Retailers Ready for Showdown Over Credit-Card Fee Deal

Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corp. (COST), among more than 500 merchants objecting to a $7.25 billion antitrust settlement with credit card firms over swipe fees, say the deal is meaningless as long as card companies can fix fees charged retailers on each transaction.

Sears Holdings Corp. (SHLD), Target Corp., (TGT) TJX Cos. (TJX) and Barnes & Noble Inc. (BKS) also have opposed the agreement being considered by a federal judge in Brooklyn, New York, as merchants face today’s deadline for filing objections to the deal. The settlement, estimated by plaintiffs to be the largest ever in an antitrust case, could receive final approval after a Sept. 12 hearing.

“Given that Visa and MasterCard can continue to fix interchange, they can recoup the settlement amount quickly by raising interchange rates in the future,” said Jai Holtz, vice president of financial services for Sears, in an objection filed May 25. “The one-time payment could be entirely eviscerated by increased fees or newly-imposed fees just months after it is paid.”

The effort by companies follows years of tensions over the fees, which amount to as much as two percent of every sale where a customer pays with a card. Major retailers and trade associations contend that the deal isn’t nearly big enough and unfairly binds all merchants nationwide against suing over the fees in the future.

‘Significant Scrutiny’

Foster City, California-based Visa and Purchase, New York-based MasterCard said they anticipate the deal will be approved.

“We are highly confident that final approval will be granted, and that the epic battle over interchange fees is finally over,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents card companies and banks.

In November, U.S. District Judge John Gleeson gave tentative approval to the deal, saying there were “issues that are going to require significant scrutiny,” though not enough to derail a preliminary sign-off. He said he would appoint an outside expert to weigh in.

Though the outcome is unusual, parties opposed to a class-action settlement have persuaded judges to throw deals out at the final approval stage, said Howard Langer, an adjunct professor at the University of Pennsylvania Law School and commercial class action lawyer.

Strong Objections

Langer, who isn’t involved in the settlement, said in a phone interview that strong objections can arise in situations where there is mandatory participation in some part of a deal, as in the interchange case.

“It always raises significant concern in a case when one person is bringing a lawsuit in which other people are going to be bound by the result,” he said.

The interchange settlement has two parts: a portion under which merchants receive payments for damages, and another under which credit card companies promise certain rule changes. Merchants could have opted out of the damages portion by notifying the court by May 28. They weren’t eligible to opt out of the rule change portion, which also prohibits all merchants in the country from bringing future lawsuits over the fees.

If the number of retailers dropping out of the deal makes up more than 25 percent of Visa’s and MasterCard’s total credit card volume, the card companies and major banks, including JP Morgan Chase & Co. (JPM), Citigroup Inc. (C), and Bank of America Corp., have the option to walk away from the agreement.

Opted Out

Reaching that threshold is unlikely, according to a July analysis by investment bank Keefe, Bruyette & Woods. The top 100 merchants in the U.S. represent about 25 percent of the total volume, according to the analysis. Of those, about 15 have already agreed to their own settlement with Visa and MasterCard. While many of the objecting retailers have also opted out of the damages portion of the deal, their share of credit card volume is likely to be small, according to the analysis.

At the final approval hearing, the judge would mainly consider whether the settlement meets legal requirements, said Samuel Issacharoff, a professor at the New York University School of Law, in a phone interview.

In theory, the drop-outs “should have no effect” on the approval process, said Issacharoff, NYU’s Bonnie and Richard Reiss Professor of Constitutional Law. “In practice, a lot of these who have opted out could go to the detriment of the settlement as a whole, more for atmospheric reasons.”

Customer Use

In their objections, retailers said the settlement promises just a fraction of the tens of billions of dollars in interchange fees paid over the years. The retailers said they must continue to pay the fees because they can’t afford to stop accepting Visa and MasterCard credit cards used by many customers.

“It is a massive price fixing agreement in front of everybody,” said Joseph Alioto, a San Francisco antitrust lawyer who isn’t involved in the settlement. “The ones that are really hurt are the consumers. They don’t have a case,” he said, adding that merchants often raise their prices to make up for extra costs.

