A $7.25 billion settlement between merchants and Visa Inc. and MasterCard Inc. over credit card transaction fees was rejected Thursday by a federal appeals court, a ruling praised by a retail trade association as a victory for consumers.

The 2nd U.S. Circuit Court of Appeals in Manhattan said the 12 million merchants covered by the antitrust class action were inadequately represented by law firms that gave merchants who stood to gain little or nothing no opportunity to opt out of the deal, approved by a judge in December 2013.

The decision written by Circuit Judge Dennis Jacobs noted that what was described as the largest ever cash settlement in an antitrust class action could have paid lawyers over a half billion dollars in fees.

Mallory Duncan, senior vice president and general counsel for the National Retail Federation, praised the ruling, saying the appeals court had nullified a “seriously, seriously flawed settlement.” The federation is the world’s largest retail trade association, representing 9,000 retailers of various sizes, including chain restaurants and industry partners, from the U.S. and 45 countries overseas.

He said merchants, and ultimately consumers, will benefit from a fairer legal challenge to the fees that can add $400 and $500 annually to a consumer’s cost of purchases.

“This is not just a business-to-business dispute,” Duncan said. “These fees drive up the price of retail merchandise, costing the average family hundreds of dollars a year in added expenses.”

Merchants and trade groups in 2005 sued over the billions of dollars in “swipe” or “interchange” fees they pay that average about 2 percent of a purchase’s price. They alleged credit card networks colluded to set fees charged to stores for handling credit card payments, violating antitrust laws.

Credit card companies have defended the fees, saying stores benefit because customers often spend more when they are using credit and debit cards rather than cash or checks.

The 2nd Circuit said negotiations resulting in the settlement were flawed because the same lawyers represented merchants that had conflicting interests. Those conflicts “sapped class counsel of the incentive to zealously represent” some merchants.

A number of the nation’s largest retailers, including Target Corp. and Macy’s Inc., rejected the settlement.

Jeffrey Shinder, representing dozens of major retailers including The Gap Inc., Barnes & Noble Inc., Starbucks Corp., Nike Inc., Amazon.com Inc., Wal-Mart Stores Inc. and The Wendy’s Co., praised the ruling, calling it “a vindication of pretty much everything we argued.”

“It’s a good day for competition,” he said.

Other lawyers, including those representing Visa, MasterCard and various banks, did not immediately return messages seeking comment.