By Robin Sidel
The love-hate relationship between retailers and the credit-card
industry is tipping into greater acrimony, as the burden of
installing secure new technology aggravates longstanding tensions
over fees.
The latest blow came Thursday, when a federal appeals court
panel threw out a $7.25 billion antitrust settlement between Visa
Inc. and MasterCard Inc. and millions of retailers after
determining that some of the merchants covered by the pact weren't
adequately represented.
The three-judge panel's unanimous ruling upends more than a
decade of efforts to resolve litigation between the card industry
and merchants ranging from Wal-Mart Stores Inc. to the Iron Barley
Restaurant in St. Louis. The settlement already had been fraying,
as big retailers including Home Depot Inc. and Macy's Inc. dropped
out.
The reversal comes after Wal-Mart and Kroger Co. recently filed
separate lawsuits against Visa seeking the ability to require use
of a personal identification number, or PIN, when customers pay
with a chip-enabled debit card. Visa's rules require that customers
also have the choice of signing, which retailers say is more
expensive and less secure.
The developments are the latest in an argument that has run for
a quarter-century about the fees merchants must pay when customers
use cards and the rules Visa and MasterCard impose as conditions
for using their networks. U.S. merchants paid roughly $40 billion
in interchange fees last year -- roughly 2% of every transaction --
according to payments consulting firm R.K. Hammer Inc.
"Shots are being fired by really large and powerful merchants
where payments matter big time," said John Grund, a partner at
First Annapolis Consulting Inc., which advises financial
institutions and retailers on payment issues.
Wal-Mart is also battling Visa over fees in Canada and has
threatened to stop accepting Visa cards in its stores there
starting in mid-July.
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.
A spokeswoman for Visa declined to comment.
Shares of Visa ended the day down 3.3%, at $74.17, while
MasterCard's shares fell 4.4%, to $88.06.
The ruling by the U.S. Court of Appeals for the Second Circuit
comes at a time when merchants and card companies are scrambling to
embrace technology that lets customers pay with their phones at the
checkout line or swap payments with friends over social networks
like Venmo.
Merchants also are spending millions of dollars to install new
technology that enables the higher security protections of cards
embedded with a computer chip. The chip cards are aimed at reducing
counterfeit fraud after a rash of hacks at retailers including Home
Depot and Target Corp.
Chip cards are used around the world, but many merchants have
been unhappy with aspects of the U.S. rollout, prompting Visa and
MasterCard to speed up the certification process for new checkout
terminals, limit costs that retailers will incur for counterfeit
transactions and introduce new software to make the transactions
faster.
The settlement thrown out Thursday had been struck in 2012 and
approved by a court in 2013. Visa and MasterCard originally agreed
to pay merchants $7.25 billion, although the total was later
reduced to about $5.7 billion as many dropped out. The pact also
allowed retailers to charge customers more for using credit cards
than other forms of payment.
In return, merchants who participated in the pact agreed not to
sue Visa and MasterCard over those fees in the future.
The settlement divided merchants into two classes: those that
had accepted credit cards up to that point and those that would
accept them after the settlement, including retailers that don't
yet exist. The deal allowed members of the first group to opt out,
as many have, but the second group would be required to abide by
the terms.
The appeals panel challenged the structure of the accord, in
particular the constraint on future merchants, calling it
"unreasonable and inadequate."
"The benefits of litigation peace do not outweigh class members'
due process right to adequate representation," the ruling said.
The case dates back to 2005, when merchants began accusing Visa
and MasterCard in lawsuits of conspiring with card-issuing banks to
set fees on transactions. Merchants pay the interchange fees that
are set by Visa and MasterCard to card-issuing banks for each
transaction.
The merchants had challenged a series of card-industry rules as
being anticompetitive, including an "honor all cards" requirement
that forced merchants to accept all Visa and MasterCard credit
cards regardless of the different fees associated with them. Other
rules prohibited merchants from charging different prices for
different types of payment.
Out of the 12 million merchants included in the class-action
suit, 8,000 opted out, representing roughly 25% of total purchase
volume for Visa and MasterCard, according to a report issued by
Sanford Bernstein. They included Wal-Mart, Gap Inc., Target and
Amazon.com Inc.
Wal-Mart and Target both said they were pleased with the
ruling.
Jason Kupferberg, an analyst at Jefferies LLC, said any future
settlement could have a larger price tag and be hard fought.
"If history is any guide, the new litigation could take years,"
he said in a note to clients.
--Austen Hufford and Sarah Nassauer contributed to this
article.
Write to Robin Sidel at robin.sidel@wsj.com
(END) Dow Jones Newswires
July 01, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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