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Swipe Settlement

While lawyers battle, franchisors weigh wisdom of surcharges


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 There may be a settlement, but the swipe fee controversy is far from settled.

You would think the largest recovery ever in an antitrust case—$7.25 billion in proposed payouts—would please the 7 million merchants battling Visa and MasterCard for nearly eight long years over so-called credit card swipe fees.

You would be wrong.

I reached Craig Wildfang just a few days into a flurry of media interviews, when the lead co-counsel for the plaintiffs was touting the historic nature of the proposed settlement, announced in late July and heading off the pending trial date in September.  

“We got everything we could get, plus we got seven and a quarter billion dollars, which is a lot of money,” said Wildfang, a partner at Robins, Kaplan, Miller & Ciresi in Minneapolis. “We think this is a wonderful settlement for the merchants.”

An attorney for one of the class representatives, however, hired in a hurry when the proposal was announced, said the settlement “almost amounts to a surrender. There’s no relief whatsoever in the structure of the system,” said Jeffrey Shinder, with the high-profile Constantine & Cannon firm in New York.

And poof! went Wildfang’s triumphant moment.

Franchisors beware

Attorney Alan Greenfield isn’t waiting for the end game, which will take many months to play out. He’s managing partner at Greenberg Traurig’s Chicago office, with many franchise systems as clients, such as restaurants, hotels and convenience stores.  

The proposed settlement allows merchants for the first time to add surcharges to credit card transactions. But he’s advising his clients to carefully consider whether they will allow individual franchisees to do so. “That may not be in the best interest of the overall brand; that could create negative publicity,” he said, noting that consumers may not be keen on the idea. Also, 10 states have laws on the books forbidding surcharges, so franchisors with outlets in those states would have to beware.

Ralph Askar, owner, president and CEO of Instant Imprints in San Diego, is one franchisor who will not recommend adding surcharges. To him, swipe fees are just a cost of doing business; stores that take credit cards from customers “by far” sell more merchandise and have more people coming in. He said an average Instant Imprints store pays from $8,000 to $12,000 a year for credit card merchant services.

If lots of retailers do add surcharges, he thinks those that don’t will have an advantage to tout. “This is a marketing opportunity, very similar to what Southwest is doing,” in that it’s not charging for every extra bag or pillow or blanket like at other airlines. “People don’t like the excess fees.”

‘Over the top’

Wildfang filed his first complaint on behalf of the plaintiffs in June 2005, and spent the last several months in intense negotiations with two mediators and U.S. District Court Judge John Gleeson presiding in Brooklyn. He’s been involved in plenty of tough cases over the years. “This was,” and he chuckled ruefully, “over the top of anything I’ve ever experienced.

“Everything about the case was big and complicated. The claims were broad and covered essentially the entire structure of the payment card industry. Settling it was big and complicated, too.”

It’s nowhere near over, as shown by one of Wildfang’s other tasks that late July day: filing a motion to withdraw as counsel for NACS, the National Association of Convenience Stores, the only one of 19 named class representatives to reject the proposed settlement.

Henry Armour, president and CEO of NACS, put his board’s reaction this way: “I think what you just quoted is true—it is the largest monetary proposed settlement in history, but what he didn’t say is it doesn’t fix the problem,” said Armour, referring to Wildfang’s characterization.

A loud rejection

NACS is rejecting it loudly, with their first move designed for maximum impact in legal circles. Right after the board voted to reject the proposal, they called Shinder to represent their cause. He’s the attorney at Constantine & Cannon, known for its work on an earlier high-profile antitrust case on a similar issue. Before the call, Shinder had no involvement in this case, called Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.

He got right to work matching Wildfang’s rhetoric, from the opposite point of view. “The settlement is a deeply flawed, inadequate settlement that has some fundamental due process issues,” Shinder said. “There’s no structural relief on the core issue, so the system is perpetuated.”

The matter dates back to 2005, when several retailers filed a class-action complaint alleging the named credit-card companies and banks had unlawfully conspired to fix interchange fees paid by retailers for consumer purchases, sometimes called swipe fees and amounting to about 3 percent per transaction.

According to the agreement, Visa and MasterCard must modify their “no surcharge” rules to permit retailers to add them. But the core problem is unaddressed, according to NACS: “Visa and Mastercard fix the rates for the banks; the banks don’t compete on price. This settlement doesn’t fix that at all,” Armour said. “The proposal really only tinkers around the edges of this thing.”

He pointed out major retailers speaking out against the agreement—Target and Walmart both came out against it within a week—but neither of those is a named plaintiff. “It would not be surprising to me if you see in the coming days and weeks other class representatives state their public positions,” Armour said.

Among those named plaintiffs are five other associations, like NACS, representing millions of merchants, and Armour emphasized that each would go through its own process to reach its own conclusion.

“I think you will find, however, that many of them if not all of them will reach the same conclusion NACS did,” Armour said.

Shinder is more direct about what could happen to the proposed settlement: “It can fall apart.”
Wildfang, lead counsel for the plaintiffs, still expects to win the day. “We have obtained in the course of the case and in the settlement really everything that we sought when we started that is obtainable in an antitrust action,” he said.

Next up: They’ll file a motion for preliminary approval of the settlement and give notice to the class of roughly 7 million merchants. Then merchants will have a time period to consider whether they want to opt out of the class. Then they’ll bring a motion for final approval before Judge Gleeson, likely by the spring of next year. If he approves and there are no appeals, distribution of the settlement funds would follow quickly.

Wildfang said the immediate opposition by NACS in particular surprised him, but he’s not too fazed by the rest. “I’m a realist. If you’ve got 7 million class members, chances are a few of them are going to be unhappy.”

He notes, too, that big cases like this routinely draw “professional objectors,” but he didn’t name names. Any law firm involved in the case, of course, will rack up more and more fees if the settlement fails. “I expect that the vast, vast majority of the 7 million merchants are not going to be opposed, and there are many that are ecstatic,” he said.

Beth Ewen, managing editor of Franchise Times, writes the Continental Franchise Review legal column each issue. Send tips about interesting legal cases involving franchises to bewen@franchisetimes.com

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