After three days of sparse quotes and speculation, the New York Eastern District court judge presiding over the latest chapter in the proposed credit card swipe fee settlement between Visa, Mastercard and millions of merchants has posted her 88-page opinion.
The opinion comes almost a week after U.S, District Judge Margo K. Brodie indicated she would not approve a previous settlement negotiated in late March.
The general gist of the opinion is that Brodie was “not likely to approve the proposed settlement” because it failed to treat all merchants equitably and did not provide adequate relief compared to what merchants could potentially win at trial. The decision sends the parties back to the negotiating table in a case that has dragged on for nearly two decades.
Key points from Brodie’s ruling:
Brodie said the proposed relief “falls short of the ‘best possible’ recovery” for merchants if the case went to trial. She noted that plaintiffs’ claims have already survived summary judgment motions, putting them in a strong position.
“The insufficiency of the provisions detailed above is underscored by the Court’s denial of Defendants’ motion for summary judgment on all of Plaintiffs’ claims of anticompetitive conduct,” Brodie wrote.
A key feature of the rejected settlement was expanded ability for merchants to surcharge customers for credit card use. The settlement would have allowed merchants to surcharge up to 1% on all Visa or Mastercard credit card transactions, regardless of whether they surcharge other cards.
However, Brodie found these provisions provided little benefit to many large retailers, writing that “large national merchants are more likely to accept American Express and operate in states that prohibit surcharging, and therefore, these merchants ‘gain no appreciable benefit from the [Settlement],’ while merchants ‘that do not take American Express and operate in states that permit surcharging . . . derive a potentially substantial benefit.’”
She added that for merchants accepting American Express, “the surcharging provisions would still prohibit surcharging at the issuer level, meaning that merchants still have no way to use surcharging (or credible threats thereof) to urge competition among issuing banks.”
She also highlighted that many states have laws that may make it “functionally impossible to comply with state laws while taking advantage of the Settlement’s surcharging provisions.” This casts doubt on the plaintiffs’ claim that 96% of transactions would be eligible for surcharging under the settlement.
The judge took issue with provisions maintaining Visa and Mastercard’s “Honor All Cards” rules, which require merchants to accept all of a network’s credit cards if they accept any. She said this fell far short of the relief some objecting merchants seek — elimination of these rules entirely.
The settlement would have clarified that merchants can selectively decline acceptance of certain categories of Visa or Mastercard products at all outlets operating under the same trade name. It also would have allowed merchants to run 120-day pilot programs declining acceptance at up to 20% of outlets annually.
Brodie found these changes insufficient, writing: “Although this change offers some merchants the option to test non-acceptance of some range of products at some of their outlets, merchants are still ‘saddled with another all-or-nothing choice’ among card products.”
She noted that regardless of whether objecting plaintiffs would successfully argue for elimination of the Honor All Cards rule at trial, “the fact that such relief has been continuously argued for and would offer significantly more choice to all Class Members, suggests that the relief offered in the Settlement falls short of the ‘best possible’ recovery.”
The settlement also included modifications to Visa and Mastercard’s “Honor All Wallets” rules, which currently require merchants that accept digital wallets to accept all digital wallets that include a Visa or Mastercard payment card.
Under the proposed changes, merchants could accept some digital wallets and decline others, subject to certain restrictions. However, they would still be required to accept Visa- or Mastercard-branded cards in digital wallets owned or operated by Visa or Mastercard.
Brodie found this to be a “significantly limited form of the relief that several of the objecting Class Members seek: elimination of the Honor All Cards rules.” She noted the settlement would still require merchants to follow Honor All Cards rules for any digital wallet owned or operated by Visa or Mastercard.
The settlement would have required Visa and Mastercard to reduce posted interchange rates by at least four basis points and keep average effective rates at least seven basis points below current levels for five years. Brodie found these reductions inadequate, noting they would still keep rates above those challenged by plaintiffs when the case began. She cited expert testimony that competitive interchange rates could be over 100 basis points lower than current levels.
“As reported by one of Plaintiffs’ experts, the average Visa and Mastercard interchange rate in 2023 was about [redacted] basis points,” the judge wrote. “Lowering this average rate by the amounts proposed in the Settlement would still keep interchange significantly above rates that experts in this litigation have previously described as an ‘upper limit’ on what interchange fees might have been in the absence of the challenged competitive restraints.”
Another key factor in rejecting the deal was Brodie’s finding that it did not treat all merchants equitably.
She said it provided the least benefit to merchants with the most valuable claims — large national retailers who pay the most in swipe fees.
“The Settlement provides the least benefit to the merchants with the most valuable claims. In this respect, it is akin to the inversion of pro rata distribution,” Brodie wrote.
She noted large merchants are more likely to have negotiated custom interchange rates, so would not benefit from reductions to posted rates. They are also more likely to accept American Express and operate in states prohibiting surcharging, limiting their ability to benefit from those provisions.
“Although the Court does not agree with objectors’ contentions that the Settlement is ‘essentially worthless,’ ‘meaningless,’ or provides ‘no benefit,’ the Court finds that the benefits of the Settlement are likely to flow disproportionately and inequitably to small, local merchants like the Class Representatives,” Brodie wrote.
The settlement would have required merchants to release Visa and Mastercard from antitrust claims for five years. Some objectors argued this improperly released future claims. While Brodie did not find the release overly broad, she agreed with concerns that it could bind merchants that come into existence between preliminary and final settlement approval, depriving them of due process rights to object.
To address this, she amended the class definition to end at the date of preliminary approval rather than final approval. This ensures all class members will have the opportunity to object to the settlement terms.
In assessing whether Visa and Mastercard could withstand a larger judgment, Brodie found strong evidence they could. She noted the $30 billion in fee reductions over five years paled in comparison to the $100 billion in annual interchange fees merchants paid in 2023.
The judge also pointed to the networks’ continued viability in markets with much lower regulated interchange rates as evidence they could agree to more substantial concessions.
“The continuing viability of Visa and Mastercard in those regulated jurisdictions thus strongly suggests that Defendants could agree to more substantial rate caps and rollbacks (i.e., that they could withstand a greater judgment),” she wrote.
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