Lessons Learned from In re American Express Anti-Steering Rules Litigation


Lessons Learned from In re American Express Anti-Steering Rules Litigation

by John Atkins and Chris Dachniwsky1

Class action lawyers and antitrust attorneys alike were surprised on August 4, 2015, when Judge Nicholas G. Garaufis rejected the settlement agreement in In re American Express Anti-Steering Rules Litigation.2 The story behind this decision teaches three lessons about how lawyers should conduct themselves in antitrust class action litigation, particularly when representing a plaintiff class: (1) comply with court orders, including protective orders, even when disclosures will not hurt your clients; (2) do not strategize with parties or nonparties to the litigation if they have interests different from your clients’ interests; and (3) understand and respect the competitive implications of the settlements you negotiate, because antitrust cases are particularly sensitive to concerns about coordination.

In re American Express is a class action in which numerous large retail corporations seek primarily injunctive relief against American Express to compel it to end its practices of imposing rules on retailers that (1) prevent the retailers from using surcharges to “steer” customers to other payment methods, and (2) require retailers that want to accept any American Express card to accept all of them.3 Running parallel to this litigation is In re Payment Card Interchange Fee & Merchant Discount Antitrust Litigation4 (the “1720 MDL”), a class action in which retailer plaintiffs accused Visa and MasterCard of conspiring to fix credit and debit card interchange fees.

Both cases were headed to settlement. In fact, the judge in the 1720 MDL approved a settlement agreement in December of 2013.5 One provision of the 1720 MDL settlement agreement allowed retailers to impose a surcharge for the use of Visa and MasterCard cards, but only if the retailers also surcharged payment products that were equally or more costly to process.6

In April 2014, a few months after the 1720 MDL settlement was approved, the parties in In re American Express filed their own proposal for a settlement with the district court (Judge Garaufis presiding).7 This agreement provided that American Express would allow retailers to impose surcharges on American Express cards, even if they did not also do so for debit cards or their own in-store cards.8 However, the agreement required that surcharges on American Express cards could not exceed surcharges on other major credit cards.9 The agreement also included a general release of all remaining claims for injunctive or monetary relief claims arising out of the American Express policies at issue.10 About 20% of the class members objected to the settlement.11

On August 4, 2015, after conducting the fairness hearing and reviewing the numerous objections from the plaintiff class members, Judge Garaufis denied final approval of the settlement.12 The court noted the deep dissatisfaction of many of the class members with the agreement and that the objectors had good reason to be dissatisfied, especially because that the settlement agreement had nothing but downside for many of them: it foreclosed their ability to pursue future claims, without entitling them to any monetary relief.13 But these concerns over substantive fairness were not the basis of the court’s decision to deny final approval.14 Instead, the court denied final approval of the settlement, and sent the parties back to the drawing board, because of the conduct of the chief lawyer for the plaintiff class, Gary B. Friedman.15 In Judge Garaufis’s eyes, the fairness of the settlement had been undermined, and the parties needed to go back and try it all again with different counsel for the plaintiffs.

Judge Garaufis explained that Mr. Friedman had been in frequent contact with Keila Ravelo, counsel for MasterCard in the 1720 MDL, during the time he was negotiating the settlement agreement on behalf of the plaintiff class in In re American Express.16 After Ms. Ravelo’s representation of MasterCard ended, she was arrested for an unrelated fraud and her law firm discovered that she possessed documents subject to the protective order in In re American Express, to which MasterCard was not a party.17

An investigation ensued, and the court discovered that Mr. Friedman had sent Ms. Ravelo numerous emails containing information that American Express had designated as highly confidential under the court’s protective order prohibiting its dissemination.18 Ms. Ravelo’s assistance to Mr. Friedman began during discovery and continued all the way through the fairness hearing.19 Mr. Friedman and Ms. Ravelo corresponded about the settlement in 1720 MDL before it was finalized, and Mr. Friedman frequently consulted her regarding the details of his settlement negotiations in In re American Express.20 Worse, Mr. Friedman’s disclosures to Ms. Ravelo were not accidental: on more than one occasion, Mr. Friedman suggested that Ms. Ravelo “burn after reading” documents he sent her.21 While these documents were American Express materials, and not those of Mr. Friedman’s clients, their disclosure was nevertheless a clear violation of the court’s protective order.

Worse yet, Mr. Friedman also breached client confidences (and his fiduciary duty as class counsel) by revealing plaintiff class work product to Ms. Ravelo.22 Judge Garaufis indicated that this alone was probably sufficient to render Mr. Friedman inadequate as class counsel, and thereby prevent final approval of the class settlement.23 But this still was not Judge Garaufis’s primary objection to the settlement.

