MA MasterCard Incorporated

By Austen Hufford 

A U.S. Court of Appeals rejected the 2012 swipe-fee settlement, originally valued at $7.25 billion, between the retail industry and payments companies Visa Inc. and MasterCard Inc., calling the agreement "unreasonable and inadequate."

"The benefits of litigation peace do not outweigh class members' due process right to adequate representation," the Thursday ruling said.

The court ruled that the settlement violated the rule that requires the representative parties to "fairly and adequately protect the interests of the class" and uncover any conflicts of interest.

Specifically, the court noted the conflict between merchants in one class, which were pursuing solely monetary relief, and merchants in the other class, defined as those seeking only injunctive relief.

"The former would want to maximize cash compensation for past harm, and the latter would want to maximize restraints on network rules to prevent harm in the future," the ruling said.

The court said the class seeking injunctive relief "were inadequately represented" because those merchants couldn't opt out of the deal and they shared representation with the other class. The court added that the only apparent benefits to putting the competing claims into one class were higher fees for counsel and the ability of the defendants to pay a bundled group with a single payment.

The court noted the $544.8 million in fees granted to lawyers, saying the firms stood to gain "enormously" if the deal was completed.

"We expressly do not impugn the motives or acts of class counsel," the court wrote. "Nonetheless, class counsel was charged with an inequitable task."

According to the deal's critics, it also protected Visa and MasterCard from future litigation. Wal-Mart Stores Inc. and Target Corp. both opposed the deal.

A Visa representative declined to comment. MasterCard said it was disappointed by the ruling and is reviewing the decision to determine its next steps.

"We believe we presented a clear case to the court that the settlement was fair and appropriate based on more than four years of negotiation and the close involvement of the District Court," the company said in a statement.

Billed at the time as the largest settlement of an antitrust class-action case in U.S. history, the deal -- reached in July 2012 -- was to end years of litigation brought by merchants against Visa and MasterCard and several large banks that issue the companies' credit cards, such as Bank of America Corp. and J.P. Morgan Chase & Co.

Lawsuits filed by trade groups and several retailers in 2005 accused Visa and MasterCard of conspiring with banks to set so-called swipe fees on credit-card transactions at arbitrarily high levels. The fees, also called interchange fees, are set by Visa and MasterCard and flow to banks that issue cards as revenue each time a customer swipes a card at a merchant.

The settlement reignited a long-running battle over credit-card transaction fees, with big-box merchants and retail trade groups making their case for why the deal should be blocked.

"We conclude that the class plaintiffs were inadequately represented," the court wrote.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

June 30, 2016 12:10 ET (16:10 GMT)

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