Responding to Retailer “Objections”

Responding to Retailer “Objections”

The Truths Behind Retailer OPPOSITION to the interchange settlement

On July 13, 2012, after seven-years of litigation and over two years of mediation with two mediators and the participation of the Court with the consent of both sides, retailers and the payment industry reached a settlement that would end, once and for all, the dispute over the manner in which the costs of credit card payment acceptance are set and who should bear them. The litigation settlement was mutually agreed upon by the class counsel, who have a fiduciary duty to act in the best interests of the putative class, and all defendants, with participation from all putative class plaintiffs, and the concerns of both sides were discussed at length during the process. With any settlement, everyone involved must give a little to reach a compromise and after several years, the parties involved in this settlement have willingly agreed to settle this long conflict.

In recent weeks, some retailer lobby groups have publicly opposed portions of the settlement and are voicing concerns that they already raised during the course of the negotiations.

“Unfortunately, before the ink on the settlement had dried, two major retail trade organizations and large retailers have rejected it and are now running to their friends on Capitol Hill claiming the deal “didn’t go far enough.” In an act of crony capitalism obesity, they’re back for more.” – Steve Forbes, Politico

The retailers and trade associations that are now objecting to the settlement are at odds with the class representative plaintiffs and their counsel as well as the court appointed class counsel representing millions of merchants who were intimately involved in the extensive negotiations. To that end, this letter was submitted by all of the class counsel to the Court, and later released publically by the Court, in which they called out the National Association of Convenience Stores (NACS), specifically, for highly questionable conduct.

With the multitude of distorted claims being made by the small, but increasingly vocal, opposition, it is important to remember a few details about the settlement process:

Six Questions Surrounding the Interchange Settlement

Members of the Electronic Payments Coalition remain highly confident that the Court will grant preliminary, and ultimately final, approval for the settlement in the merchant class action suit against the payment card industry – and that this represents the end of a long battle and finally puts all the issues raised to rest going forward.  Recent noise in the press, however, has raised a number of questions as to why we remain so confident in this outcome.  Below is an interview with Robert Stolebarger, partner at Bryan Cave LLP and antitrust counsel for the Electronic Payments Coalition, where he addresses some of the most commonly asked questions.

Question #1:  Given that more than half of the named plaintiffs are now “opposed” to the settlement, doesn’t that mean the settlement will fall apart?

Stolebarger:  The settlement is on track, and proceeding precisely as predicted from the beginning. It was always predicted that there would be opposition, objections and opt-outs.  Legally, there is no requirement of any kind in a class action that a majority of the original plaintiffs agree to the settlement – particularly given that the volume represented by these objectors is proportionately insignificant.  There is only one test for preliminary approval – does the Judge find that this settlement is sufficiently fair, reasonable and adequate (based on the years of litigation, mediation and negotiation that went into its development) that it warrants being noticed and presented to the entire class and set for hearing on final approval.  Given that the settlement agreement was effectively developed by two highly regarded mediators – with the direct oversight of Judge Gleeson, himself – and given that these recent “objections” are not new in any way, nothing that hasn’t already been considered – it is difficult to imagine that the Court would deny preliminary approval based on old, tired arguments that have already been given due weight or not based on merit or the lack thereof.

Press releases, like those seen from some of the trade associations, have no legal significance and mean absolutely nothing in this process.  Moreover, the trade associations who are named plaintiffs and yet now are speaking out against the settlement are likely doing so because they fear that if they continued to support the settlement – a settlement they themselves helped to create – they would essentially be putting themselves out of a job in Washington.  Their primary role is to lobby Congress in an effort to gain even greater political windfalls than what they’ve achieved with the $8 billion Durbin amendment windfall last year.  When this settlement is final, they understand that they will no longer be able to lobby Congress for further handouts on the “swipe fee” issue – Congress understands well that when the Court finally approves this settlement, the case is closed.  The noise they are creating right now is simply that – noise – and we remain undeterred in our conviction that this settlement will receive preliminary approval, and ultimately final approval.

To be clear – officially, there are not yet any “representative” plaintiffs at this point in the process.  After this settlement receives preliminary approval and the class is certified for settlement purposes, the Court will officially recognize class representatives.  There is a test that must be passed in order to be named a class representative, under Rule 23.  In order to be deemed a representative plaintiff, the plaintiff must have a claim typical of other members of the class with issues in common.  But most importantly, the plaintiff must demonstrate that it will fairly and adequately represent and protect the interests of the class.  Given this, and assuming the Court grants preliminary approval of the settlement, it is most likely that those named plaintiffs supporting the settlement will be recognized as class representatives and those opposing the settlement will not.

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Question #2:  It seems like the entire retail industry is objecting, via their trade associations.  Isn’t that concerning?

Stolebarger:  As a matter of law, the trade associations that are objecting are doing so on behalf of themselves – not on behalf of their members, each of whom will have the individual opportunity to benefit from this settlement.  As a trade association, they legally represent only themselves and the tiny volume of card acceptance they derive from accepting cards as payment for things like member dues or association fees.

It is important to remember that these trade associations are lobbying groups, and the objection-by-press release we are now seeing is merely their attempt to justify their existence as a lobbying organization to their members.

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Question #3:  These “objectors” are now saying that the settlement was struck by attorneys who didn’t have retailers’ best interest at heart, which is why the retail industry fired their attorney and hired a new one.

