Walmart and other large merchants would face considerable work to create card surcharge and discount programs under the terms of a proposed card-fee legal settlement, they told a federal judge Monday.
U.S. District Judge Brian Cogan called the hearing for merchants who oppose the settlement to elucidate their problems with the proposed settlement.
Meanwhile, supporters of the pact — Visa, Mastercard and the plaintiffs’ counsel — on Monday explained to Cogan why he should approve the pact and responded to the objectors’ arguments about why it falls short.
The interchange fee settlement – covering about 12 million U.S. merchants – is aimed at ending 21 years of litigation on the matter. It is supported by the networks and attorneys for the class of plaintiffs, with the litigation dating to mid-2005.
Cogan is weighing whether the agreement, announced in November, is “fair, adequate and reasonable,” the legal standard for review under antitrust law, and should be given preliminary approval.
The judge put several questions to lawyers on both sides of the dispute but didn’t convey his own views of the agreement’s merits during the nearly three-hour hearing. Cogan said he’d issue a decision as soon as he could.
The proposed settlement would trim credit interchange rates by 10 basis points for five years and impose a 1.25% rate for standard consumer cards for eight years. It would also give merchants the right to decline some higher-cost Visa- and Mastercard-branded premium and commercial credit cards – a departure from the networks’ “honor all cards” rule.
Merchants would also gain new rights to add surcharges and offer discounts for cards as a way to steer customers away from cards with higher interchange fees. But large merchants argue that they can’t easily reject bank’s premium cards – which offer travel and cashback rewards and carry higher fees – because customers want to use them.
“They’re putting the onus on the merchants to correct” anticompetitive market structures, said Mary Miller, an attorney for the National Association of Convenience Stores and Circle K, adding that “merchants have a lot of work to do” under the proposed settlement.
“There’s just something that doesn’t make sense about requiring the merchants, who are arguably the ones being harmed by the anticompetitive scheme, having to do the work and telling the customer ‘Now I'm going to have to surcharge you,’” she said at the hearing.
Cogan posed several questions related to customers’ confusion around card acceptance and plaintiffs’ views of their chances of winning at a trial.
An attorney for Walmart, Jesse Panuccio of the law firm Boies Schiller Flexner, said that the settlement envisions a system by which merchants could decline high-fee cards and wean consumers from the higher-cost, reward-based credit cards by establishing their own reward systems.
He told the court it’s improbable that merchant-based rewards schemes would work as a replacement for banks’ existing programs under premium cards.
“They say Walmart should set up its own reward program and replace what the premium card is doing,” Panuccio said. “So, by fiat, we have to come up with this new system that we don’t have.”
An attorney for Visa, Michael Shuster of the law firm Holwell, Shuster & Goldberg, called the honor all cards rule “an article of faith” under which the company operated for 60 years.
“It is a big give,” Shuster told the court. “And it is a give for which merchants have been agitating for many years. That is not our idea, this is their idea. And it’s painful for us to make that give.”
He also said that merchants’ ability to reject some Visa and Mastercard-branded cards under the terms would help rival American Express. “You can see the ads now,” Shuster said. “Amex is going to say ‘You don’t want your card rejected? Get an Amex.’”
Lawyers for the card networks and Steve Shadowen, one of the plaintiffs’ class counsel, argued Monday that merchants objecting to the settlement have drastically underestimated their litigation risk involved with pursuing a trial and subsequent appeals.
That timeline would also take multiple years to play out compared to a settlement that would help merchants very soon, Shuster said.
Objecting merchants also argue that the settlement doesn’t alter the current system under which the networks set fees on behalf of issuing banks. That prevents banks from having to compete against each other, Miller said.
Walmart has told Cogan that it needs to be able to negotiate interchange fees directly with banks to lower its card-transaction costs, and to be able to decline certain issuers’ cards, not just particular types of cards.
The top 10 card issuers represent 84% of merchant transactions volume, Miller said.
Being able to negotiate fees directly with banks – and decline certain issuers – would not destroy the networks’ business or harm consumers, she told Cogan, responding to the network lawyers’ contention about the negative effects of such a change.
The proposed settlement is the third Visa and Mastercard have reached with merchants in the past decade. Two years ago, U.S. District Judge Margo Brodie rejected a previous settlement, while a federal appeals court scuttled a 2016 pact. The multi-district case in the Eastern District of New York was transferred to Cogan last year.
Walmart and the national retail trade groups also argued that Cogan should let plaintiffs opt out of the proposed settlement – which covers injunctive relief – as merchants were allowed to do in a separate damages portion of the proceedings that played out in cases in Chicago and Manhattan.
“If this was such a good deal, the parties should be happy to include an opt out,” Debra Greenberger, an attorney for the National Retail Federation and Retail Industry Leaders Association, told the court. “They didn’t.”
Panuccio said it’s “probably unconstitutional” for the class not to have a right to opt out of the settlement.
