Settled Merchant Lawsuit

In June 2003, MasterCard signed a settlement agreement on all claims in the class-action antitrust lawsuit brought against MasterCard and Visa in 1996 by merchants in the United States. U.S. District Court Judge John Gleeson will hold a hearing to approve the settlement on September 25, 2003.

The suit, which was initiated by Wal-Mart and several other merchants, challenged each card association's Honor All Cards rule. The merchants claimed that they did not want to accept consumers' MasterCard- or Visa-branded off-line, or signature-based debit cards, and that the associations violated the antitrust laws by tying acceptance of debit to acceptance of credit. As a remedy, the merchants sought billions of dollars in damages as well as the right to elect not to accept MasterCard-branded debit cards while accepting MasterCard credit or charge cards.

The settlement agreed to by MasterCard and the merchants ensures that the payments system will continue to work for consumers, merchants and MasterCard member financial institutions. It preserves the important consumer benefits of MasterCard's Honor All Cards rule, while giving merchants flexibility to choose how broad a range of payment choices to offer their customers.

MasterCard's key consumer protections prohibiting merchants from surcharging cardholders or discriminating against any MasterCard card or cardholder will be maintained for credit and charge cards and honored by merchants who continue to accept MasterCard debit cards. Merchants will have the right to choose not to accept U.S. - issued MasterCard debit cards, and under the terms of the agreement, MasterCard is free to establish an Honor All Cards rule for MasterCard debit cards. This will ensure that merchants who accept MasterCard debit will accept all MasterCard-branded debit cards.

MasterCard also agreed to establish a new interchange rate for debit at least one-third lower than the existing interchange rate, and at a level which should incent both issuance and acceptance of MasterCard debit cards. MasterCard will also develop rules requiring issuers to clearly and consistently identify MasterCard debit cards on their face and to make these debit cards identifiable through electronic terminals.

Also as part of the agreement, MasterCard agreed to pay into a settlement fund for eligible merchants $100 million a year for ten years, except for the first year when the payment will be $125 million.

One result of this lawsuit is that after January 1, 2004, the date by which merchants can choose to accept MasterCard-branded credit cards but not MasterCard-branded debit cards, some consumers may get to the front of the checkout line and find that the merchant rejects the payment option they have chosen. While this could impact a consumer's ability to choose their preferred method of payment, MasterCard is confident that because of the strength of the MasterCard brand and the value proposition it brings to merchants and consumers, the vast majority of merchants will continue to choose to accept MasterCard-branded debit cards.

If a consumer finds that after January 2004, a merchant rejects his/her MasterCard-branded debit cards, the consumer has several options. First, the consumer can choose a store that welcomes the MasterCard debit card. Alternatively, the consumer can utilize a MasterCard credit card or other form of payment. Finally, the consumer can express his/her opinion that the merchant should offer their customers the broadest choice of payments by accepting MasterCard debit cards.

In June 2003, MasterCard signed a settlement agreement on all claims in the class-action antitrust lawsuit brought against MasterCard and Visa in 1996 by merchants in the United States. U.S. District Court Judge John Gleeson approved the settlement on December 19, 2003.

The suit, which was initiated by Wal-Mart and several other merchants, challenged each card association's Honor All Cards rule. The merchants claimed that they did not want to accept consumers' MasterCard- or Visa-branded off-line, or signature-based debit cards, and that the associations violated the antitrust laws by tying acceptance of debit to acceptance of credit. As a remedy, the merchants sought billions of dollars in damages as well as the right to elect not to accept MasterCard-branded debit cards while accepting MasterCard credit or charge cards.

The settlement agreed to by MasterCard and the merchants ensures that the payments system will continue to work for consumers, merchants and MasterCard member financial institutions. It preserves the important consumer benefits of MasterCard's Honor All Cards rule, while giving merchants flexibility to choose how broad a range of payment choices to offer their customers.

MasterCard's key consumer protections prohibiting merchants from surcharging cardholders or discriminating against any MasterCard card or cardholder will be maintained for credit and charge cards and honored by merchants who continue to accept MasterCard debit cards. Merchants will have the right to choose not to accept U.S. - issued MasterCard debit cards, and under the terms of the agreement, MasterCard is free to establish an Honor All Cards rule for MasterCard debit cards. This will ensure that merchants who accept MasterCard debit will accept all MasterCard-branded debit cards.

MasterCard also agreed to establish a new interchange rate for debit at least one-third lower than the existing interchange rate, and at a level which should incent both issuance and acceptance of MasterCard debit cards. MasterCard will also develop rules requiring issuers to clearly and consistently identify MasterCard debit cards on their face and to make these debit cards identifiable through electronic terminals.

Also as part of the agreement, MasterCard agreed to pay into a settlement fund for eligible merchants $100 million a year for ten years, except for the first year when the payment will be $125 million.

One result of this lawsuit is that after January 1, 2004, the date by which merchants can choose to accept MasterCard-branded credit cards but not MasterCard-branded debit cards, some consumers may get to the front of the checkout line and find that the merchant rejects the payment option they have chosen. While this could impact a consumer's ability to choose their preferred method of payment, MasterCard is confident that because of the strength of the MasterCard brand and the value proposition it brings to merchants and consumers, the vast majority of merchants will continue to choose to accept MasterCard-branded debit cards.

Statements & Trial Updates Backgrounder Honor All Cards Houston Business Journal Myths & Facts