$7.25 billion credit card swipe fee settlement fraying

Legal settlements usually settle disputes, but a proposed $7.25 billion class-action settlement involving Visa and MasterCard appears to be erupting into a whole new battle over the fees retailers have to pay when consumers pull out their plastic.

Scores of angry retailers — from Wal-Mart and Starbuck's to Target and Domino's Pizza — opted out of the historic settlement by last week's deadline and filed formal objections for U.S. District Judge John Gleeson in Brooklyn to consider. Some, such as Minneapolis-based Target Corp. and Macy's Inc., already have struck back with a new lawsuit seeking damages.

They are walking away from what's regarded as the largest private antitrust class-action settlement in U.S. history, one that involves more than 7 million U.S. businesses — just about every entity that swiped a Visa or MasterCard credit or debit card since 2004.

"It's extraordinarily rare for a class settlement to be rejected because of concerns raised by class members," said David Fink of Fink and Associates Law in Bloomfield Hills, Mich., who specializes in class-action litigation.

At the heart of the battle are allegations that Visa, MasterCard and a group of card-issuing banks illegally colluded since 2004 to fix the swipe fees merchants pay to process cards. The interchange fees average about 2 percent of every purchase at the register, and total about $30 billion a year.

Many retailers say the swipe fees rival their health care costs as a significant operating expense. The National Retail Federation estimates the swipe fees drive up consumer costs by more than $250 a year per average household.

"[The settlement] fails to address the price fixing that harms merchants and their consumers. It takes away retailers' legal rights to ever try again, and it offers virtually nothing in return," said Mallory Duncan, the retail federation's general counsel, in a news release.

The objecting retailers "are not raising anything new that hasn't already been discussed and over-discussed for seven years," she said.

Ultimately, control over the U.S. interchange system for processing cards is at stake, and the outcome of the settlement dispute could have far-reaching consequences for Visa and MasterCard, which dominate the credit card industry, said Patricia Hewitt, a payments analyst at Boston-based Mercator Advisory Group. Consumers could see the costs for their credit cards climb, too, she said.

"We can see that interchange as a system is being examined and analyzed and modified all over the world," Hewitt said. "This industry is evolving. This is likely another evolutionary turn of the industry."

Just how many businesses dropped out of the swipe-fee agreement won't be known for some time. If merchants accounting for more than 25 percent of the total credit-card volume from 2004 through 2012 opt out, which is highly unlikely, the defendants can walk away.

All eyes are on the judge, who must decide whether the deal is "fair, reasonable and adequate" for the vast class of businesses. He could reject the deal or take some other course of action. If the settlement fails, the dispute could proceed to trial.

"I'm kind of a blue-collar kind of guy. I do my 10 hours a day here," said Ken Herren, owner of Your Art's Desire Gallery of Art and Framing in Minnetonka. "I'll take whatever I can get," he said of the settlement, adding that "If it hurts [the credit card companies], I'm happy about that."

If the settlement is approved, payments are expected to amount to about two to three months worth of a business's interchange tab. For a very small businesses, it might be a few hundred dollars or less.

The settlement stems from lawsuits merchants filed in 2005, and attorneys for the huge class of merchants say that after more than seven years of wrangling it's the best deal possible. It abolishes the Visa and MasterCard "no surcharge" rules, permitting merchants to pass their fees on to customers. Experiences in other countries such as Australia shows that merchants can drive down interchange fees by surcharging, attorneys supporting the deal say.

The deal also allows merchants to form buying groups to negotiate better interchange rates, and requires Visa and MasterCard to negotiate in good faith with them. It cements reforms from a consent decree between Visa/MasterCard and the U.S. Department of Justice, as well as the Durbin Amendment, which capped debit-card swipe fees.

Responding to media inquiries about the opposition, K. Craig Wildfang, the Minneapolis lawyer who helped broker the deal as co-lead counsel for the class of retailers, has challenged the objecting retailers to present some sort of viable Plan B.

"Settlements get negotiated between parties," Kantor said. "We have looked at many different permutations, but there is no benefit whatsoever to publicly having a discussion only with ourselves. The defendants have made clear they are not discussing or negotiating anything. They are in take-it-or-leave-it mode."

Among other things, objecting retailers argue that the deal doesn't reform the broken interchange system and leaves Visa and MasterCard and the banks far too much power to set high rates, costing retailers.

The retailers also say it contains a provision preventing retailers from suing Visa and MasterCard over price-fixing in the future, which some argue violates their constitutional right to due process.

Target and a group of more than three dozen major retailers escalated the fight on May 23, filing their own lawsuit against Visa and MasterCard for damages from illegal price-fixing since 2004.

Last week, in a move to head off that and similar lawsuits, Visa and MasterCard asked Gleeson to declare once and for all that, as it relates to the named defendants in the settlement that opted out, Visa, MasterCard and the card-issuing banks did not violate federal antitrust laws between 2004 and November 2012.