Judge Garaufis found that Mr. Friedman was not merely sending information to Ms. Ravelo, he was strategizing with her about his negotiation strategy on behalf of the plaintiff class (a class that included many of Ms. Ravelo’s client’s opponents in MDL 1720). Ms. Ravelo was defense counsel in a matter related to, and deeply affected by, the outcome in In re American Express. One provision of the 1720 MDL Settlement Agreement, termed the “Level Playing Field” provision, permits a surcharge for Visa and Mastercard only to the extent that other major credit cards, like American Express, allow it.24 This interplay between the 1720 MDL and In re American Express means that any retailer who accepts American Express may not impose a surcharge (parity or differential) on Visa and MasterCard transactions unless and until American Express permits such surcharges.25 Accordingly, the 1720 MDL settlement was substantively linked with the American Express settlement. Judge Garaufis expressly found that Friedman understood this linkage, and discussed it with Ravelo.26

This represented a serious conflict of interest and presented serious antitrust problems.27 These two settlements will determine – for much of the American retail market – what kinds of surcharges will be allowed, if any, on credit card transactions. This relationship between the settlements, therefore, made it particularly problematic for an attorney for the retailers to strategize and coordinate efforts with a defense attorney with interests adverse to those of his clients. Ultimately, the relief proposed in the settlement agreement, which included a requirement that surcharges on American Express cards not exceed those imposed on other cards, could have weakened competition in the credit card market by forcing surcharge parity, arguably to the benefit of MasterCard, Visa, and American Express, and to the detriment of retailers.28

This conduct was especially concerning in the antitrust context. American Express, Visa, and MasterCard were already in court for allegedly anticompetitive conduct. Visa and MasterCard were in court for anticompetitive coordination. Mr. Friedman and Ms. Ravelo’s conduct, had it not been discovered, might have resulted in two settlements that, viewed together, weakened competition in the credit card market, while precluding future relief against the credit card companies’ anticompetitive policies.

The parties in In re American Express will have to try again to resolve the litigation now that Mr. Friedman has been removed.29 No doubt the court will carefully scrutinize any future settlement agreement, and the conduct of the new class counsel, to make certain that something like this doesn’t happen again. For lawyers in antitrust class action cases, the lessons of this litigation are clear: make certain that your conduct is consistently loyal to the class you represent, that you treat your class clients as you would your individual clients, and that you do not further the anticompetitive conduct that led to the litigation and settlement with collusive conduct during settlement negotiations. For class plaintiffs, particularly class representatives, this litigation shows the importance of actively monitoring both the litigation and class counsel, and the value of objecting to settlements that are not in your best interests.30

Endnotes
1John Atkins and Chris Dachniwsky are litigation associates at Thompson & Knight, LLP in Dallas, Texas.
2In re Am. Exp. Anti-Steering Rules Antitrust Litig., No. 11-MD-2221 (NGG) (RER), 2015 WL 4645240, at *1 (E.D.N.Y. Aug. 4, 2015) (“Amex Final Approval Order”).
3Id. at 8.
4In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., 986 F. Supp. 2d 207 (E.D.N.Y. 2013), appeal withdrawn (Sept. 8, 2014) (“1720 MDL Final Approval Order”).
5In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., Class Settlement Agreement, No. 1:05-MD-1720 (JG) (JO) (E.D.N.Y. Oct. 19, 2012) (available at www.paymentcardsettlement.com/Content/Documents/1656-1 part 1 Exhibit 1 to Notice of Motion.pdf) (“1720 MDL Settlement Agreement”).
61720 MDL Final Approval Order, 986 F. Supp. 2d at 234.
7In re American Express Anti-Steering Rules Litigation, Class Settlement Agreement, No. 11-MD-2221 (NGG) (RER) (E.D.N.Y. Jan 7, 2014) (available at
www.amexmerchantsettlement.com/Content/Documents/Settlement Agreement.pdf) (“Amex Settlement Agreement”).
8Amex Final Approval Order, 2015 WL 4645240 at *4.
9Id.
10Id. at *11.
11Id. at *5.
12Id. at *21.
13Id. at *11.
14Id. (“But the court need not, and does not, reach the merits of these aforementioned objections today, because it concludes that the improper and disappointing conduct of Co–Lead Class Counsel Gary B. Friedman has fatally tainted the settlement process.”).
15Id.
16Id. at *6-9.
17Id.
18Id. at *13.
19Id. (“The documents show, for example, that Ms. Ravelo helped Mr. Friedman at the outset of this litigation with framing the legal issues, and later was solicited for advice on discovery processes, damages approaches, settlement strategy, final approval briefing and Mr. Friedman's slide presentation at the final fairness hearing.”)
20Id. at *15.
21Id. (Along with another set of emails acknowledging that a brief contained Plaintiffs’ confidential information, and thirty minutes later forwarding the brief to Ravelo with comment: ‘hahahahahaha’).
22Id. at *14.
23Id. (“This evident disloyalty to class members gives the court more pause than does the dissemination of American Express's information; even if this were where Friedman's misbehavior ended, the court might determine him to be an inadequate representative.”).
24Id. at *16.
25Id.
26Id. at *18 (“In one noteworthy email from November 2011, Friedman wrote that ‘Amex would be thrilled’ by a 1720 MDL settlement with an LPF provision, because ‘Amex's fantasy resolution of all this litigation is a world where merchants are free to surcharge Amex cards but only if (i) the merchant also surcharges [Visa/MasterCard] and (ii) surcharges [Visa/MasterCard] at the same level.’”).
27Id. at *14.
28Id. at *17 (“The resolution of the Amex Class Actions therefore effectively determines for the entire credit card industry whether parity, differential, or no surcharging will occur. . . . The combined result of the two settlement agreements, including the releases contained therein, would bind merchants and the three major credit card companies to this state of affairs for an indefinite period of time, and potentially into perpetuity. From a substantive point of view, the court is concerned that this combination might itself amount to an anticompetitive agreement.”).
29Id. at *22.
30After all, had class members not objected, the collusive nature of the settlement agreement may not have come to light.

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