There’s been a lot of talk lately about how the retail industry has supposedly settled a federal lawsuit with Visa and MasterCard over credit card swipe fees.
The truth is that there is no settlement with the retail industry. Instead, there’s a settlement with a grand total of nine individual retailers trying to represent themselves as a “class” in a class-action case. That’s right — nine retailers out of the millions of retailers across the country. A majority of the original plaintiffs in the case repudiated the settlement as soon as they saw its terms; the nation’s largest retailers have spoken out against it, and close to 8,000 retailers have formally rejected the proposal.
Ordinarily, a small group of plaintiffs can bring a lawsuit on behalf of an entire industry and, barring a verdict in court, negotiate a settlement on behalf of that industry. But this is no ordinary case. With so many members of the industry saying they want no part of the deal, forcing them into a settlement and stripping them of their rights is an abuse of the class action system that should never have been approved.
To understand why so many retailers oppose this settlement, you need to understand why the underlying lawsuit was brought.
For years, Visa and MasterCard have set the complex schedule of fees that are collected each time one of their credit cards is swiped to make a purchase. But it isn’t Visa or MasterCard that issues the cards or collects the fees. Instead, thousands of banks issue the cards, and it’s the banks that collect the fees. Yet these thousands of banks — ostensibly in intense competition with one another — charge exactly the same amount.
With no actual competition and the growing use of plastic, the fees have soared, tripling to $30 billion a year in the past decade or so. And since Visa and MasterCard rules have effectively required the fees to be built into the price of merchandise, retailers’ profits have been squeezed and consumers have paid higher prices as a result.
Retailers have argued for years that this practice is a violation of antitrust law the same as if retailers colluded to all charge the same price for a gallon of milk, a pair of pants or a television set. In 2005, a number of lawsuits making that claim were filed in U.S. District Court and were ultimately consolidated into the case that is the subject of the current settlement proposal.
The case never got to trial. Instead, lawyers negotiated behind closed doors — with little or no input from the retail industry at large — and in July 2012 unveiled a $7.25 billion deal that was highly touted as the largest antitrust settlement in history.
Retailers, however, began bailing out as soon as the settlement was announced, blasting it as a one-sided deal written by the card industry for the card industry.
To start, the amount of money offered, while undoubtedly large, amounts to only pennies on the dollar for the nearly quarter-trillion dollars collected over the period covered by the lawsuit. Divided among millions of merchants based on card volume, some small retailers would see as little as a few hundred dollars.
Secondly, the settlement does nothing to dismantle the cartel-like price-fixing system that was the heart of the suit. After making the payment, the card industry would be free to continue fixing and raising prices, even to the point of recouping the payout.
Thirdly, the card industry’s alternative to lowering its fees is to allow retailers to pass them along to consumers as a surcharge. That is the total opposite of the goal of the lawsuit, and has been rejected by virtually every major retailer who has spoken out on the issue.
Finally, the settlement includes an unprecedented broad ban on future lawsuits over swipe fees that would last indefinitely, blocking even retail companies that have yet to be formed from going to court.
Despite these obvious flaws and widespread objections, the settlement was approved by Judge John Gleeson in December. The approval triggered another round of headlines claiming “millions” of retailers had settled their dispute with Visa and MasterCard. In fact, retailers and retail groups — including the National Retail Federation — filed appeals almost immediately, and the case is now before the Second U.S. Circuit Court of Appeals.
How could such an obviously unsettled “settlement” win approval?
To start, as lead plaintiffs, the nine retailers still involved in the case would receive a larger share of the money than other retailers, and have the incentive of a significant influx of cash regardless of whether the deal solves the problem. The class action lawyers are seeking to collect half a billion dollars in legal fees. And the lower court has cleared a complicated and time-consuming case off its always-busy docket. Visa and MasterCard and their banks, needless to say, have no objections because they will be allowed to continue collecting tens of billions of dollars in hidden fees each year.
Each of these parties, however, has done a disservice to the retail industry and American consumers. The retail plaintiffs should have stood up for their fellow retailers, as intended in a class-action case. The lawyers for the retailers should have stood up for their clients rather than just looking to maximize fees. And the judge, more than anyone, should have stood up for what was fair.
At this point, it’s up to the appellate court to tell the lawyers and judge to go back to the drawing board and come up with a settlement that truly fixes the broken system of credit card swipe fees. But with briefs yet to be filed and oral arguments yet to be made, this case could come close to its 10-year anniversary before any final decision is reached. Until then, remember — a “settlement” isn’t always settled.
Mallory Duncan is SVP and general counsel of the National Retail Federation