The U.S. Second Circuit Court of Appeals has rescinded a 2013
antitrust settlement against MasterCard and Visa worth up to $7.25 billion. The
court will meet with the involved parties on Aug. 11 to determine the next step
in the litigation.
MasterCard said it was disappointed by the ruling and is
reviewing the decision to determine its next step. "We believe we
presented a clear case to the court that the settlement was fair and
appropriate based on more than four years of negotiation and the close
involvement of the district court," according to a MasterCard
spokesperson. Visa could not be reached for comment.
The suit originally went to court in 2006 and by September
2013 included 12 million merchants that claimed some of the networks' rules
were anticompetitive. For one, the plaintiffs claimed MasterCard, Visa and
various issuing and acquiring banks worked together to allow "issuing
banks to impose an artificially inflated interchange fee that merchants have
little choice but to accept, according to the appeals court. "[The card
networks'] antisteering rules prohibit [merchants] from nudging consumers
toward cheaper forms of payment; the issuing banks are thus free to set
interchange fees at a supra-competitive rate."
The merchants also contested the networks'
"honor-all-cards" rule that required them to accept all MasterCard
and Visa credit cards, regardless of the differences in interchange fees, if
they accepted at least one type of credit card.
In October 2012, the parties agreed to a settlement and the
district court granted a final approval on December 2013. The settlement
divided the plaintiffs into two classes: An opt-out class that would receive
monetary relief from the $7.25 billion funds and another class that would
receive "injunctive relief" through changes to Visa's and
MasterCard's network rules. In return, the plaintiffs waived any claims they
may have had against the defendants now and in the future.
The court now believes that the "incremental value and
utility" of the injunctive relief was "limited," as many states
like New York, California and Texas prohibit surcharging, according to the
filing. Additionally, because American Express also prohibits surcharging, something
that also is being challenged
in court, and the settlement only permits surcharging for Visa and
MasterCard if the merchant also surcharges for competing networks like Amex,
those merchants that accept Amex cannot take advantage of the settlement
agreement, nor can those merchants in the injunctive-relief class opt out of it.
Furthermore, while the injunctive relief laid out in the settlement
was set to expire on July 20, 2021, the merchants would never regain the right
to sue, the filing noted. "It operates in perpetuity, provided only that
Visa and MasterCard keep in place the several rules that were modified by the
injunctive relief provided to the [second] class," according to the
filing. "In sum, regardless of what Visa or MasterCard do with their
network rules after July 20, 2021, no merchant will ever be permitted to bring
claims arising out of the network rules that are unaffected by this Settlement
Agreement, including most importantly, the honor-all-cards rule or existence of
default interchange fees," the filing stated.
Ultimately, the court concluded that members of the injunctive-relief
class were "inadequately represented." The filing stated, "as a
result, this class action was improperly certified and the settlement was
unreasonable and inadequate."
In a research note, investment banking advisory
firm Evercore Partners said, "Based on our preliminary assessment, the
negative financial impact on Visa and MasterCard should be manageable, although
it is too early to quantify."