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24-07-2012 21:25:00

Wal-Mart Opposes Credit-Card Settlement

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--Wal-Mart has battled with Visa and MasterCard previously over card fees

--Investors worry merchants could derail the settlement if too many oppose it

--"It's an unending war"

Wal-Mart Stores Inc. (WMT) on Tuesday urged merchants to reject a pending multi-billion settlement reached by Visa Inc. (V) and MasterCard Inc. (MA) of numerous lawsuits filed by retailers over credit-card fees.

The move is the latest swipe taken by the world's largest retailer against the card industry, which has battled with Wal-Mart previously over so-called interchange fees in court and on Capital Hill.

The Bentonville, Ark., company is also the latest merchant to come out swinging against the settlement, which would put to bed more than 50 lawsuits filed since 2005 against Visa, MasterCard and numerous large banks that issue the payment networks' cards. The suits, which are consolidated in U.S. District Court in Brooklyn, argue that the defendants conspire to set transaction fees arbitrarily high. The litigation was set to go to trial in September.

"The proposed settlement would not structurally change the broken market or prohibit credit card networks from continually increasing hidden swipe fees," Wal-Mart said in a statement, adding that it urges "all merchants to put consumers first and reject the settlement."

Target Corp. (TGT) and the National Association of Convenience Stores, or NACS, which is a plaintiff in the suits, have also opposed the deal. Wal-Mart and Target aren't parties to the suits, though they will have the chance to formerly opt out of the class settlement. If enough merchants opt out, it could derail the deal.

"It's a very real possibility that there could be a snowball effect," said David Robertson, publisher of the Nilson Report, a payments-industry newsletter. "You do have two of the largest retailers speaking out against the settlement, which is significant."

A key issue for critics of the deal is the release it would grant Visa and MasterCard over future litigation, preventing merchants from suing the payments networks again over how interchange fees are set. In addition, rule changes that Visa and MasterCard have agreed to under the settlement, including the ability for merchants to charge customers an extra fee for paying with a credit card, would be binding on all merchants, regardless of whether they opt out of the settlement. Some merchant groups have argued the surcharging provision has too many strings attached, effectively making it too difficult for retailers to take advantage of.

Wal-Mart said the settlement "would require merchants to broadly waive their rights to take action against the credit card networks for detrimental conduct or acts."

Wal-Mart has a tenuous history in the payments industry, having pushed aggressively for changes to how card fees are set. Those fees, known as interchange, are decided by Visa and MasterCard but collected by card-issuing banks, such as Bank of America Corp. (BAC), J.P. Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), as revenue.

The retailer was a key proponent of the Durbin amendment, a provision of 2010's Dodd-Frank financial overhaul legislation that cut nearly in half the interchange fees charged on debit-card transactions. Banks and card networks lobbied hard to first squash and then delay the provision, which ultimately took effect in October but didn't touch credit-card interchange fees.

Wal-Mart also helped win a $3 billion class-action settlement with Visa and MasterCard in 2003 over the card networks' rules that required merchants who accepted their credit cards to also accept their debit cards. Visa and MasterCard agreed to drop that rule and temporarily reduced debit-card transaction fees as part of the settlement.

"I think it's ironic that Wal-Mart, which of course was a lead plaintiff in a prior case that achieved dramatically less in the way of market reforms, is now criticizing our case even though we achieved dramatically more market reforms," Craig Wildfang, a partner with Robins, Kaplan, Miller & Ciresi LLP, one of the law firms that helped negotiate the settlement on behalf of the class plaintiffs.

Critics of the settlement "haven't said what they think it is that could be obtained in an antitrust trial that we haven't obtained," Wildfang added. "The kinds of things they seem to want are not things that are attainable in an antitrust trial. They're more regulatory. We agree that there remain issues .. with respect to the payment card markets, but federal judges aren't going to order Visa and MasterCard to reduce their prices."

It's not the "least bit surprising" that large merchants like Wal-Mart and Target have opposed the settlement, given their constant push to lower fees, said Eric Grover, principal of payments-consulting firm Intrepid Ventures and a former sales manager for Visa.

"Large merchants effectively want card acceptance costs to be zero, to be free," Mr. Grover said, adding that he expects merchants will continue to lobby for broader changes to how card fees are set regardless of the settlement outcome.

While Wal-Mart and Target aren't parties to the litigation, they will have the chance to formally opt in or out of the settlement as part of the court approval process. NACS is also one of 19 class plaintiffs that had filed lawsuits against the card companies, though the law firms representing those parties have filed a motion to withdraw as counsel for the trade group.

NACS has already hired law firm Constantine Cannon LLP, which helped reach the $3 billion settlement in 2003 in the Wal-Mart case, to represent it in the proceedings.

A provision of the deal would allow Visa and MasterCard to cancel the deal if merchants representing at least 25% of credit-card sales volume opt out of the settlement.

It wasn't immediately clear what Wal-Mart's and Target's credit-card volume is, though analysts have said it would be difficult to reach the 25% threshold without a significant number of merchants opting out of the settlement.

Randy Hargrove, a spokesman for Wal-Mart, declined to comment on the company's credit-card sales volume.

"The defendants likely contemplated .. that some retailers would take issue with the terms of the settlement and set a fairly high bar in terms of the settlement termination clause," Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, wrote in a research note Tuesday.

The other plaintiffs that are part of the pending settlement include the National Grocers Association, National Community Pharmacists Association and Payless ShoeSource, which is part of Collective Brands Inc. (PSS). Separately, about 20 individual retailers including Kroger Co. (KR), Publix Super Markets Inc. (PUSH), Safeway Inc. (SWY) and Walgreen Co. (WAG), also reached a settlement with Visa, MasterCard and the defendant banks.

Combined, the card networks and banks have agreed to pay merchants $6.6 billion, in addition to reducing interchange fees temporarily, a move valued at $1.2 billion.

MasterCard spokesman Jim Issokson said in a statement Tuesday that the settlement was reached after years of litigation and months of negotiation.

"The provisions of the settlement, including the flexibility for merchants to impose checkout fees, new negotiating tools for merchants and the scope of the release, was reached with the assistance of the court and was supported by the merchant class representing millions of large and small retailers, and prominent trade groups across the country," Mr. Issokson said.

Visa spokesman Paul Cohen declined to comment.

-Tess Stynes contributed to this story.

Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

July 24, 2012 15:25 ET (19:25 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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