Credit Card Merchant Fee Settlement — Injunctive Relief
Prior installments in this series addressed the background leading up to the credit card merchant fee class action and the damages provisions in the b(3) opt out class action. This post addresses the injunctive relief provisions that the settlement in In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation styles as a mandatory b(2) non-opt out class action. An upcoming final installment in this series will address the release provisions in the settlement.
B(2) classes are appropriate where the nature of the injunctive relief is such that it will necessarily affect every class member. After setting out the relief proposed in the settlement, I’ll provide some thoughts on whether b(2) is really an appropriate device for this case. Perhaps class action experts out there could weigh in on this issue in the comments.
The injunctive relief set out by the settlement is notable for what is not provided. Nothing in the settlement addresses the core concerns in the complaint about (1) the collective setting of a default interchange fee; (2) the rule prohibiting merchants from rejecting the cards of, surcharging the card transactions of, or otherwise discriminating against some card-issuing banks, but not others; or (3) the rules making it impossible for merchants to route transactions over the least expensive network.
The proposed settlement does purport to address the merchants’ concern that the existing rules prohibit them from steering their customers toward less expensive payment mechanisms. The settlement includes provisions enabling merchants to:
(1) accept cards at one brand of store but not another;
(2) bargain collectively with Visa and MasterCard over interchange fees;
(3) adopt minimum purchase requirements up to $10 on credit cards;
(4) discriminate against higher priced payment mechanisms; and
(5) most importantly surcharge credit card transactions.
The objectors were not impressed with any of these provisions. They pointed out that nothing in the defendants’ current rules restricts taking cards at one brand of store but not another. Similarly, the defendants’ existing rules do not prohibit merchants from attempting to bargain collectively. And the settlement cannot override potential antitrust concerns with collective action, nor does it require Visa or MasterCard to actually agree to reasonable interchange fees with merchant groups. The defendants are required only to negotiate in good faith, and the only penalty for their failure is that they would need to pay an objecting merchant’s attorneys’ fees in bringing a claim for breach of the settlement agreement.
A federal statute already prohibits minimum purchase requirements up to $10, and a consent decree entered by the defendants with the Department of Justice prohibits rules restraining the merchants from discriminating against higher priced cards.
Defenders of the settlement have relied heavily on the merchants’ new-found right to surcharge as a potential game changer that would bring competitive forces to bear on merchant fees. Although Visa and MasterCard could continue to prohibit surcharging based on the identity of the issuer through their honor-all-cards rules, the settlement nominally permits merchants to surcharge either (1) all credit cards within a brand; or (2) particular credit card products, but not both. And the settlements’ supporters cite the significant impact that surcharging has had on merchant fees in other countries, in particular Australia.
The objectors argued, however, that the settlement limited the right to surcharge in ways that would effectively prohibit most merchants from engaging in the practice. First, objecting merchants pointed out that the settlement did not limit the applicability of state laws prohibiting surcharging. Ten states accounting for 42% of all retail transactions prohibit surcharging. So, none of those transactions could be surcharged. And the settlement further limits surcharging by requiring a merchant to surcharge “all” transactions at all similarly branded outlets. Any merchant with multi-state operations in at least one state that prohibits surcharging would thus be barred from taking advantage of this aspect of the settlement.
Second, even merchants doing business entirely in states that permit surcharging, would be unable to use the practice if that merchant accepted American Express cards. The settlement allows Visa and MasterCard to maintain their no surcharge rules if (1) the merchant accepts another card brand that is more expensive for the merchant, which American Express often is; and (2) the merchant does not surcharge that brand. Although AmEx does not prohibit surcharging, it requires non-discrimination among all cards, including debit. For a merchant that accepts AmEx to surcharge consistently with AmEx’s rules, it would have to apply the surcharge to debit cards as well as credit cards. But the settlement allows Visa and MasterCard to prohibit debit card surcharging. And, of course, merchants would not want to surcharge less expensive debit cards. A merchant might also decide that it is happy with the value it received from American Express, even at a higher price point, and thus might have no desire to surcharge that brand even if it could.
As a result of these limitations, the objectors pointed out, the nine named plaintiffs that support the settlement would continue to be prohibited from surcharging because (1) all but one does business in a state prohibiting surcharging, and (2) all accept American Express cards. The centerpiece of the injunctive relief in the settlement would thus fail to benefit even the nine name plaintiffs supporting the deal.
