banks.

The interchange fees on credit cards, which average about 2 percent of the purchase price, add up to $40 billion a year for retailers, not including debit cards.

‘Result of Competition’

“The level of interchange is not the result of any anticompetitive conduct,” Peter E. Greene, a lawyer for JPMorgan, told Gleeson yesterday. “That level is the result of competition.”

Greene is a partner at Skadden, Arps, Slate, Meagher & Flom LLP in New York.

“The defendants’ rules and interchange fees increase merchants’ costs to accepting payment cards, and that shows harm to competition,” K. Craig Wildfang, a lawyer for the merchants, told Gleeson.

The lawsuit threatens a revenue source for banks that U.S. lawmakers left untouched in passing the Dodd-Frank Act financial overhaul last year. Congress opted to cap only debit-card interchange fees, which typically had cost merchants about half of what they pay to accept credit cards. The debit caps may cut annual revenue at the biggest banks by $8 billion, according to data compiled by Bloomberg Government.

Summary Judgment

Both sides have asked Gleeson for summary judgment in their favor now that discovery, or information-gathering, is done. They say a trial isn’t needed, at least on most counts, because there are no facts in dispute for a jury to decide. Gleeson said yesterday that he would rule on the motions at a later date.

The lawsuit contains allegations that the card companies’ rules, including those prohibiting merchants from steering customers to cheaper forms of payment, violate U.S. competition law. Last year, Visa and MasterCard settled with the U.S. government on such anti-steering allegations. New York-based American Express Co. (AXP), the biggest credit-card issuer by purchases, is fighting that suit.

The two sides also debated yesterday whether the networks’ rules preventing merchants from adding a surcharge to payment- card purchases violates antitrust law.

Visa, MasterCard and the banks argued in court papers that the case has to be tossed because the merchants have no standing to bring it: They don’t directly pay the interchange fees -- the merchants’ banks pay them to the cardholders’ banks, which pass them along to the merchants.

Antitrust Violation

They cite a 1977 U.S. Supreme Court decision that said indirect buyers can’t claim they were injured by an antitrust violation.

“Interchange fees are not paid by merchants,” David Graham, a lawyer for Citigroup at Sidley & Austin LLP in Chicago, told the judge yesterday.

Courts have refused to apply the 1977 case when the direct purchaser is a co-conspirator, as the merchants’ banks are, the plaintiffs argue.

“It’s undisputed that it’s merchants who pay the fee,” said Wildfang, a partner at Robins, Kaplan, Miller & Ciresi LLP in Minneapolis.

In 2003, Visa and MasterCard settled a separate antitrust class action, called In re Visa Check, for $3 billion. That case targeted debit-card rules.

Litigation Releases

As part of the settlement, the merchants can’t sue over conduct occurring before 2004. The defendants argue that release covers their current rules, which date from before 2004.

“Plaintiffs do not challenge new conduct,” said Mark Ladner, a lawyer for Bank of America at Morrison & Foerster LLP in New York. “They simply challenge continued adherence to those rules.”

The merchants said they are alleging new antitrust injuries that came after the rules were reauthorized and new fee rates established.

The defendants also argue the banks no longer control the payment-card companies now that they are publicly traded, and don’t control the rate of the interchange fees. MasterCard conducted an initial-public offering in May 2006, Visa in March 2008. Before that, they were joint ventures owned by the banks.

Merchants argue the banks continue to control rules and interchange rates in a way that restrains competition or at least threatens anticompetitive effects.

“Visa and MasterCard were formed by competitors,” Wildfang said. “The defendants continue yesterday to abide by those rules.”

The merchants are also seeking to have the IPOs unwound, contending they lessen competition. Gleeson previously dismissed that argument, though he allowed the merchants to re-file it.

The case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-md-1720, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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