When a federal judge said earlier this month that she wasn’t inclined to approve a pending landmark litigation settlement hammered out by lawyers for a group of merchants who sued the card network behemoths Visa and Mastercard in 2005, she didn’t detail her reasoning.

And that judge, Margo Brodie, still hasn’t delivered her written opinion yet, though she had indicated she might do so by last Friday so it should land any day now.

But during the course of a hearing with lawyers for the plaintiffs and defendants on Thursday, June 13, in Brooklyn at the U.S. District Court for the Eastern Division of New York she dropped more than a few clues about what was bothering her about the proposed settlement. 

Indeed, she said she would give the pack of attorneys a “preview” of the opinion that she had already started writing, noting she isn’t taking it “lightly,” according to a transcript of the courtroom hearing that day. 

Before her is the question of injunctive relief in the antitrust class action brought two decades ago. Proponents of that settlement said it would yield about $30 billion in benefits for merchants. And it’s important to remember that it’s separate from a settlement that’s in the process of delivering $5.6 billion to plaintiffs who were granted those damages in an earlier 2019 settlement that’s part of the same case.

In the settlement at hand this month, the hearing transcript showed Brodie zeroing in on how the pact treats what is called the “honor all cards” rule — a kind of rule that Visa and Mastercard each have for merchants accepting their cards. Under each rule, any merchants who chooses to accept a card tied to the Visa network, or alternatively the Mastercard network, must accept all cards tied to that network, regardless of which bank issued the card.

In other words, when a merchant is presented with a Visa card, whether it’s issued by JPMorgan Chase or by Capital One, the merchant can’t discriminate among Visa cards by accepting those issued by one bank, but not another. The same goes for Mastercard. So, if a merchant finds one card issuer’s interchange rates particularly unpalatable, it can’t decide to decline that particular card when a consumer presents it for payments. 

Visa and Mastercard’s honor all cards rules have been controversial in the payments industry for years because, from the perspective of the merchant litigants, they essentially allow the banks to collude in setting terms, without allowing retailers and merchants to pick and choose those they find most attractive. 

Brodie noted that allowing the honor all cards rules to remain in place was a key point of contention between merchants who support the settlement, and those who don’t. “Walmart and the larger groups are saying, ‘Look, at the end of the day, if you’re not eliminating the Honor All Cards rule, then we are not really getting anything from this settlement,” Brodie said, according to the transcript.

The lawyer representing merchants who negotiated the settlement acknowledged that jettisoning those rules would be preferable, but he essentially threw up his hands and said it was a concession his clients stand little chance of winning from Visa and Mastercard. 

“It may be the case that in an ideal world you would eliminate the Honor All Cards rule, but we don’t live in an ideal world,” said attorney Steve Shadowen, who was part of a group of lawyers who negotiated the settlement on behalf of some merchants. He then explained how the plaintiffs would get nowhere with Visa and Mastercard in discussion of that possibility. 

“The defendants say — not crazily — that that would be tantamount to, or at least akin to, ordering the break-up of the networks,” Shadowen said, according to the transcript.

Alternatively, Shadowen emphasized that merchants would win terms that allow for increased surcharging as part of the deal. Surcharging lets retailers and other merchants collect fees from consumers when they use Visa and Mastercard cards, though there are some limitations.

Brodie seemed unimpressed with his trade-off. She pooh-poohed the extended surcharging terms, observing that such surcharging options wouldn’t be available everywhere in the U.S. and noting that it already exists in some places. “It doesn’t appear to really offer that much relief,” she said.

Ultimately, Brodie concluded: “I don’t know what an adequate settlement would be, but I do know that I’m troubled by this one.”

With that, she promised “a detailed opinion” in which she would “explain my reasoning.” With such a solid roadmap of her thinking laid out at the hearing, she’s probably not changed her mind, even though the written opinion hasn’t arrived yet.

Shadowen didn’t respond to a request to talk about the judge’s forecast of her decision. Neither did Jeff Shinder, an attorney with Constantine Cannon who has opposed the settlement on behalf of some merchants involved in the case. Both were eager to air their views after the settlement was announced in March.

Lawyers in the case for both the merchants and the card networks are likely scrambling to come up with something that might be more pleasing to the judge. Maybe the honor all cards rules won’t be as off the table as it was in the past, if they want to avoid a trial.

By Lynne Marek on June 24, 2024
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