On January 24, 2019, Judge Margo K. Brodie of the U.S. District Court for the Eastern District of New York granted preliminary approval of Visa and Mastercard's second attempt to settle the 13-year old antitrust litigation brought by approximately 12 million merchants, alleging that Visa, Mastercard, and several issuing and acquiring banks conspired to fix artificially high interchange fees in violation of the Sherman Act. The settlement of between $5.56 billion and $6.26 billion, which if granted final approval will be the largest antitrust class action settlement in history, seeks to remedy certain flaws of the prior settlement, which was approved by the Eastern District of New York, but vacated by the 2nd Circuit in 2016.

Background of the Interchange Litigation and Prior Settlement

In 2004, several national retailers and trade associations filed lawsuits against Visa and Mastercard, alleging a conspiracy to fix interchange fees in violation of Section 1 of the Sherman Act. In 2006, the suits were consolidated and certified as a class action in the Eastern District of New York. Specifically, the merchants alleged that several of Visa’s and Mastercard’s network rules, including the “default interchange fee” that applies to every transaction on the network, the “honor-all-cards” rule that requires merchants to accept all Visa or Mastercard credit cards if they accept any of them, and “anti-steering” rules (which include “no-surcharge” and “no-discount” rules that prohibit merchants from charging different prices at the point of sale depending on the means of payment), effectively allowed issuing banks to impose an artificially inflated interchange fee that merchants have no choice but to accept.

In 2012, the parties reached a settlement that divided the merchant plaintiffs into two classes: (1) merchants that accepted Visa and/or Mastercard from January 1, 2004, to November 28, 2012; and (2) merchants that accepted (or will accept) Visa and/or Mastercard from November 28, 2012, onward. While the former class would be eligible to receive up to $7.25 billion in monetary relief, the latter would instead receive injunctive relief in the form of changes to Visa and Mastercard’s network class. Further, because members of the first class were to receive money damages in the settlement, such class members had the ability to opt out of the settlement and pursue direct actions, but because the members of the second class received only injunctive relief, they did not have the ability to opt out. Additionally, the settlement agreement specified that all of the injunctive relief would terminate on July 20, 2021.

While the Eastern District of New York granted final approval of the settlement in December 2013, the 2nd Circuit vacated the proposed settlement on June 30, 2016, finding it to be “unreasonable and inadequate.” In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 827 F.3d 223, 231 (2d Cir. 2016). Specifically, the 2nd Circuit found a clear conflict between the two classes because the merchants who were pursuing solely monetary relief wanted to maximize compensation, while the merchants seeking injunctive relief wanted to achieve maximum restraints on Visa and Mastercard’s network rules to prevent future harm.  Id. at 233-236. Based on this, the 2nd Circuit ruled that class counsel’s unitary representation and negotiation of the settlement on behalf of both classes was inadequate.  Id. Further, the 2nd Circuit was concerned that the settlement did not sufficiently protect the interests in the class of merchants only seeking injunctive relief because some of the members did not stand to receive an “appreciable benefit from the settlement,” but still agreed to “release virtually any claims they would ever have against the defendants.”  Id. at 238.

Proposed Terms of New Settlement

The new settlement appears to correct some of the inadequacies noted by the 2nd Circuit: (1) separate counsel was appointed to represent the injunctive relief class, so the unitary representation of two classes with divergent interests is no longer a concern; (2) the settlement only addresses one class (the monetary damages class, and not the injunctive relief class); (3) the settlement of the monetary damages claims are not contingent on the resolution of the injunctive relief class action (which may be pursued separately); and (4) the settlement’s release provision applies only to merchants who accepted Visa or Mastercard branded cards between January 1, 2004, and January 24, 2019, and is limited in duration, barring only claims that have accrued within five years of the court’s approval of the settlement.

Under the settlement, merchants who submit timely and valid claims will receive a pro rata share based on the interchange fees attributable to their transactions during the class period, i.e., January 1, 2004, and January 24, 2019. If more than 25% of class members opt-out of the class, the defendants will have the ability to terminate the settlement.A final approval hearing is scheduled for November 7, 2019.

Potential Impact of Settlement

When the original suit against Visa and Mastercard was filed in 2005 by 12 million merchants, the companies were owned by banks and not public. Since that time, Visa and Mastercard have become public companies – Mastercard in 2006, and Visa in 2008 – and their stocks have performed very well. Some of the stock owned by the previous merchant banks is being used as part of the payment for the settlement. The value of both stocks have risen since the announcement of the settlement.

This settlement sets the stage for the next battle. Retailers are gearing up for the issues remaining on the table, in particular, injunctive relief to change Visa’s and Mastercard’s business practices, which was separated from the monetary damages at the time the court rejected the prior settlement. One of the goals of the lawsuit is to lower the amount the merchants pay in swipe fees, which they claim will be passed onto consumers. If these changes include a reduction in interchange fees, it would affect the card future earnings. This next stage could be crucial in this ongoing litigation.

The settlement also avoids any appeal, as happened in the AmEx case , which the Supreme Court threw out in a years-long lawsuit filed by the U.S. government and some states that accused AmEx of thwarting competition with antisteering provisions. The settlement also avoids any appeal, as happened in the AmEx case, which the Supreme Court threw out in a years-long lawsuit filed by the U.S. Government and some states that accused AmEx of thwarting competition with antisteering provisions.

We'll continue to monitor developments.