Evan Schuman's StorefrontBacktalk

With a week to go before the deadline for merchants to opt out of the $7.25 billion interchange settlement, a group of major retailers said on Tuesday (May 21) that they’re not playing.

Walmart (NYSE:WMT), Costco (NASDAQ:COST), Starbucks (NASDAQ:SBUX), Gap (NYSE:GPS), Lowe’s (NYSE:LOW), 7-Eleven, Nike (NYSE:NKE) and a dozen other chains filed paperwork with the U.S. District Court in Brooklyn that’s handling the case, all saying they both objected to the settlement and were opting out. The group also said its members were considering “additional legal action to recover damages from Visa (NYSE:V) and MasterCard (NYSE:MA) under U.S. antitrust laws.”

A key point in the settlement is that Visa and MasterCard won’t be subject to future interchange-related litigation.

Other chains that joined in the mass opt-out were IKEA, Crate & Barrel, J Crew, Dillard’s (NYSE:DDS), Foot Locker (NYSE:FL), REI, Michaels, Panera (NASDAQ:PNRA), GNC (NYSE:GNC), D’Agostino’s, Roundy’s (NYSE:RNDY) and the Alon (NYSE:ALJ) gas station chain.

K. Craig Wildfang, one of the attorneys who negotiated the settlement, told Bloomberg he wasn’t surprised by the announcement from Walmart and the other chains. “These merchants have been publicly critical of the settlement, and we always thought that many of them were likely to opt out,” Wildfang said. “We remain confident that the vast majority of merchants in the class will not opt out.”

That’s an easy claim to make, since “merchants in the class” includes anyone that has taken a Visa or MasterCard payment since 2004—an estimated 8 million retailers, government agencies, utilities, professional practices, publishers, theaters, not-for-profit charities and a wide variety of other organizations that accept payments, many of which don’t realize they’re “merchants.”

Then again, some do. Last week, two cities—Little Rock, Ark., and Oakland, Calif.—filed objections to the settlement. Oakland’s objection, filed on May 15 with the U.S. District Court in Brooklyn, said because the city “is not permitted to charge convenience fees, this hidden and regressive tax has fallen equally on those who make so little money that they cannot qualify for a credit card.”

In Little Rock’s case, because the city takes American Express (NYSE:AXP) for payments and AmEx doesn’t allow surcharging, that city said it can’t benefit from the settlement’s terms either.

The large number of “merchants” means it’s almost certain that most of them won’t object, because they’ll never have been notified. Under the settlement’s terms, notices were originally supposed to be sent to merchants responsible for “more than 90 percent of merchant transaction volume and 90 percent of merchant outlets” as reported by an industry newsletter, the Nilson Report. In practice, that means customers of the 25 largest acquirers and processors.

But there’s a very long tail on the payment-card curve. The smaller the transaction volume, the larger the number of merchants that fall in that category. And although those merchants don’t drive large payment volumes, they represent a huge category of people affected by the settlement—which also includes whole new categories of Visa- and MasterCard-accepting “merchants” in the future who use Square or other card-accepting systems. That last 10 percent of transaction volume could represent 99 percent of merchants affected by the settlement.

Or think of it another way: Even if 800,000 of those merchants individually opted out of the settlement in the next week (which would effectively qualify as a denial-of-service attack against the court’s electronic filing system), that would still leave 90 percent of merchants who haven’t opted out.

More significant than the percentage of opt-outs will probably be the claims—repeated by Walmart and the other large chains who opted out on Tuesday—that the class-action settlement is unfair to merchants and violates their legal rights by blocking them from future antitrust lawsuits against Visa and MasterCard. The final step in the approval process for the settlement is a “fairness hearing” on Sept. 12, when Judge John Gleeson will decide how much weight to give those arguments.

If Judge Gleeson approves it, the deal is done—in theory. But in practice, any settlement in which 99 percent of the millions of people affected were never notified that they were part of a settlement creates a major political problem. And in turn, it means the likelihood of the settlement generating a political backlash in Congress increasingly approaches 99 percent, too.