2d Cir. Affirms $3 Billion Visa, MasterCard Antitrust Settlement

In a case it described as a "clash of commercial titans," a federal appeals court in New York has affirmed the largest settlement in the history of antitrust law — a $3 billion pact between credit card giants Visa and MasterCard and about 5 million merchants.

The merchant plaintiffs alleged in court filings they were victims of an illegal arrangement that forced them to accept Visa and MasterCard's debit cards in addition to their credit cards.

This was a "once in a generation" antitrust case that resulted in the "fundamental restructuring" of an entire industry, said David Balto, an antitrust partner at Robins, Kaplan, Miller & Ciresi in Washington, D.C., who was not involved in the case.

No antitrust case since the 1982 breakup of AT&T — including the Microsoft litigation —has had as big an impact on consumers as this one will, he said.

This case also highlighted the importance of private class-action suits in enforcing antitrust laws, he said.

"This was a case the [U.S. Department of Justice] could have brought but chose not to," he said.

The DOJ did file and eventually win an antitrust case against Visa and MasterCard, but it focused on a different aspect of the defendants' business, involving rules that prohibited member banks from issuing competing cards.

In its ruling, the U.S. Court of Appeals for the 2d Circuit praised the work of the plaintiffs' attorneys and the trial judge's handling of the complex case.

"[T]he court system and the mediation process worked exactly as they are supposed to work at their best; a consensual resolution was achieved based on full information and honest negotiation between well-represented and evenly balanced parties," the appeals court said, quoting a statement made by settlement mediator Eric Green.

The 2d Circuit also rejected challenges to the $220 million in fees the lower court awarded to the plaintiffs' counsel, 30 law firms headed by lead counsel Constantine & Partners in New York. Some class members argued the award was too high, while Constantine & Partners — who had asked for $609 million — contended it was too low.

The settlement came just before opening arguments were to begin in the trial in the U.S. District Court for the Eastern District of New York, after seven years of discovery and pretrial proceedings.

Defendants Visa U.S.A. Inc. and MasterCard International Inc. are nonprofit, joint-venture associations owned by their members, primarily banks, which issue Visa and MasterCard credit and debit cards.

Visa and MasterCard maintained an "honor all cards" policy requiring businesses that accept the associations' credit cards to also accept their debit cards, known as Visa Check and MasterMoney. Merchants pay a fee each time a customer uses a credit or debit card to make a purchase.

The plaintiffs, including the world's largest retailer, Wal-Mart Stores Inc., alleged that the policy was an illegal attempt to monopolize the market for debit cards, in violation of federal antitrust law. According to the plaintiffs, the fee they pay for each debit card transaction would decline if they were free to choose whether or not to accept either Visa or MasterCard debit cards.

Other plaintiffs named in the suit included Safeway Inc., The Limited Inc., Circuit City Stores Inc. and Sears, Roebuck & Co., along with three trade associations: the National Retail Federation, the Food Marketing Institute and the International Mass Retail Association.

On behalf of some 5 million businesses, they sought an injunction to force an end to the "honor all cards" policy, along with $8 billion in damages, which could have been trebled under the Sherman Act, the federal antitrust statute.

Just before the trial was to have started in April 2003, Visa and MasterCard announced they had settled the litigation, with Visa agreeing to pay $2 billion and MasterCard $1 billion in installments over the next 10 years. Both also promised to change their debit card policies.

In reaching the settlements, neither Visa nor MasterCard admitted to violating any laws.

U.S. District Judge John Gleeson approved the settlement after class members were notified and given a chance to object. Eighteen class members did object, but Judge Gleeson found no merit in any of their arguments.

On appeal, the objecting class members — all smaller businesses — argued that the settlement wrongly released Visa's and MasterCard's member banks from legal liability for the alleged antitrust violations, even though the banks were not parties to the case. They also took issue with the adequacy of the notice sent to class members, the settlement's overall fairness and the amount of the attorney fee award.

Constantine & Partners filed its own appeal from the award of attorney fees, seeking nearly $400 million more than authorized by the trial court.

The appeals court found no merit in any of these arguments. It noted that only 18 class members out of some 5 million objected and that the class as a whole appears to be "overwhelmingly in favor" of the pact.

The appeals court noted that a trial would have been risky for the plaintiffs, both in proving liability and establishing damages, and that it was doubtful whether the defendant credit card associations could have afforded to pay much more than the amount of the settlement.

Finally, the appellate judges said the $220 million fee award struck an appropriate balance between compensating the plaintiffs' counsel for their hard work and willingness to take financial risks, and protecting the class members' recovery.

"Measuring the difficulties of a large antitrust action and the degree of success by counsel in forging a settlement is not an easy task," the appeals court concluded. "In our view, the District Court carried out its responsibility with admirable care and thoroughness, and with an eye to a just result."