Courts Balk If People Give Up Their Day in Court

VISA and MasterCard's big settlement payment to merchants was fine. But not in exchange for a promise to never sue.

Try again.

Photographer: Damien Meyer/afp/getty images

Last month’s appellate court decision refusing to approve the $7.25 billion class-action settlement that VISA and MasterCard reached with merchants is big news in legal circles. The court was fine with the monetary part of the settlement, intended to compensate retailers who were forced to pay higher fees as a result of the credit-card giants’ market dominance and payment terms. It balked at the other part of the settlement, which changed the payment rules in exchange for a guarantee from merchants that they wouldn’t be able to sue again. The lawyers will now have to go back to the drawing board and renegotiate.

Three important lessons can be learned from the landmark decision. First, courts are rightly skeptical of class-action lawyers. Second, courts don’t like it when an agreement blocks access to courts in the future because they suspect it opens the door to abuse. And third, the credit-card oligopoly is a weird holdover from an earlier era in communications and technology, and if it doesn’t change soon, legal problems will follow.

The key to the unanimous opinion of the U.S. Court of Appeals for the Second Circuit was that there was something fishy about the nonmonetary part of the settlement. That consisted of an agreement by VISA and MasterCard to  allow retailers in the future to charge customers more if they use a credit card to pay than if they use cash.

On the surface, that sounds pretty good for merchants, who might be able to recoup some of the costs of the charges they pay the credit-card networks for every transaction.

But the court noted that several states, including New York and Texas, prohibit such surcharges. And to make matters worse, the agreement said that retailers who also accept American Express wouldn’t be able to impose a surcharge on VISA and MasterCard charges. That further weakened the impact of the deal.

In exchange, the retailers had to agree to not sue the credit-card companies in the future for any policies in place as of November 2012 or for any “substantially similar” future policies.

What drove the Second Circuit’s decision was that the lawyers representing the merchants were inevitably going to be focused on their big payday, not the future-oriented rules change. That matters in particular because a future-looking agreement binds all retailers, whether they were represented in the case or not.

To put it another way, anyone starting a retail business now or in the future would be blocked from suing VISA or MasterCard, even though he or she had no say in the settlement. The court thought that such retailers should have had their own lawyers to look out for their interests in court. But they didn’t.

In two important precedents from the late 1990s, Amchem v. Windsor and Ortiz v. Fibreboard, the Supreme Court urged courts to be cautious in approving settlements that bound absent parties, who might never get their own day in court. The Second Circuit cited those cases.

Its core worry was that class counsel, no matter how well-intentioned, would always be willing to compromise the rights of absent parties who aren’t getting paid money in exchange for present plaintiffs who are -- since the lawyers are paid out of the monetary settlement.

The second disturbing feature of the settlement was the ban on suits by future retailers who didn’t recover any money. In a concurrence, Judge Pierre Leval wrote that barring their lawsuits “in perpetuity” and “until the end of time” is “not a settlement; it is a confiscation.” After all, he noted, “although no court will ever have ruled that the Defendants’ practices are lawful, no person … will ever have the legal right to sue to challenge those practices.”

Leval was reflecting the view of Yale Law School professor Owen Fiss, who argued in a famous 1984 article titled “Against Settlement” that private settlements stand in the way of courts’ fundamental duty to do justice by adjudicating legal rights.

The proposed settlement clearly was intended to block any court from getting to the merits of whether the credit-card companies’ policies are unlawful.

That brings us to the third lesson: that the credit-card companies’ oligopoly is anachronistic in the contemporary world of technology and finance. At one time, the VISA and MasterCard were bank-controlled networks, which were arguably necessary to coordinate the complexity of dispersed consumers and retailers engaging in transactions all over the world.

But today, telecommunications networks that are not themselves financial institutions should in principle let people communicate securely the facts of their economic transactions. Ultimately, that should render credit-card companies in their current form unnecessary.

My point isn't to predict the demise of the industry, but to note the contrary: the Second Circuit was clearly worried that the companies’ oligopoly might endure indefinitely. In a truly free market, other companies might arise that would undercut the credit-card companies’ fees, rendering suits against VISA and MasterCard unnecessary. But the court feared, no doubt rightly, that the companies’ market dominance would enable them to block competition and last until the end of time. Let’s hope not.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Noah Feldman at

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