Visa, MasterCard Class-Action Settlement With Retailers Rejected by U.S. Court -- 2nd Update

By Austen Hufford

A U.S. Court of Appeals rejected the 2012 swipe-fee settlement, originally valued at $7.25 billion, between the retail industry and payments companies Visa Inc. and MasterCard Inc., calling the agreement "unreasonable and inadequate."

"The benefits of litigation peace do not outweigh class members' due process right to adequate representation," the Thursday ruling said.

The court ruled that the settlement violated the rule that requires the representative parties to "fairly and adequately protect the interests of the class" and uncover any conflicts of interest.

The 2012 settlement broke the class of plaintiffs into two groups: one which accepted Visa or MasterCard from 2004 through 2012 and another which would accept the cards from 2012 onward. In its ruling, the appeals court noted the conflict between the merchants in the first class, which were pursuing solely monetary relief, and the merchants in the second class, which were seeking only injunctive relief.

"The former would want to maximize cash compensation for past harm, and the latter would want to maximize restraints on network rules to prevent harm in the future," the ruling said. In addition, only the first group was eligible for the $7.25 billion cash settlement and could opt out of the settlement.

Shares of MasterCard fell 1.9% to $90.36, while Visa shares dropped 2.4% to $74.90.

The court said the class seeking injunctive relief "were inadequately represented" because those merchants couldn't opt out of the deal and they shared representation with the other class. The court added that the only apparent benefits to putting the competing claims into one class were higher fees for counsel and the ability of the defendants to pay a bundled group with a single payment.

The court noted the $544.8 million in fees granted to lawyers, saying the firms stood to gain "enormously" if the deal was completed.

"We expressly do not impugn the motives or acts of class counsel," the court wrote. "Nonetheless, class counsel was charged with an inequitable task."

According to the deal's critics, it also protected Visa and MasterCard from future litigation. Wal-Mart Stores Inc. and Target Corp. both opposed the deal.

A Visa representative declined to comment. MasterCard said it was disappointed by the ruling and is reviewing the decision to determine its next steps.

"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," the company said in a statement.

"The settlement orchestrated by the card networks and banks would have undermined merchants' legal rights," said Deborah White, general counsel for the Retail Industry Leaders Association, which opposed the settlement. "Today's decision is a victory for all merchants and consumers."

In a class-action lawsuit, a large number of plaintiffs with similar claims are able to sue a defendant, allowing for a bunch of smaller-scale claims to get handled in the aggregate. A court grants a "class" to a group that it determines meets the criteria; in return, those within the defined class generally have to follow the terms of any settlement reached.

Billed at the time as the largest settlement of an antitrust class-action case in U.S. history, the deal -- reached in July 2012 -- was to end years of litigation brought by merchants against Visa and MasterCard and several large banks that issue the companies' credit cards, such as Bank of America Corp. and J.P. Morgan Chase & Co.

Lawsuits filed by trade groups and several retailers in 2005 accused Visa and MasterCard of conspiring with banks to set so-called swipe fees on credit-card transactions at arbitrarily high levels. The fees, also called interchange fees, are set by Visa and MasterCard and flow to banks that issue cards as revenue each time a customer swipes a card at a merchant.

The settlement reignited a long-running battle over credit-card transaction fees, with big-box merchants and retail trade groups making their case for why the deal should be blocked.

"We conclude that the class plaintiffs were inadequately represented," the court wrote.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

June 30, 2016 12:31 ET (16:31 GMT)

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