Visa Inc. (V) and MasterCard Inc. (MA), the world’s biggest payment networks, will try to persuade a federal judge to dismiss multibillion-dollar lawsuits accusing them of price fixing because the merchants suing don’t directly pay the fees at issue.
Visa and MasterCard will also argue before U.S. District Judge John Gleeson in Brooklyn, New York, today that the behavior alleged is covered under an earlier settlement.
They will also try to convince the judge that they and banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. and Citigroup Inc. (C) can’t be accused of a conspiracy because the payment-card operators are now public companies, which set the fees themselves, rather than joint ventures of the banks. The 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.
“When you consider the damages, when you consider the banks are under significant regulatory scrutiny now and their profitability has gone down, this is quite a substantial litigation,” Matthew L. Cantor, a lawyer at Constantine Cannon LLP in New York who has represented merchants and payment-card issuer Discover Financial Services in antitrust litigation, said in a phone interview.
Merchants such as D’Agostino Supermarkets Inc. in Larchmont, New York, and Collective Brands Inc.’s Payless ShoeSource in Topeka, Kansas, accuse Visa, MasterCard and the biggest U.S. banks of violating antitrust laws by illegally inflating swipe fees, or interchange, charged to merchants on payment-card purchases.
The merchants estimate damages in the case “will range in the tens of billions of dollars,” according to their complaint.
In addition to a class action, individual suits before the judge include those filed by Publix Super Markets Inc. (PUSH), the Lakeland, Florida-based supermarket chain; Rite Aid Corp. (RAD), the Camp Hill, Pennsylvania-based drugstore chain; and Englewood, Colorado-based Liberty Interactive Corp. (LINTA)’s QVC, the home-shopping channel.
Visa, MasterCard and the banks argued in court papers that the cases have to be tossed because the merchants have no standing to bring them: They don’t directly pay the interchange fees -- the merchants’ banks pay them to the cardholders’ banks, which in turn seek payment from the merchants.
“The undisputed evidence shows that plaintiffs do not pay directly the interchange fees they assert were illegally set,” the defendants wrote in court papers.
They cite a 1977 U.S. Supreme Court decision that said indirect buyers can’t claim they were injured by an antitrust violation. Courts have refused to apply the 1977 case when the direct purchaser is a co-conspirator, as the merchants’ banks are, the plaintiffs argue.
“The defendants are making what we think are not well-founded arguments, like the scope of the release and the standing issue, that don’t address the real merits of the case,” K. Craig Wildfang, a partner at Robins, Kaplan, Miller & Ciresi LLP in Minneapolis and a lawyer for the merchants, said in a phone interview.
The lawsuits threaten a revenue source for banks that U.S. lawmakers left untouched in passing the Dodd-Frank Act 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.
Merchants say the fee hurts consumers because they lead to higher prices for products and services. A judgment or settlement could result in a rate reduction, they claimed.
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 is scheduled to hear arguments on those motions today.
The litigation, dating back to 2005, has produced more than 82 million pages of documents and sworn testimony from almost 500 witnesses, according to court papers.
The lawsuits contain allegations that the networks’ 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.
“We welcome the opportunity to present arguments on motions seeking dismissal of the litigation and will offer strong proof points demonstrating our practices serve to benefit consumers and enhance competition,” James Issokson, a spokesman for Purchase, New York-based MasterCard, said in an e-mailed statement.
“Wednesday’s hearing is simply the next step in the litigation process,” Denise Dunckel, a spokeswoman for San Francisco-based Visa, said in an e-mailed statement. “Plaintiffs’ claims against a centralized system for setting interchange rates are without merit and overlook the fact that interchange has been upheld as legal in every direct challenge made in U.S. courts.”
Laura Lubin Rossi, a spokeswoman for New York-based JPMorgan; Shirley Norton, a spokeswoman for Charlotte, North Carolina-based Bank of America; and Emily Collins, a spokeswoman for New York-based Citigroup, declined to comment. The three banks are the biggest in the U.S. by assets.
Steven Semeraro, a professor at San Diego-based Thomas Jefferson School of Law, who has written on interchange fees, said in a phone interview that the merchants will likely win on the standing argument.
“There’s so much in the case law that says what matters is the economic realities and not the form,” Semeraco said.
Michael Simkovic, an associate professor at Seton Hall University School of Law in Newark, New Jersey, said the appeals court covering Brooklyn has taken a narrow view of the co-conspirator exception.
“The defendants have some pretty strong arguments there and they might be able to win on that basis,” he said. “The merchants are focusing on the cash flow, but contractually that’s not how it works. Contractually, everything goes through the intermediary.”
In 2003, Visa and MasterCard settled a separate antitrust class action, called In re Visa Check, for $3 billion. That case, which Gleeson presided over, targeted debit-card rules.
As part of that settlement, the merchants can’t sue over conduct occurring before 2004. Visa and MasterCard argue that release covers their current rules, which date from before 2004.
“Rather than negotiate additional changes to the existing rules in the Visa Check settlement, plaintiffs negotiated ‘the largest antitrust settlement in history,’” they wrote.
The merchants argue they are alleging new antitrust injuries that came after the rules were reauthorized and new fee rates established.
“Each time a new interchange fee is set or charged, a new price-fixing agreement occurs,” they wrote.
The defendants also argue the banks no longer control the payment networks 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.
The merchants argue that, even after the IPOs, the banks continue to control rules and interchange rates in a way that restrains competition or at least threatens anticompetitive effects.
“Far from disavowing the goals of their conspiracy, bank defendants merely set up new entities to continue to administer those conspiracies and ensure that they continued to profit from their activities,” the merchants wrote.
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.
Merchants accuse MasterCard of committing a “fraudulent conveyance” when, in its IPO, it eliminated the ability to assess the banks for litigation costs and got nothing in return for it. The merchants say that move hurts their ability to recover any judgment in the case.
In February, Visa, MasterCard and the banks reached an agreement about how they would divvy up a global judgment or settlement involving all the defendants, according to regulatory filings. Visa would pay two-thirds and MasterCard one-third. MasterCard’s agreements with its banks limit its portion to 36 percent of that, with banks picking up the rest.
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).
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