Settlement Without Consent: Assessing the Credit Card Merchant Fee Class Action

Posted by Social Science Research Network

Settlement Without Consent: Assessing the Credit Card Merchant Fee Class Action – Steven Semeraro (Thomas Jefferson School of Law)

ABSTRACT: The multi-district class action In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation has pitted the merchants that accept credit cards against the two largest card networks, Visa and MasterCard, and the thousands of banks issuing their cards. The merchants charged the banks with fixing the prices merchants pay to accept cards.

Last year, the parties’ attorneys announced a $7 billion settlement, the largest ever. But in exchange, all class members were required to accept (1) an injunction that did not alter the contested pricing practices; and (2) a breathtakingly broad release. The settlement prohibited class members from opting out, deeming the injunctive relief class mandatory under Federal Rule of Civil Procedure 23b(2).

Despite objections from over half the named plaintiffs and many other merchant class members, the District Court approved the settlement. Home Depot summed up the objectors view, arguing that the settlement “fails to address in any meaningful way the anticompetitive practices that are the subject of this litigation” and leaves “Visa and MasterCard . . . free to keep setting . . . fees exactly as they do now, free from any liability . . .”

Although Fed. R. Civ. Pro 23 recognizes mandatory classes when a court enjoins conduct that necessarily impacts the entire class, the settlement here does not have that quality. Its principle feature – granting merchants the ability to surcharge credit card transactions – could be extended to some class members, but not others. Indeed, the settlement explicitly recognized this possibility, allowing Visa and MasterCard to negotiate bi-lateral agreements prohibiting surcharging with individual merchants.

The court justified its decision to bind millions of merchants on its belief that the merchants could not expect to do any better. They had a slim chance of winning the case and, even if they did, the court could not grant a more effective remedy than the right to right to surcharge.

The court was wrong on all counts. Antitrust law requires price competition, and nothing about current credit card markets should exempt the banks for that standard requirement. And although commentators’ views on surcharging differ, they agree that settlement as written does not grant merchants the flexibility necessary to create acceptance fee competition. Finally, if the merchants prevailed, the court could impose significantly more effective relief than the settlement provides. The credit card systems could operate as they do now with one exception – any merchant could insist that one or more of the four largest card-issuing banks offer it a bi-lateral card acceptance fee at a rate below the networks’ default interchange rates. This approach would force a card issuer that is big enough to support its own system to compete head-to-head, bearing the risk that a merchant would drop its cards while continuing to accept those issued by its competitors.