When a customer swipes a card at a retailer’s check-out counter, fees are deducted from the amount that the merchant ultimately receives. Interchange, the largest of the deductions, is collected by Visa and MasterCard to be passed along to the customers’ and merchants’ banks, according to the card firms’ annual reports filed with the U.S. Securities and Exchange Commission.

‘Core Evil’

The fees provide an incentive to banks to do business with Visa and MasterCard, according to the reports. Banks, in turn, pay Visa and MasterCard for use of their networks, the card firms said in the reports.

The National Retail Federation, which opposes the deal, said in a brief filed with the court today that the settlement “fails to address the core evil that motivated this class action and that continues to plague the industry: the outside economic power of and the manipulation of interchange rates by Visa, MasterCard and their constituent banks.”

The lawsuit that gave rise to the settlement is one of a series of legal actions and policy developments aimed at reining in the fees. The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 imposed caps on debit card interchange fees. Also in 2010, Visa and MasterCard consented to rule changes allowing merchants to steer customers to lower-cost credit and debit cards under a settlement with the U.S. Justice Department.

Growing Concerns

A lead plaintiff in the suit, California small businessman Mitch Goldstone, said the opposition to the settlement is misguided.

“If this goes to trial, it’s going to take 10 years. All the while, Visa and MasterCard can charge any rate they want, unchecked,” Goldstone, owner of Irvine-based ScanMyPhotos.com, said in a phone interview.

Goldstone discussed his growing concerns about interchange fees on his bog www.WayTooHigh.com. His crusade was featured in an April 2005 Wall Street Journal article, he said.

Lawyers from Minneapolis-based class action firm Robins, Kaplan Miller & Ciresi LLP reached out to Goldstone after the article was published, he said. Goldstone remained a vocal advocate of the settlement on his blog and Twitter account @WayTooHigh even after other named plaintiffs turned against the deal.

Incentive Payments

Goldstone said that he expects to be financially rewarded for his publicity efforts. Lawyers representing the plaintiffs have requested incentive payments worth $200,000 for each named plaintiff, according to a proposed order filed with the court. The lawyers are seeking about $750 million in fees and expenses from the settlement fund.

“Most certainly, this was my Erin Brockovich moment,” Goldstone said, comparing his pursuit of claims against the credit card firms to the work of the famous legal advocate played by Julia Roberts in an eponymous movie.

“I’ve been flying to Washington, to New York. It was very exciting to meet Judge Gleeson in his chambers,” he said. “It’s a very inspiring story how a single merchant can be at the table with the biggest people. It’s proof that the little guy can accomplish something very big.”

Lawyers for the plaintiffs and credit card firms have questioned the motives of the objectors. In August, lawyers for Visa said in a letter to the court that a lawyer representing many of the objectors, Jeffrey Shinder, has a conflict of interest because his firm, Constantine Cannon LLC, has also advised a competing startup payment network, the Merchant Customer Exchange.

‘Publicity Campaign’

Lawyers from plaintiffs’ firm Berger & Montague PC said in an August letter that the National Association of Convenience Stores, one of the earliest opponents of the settlement, and Shinder “orchestrated an extrajudicial publicity campaign against the settlement.”

At a hearing in November, a lawyer for the plaintiffs, Patrick Coughlin, said the opposition was “literally orchestrated by a small group” and referred to MCX, formed by merchants including Target and Wal-Mart.

Last week, Visa, MasterCard and the banks sued the convenience stores association, and other trade groups and retailers that were involved in litigation over the deal and rejected it, seeking declaration from a court that the fee practices weren’t illegal.

A group of 17 retailers led by Target filed their own lawsuit on May 23 in federal court in Manhattan seeking damages for the swipe fees.

“Plaintiffs have paid and continue to pay significantly higher costs to accept Visa-branded and MasterCard-branded credit and debit cards than they would if the banks issuing such cards competed for merchant acceptance,” the retailers said in their complaint.

The case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-md-01720, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Christie Smythe in New York at csmythe1@bloomberg.net.

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

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