A growing community of merchants has joined the National Grocers Association (NGA) and nine other named plaintiffs in filing objections with the U.S. District Court for the Eastern District of New York to the proposed interchange settlement in a seven-year-old antitrust litigation against Visa, MasterCard and the largest banks.
NGA has been a named plaintiff on In Re Payment Card Interchange Fees and Merchant Discount Antitrust Litigation since the beginning of the lawsuit. NGA was joined in the litigation by three of its members, Coborn’s Inc., D’Agostino Supermarkets, and Affiliated Foods Midwest, along with Jetro Holdings and Jetro Cash & Carry Enterprises, and five other national associations on behalf of their members: the National Association of Convenience Stores (NACS), National Community Pharmacists Association (NCPA), National Cooperative Grocers Association (NCGA) National Restaurant Association (NRA) and NATSO (travel plazas and truck stops).
They are now joined by a chorus of others, including American Booksellers Association, National Association of College Stores, National Retail Federation, Retailer Industry Leaders Association, and more than 1,200 merchants ranging from the smallest single-store operators to the nation’s largest retailers.
They are urging U.S. District Court Judge John Gleeson to deny preliminary approval to the settlement on the grounds that it locks in the broken interchange system rather than imposing meaningful reforms to it.
Gleeson reportedly has said the settlement meets the requirements for preliminary approval.
Oral arguments will begin Nov. 9 in the case.
Peter Larkin, president and CEO of NGA, said in an Oct. 22 conference call that the current system is “abusing merchants,” and that it was made “very clear” to their attorneys that they wanted structural reform of the rules retailers must obey in order to accept debit and credit cards.
“Throughout this process, we have expressed serious—and I mean very serious—misgivings,” he said. A majority of the plaintiffs have “all said the same thing: that they think this is a bad deal. It’s one that the lawyers like, but none of the businesses they represent like the deal. It is clearly one sided, and for them to substitute their judgment for ours is inappropriate.”
Merchant plaintiffs seethe at their own attorneys
As reported in the November issue of The Shelby Report of the Midwest, retailers and their representative organizations are angry with attorneys hired to stand up for their interests in the litigation. At least one attorney in a firm hired to represent them has accused the retailers of “holding the settlement hostage,” and said the settlement is a best-case outcome for merchants.
Craig Wildfang, partner with law firm Robins, Kaplan, Miller & Ciresi, which is serving as co-counsel to the merchants, was quoted in The Wall Street Journal as saying that dissenters are trying to persuade “Congress to enact some kind of interchange system.”
Leaders with NACS and NRA also expressed their anger in the Oct. 22 conference call.
Scott DeFife, EVP of policy and government affairs for the NRA, said the settlement reinforces problems with the current system and “virtually guarantees a need for legislative action to address the major parts of the system with credit card interchange. Instead of cementing in and dealing with forever and ending the debate on interchange rates for credit cards, it assures a need to go to Congress for more legislative action with interchange rates for credit cards.”
It will be needed to address “the price-fixing element of the way that Visa and MasterCard work together to set prices with rates going up an average two times a year,” DeFife said. “They are not supposed to ignore the problem and set things in stone that were broken in the first place.”
Doug Kantor, counsel to NACS, has been actively involved in discussions regarding the proposed settlement, and said the lawyers are trying to “cram a settlement down the throats” of their own clients.
“Your assumption is that the lawyers you hired will do all they can to fight for and protect your rights and not come to an agreement that you disagree with, that undercuts your fundamental position,” Kantor said. “Unfortunately, we have that situation here where the lawyers that we hired are trying to come to a settlement to end our rights to go to court against our wishes, and in that process get their own fees paid but not get our problem resolved, so that’s taking up our full attention right now.”
Kantor said the settlement would tie the hands of retailers because it sets up an unchangeable system of swipe fees, and the ability to make changes in the future is “vastly important in this realm of swipe fees.”
The settlement also gives Visa and MasterCard “more clearance, more knowledge and communication and more policing,” DeFife said. “It would grant them more oversight of how retailers communicate with their customers, “keeping prices hidden, policing the advertising on differential rates that someone might want to give,” and it almost assures that surcharging would become more difficult.
C-store retailer says swipe fees are fastest-growing expense and second only to labor
Meanwhile, interchange rates have gone up substantially since the lawsuit began, and nothing in the settlement would keep them from rising further, DeFife said. He quoted U.S. Government Accountability Office (GAO) estimates that swipe fees increased 25 percent between 2005 and 2009 alone.
Dave Carpenter is president of JD Carpenter Cos., which is building several new 7-Eleven stores in Colorado. In the conference call, he said swipe fees are the fastest-growing expense for his company, rising “much, much faster” even than healthcare costs, and second overall only to labor. This makes the credit card companies of his biggest vendors, he said, and he’s never been able to meet with them.
His company averages 4.1 cents gross margin per gallon of gas sold. Credit card fees for a three-month period averaged 6.3 cents per gallon, so the company actually loses 2.2 cents per gallon.
Or, to put it more broadly, labor costs at a new Colorado store total $16,642 a month, or $199,000 a year. Rent on the $2 million property that was developed by another company and is leased to JD Carpenter Cos., is $13,166 a month, or $157,000 a year.
Credit card fees in the first month the store was open totaled $11,534, which would amount to $138,000 annually.
“So just shy of the guy who spent $2 million to build the store and lease it to us, and $16,000 vs. the $11,500 it takes us to staff that store with multiple people 24 hours a day, 365 days a year,” he said. “Twenty years ago, 15 years ago, to just accept payments in cash or checks from our customers would have been a tenth of that, if not less.
“These costs are just mind-blowing. For us to provide health insurance—even to a part-time guy who works six hours a week—to every single employee at that store, part time, full time, doesn’t matter, it would cost us $34,000 a year,” Carpenter said. “Credit card fees at that store are $138,000 a year. That’s just to process the payment.”
The expense is “staggering and suffocating” to small businesses and “hard to even explain,” he said. “Sometimes when you get shocked it neutralizes over time and you get used to it. This never neutralizes. It never gets easier.”
The settlement focuses on the wrong issue, too, Carpenter said.
“This settlement really just makes surcharging the centerpiece, but that’s not what this issue is about with small businesses like mine,” Carpenter, who also is chairman of NACS, said. “We don’t want to surcharge our customers. We don’t want to be the conduit for them to charge these fees directly to our consumers. It…makes us nothing more than collection agents to be honest with you, taking the billions of dollars in hidden fees from our customers. It’s just the wrong answer.”
DeFife said that first and foremost with any type of settlement, “Visa and MasterCard need to stop telling merchants how to run their own businesses.
“They shouldn’t tell us what we can and can’t disclose and when; they shouldn’t tell us what we can and can’t charge customers and when; they shouldn’t tell us how to advertise,” he said. “They shouldn’t tell us any of those things.”
DeFife said the proposed settlement “pretends to give us the ability to make pricing more transparent,” but “layers it with provision after provision preventing that from happening.”
He said those who were supposed to negotiate on their behalf have focused more on what Visa and MasterCard would agree to rather that what the merchant community wanted.