By Robin Sidel and Austen Hufford 

A U.S. appeals court threw out a record-setting $7.25 billion antitrust settlement between credit-card firms Visa Inc. and MasterCard Inc. and millions of retailers after determining that some of the merchants who were part of the pact weren't adequately represented.

The ruling from the U.S. Court of Appeals, which was largely unexpected, upends more than a decade of litigation between the credit-card industry and merchants that range from Wal-Mart Stores Inc. to The Iron Barley Restaurant in St. Louis. The settlement had already been muddied as many big retailers, including Home Depot Inc. and Macy's Inc., had dropped out of it.

The wide-ranging settlement, first struck in 2012 and completed by a court in 2013, sought to resolve many long-running disputes between merchants and the card industry. Among other things, the pact permitted merchants to charge more to customers who pay with credit cards.

But, in its decision Thursday, the three-judge appeals panel challenged the structure of the accord, calling it "unreasonable and inadequate." In particular, it criticized a portion of the settlement that applies to future merchants that may not be in business yet, but would be still be bound by the agreement. "The benefits of litigation peace do not outweigh class members' due process right to adequate representation," the ruling said.

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.

A spokeswoman for Visa declined to comment.

The settlement divided merchants into two classes: those that accepted credit cards up to that point and those that would accept them after the settlement. The legal deal allowed members of the first group to opt out, as many have, but the second group would be required to abide by the terms.

Merchants who had been unhappy with the settlement praised the court's ruling. "Everything was wrong with this settlement and the court saw that," said Jeffrey Shinder, a lawyer at Constantine Cannon LLP, who represents merchants that have opted out of the pact, including Wal-Mart Stores Inc., Gap Inc. and Amazon.com Inc.

Shares of Visa fell $1.95, or $2.55%, to $74.79 in midday trading Thursday. Shares of MasterCard were down $2.35, or $2.53%, to $89.80.

Jason Kupferberg, an analyst at Jefferies LLC, said the case would likely go back to the lower court that oversaw the original settlement. He also warned that any future settlement could have a larger price tag. "If history is any guide, the new litigation could take years," he said in a note to clients.

The case dates back to 2005, when merchants began filing lawsuits against Visa and MasterCard, accusing the firms of conspiring with card-issuing banks to set fees on credit-card transactions. Merchants pay the "interchange fees" that are set by Visa and MasterCard to card-issuing banks for each credit-card transaction.

The merchants had challenged a series of card-industry rules as being anticompetitive, including a so-called "honor all cards" requirement. This meant merchants had to accept all Visa and MasterCard credit cards regardless of the different fees associated with them. Other rules prohibited merchants from charging different prices for different types of payment.

The merchants claimed that the rules allowed card-issuing banks to impose fees that the merchants essentially were forced to accept. "The settlement orchestrated by the card networks and banks would have undermined merchants' legal rights," said Deborah White, general counsel for the Retail Industry Leaders Association, which opposed the settlement.

A number of large card-issuing banks were also defendants in the case, including J.P. Morgan Chase & Co. and Bank of America Corp.

Among other things, the appeals court noted that the settlement called for $544.8 million in lawyer fees. The initial case included more than 400 depositions and more than 80 million pages of documents, the court said.

In a bizarre twist, the settlement came under a different type of attack last summer when it was discovered that two opposing lawyers in the case, who were also close friends, shared confidential information. Merchants sought to unravel the pact because of those communications, but that effort wasn't part of the appellate court's decision.

Write to Robin Sidel at robin.sidel@wsj.com and Austen Hufford at austen.hufford@wsj.com

 

(END) Dow Jones Newswires

June 30, 2016 14:39 ET (18:39 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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