When I read the announcement that the Second Circuit had reversed the decision approving settlement of the long-running class action challenging interchange, the short prelude to John Lennon’s “(Just Like) Starting Over” played in my head. That song, if you don’t know it, opens with three chimes of a bell and then, after a beat, John’s voice. The song has nothing to do with payments or interchange. It is a somewhat treacly ballad about trying to rekindle the passion in a long-term relationship. The song is generally interpreted as a love note to Yoko Ono, though some Beatles fans claim that the title and lyrics contain an encrypted call to get the band back together.
Either way, the association seems appropriate. The plaintiffs launched the antitrust attack on interchange in May 2006. Which means the case started before then-Senator Obama announced his campaign for President (May 2007) and Steve Jobs introduced the iPhone (June 2007). And the Second Circuit’s decision seems to send the industry back to where it all began. But that is not what brought the song to mind for me. I associate that song, particularly the opening, with the sense of nostalgia. That little fragment is, for me, the aural equivalent of Proust’s madeleine. And when I read the headline, I recalled a younger self sitting at a counsel table in Judge John Gleeson’s courtroom as a prior settlement of an earlier antitrust case between merchants and the card networks was announced to the world.
That settlement was announced on May 1, 2003. As veterans of the industry will recall, it, too, sought to end a long-running antitrust battle between the card networks and the merchants. The target in that case was the honor all cards rule and, specifically, the merchant’s obligation to accept network branded debit cards if the merchant chose to accept credit cards. To roll the tape backwards, the settlement granted merchants relief from the honor all cards rule and provided for a $2.75 billion payout over a 10-year period.
When the settlement was announced, it was widely hailed as an industry game changer. One prominent critic of the card networks claimed that the settlement would “produce a significant upsurge in competition.” Although some merchants objected to its terms, the Second Circuit ultimately affirmed the decision approving the settlement.
The settlement did not, however, produce a lasting peace between the networks, their issuers and merchants. The ink on the Second Circuit’s decision had barely dried before merchants were back in court, before the very same judge, bringing the claim that produced the failed settlement that was just dumped by a unanimous panel of the Second Circuit. Ironically, the flaw identified by the Second Circuit was the attempt to turn the settlement into a perpetual end to the antitrust disputes that have roiled the industry for a few months short of 20 years.
Now that the effort to create lasting peace has failed, the question is what now. There is the possibility that the Supreme Court will take up the case, reverse the Second Circuit, and revive the settlement. That prospect, for what it is worth, strikes me as remote. As Judge Pierre Leval explained in a short concurrence accompanying the decision of the Second Circuit, the settlement tried to do something that the Supreme Court has specifically said cannot be done: It purports to give one group of plaintiffs compensation for defendants’ past violations of law, “and in return gives up the rights of others.” That type of arrangement, as the Second Circuit explained, does not work, and in all likelihood, the case is headed back to the district court, though not before Judge Gleeson, who retired in March.
The case will not, however, be starting over. As Judge Gleeson documented in the decision ultimately reversed by the Second Circuit, this case was about as far along as a case could go without a trial. When Judge Gleeson accepted the settlement three years ago, the parties had completed fact discovery in the case, exchanged expert reports, deposed one another’s experts, and briefed dispositive motions. And it was clear three years ago that the plaintiffs’ case suffered from some real flaws. As Judge Gleeson explained in his decision accepting the settlement, plaintiffs might well fail to show that any of the practices they challenge — default interchange rates or the honor all cards rule as applied to different issuers and types of cards other than debit and credit cards — violate the antitrust laws, or fail to prove that they suffered any harm even if the court were to conclude that the rules did violate the antitrust laws.
So, to quote a more contemporary musical source, “what comes next?” There are some very practical obstacles to a quick settlement. First, as noted above, the judge who has presided over almost 20 years of continuous litigation between the industry and the merchants retired in March. Both sides will have to get acquainted with the new judge, Judge Margo Brodie. Second, from afar, it is not obvious who can speak for the merchant class. In particular, the plaintiffs’ lawyers who negotiated the earlier settlement have lost much of their credibility. Nearly half of the top 60 merchants in the U.S. had opted out of the settlement prior to its approval by Judge Gleeson, and a member of the panel that rejected the settlement that they crafted described it as a “confiscation.”
But once that problem is solved, the pressure on both sides to resolve the case without a trial or a definitive ruling from the court will be enormous. Although the decision from the Second Circuit is very critical of the prior deal, it opens a clear path to a new one: confine the release to the merchants that receive compensation and benefit from rule changes implemented by the settlement. Such a settlement will not provide the networks or the issuers with blanket immunity to future claims, but it might just be enough to rekindle the relationship that brought them all together in the first place.
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Thomas Brown is a partner in the Antitrust and Competition and the Global Banking and Payment Systems practices. He is based in the firm’s San Francisco office.
Mr. Brown’s practice focuses on competition law and legal issues affecting the financial services industry. In addition to strategically advising payment systems and financial services clients across a broad spectrum of regulatory issues, he has litigated notable antitrust cases, including class actions, in the financial services industry for more than fifteen years.
Mr. Brown was Vice President, Senior Counsel at Visa U.S.A. Inc. There he was responsible for managing the aftermath of the settlement in In re Visa Check/MasterMoney Antitrust Litigation, including the dozens of consumer class actions that were filed following the settlement. He was also deeply involved in the company’s transformation from a co-op to a shareholder owned company.