Chatty lawyers kill settlement in American Express anti-steering case

4 August 2015. By Richard Vanderford.

A federal judge on Tuesday refused to approve a settlement between merchants and American Express in litigation over the card company’s allegedly anticompetitive rules, saying that the deal was marred by a top negotiating lawyer’s inappropriate communications with an adversary.

The settlement, which would have resolved litigation with roots stretching back to 2006, was “fatally tainted” by improper communications between Gary Friedman, who was a lead lawyer for the settling merchants, and a lawyer for MasterCard, an adversary in related litigation, US District Judge Nicholas Garaufis said in a written order.

The “communications that this court has reviewed reveal egregious conduct by Friedman,” he said.

Garaufis’ decision revives litigation over rules that merchants claim help drive up credit card acceptance costs, a set of fees that together cost US businesses about $55 billion a year.

American Express said in a statement that the company is disappointed by the decision.

“We continue to believe the agreement was fair to merchants, and would provide them with additional flexibility while ensuring our card members are treated fairly at the point of sale,” the company said.

The company believes it has strong defenses and will continue to fight the case in court, it said.

Friedman and lead lawyers for the plaintiffs didn’t immediately respond to requests for comment.

The litigation challenged American Express rules, referred to as anti-steering rules or nondiscrimination provisions, that broadly are intended to stop merchants from trying to get customers to use other, cheaper-to-accept forms of payment.

The deal would have let merchants that take American Express impose surcharges on transactions using those cards, as long as they also imposed surcharges on Visa and MasterCard purchases.

That bargain to allow what is known as “parity surcharging” had drawn complaints from some of the largest US merchants, including 7-Eleven, Target, Home Depot, Walgreens, Safeway and Wal-Mart.

The objectors, whose charges accounted for about one-fifth of the proposed settlement group’s total volume, complained that the agreement, which disallowed opting out, was a “sell out” that gave away too much (see here). It would have insulated American Express from future lawsuits while failing to allow so-called differential surcharging.

With differential surcharging, a merchant could charge a customer more to accept American Express than Visa, for example, and steer credit card users to the cheapest-to-accept cards.

Under the settlement rules, a merchant taking Visa, MasterCard and American Express could have only imposed a uniform credit card surcharge regardless of how much any of those companies charged in fees.

Garaufis expressed concern about the objections to the settlement at a hearing in September. He was able to sidestep those issues, though, after an unusual scandal emerged involving Friedman, the merchants’ counsel. Friedman’s misconduct on its own was enough to kill the settlement, Garaufis said.

In December, federal prosecutors charged former Willkie Farr & Gallagher partner Keila Ravelo with ripping off MasterCard, a client, by billing it for work supposedly done by fake litigation support firms. Ravelo and her husband, who was separately charged with conspiring to traffic cocaine, allegedly pocketed money the firms billed.

A Wilkie investigation discovered communications between Ravelo and Friedman, who had been friends from their days as associates but sat on opposite sides of litigation between merchants and the credit card industry.

Class action settlements are supposed to be negotiated at arms-length, but the two lawyers were in “frequent, possibly constant” contact about this case and another major lawsuit over credit card fees, Garaufis said.

Friedman shared confidential documents that his side had made and confidential material shared by American Express, Garaufis said.

“There were blatant violations of the protective orders entered in the various actions brought against American Express,” he said.

Friedman seemed to indicate he knew the communications were wrong. In at least two instances, he wrote Ravelo that she should “burn after reading,” Garaufis said.

Ravelo responded once with a “hahahahahaha.”

Friedman’s firm and other lawyers for the plaintiffs will be out up to $75 million in fees they had negotiated as part of the deal. Those lawyers unsucessfully argued that the communications should have no bearing on Garaufis’ evaluation of the deal.

Garaufis said he was shocked that the lawyers representing the settling merchants kept Friedman among their ranks, and ordered Friedman and his firm out of the group of co-lead counsel. It looked like the other plaintiffs’ lawyers might be more interested in protecting their settlement and their attorneys fees than the merchants they represent, he said.

The judge also ordered the top lawyers still representing the plaintiffs to explain why they should keep that job.

Garaufis also presided over a separate case that the US Department of Justice brought against American Express over the same rules. In February, he found that the company violated antitrust law, a decision that American Express has appealed.