As Fed Debit Rule Sinks in, Merchant Class Action Grinds Toward Trial

Now that the Federal Reserve’s new debit card interchange regulations are finally out in the open, the profile of yet another payment card interchange and rules controversy is slowly rising. That’s the raft of merchant antitrust lawsuits pending in U.S. District Court in Brooklyn, N.Y., collectively known as “MDL 1720.” Merchants first sued back in 2005, and earlier this year they finally got a trial date: Sept. 10, 2012. Ahead of that, a judicial decision about whether their cases will be certified as a class action could come at any time.

The lawsuits, consisting of three major complaints under the supervision of U.S. District Judge John Gleeson, name Visa Inc., MasterCard Inc., and some of their major customer and former owner banks as defendants. Citing the Sherman and Clayton antitrust acts as well as state laws, the merchants portray the current U.S. credit and debit card interchange process as a price-fixing scheme by the bank card networks and card issuers to the detriment of merchants. Networks set interchanges fees, which are paid to issuers by merchant acquirers, which pass the expense on to merchants.

The merchants also are challenging the legality of certain network rules or policies that prohibit them from surcharging for card transactions or limit their steering of customers to their preferred forms of payment. The plaintiffs further allege that the initial public offerings by MasterCard (2006) and Visa (2008), both of which were founded and developed by banks, have done little to change the anticompetitive nature of interchange even though banks no longer own the networks. The merchants also say Visa’s Interlink point-of-sale debit network demonstrated market power by raising PIN-debit interchange rates close to rates for signature-based debit without losing significant merchant acceptance.

The merchants are seeking both damages and injunctive relief. The defendants’ potential liability should they lose is still unclear, but it could easily run into the tens of billions of dollars because damages could be trebled under antitrust laws.

The complicated litigation began as approximately 55 lawsuits filed in various jurisdictions, all but 10 of them seeking class-action status, according to Visa’s fiscal 2010 annual report. Plaintiffs include local and regional retailers all the way up to national trade associations and retailers such as Kroger, Supervalu, Walgreen, CVS, and others. Federal court administrators consolidated the suits in Gleeson’s court. Gleeson oversaw an earlier landmark lawsuit commonly known as the Wal-Mart case that resulted in the demise of the networks’ so-called honor-all-cards rules. Those rules forced merchants to accept Visa or MasterCard-branded signature debit cards if they accepted credit cards.

Spokespersons for MasterCard and Visa declined to comment, referring Digital Transactions News to references to the cases in their respective regulatory filings.

Gleeson heard arguments regarding class-action status in November 2009 but still hasn’t ruled. The proposed class is huge: all U.S. merchants that have accepted Visa or MasterCard cards since 2004. That’s approximately 5 million businesses based on the 8 million locations that currently accept bank cards.

K. Craig Wildfang, an attorney for the merchants seeking class status and a partner with Robins, Kaplan, Miller & Ciresi L.L.P. in Minneapolis, says he can’t guess what may be taking Gleeson such a long time to make a decision. He does note that the magistrate judge handling much of the pre-trial work, James Orenstein, has a large number of motions and documents to sift through. “Based upon the arguments and briefs and the questions from the bench, we think we are on very solid ground and we think we’re going to get the class certified,” Wildfang tells Digital Transactions News.

And if it doesn’t? “The merchants will proceed to trial on their claims even if Judge Gleeson does not certify the class,” Wildfang says. “However … we are very optimistic that at least some class will be certified, even if the court were to decide to narrow the class in some fashion.”

The opponents have participated in court-recommended mediation sessions, but for now settlements seem unlikely. “We have been in mediation with the defendants for quite some time, but not much has happened,” says Wildfang. “The real problem is the revenue streams to the banks is so enormous.”

MasterCard in its first-quarter report said “substantial progress” has been made in mediation with individual merchant plaintiffs. “There has not been similar progress with the class plaintiffs,” MasterCard said. “In particular, the class plaintiffs’ confidential demands to MasterCard include unacceptable financial components as well as unacceptable changes to MasterCard’s business practices, and accordingly, MasterCard cannot ascertain whether the mediation or any settlement efforts will be successful.”

MasterCard said the merchants are seeking an order “reversing and unwinding” its IPO. Wildfang, however, says that’s not likely something his side would recommend should it win. “We’re not at the stage yet where we would specify the relief we would want,” he says.

The new Federal Reserve regulations and settlements Visa and MasterCard reached with the U.S. Department of Justice last October over acceptance rules cover some of the same ground as the merchant litigation, but, according to Wildfang, not all of it.

Defendant banks include Bank of America, JPMorgan Chase, Citigroup, HSBC, Wells Fargo, Capital One, Fifth Third, First National of Omaha, Barclays, and Texas Independent Bancshares.