Not All Merchants Are Happy with the $7-Billion-Plus Credit Card Settlement

No sooner had the ink dried on a proposed settlement of a massive credit card suit than cracks began to appear in what had been an edifice of merchant solidarity. The NACS, a national trade group for convenience-store operators, on Friday said its board of directors had unanimously rejected the settlement, and on Monday its attorney told Digital Transactions News more merchant dissenters will emerge. “A lot of merchants are very upset about this [settlement],” says Douglas Kantor, a Washington, D.C.-based partner at Steptoe & Johnson LLP and counsel to the Alexandria-based NACS, which has about 3,700 members, including 2,100 retailers and 1,600 suppliers. Its board consists of more than 24 merchant representatives.

The NACS is one of 19 representatives for millions of smaller businesses involved as a class in the giant, 7-year-old lawsuit alleging Visa Inc., MasterCard Inc., and a dozen major banks violated federal antitrust law through their policies on credit card interchange rates and network rules. Other plaintiffs include retail chains suing on an individual basis, including Kroger Co., Supervalu Inc., and Walgreen Co. The proposed settlement announced Friday includes $6.6 billion in cash payment to class and individual merchants, up to $1.2 billion in interchange relief for class merchants, and relaxation of network rules banning surcharges.

The NACS argues the settlement does nothing to change the way Visa and MasterCard set interchange rates for credit cards, a practice the plaintiffs have alleged amounts to illegal price fixing across all banks. “I’m confident there will be more” class representatives rejecting the settlement, Kantor says, though how many more “remains to be seen,” he adds.

The association was an insider on settlement negotiations but found little in the proceedings that addressed its concerns, Kantor says. “We were part of the [settlement] talks, but we were not happy,” he says.

While the NACS hasn’t opted out the settlement, Kantor says it’s premature for that action. “That’s a decision that’s months away,” he says. For one thing, the agreement must be approved by the presiding judge, John Gleeson of the U.S. District Court for the Eastern District of New York in Brooklyn. At a fairness hearing on the settlement agreement, which Kantor doesn’t expect until next year, dissenting plaintiffs like the NACS will have a chance to present their objections. If the judge then withholds approval, an opt-out would be unnecessary.

To press its case, the NACS has brought in a big gun, hiring New York City-based Constantine Cannon LLP, the firm that represented merchants in the so-called Wal-Mart case, a suit over debit card policies that was settled in 2003 with Visa and MasterCard paying $3 billion to merchants and offering temporary interchange relief.

Other class members express satisfaction with the deal, which caps a legal odyssey that began in 2005 with a series of merchant suits that ultimately wound their way to court in Brooklyn. “I’m thrilled with it,” says Mitch Goldstone, president and chief executive of Irvine, Calif.-based Scanmyphotos.com. “These are significant reforms that are going to help control merchant costs and consumer pricing.”

Already, he says, he has cut the price of online orders for prepaid photo-scanning boxes from $225 to $220 in response to the agreement, which proposes cash payment to merchants equivalent to a 10-basis-point reduction in credit card interchange over an eight-month period. One of ScanMyPhotos’s mailing boxes can hold about 1,800 standard-size photos. The new freedom to surcharge customers for card use, up to an unspecified limit, will also help control interchange costs, says Goldstone, who was one of the first merchants to file suit in 2005. “I’m looking at the threat of surcharge as leverage to increase competition,” he says, arguing the card networks will keep rates low to discourage surcharging.

As for the NACS’s dissent, Goldstone withholds comment. “I don’t have a reaction to it right now,” he says. “I’m evaluating it.”

Kantor says his client’s objections are that the agreement leaves in place the networks’ price-fixing ability with respect to credit card interchange and leaves untouched network policies that help prop up pricing. While the settlement opens the door to surcharges, it says nothing about transaction routing, he points out. Merchants have long sought the ability to send transactions to networks offering the most favorable pricing, something that became a key element of the Durbin Amendment to the 2010 Dodd-Frank Act. The Durbin rules, which include interchange caps, cover debit cards.

In the end, the settlement “tinkers at the edge of how Visa and MasterCard police merchants, but doesn’t change it,” Kantor says.