After three days of scattered citations and speculation, the judge in the Eastern District of New York presiding over the latest chapter in the proposed credit card swipe fee settlement between Visa, MasterCard and millions of merchants has issued an 88-page opinion.
The opinion came nearly a week after U.S. District Judge Margo K. Brody indicated she would not approve the settlement negotiated in late March.
The gist of the ruling was that Brody “is unlikely to approve the settlement” because it does not treat all merchants fairly and does not provide sufficient relief compared to what merchants might win at trial. The ruling brings the parties back to the negotiating table in a lawsuit that has been going on for nearly two decades.
Key points from Brody:
- The proposed settlement would have required Visa and Mastercard to pay up to $30 billion to merchants over five years through reduced interchange fees.
- This gives retailers more flexibility to charge customers extra for using their credit cards.
- Large national retailers such as Walmart and Target opposed the deal, saying it would provide little benefit to their companies and force them to give up valuable legal claims.
- The judge found that the settlement unfairly benefited smaller stores at the expense of larger stores.
- She found the reduction in interchange fees to be insufficient when compared with rates in other countries and expert estimates of competitive rates.
Best case scenario
Brody said the proposed relief “falls short of the ‘best possible’ recovery” for shopkeepers if the case goes to trial. He noted that the plaintiffs’ claims have already survived a summary judgment motion, giving them a strong case.
“The inadequacy of the above provisions is highlighted by the Court’s denial of Defendants’ motion for summary judgment on all of Plaintiffs’ anticompetitive conduct claims,” ​​Brody wrote.
A key feature of the rejected settlement was its expanded authority for retailers to charge customers surcharges for credit card usage. The settlement would have allowed retailers to charge up to a 1% surcharge on all Visa or Mastercard credit card transactions, regardless of whether they charged surcharges on other cards.
However, Brody concluded that these provisions provide little benefit to many large retailers, writing that because “large national retailers accept American Express and are more likely to operate in states that ban surcharges, these retailers ‘do not derive any significant benefit from the surcharges.'” [Settlement]”Meanwhile, merchants who don’t use American Express and operate in states that allow surcharges stand to gain significantly more.”
She added that for merchants who accept American Express, “the surcharge rules still prohibit surcharges at the card-issuer level, meaning merchants still have no way to use surcharges (or the credible threat of them) to encourage competition among card-issuing banks.”
She also emphasized that many states may have laws that make it “virtually impossible to take advantage of the Settlement’s surcharge provisions and still comply with state law,” casting doubt on plaintiffs’ assertion that 96 percent of transactions under the Settlement would be subject to surcharges.
Rules for Respecting All Cards
The judge challenged a provision that maintained Visa and MasterCard’s “universal card acceptance” rules, which require merchants to accept all of a network’s credit cards if they accept any of them. The judge said this falls short of the relief some opposing merchants have sought: a complete repeal of those rules.
The settlement clarified that retailers could selectively refuse to accept certain categories of Visa or MasterCard products at all stores operating under the same trade name, and also permitted retailers to conduct a 120-day pilot program in which they could refuse to accept up to 20% of their stores per year.
Brody believes these changes are insufficient, writing: “While the changes provide some retailers with the option to test not accepting certain ranges of products in some of their stores, retailers are still burdened with yet another all-or-nothing choice between card products.”
She noted that whether or not the dissenting plaintiffs are successful in arguing at trial to repeal the “all cards allowed” rule, “the fact that such relief continues to be asserted, providing significantly more options to all plaintiffs, suggests that the relief offered in the settlement falls short of the ‘best possible’ recovery.”
Digital Wallet Perspective
The settlement also includes amendments to Visa and Mastercard’s “Honor all wallets” rules, which require merchants that currently accept digital wallets to also accept all digital wallets, including Visa or Mastercard payment cards.
The proposed changes would allow retailers to accept some digital wallets and reject others, subject to certain restrictions, but retailers would still be required to accept Visa- or Mastercard-branded cards in digital wallets owned or operated by Visa or Mastercard.
Brody found this to be “a significantly more limited version of the relief sought by some of the dissenting plaintiffs, namely the repeal of the All Cards Preferential Treatment Rule.” He noted that the settlement still requires retailers to comply with the All Cards Preferential Treatment Rule for all digital wallets owned or operated by Visa or Mastercard.
The proposed settlement called for Visa and Mastercard to reduce their posted interchange rates by at least four basis points and maintain average effective rates at least seven basis points below current levels for five years. Brodie noted that these reductions were insufficient and would maintain rates higher than the rates the plaintiffs challenged at the start of the litigation. He cited expert testimony that competitive interchange rates could be more than 100 basis points below current levels.
“According to one of the plaintiffs’ experts, the average Visa and Mastercard interchange rates in 2023 will be approximately [redacted] “Even if we were to reduce this average rate by the amount proposed in the settlement, it would still be significantly higher than the rates previously described by experts in this litigation as a ‘ceiling’ for interchange rates in the absence of the contested competition restrictions,” the judge wrote.
Fair Treatment
Another important factor in rejecting the deal was that Brody felt that the deal did not treat all traders fairly.
She said the measure would be least beneficial to retailers with the highest value claims — the big national retailers who pay the most in swipe fees.
“The settlement provides the least benefit to those merchants with the most valuable claims. In this respect, it resembles a reversal of pro rata,” Brody wrote.
She noted that large retailers would not benefit from lower indicative rates because they are more likely to have negotiated custom interchange rates. They are also more likely to accept American Express cards and operate in states that ban surcharges, limiting their ability to benefit from such provisions.
“While the Court disagrees with the Objectors’ arguments that the Settlement is ‘essentially worthless,’ ‘meaningless’ or ‘will provide no benefit,’ the Court finds that the benefits of the Settlement will likely flow disproportionately and unfairly to small, local merchants like the Class Plaintiffs,” Brody wrote.
Waiver of Claims
The proposed settlement required merchants to grant immunity to Visa and Mastercard from antitrust lawsuits for five years, something some opponents argued would unfairly grant immunity from future lawsuits. Brody didn’t think the immunity was overly broad, but he agreed with concerns that it could tie up new merchants who were created between the tentative and final settlement approvals, potentially depriving them of the right to legitimately challenge the terms.
To address this, she amended the class definition to end on the preliminary approval date rather than the final approval date, which would ensure that all class members have an opportunity to challenge the settlement terms.
In assessing whether Visa and Mastercard could withstand a larger judgment, Brody found strong evidence that they could: He noted that the $30 billion in fee cuts over five years pales in comparison to the $100 billion in annual interchange fees that merchants will pay in 2023.
The judge also pointed to the network’s continued viability in markets where regulated exchange rates are much lower as evidence that it could agree to more substantial concessions.
“The viability of Visa and MasterCard in regulated jurisdictions strongly suggests that defendants can agree to more significant fee caps and reductions (i.e., can withstand higher sentences),” she wrote.
