How DOJ Could Upend the Credit Card Interchange Settlement

Ever since the nation's largest banks and retailers announced a tentative deal to settle a high-stakes lawsuit over interchange fees, a great deal of attention has been paid to whether enough dissenting merchants will band together to scuttle the agreement.

But if the settlement is to take effect, it may also have to get past a second, little-discussed hurdle: the U.S. Department of Justice, which has the right to object on the grounds that the deal is bad for consumers.

A Justice Department spokeswoman declined to comment on whether the department plans to share its view of the settlement with U.S. District Judge John Gleeson, who is responsible for approving the deal.

But in the past, the Justice Department's Antitrust Division has occasionally raised objections to proposed settlements of private lawsuits when it concludes that their terms would harm consumers.

"I can say that it's not common. But if it's a case that has major implications either for the economy or for the development of the law, they have the ability to weigh in, and they will carry a lot of weight," said Bert Foer, president of the American Antitrust Institute, a think tank that seeks to promote economic competition.

The most prominent recent example of the Justice Department lodging such an objection happened in 2009, after Google reached a tentative agreement with authors and book publishers who alleged that the tech giant's digitization of their works infringed on their copyrights.

Under the proposed settlement, Google agreed to pay $125 million, including funds for setting up a registry that would distribute revenues to copyright holders. But the Justice Department objected, raising questions about whether the deal violated antitrust law, and arguing that the case raised public-policy questions that went beyond the private parties involved.

The plaintiffs and Google later amended their settlement agreement, but the Justice Department objected again, arguing that the deal would make Google the only competitor for the digital distribution of a vast array of books. A federal judge eventually rejected the proposed settlement.

There are both similarities and differences between the Google case and the interchange fee settlement that was submitted to the court for approval Friday.

Under the proposed deal, announced in July, Visa (NYSE: V) and MasterCard (MC) and more than a dozen big banks agreed to pay nearly $7.5 billion to merchants that filed suit in 2005 objecting to the card networks' processing fees that they argued resulted in higher costs for retailers. Under the settlement, retailers also won the right impose a surcharge on credit-card purchases, though some states ban that practice.

But the banks and card networks, which retained the authority to set credit card interchange fees and got a broad release from future lawsuits, were widely seen as the deal's victors.

For the banking industry, the settlement was a comeback after Congress, led by Democratic Sen. Richard Durbin, established price caps on debit card interchange fees.

As in the Google case, the stakes in the interchange settlement are high enough to potentially attract the Justice Department's interest. The agreement would affect a large swath of the U.S. economy, and its implications would go well beyond the lawsuit's parties.

And while the interchange fee agreement may make sense for the parties involved, some critics argue it would be a bad deal for consumers, who did not have a seat at the table.

One of the pieces that some critics say would harm consumers is the provision to allow merchants to impose surcharges. "It's a cost that's going to be passed on to consumers, who've never paid it before," said Duncan MacDonald, an independent consultant who is former general counsel of Citigroup's Europe and North America card businesses.

 

Another potentially thorny part of the agreement is its requirement that any retail surcharges be imposed on all forms of electronic payment. That provision could weaken the challenge to the major payment networks from PayPal, which currently prohibits surcharges.

Likely to be a factor in the Justice Department's decision about any particular case is whether its Antitrust Division has the necessary expertise to devote to the matter. Prior to stepping in to the digital book settlement, the department had already taken action designed to limit Google's growing market power.

Similarly, the Justice Department has previously tried to rein in the pricing power exerted by the major payment networks. Last year, the department settled a case with Visa and MasterCard over their prohibitions on merchants steering customers to cheaper forms of payment. A similar suit against American Express (AXP) remains pending. So the Justice Department has experience with the complex economic implications of interchange pricing.

But there are also key distinctions between the Google case and the proposed payments settlement. In the Google suit, news reports emerged about the Justice Department's inquiry into the proposed settlement more than four months before the department formally intervened. In the interchange fee case, by contrast, there has so far been silence from the DOJ.

The process of court approval for the agreement is set to happen in two stages, with the preliminary phase on track to wrap up around January 2013. While the Justice Department could potentially weigh in on the side of dissenting merchants who will argue that the settlement should be thrown out, the banks and payment networks are expressing strong confidence that the deal will move forward.

"We feel 100% confident that the judge is going to grant preliminary approval on this," said Trish Wexler, spokeswoman for the Electronic Payments Coalition, which speaks on behalf of the suit's defendants.

The Justice Department could also wait until the second phase, when a broader group of dissatisfied merchants will have the opportunity to object to the class action. Numerous retail trade groups have expressed their opposition to the settlement, but 25% of all merchants nationwide would have to opt out in order to reach the threshold established by the settlement. Even if they reach that milestone, the only effect would be to give the banks and card networks the option of backing out of the deal.

Ultimately, the decision about whether to approve the settlement rests in the judge's hands. Observers close to the case believe that Gleeson, a U.S. District judge in New York who was appointed to the bench by President Bill Clinton, is eager to resolve the seven-year-old litigation. The retailers and payment networks reached the proposed settlement with the help of mediators appointed by Gleeson.

At the same time, Gleeson is a former assistant U.S. attorney, and observers believe that if the Justice Department does raise objections, he will likely give them weight.

"Judges tend to be deferential," MacDonald said.

For reprint and licensing requests for this article, click here.
Consumer banking Law and regulation
MORE FROM AMERICAN BANKER