The settlement also imposed a series of notice requirements on a surcharging merchant. It must (1) provide 30-days notice of its intent to surcharge; and (2) disclose its surcharging practice at the points of entry to the store or website, the point of sale, and on the receipt. These provisions too would limit the potential effectiveness of surcharging as a competitive weapon to lower merchant fees.
Even putting aside all of these limitations and assuming that some appreciable number of merchants would credibly threaten to surcharge, other provisions of the settlement ensure that surcharging would not have the impact in the United States that it is purported to have had in Australia. Visa and MasterCard retained the right to cap surcharges based on both (1) the merchant’s own average card acceptance fee rate and (2) the defendants’ system-wide rates. The settlement also would cap product level surcharging at the fee the merchant paid for the right to accept the particular card product being surcharged less the statutorily imposed interchange fee for debit cards. No limits were placed on surcharging levels in Australia, and some merchants imposed surcharges so large that the Australian authorities decided to impose limits. To be sure, excessive surcharging can have anti-consumer effects of their own. Given the two-sided nature of credit card markets, as I have discussed previously, efficient pricing generally requires lower prices to cardholders and higher prices to merchants. Unlimited surcharging would empower the merchants to undermine that efficient pricing mechanism. Justified, or not, however, these caps (combined with the limitation prohibiting merchants from singling out individual banks for surcharging) also likely neuters any potential pro-competitive impact that surcharging might have to lower merchant fees. It is also worth noting that the surcharging right in Australia was accompanied by regulatory measures dramatically reducing merchant fees. As discussed in the installment on damages, however, nothing in the settlement prohibits Visa or MasterCard from increasing merchant fees immediately (much less reduces them).
In his expert report on the settlement, Professor Alan Sykes concludes that he cannot determine whether surcharging would have an appreciable impact on merchant pricing. Really?
Finally, even if these injunctive provisions held the potential for reducing merchant fees, the settlement provided for a July 20, 2021 sunset, at which time the defendants would be free to reinstate any rule not otherwise prohibited by then-applicable law. The objecting merchants thus conclude that the settlement would fail to stop card networks and banks from “forc[ing] merchants to pay supracompetitive interchange fees on all Visa and MasterCard transactions . . ..”
Prof. Sykes suggests that even if surcharging would be an ineffective remedy, the settlement should not be rejected because no simple injunctive measure could produce meaningful competition on merchant fees. I disagree with that. A competitive market equilibrium could emerge if the very large card issuers (such as those as big as the Discover Card system) were required to negotiate individually with any merchant without the protection of the honor-all-cards rules. To minimize the potential for unforeseen consequences, Visa and MasterCard could continue to set default interchange fees for smaller banks and prohibit merchants from rejecting those cards. Any merchant who chose to do so could also simply pay the default fee to accept cards issued by the larger banks. But if a merchant wanted to negotiate a lower fee with a particular large issuer, it could use the threat of refusing to accept just that issuer’s cards.
To wrap up this discussion, I want to raise the question whether a b(2) mandatory (no opt out) class action is appropriate in this case. For this section to apply, the injunctive relief must necessarily apply to the entire class, making a right to opt out futile. The Supreme Court recently clarified that b(2) classes are appropriate only when a single injunction necessarily governs the entire class’s claims. “The key to the (b)(2) class,” Justice Scalia wrote for the Court in Wal-mart v. Dukes, “is ‘the indivisible nature of the injunctive . . . remedy warranted — the notion that the conduct is such that it can be enjoined . . . only as to all of the class members or as to none of them.'” For example, the advisory committee notes to Rule 23(b)(2) cite civil rights cases in which a defendant is charged with discriminating on a class basis or in antitrust cases where a patent holder enforced an invalid patent. An employer either discriminated or it didn’t; a patent is either valid or invalid. Relief relating to these issues thus necessarily applies to the entire class.
The nature of the injunctive relief provided by the proposed settlement, the objectors argue, does not fit this paradigm. The centerpiece is the provision restricting Visa’s and Mastercard’s right to prohibit merchants from surcharging credit card transactions. frequent flyer credit cards are apparently mainly affected by this. Yet, the settlement empowers the defendants to enter individual agreements with merchants to discourage them from surcharging. Because the settlement both (1) permits surcharging and (2) specifically authorizes Visa and MasterCard to enter agreements with particular merchants that prohibit surcharging, the objectors argue, the proposed settlement would not enjoin the defendants in a way that is necessarily applicable to the entire class. Because opting out would be feasible, Rule 23(b)(2) is an inappropriate vehicle for this settlement. Prof. Sykes does not address this issue in his report. Hopefully, some class action experts can weigh in.