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Retailers ready for showdown over credit-card fee agreement

By Christie Smythe
Bloomberg News

NEW YORK Wal-Mart Stores and Costco Wholesale, which are among more than 500 merchants objecting to a $7.25 billion antitrust settlement with credit card companies over swipe fees, say the deal is meaningless as long as card companies can fix fees charged to retailers on each transaction.

Sears Holdings, Target, TJX. and Barnes & Noble also have opposed the agreement, which a federal judge in Brooklyn is considering, as merchants faced Tuesday’s deadline for filing objections to the deal. The settlement, estimated by plaintiffs to be the largest ever in an antitrust case, could receive final approval after a hearing Sept. 12.

“Given that Visa and MasterCard can continue to fix interchange, they can recoup the settlement amount quickly by raising interchange rates in the future,” Jai Holtz, vice president of financial services for Sears, said in an objection filed May 25. “The one-time payment could be entirely eviscerated by increased fees or newly imposed fees just months after it is paid.”

The effort by companies follows years of tensions over the fees, which amount to as much as 2 percent of every sale in which a customer pays with a card. Major retailers and trade associations contend that the deal isn’t nearly big enough, and unfairly binds all merchants nationwide from suing over the fees in the future.

Foster City, Calif.-based Visa and Purchase, N.Y.-based MasterCard said they anticipate that the deal will be approved.

“We are highly confident that final approval will be granted, and that the epic battle over interchange fees is finally over,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents card companies and banks.

In November, U.S. District Judge John Gleeson gave tentative approval to the deal, saying there were “issues that are going to require significant scrutiny,” though not enough to derail a preliminary sign-off. He said he would appoint an outside expert to weigh in.

Though the outcome is unusual, parties opposed to a class-action settlement have persuaded judges to throw deals out at the final approval stage, said Howard Langer, an adjunct professor at the University of Pennsylvania Law School and commercial class action lawyer.

Langer, who isn’t involved in the settlement, said in a phone interview that strong objections can arise in situations where there is mandatory participation in some part of a deal, as in the interchange case.

“It always raises significant concern in a case when one person is bringing a lawsuit in which other people are going to be bound by the result,” he said.

Two-part settlement

The interchange settlement has two parts: a portion under which merchants receive payments for damages, and another under which credit card companies promise certain rule changes. Merchants could have opted out of the damages portion by notifying the court by May 28. They weren’t eligible to opt out of the rule change portion, which also prohibits all merchants in the country from bringing future lawsuits over the fees.

If the number of retailers dropping out of the deal makes up more than 25 percent of Visa’s and MasterCard’s total credit card volume, the card companies and major banks, including JP Morgan Chase, Citigroup, and Bank of America, have the option to walk away from the agreement.

Reaching that threshold is unlikely, according to an analysis last July by investment bank Keefe, Bruyette & Woods. The top 100 merchants in the United States represent about 25 percent of the total volume, according to the analysis. Of those, about 15 have already agreed to their own settlement with Visa and MasterCard. While many of the objecting retailers have also opted out of the damages portion of the deal, their share of credit card volume is likely to be small, according to the analysis.

At the final approval hearing, the judge would mainly consider whether the settlement meets legal requirements, Samuel Issacharoff, a professor at the New York University School of Law, said in a phone interview.

In theory, the drop-outs “should have no effect” on the approval process, said Issacharoff, NYU’s Bonnie and Richard Reiss Professor of Constitutional Law. “In practice, a lot of these who have opted out could go to the detriment of the settlement as a whole, more for atmospheric reasons,” he said.

In their objections, retailers said the settlement promises just a fraction of the tens of billions of dollars in interchange fees paid over the years. The retailers said they must continue to pay the fees because they can’t afford to stop accepting Visa and MasterCard credit cards used by many customers.

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