Stolebarger:  Let’s be clear – those named plaintiffs who are now “objecting” were intimately involved in this process, were in the room as the deal was being made, and everybody, including the Judge, knows that.

The notion that this settlement was developed by one side that strong-armed the other side into accepting is simply wrong.  As the Court has revealed, this settlement was the result of a proposal from the two highly regarded mediators in this case.  For a normal case, mediation takes one day.  For a complicated case, it takes a week.  For a truly complicated case, mediation can take a month.  This mediation took two years.  The Court made class counsels’ letter of August 7, 2012 public, which details that trade associations, like National Association of Convenience Stores (NACS), “participated in all aspects of the extensive negotiations, mediation and settlement conferences . . . and committed to the process of negotiating a settlement based on the same core terms contained in the Mediator’s Proposal and ultimately reflected in the Memorandum of Understanding.”  Both the named plaintiffs and class counsel understood that this settlement was the very best possible solution that could be reached under the circumstances.

As for firing their attorneys, this is spin.  In fact, the docket in this case includes a letter from Craig Wildfang asking the court to release him from his representation of NACS, which was granted.  If anyone fired anyone, it appears it was the other way around.

In any settlement, by design, no one is entirely happy.  Our side is not gleeful about paying billions of dollars, about allowing retailers the right to surcharge our customers or use that as leverage in negotiating lower interchange rates – but we agreed to this settlement for the finality it promises.  In this case, retailers got 95% of what they asked for, according to class counsel.  Those retailers opposing the settlement make it very clear that there is no amount, no compromise, that would ever be enough for them.

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Question #4:  Will “opting out” merchants reach the 25% threshold, and if so, will that dissolve this settlement?

Stolebarger:  Around Spring or Summer of 2013, merchants will have an opportunity to “opt-out” of the damages portion of the settlement agreement.  It is important to remember that there are two portions of the settlement, only one of which merchants can opt out from.  The first is the damages portion – the financial pay out class members will receive following final approval.  Retailers may choose to opt-out of this if they would prefer to hire their own attorneys and try to litigate separately in an effort to get more money.

For the damages portion of the settlement, it is highly unlikely that we would see opt-outs anywhere near 25% of all retailers as determined by a proportionate share of U.S. credit and debit volume,  the threshold built into this settlement.  Should such an unlikely event occur, this simply provides the defendants – Visa, MasterCard and the nine named banks – the option to terminate the settlement and go back to the negotiating table or go to trial.  Several experts following this case have surmised that the defendants would likely not exercise this option, even if the opt-outs exceeded the 25% threshold.

It is also unrealistic to imagine that small, mid-sized, or even larger merchants would choose to go it alone, hire their own legal counsel and go through years of future litigation in an effort to secure even more money than they could achieve through the class action settlement.  After all, given the extensive process that was undertaken to strike this deal – the largest antitrust settlement in history – it is hard to imagine any single merchant being more successful on their own.

To be clear, no retailer can opt-out of the second element of the settlement – the injunctive class portion.  This includes the rules changes, the elimination of the no-surcharge rule, the ability to form buyers groups, and acceptance of the rules going forward.  These changes become effective 60 days following preliminary approval of the settlement agreement.  The injunctive class portion of the settlement brings about the finality that puts all issues to rest, and all class members will be bound.

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Question #5:  Given that it was Judge Gleeson who previously oversaw the 2003 Walmart settlement, won’t he be more inclined to consider these retailers’ objections – particularly their desire to continue to litigate?

Stolebarger:  Judge Gleeson presided over the 2003 Walmart settlement, only to see retailers file another lawsuit with the same claims only months following the settlement.  Judge Gleeson more recently is seeing some of these same retailers “object” to this settlement before the ink is even dry.  There is an obvious need for finality in this case – the need to insist that retailers stop the endless litigation cycle.  Moreover, case law supports and allows for such a clause.

The “injunctive relief” does not prohibit anyone from suing the defendants in the future for any future new rules or changes to the existing agreements – but rather simply says that for these rules as written today and as part of the settlement, the parties agree to stop their challenges and to settle their differences.  What the retailers want is something different – they want to be able to collect their money, and then turn around and re-litigate.

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Question #6:  The National Retail Federation is saying that the surcharging provision of the settlement is proof that this settlement was “written by lawyers clueless that retailers brought the suit to lower prices for consumers, not raise them.” Is this true?

Stolebarger:  The payment card industry has long opposed surcharging, which is why Visa and MasterCard prohibited the practice via their rules and contracts.  The industry sees merchant surcharging as anti-consumer, and fought to keep this protection in place.  It was the retail community – including these named plaintiffs – that argued strenuously throughout the settlement negotiations for the right to surcharge.  Modifying the network’s surcharging rules was a required component of the settlement.  We expect most retailers to use the leverage of the threat of surcharging as a negotiating tool to seek lower interchange rates in exchange for an agreement not to surcharge.

Moreover, the National Retail Federation’s supposed desire to lower prices for consumers is laughable.  When the Durbin amendment delivered retailers an $8 billion windfall in the form of lower interchange rates on debit cards, studies have shown that retailers did not pass those savings along to consumers.

What some retailers really want – via lawsuits, lobbying, or any other means – is to pay zero to accept cards, and to make their customers pay for this valuable service instead.  These recent “objections,” combined with further calls on Congress and a corresponding lawsuit against the Federal Reserve, prove that there is no settlement, no concession, that will make all of these retail trade associations happy.

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