Attorney Misconduct Derails Amex-Merchant Settlement

Judge Nicholas G. Garaufis of the U.S. Eastern District of New York has denied final approval of the preliminary class action settlement American Express and its merchant network reached in December 2013. The agreement allowed merchants more leeway to surcharge American Express card transactions at the point of sale.

According to court documents filed Aug. 4, sufficient evidence showed that the settlement, which appeared to favor American Express, was tainted by unethical conduct and the sharing of confidential information between the plaintiffs’ co-lead counsel, Gary B. Friedman of Friedman Law Group, and Keila Ravelo, at the time a partner of Willkie Farr & Gallagher and the attorney for MasterCard in a similar case.

An Amex spokesperson emailed a statement to BTN on Monday that the card provider is “disappointed in the court’s decision” and that Amex continues to believe the agreement was fair to merchants. “We believe we have a strong defense against the merchants’ claims and will continue to fight our case in court.”

Ravelo's Case

The 2013 Visa/MasterCard antitrust settlement, known as 1720 MDL, involved similar contract disputes and many of the same merchant plaintiffs. Ravelo came under investigation in December 2014 for conspiracy to defraud Willkie Farr & Gallagher, Hunton & Williams and MasterCard. That controversy unfolded just as the Eastern District Court considered final approval of the Amex class settlement. The investigation into Ravelo uncovered communications between her and Friedman that suggest conflict of interest on the part of Friedman, whose settlement on behalf of the merchant class against Amex arguably did little to strengthen his clients’ contractual terms or to increase competition among card networks. Still, the proposed settlement included $75 million in attorney's fees.

The Merchant Group's Case Against Amex

The plaintiffs in the Amex suit sought relief from nondiscrimination provisions in Amex merchant contracts. These provisions prohibit merchants from recouping, via surcharges paid by consumers, the cost of Amex transaction fees (which on average run higher than competing card brands) unless the surcharge applies to all card brands and types, including debit and propriety prepaid store cards.

Amex claimed it was seeking to protect the rights of its customers to use whatever payment type they desire without discrimination at the point of sale.

By requiring “parity surcharges,” these provisions make it impossible for merchants that accept multiple card brands to show a preference for a certain card network or product type, thereby limiting merchants’ ability to shift transaction volume to cheaper forms of payment and to impose downward market pressure on transaction fees. If surcharges can go only as high as a Visa discount rate, for example, parity requirements work as an incentive for Amex to push its swipe rate up as far as a particular market will tolerate.

The U.S. Department of Justice's recent antitrust investigation of Amex uncovered hints of this effect in the travel sector, given the card provider’s strength in the travel and entertainment market. The DOJ noted that 2009 average card acceptance fees for airline, lodging and rental car merchants were 12 percent higher than the average fee for all other merchant segments. Garaufis, who also oversaw proceedings in this case, decided in favor of the DOJ in February. The Amex class action is similar in its aim to balance market power between merchants and card providers.

Amex's Settlement With The Merchant Group

In the merchant group suit, the preliminary class settlement granted by Judge George B. Daniels of the U.S. Southern District of New York and adopted by the Eastern District Court, modified the surcharge provisions to exclude debit and propriety store cards. Parity surcharge rules, however, remained, dictating that whatever percent surcharge might be levied on Amex transactions must also be applied to other credit and charge cards accepted by the merchant. Merchants still would be prohibited from applying surcharges to certain product types—e.g., “premium” cards—without applying the same surcharge to all card types. In addition, plaintiffs agreed never to seek future damages for complaints about nondiscrimination—i.e., the parity surcharge.

Class plaintiffs representing approximately 20 percent of the merchant group’s total transaction volume objected to the preliminary settlement on the grounds that it did not provide meaningful relief. Nonparty objectors (interested merchants not formally part of the class action) also voiced their opposition. That group included travel industry suppliers like Southwest Airlines and Alaska Airlines, both of which testified in the separate DOJ litigation.

Among the objections were concerns that credit card surcharges are limited or prohibited in some states and thus, according to an external court consultant, could render the settlement meaningless for many plaintiffs. And for merchants who accept Amex, Visa and MasterCard, the Amex settlement would curtail freedoms gained from the 2013 class action settlement between many of the same merchants and Visa and MasterCard. That case granted nearly $6 billion in damages, along with expanded rights to impose differentiated surcharges among Visa and MasterCard bands and product types. This was the same suit in which Ravelo represented MasterCard.

How The Settlement Came Undone

That last objection, while powerful, became moot as Willkie Farr & Gallagher's fraud investigation of Ravelo uncovered communications between her and Friedman, communications Willkie deemed confidential to the Amex case. “Ravelo was not merely a third party who was unentitled to receive the materials that were sent to her by Friedman,” Garaufis wrote in his 44-page decision. “She was counsel for MasterCard, a defendant in the 1720 MDL and an adversary to the merchant class in that case, a class to which nearly all members of the Amex Class Actions merchant class also belong.”

The “frequent, possibly constant” communications suggest collusion in negotiating the terms of the Visa/MasterCard and the Amex settlements, which overlapped each other chronologically. Emails and text messages, two of which directed Ravelo to “burn after reading,” reveal full knowledge of the interplay between the two suits, along with motivation to leverage the results to broker the Amex settlement and pave the way to a potential $75 million in attorney’s fees.

In a November 2011 note to Ravelo, Friedman wrote regarding the Visa/MasterCard negotiations, “Amex would be thrilled” by a 1720 MDL settlement with a parity surcharge provision because “Amex’s fantasy resolution of all this litigation is a world where merchants are free to surcharge Amex cards but only if the merchant also surcharges [Visa/MasterCard] at the same level.”

“The reason these communications are so problematic” wrote Garaufis, “is that the Settlement interacts with the settlement agreement approved in the 1720 MDL in a very important way. Under the 1720 MDL … merchants are permitted to impose surcharges on the use of MasterCard and Visa credit cards, either parity surcharges … or differential surcharges. The [Visa/Mastercard settlement] limits that relief, however, by permitting a merchant to surcharge a Visa or MasterCard credit card only to the extent that it also ‘surcharge[s] other payment products of equal or greater cost of acceptance.’ The 1720 MDL settlement provides, therefore, that any merchant that accepts American Express may not impose differential surcharges on the use of any Visa, MasterCard or American Express credit cards unless and until American Express permits such surcharges; and any merchant that accepts American Express may not impose parity surcharges on the use of all credit cards, unless American Express permits such surcharges.

“The resolution of the Amex Class Actions therefore effectively determine for the entire credit card industry whether parity, differential or no surcharging will occur. … From a substantive point of view, the court is concerned that this combination might itself amount to an anticompetitive agreement.”

Thus, Garaufis denied the settlement, citing Friedman’s “egregious conduct” and removing him and his firm from the case. The balance of the plaintiffs’ legal representation is ordered to show cause by Sept. 8 as to why they should remain as interim class counsel and, if so, to propose replacement counsel for Friedman. The merchant plaintiffs and Amex are directed to determine within the same timeframe whether the proceedings should revert back to the Southern District of New York or remain in the Eastern District. A status conference is set for Oct. 5.