What the current swipe fee settlement leaves unsettled

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In many ways, the declaration of the end of the merchants' swipe fee case against the major card brands last September with $6.2 billion settlement is not unlike previous efforts to settle the case — in that it won't truly end the antagonism between merchants and the card brands.

The merchants in this case have been categorized by the court into two classes — ones seeking money to soften the blow for years of what they claim were illegally high fees, and ones seeking changes in network rules that prohibit merchants from negotiating fees.

It's been a modern-day clash of the titans since 2005, when merchants first brought their price fixing claims to court. Many merchants may accept the settlement money this time, but they aren't done pushing for long-term change.
The U.S. District Court in New York had a preliminary approval hearing on the settlement in December, and Judge Margo K. Brodie said she would grant preliminary approval. She has not yet filed an order doing that, said Doug Kantor, a partner at Steptoe & Johnson LLP and legal counsel for merchants and the Secure Payments Partnership, in an interview last week.

"Notice to merchants and the chance to opt out won't happen until that order is filed," Kantor said. "After the opt-outs, then there will be a final approval hearing, likely next fall, so we still have a while to go."

Past settlement opt-outs indicated merchants' focus was more clearly moving toward setting lower interchange rates, loosening up the grip of the Honor All Cards rules, and other types of fees. But the caveat of the settlement five years ago was that merchants wouldn't have been able to sue the card networks again. Thus, it got scuttled.

This time around, that shouldn't be an issue, Kantor said.

"The settlement is really only about money," he said. "The rule changes are separate and there is no settlement on that to date."

By that way of thinking, many merchants are not focusing on settlement payments at all. The rule changes carry far more weight.

For some time now, merchants have argued that swipe fees from Visa and Mastercard were too high and any competition that would lower those were being stifled. In that regard, they would like the choice of what cards to accept, pointing to premium cards as too expensive to accept and that the Honor All Cards rule restricts their ability to negotiate rates.

Such a development could cause anxiety for card issuers. If merchants are able to get Honor All Cards off the table or at least altered, the potential loss in revenue would force issuers to change the way they fund reward programs.

"The question is, what the plaintiffs will really push for and whether that means a settlement or a trial" regarding rules changes, Kantor said.

For now, Visa and Mastercard have agreed to pay between $5.54 billion and $6.24 billion to a class of more than 12 million retailers as part of the settlement. Retailers who have accepted Visa and Mastercard cards at any time from Jan. 1, 2004, through the date of the settlement's approval would be included in the class.

"After years of thoughtful negotiation, we are pleased to be able to reach this agreement and move forward in our partnership with merchants to provide consumers convenient, reliable, secure ways to pay," Kelly Mahon Tullier, Visa's general counsel, said in a statement at the time of the settlement.

Indeed, many merchants may take the settlement payouts if they feel their objections to the last settlement have been addressed.

"You may see merchants opt out of the monetary settlement, but I have not heard of any grounds which the merchants would push to have any settlement overturned," said John Drechny, CEO of the Merchant Advisory Group.

"While the settlement reached is a large number overall, it is still a fraction of the fees merchants have overpaid for the acceptance of network branded cards, with hundreds of different fee levels," Drechny added. "The merchants are still hopeful once the injunctive part of the suit settles, that it will allow for a level, transparent playing field that will require all parties to negotiate in good faith."

The dispute began in 2005, before Visa and Mastercard went public, when merchants accused the banks that owned the card networks of violating antitrust laws by inflating interchange. Mastercard went public in 2006, and Visa in 2008.

District Judge John Gleeson approved a $5.7 billion settlement in 2013, but a federal appeals court rejected it three years later. The appeals court cited as unfair the provision that barred merchants from suing over fees again if they took settlement payments, and that retailers nationwide did not have proper legal representation. Brodie took over the case three years ago.

It all opened the door for a few more years of wrangling over money terms, but most important, it kept the dispute on the table potentially for years to come by creating the second class of plaintiffs attacking rules they feel are prohibitive to their businesses.

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