A three-judge panel from the U.S. Court of Appeals for the Second Circuit heard arguments Monday on whether to strip class-action status from the lawsuit filed by a group of retailers against Visa and MasterCard but made no ruling.

The judges can issue a decision at their discretion on a ruling by U.S. District Judge John Gleeson that the case initiated by Wal-Mart Stores Inc., Sears, Roebuck and Co., and many other retailers should be a class action.

The retailers are contesting the rules and prices that Visa U.S.A. and MasterCard International set for debit cards, and they are seeking rule changes and cash compensation.

Lawyers for the card associations argued that the class that was certified — which includes the four million U.S. merchants that accept Visa and MasterCard-branded cards, including mom-and-pop stores as well as Wal-Mart and Sears — is too large to be manageable and too diverse to have common interests.

The associations’ lawyers said that Judge Gleeson’s decision and reasoning were faulty, and that he himself had acknowledged that there was room to appeal his decision. “When Judge Gleeson said we could object, I suggest he revealed the analytical error that he made,” said Stephen V. Bomse, a lawyer for Visa.

Visa and MasterCard attorneys said that retailers are affected by interchange rates differently, depending on whether they handle more debit than credit card transactions, or vice versa.

But Lloyd Constantine, the lead lawyer for the merchants, said that all the members of the class face the same problem: The fees that Visa and MasterCard set for their signature-based debit card products are significantly higher than those charged by other organizations for PIN-based debit cards.

“All four million merchants signed an identical contract,” Mr. Constantine stressed repeatedly.

He told the appellate judges that “a great degree of deference is due to the district court” and that overturning its decision would be tantamount to ruling that “Judge Gleeson seriously abused his discretion.”

During the hearing, Judge Sonia Sotomayor interrupted both sides to ask whether each is fully prepared to go to trial. “You need no more discovery? You’re ready for trial?” she asked Mr. Bomse. He replied, after some hesitation, “Discovery is complete.”

Mr. Bomse told the judges that merchants pay 40 different interchange fees and that changing two of them — as the merchants have requested — would affect the entire pricing structure. “You can’t simply change one part of the world and expect the rest to remain the same,” he said.

If the case revolved solely around the “honor all cards” rule and not the monetary damages, “we’d have a much simpler case,” Mr. Bomse said. But when he suggested that the plaintiffs drop their request for monetary damages, Mr. Constantine said, “I’m not ready to do that.”

Lawyers for Visa and MasterCard said the “honor all cards” rule, which requires merchants that take Visa and MasterCard credit cards to accept those brands of debit cards as well, does not stop any merchant from “steering” a customer to pay with a card the merchant prefers.

One piece of evidence that is likely to be included in the case is a Wal-Mart employee training video in which cashiers are instructed to prompt debit card users to type in a PIN, which suggests that the retailer is trying to discourage signature-based debit cards.

“Steering is widely practiced,” said Mr. Bomse, a partner in the San Francisco firm of Heller, Ehrman, White & McAuliffe LLP. “Visa does not in any way inhibit steering.”

Mr. Constantine said the associations have changed their tune because of the retailers’ suit. Strict anti-steering rules were in force when the complaint was filed in early 1997, he said, and as the case has unfolded, the associations “tried to change the record, they tried to rewrite history.”

After the hearing Noah Hanft, MasterCard’s general counsel, said Mr. Constantine had been completely mistaken about the existence of anti-steering rules. “He knows better than that,” Mr. Hanft said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.