Antitrust Law Daily Wrap Up, TOP STORY—E.D. N.Y.: Settlement of American Express anti-steering rules suit tossed, based on counsel’s conflict of interest, (Aug 4, 2015)

By Linda O’Brien, J.D., LL.M.

A proposed settlement in multidistrict litigation against financial services company American Express over the inclusion of “anti-steering” rules in its merchant acceptance agreements was rejected. The federal district court in Brooklyn found that the plaintiffs’ lead counsel’s improper disclosure of confidential information to an attorney for MasterCard, an American Express competitor, created a conflict of interest. The class counsel’s request for an award of attorneys’ fees was also denied (In re American Express Anti-Steering Rules Antitrust Litigation, August 4, 2015, Garaufis, N.).

Services provided to merchants that accept credit cards are referred to as General Purpose Credit and Charge Card (GPCC) network services. GPCC network services allow merchants to capture, authorize, and settle transactions for customers who pay with their credit or charge card. There are four major competing firms in the GPCC network services market: American Express (AmEx), Visa, MasterCard, and Discover. When a consumer uses an AmEx branded credit card for payment, the merchant is charged a merchant discount fee that is approximately three percent of the total transaction amount. Other credit cards carry much lower merchant discount rates than AmEx.

Beginning in 2006, merchants and consumers filed a series of class action suits against the financial services company, alleging that AmEx included “anti-steering” rules in its merchant acceptance agreements that expressly prohibited merchants from steering transactions to less costly payment cards. After the consolidation action was transferred to the court, Gary Friedman, along with two other attorneys, was appointed interim lead counsel for the putative class. Friedman also represented certain plaintiffs in another antitrust suit concerning the credit and charge card industry, In re Payment Card Interchange Fee & Merchant Discount Antitrust Litigation, in which it was alleged that Visa U.S.A. Inc. and MasterCard Incorporated conspired to fix interchange fees.

In February 2014, the court granted preliminary approval to a proposed class settlement and provisionally certified a class for settlement purposes. A sizeable number of class members constituting approximately 20 percent of the class in terms of charge volume filed objections to the settlement. Subsequently, the plaintiffs and AmEx sought final approval of the class settlement agreement and class counsel moved for an award of attorneys’ fees.

Adequacy of class counsel. The court found that the class plaintiffs failed to show that the settlement was procedurally fair and met the requirements of Federal Rule of Civil Procedure 23(a). Under Rule 23(a), a plaintiff seeking to represent a class must show that it will “fairly and adequately protect the interests of the class.”

According to the court, attorney Keila Ravelo, a partner in a firm that represented MasterCard in the In re Payment Card litigation, was arrested on fraud charges. In the course of an internal audit of her conduct, the firm discovered documents in Ravelo’s possession that were subject to protective orders entered in the current litigation and various communications with Gary Friedman. The information was then disclosed to the various parties and objectors.

In the court’s view, the disclosure of the documents by Friedman to Ravelo was a blatant violation of the protective orders. Friedman improperly sent emails containing confidential information of AmEx that was subject to protective orders to Ravelo, who was counsel for MasterCard, AmEx’s major competitor and not a party to the protective orders. Friedman also improperly disseminated to Ravelo confidential information and attorney work product of the class plaintiffs and consulted with her on strategic issues, including the negotiations for the proposed settlement. Those disclosures violated the fiduciary duty that was owed by Friedman to the class members and showed him to be an inadequate representative.

The court noted that Friedman’s decision to exchange confidential and privileged information with MasterCard’s counsel Ravelo and bring her into the negotiation process created a conflict between class members and class counsel and a risk that Friedman negotiated settlement terms that were worse for the class than terms he might have negotiated absent the conflict. Thus, the risk required the court to deny approval to the settlement.

Furthermore, the proposed settlement would provide class members with only injunctive relief of questionable value, while class counsel has requested up to $75 million in attorneys’ fees. The communications between Friedman and Ravelo appeared to be blatant collusion, in which class counsel proposed to work together with the defendants to achieve a result that was contrary to the best interests of the class, the court concluded.

The case is No. 13-CV-7355.

Attorneys: Philip C. Korologos (Boies, Schiller & Flexner LLP) for American Express Anti-Steering Rules Antitrust Litigation, NO II. David P. Germaine (Vanek Vickers & Masini, PC) for Rite Aid Corp., Rite Aid HDQTRS Corp., and Walgreen Co. Gary B. Friedman (Friedman Law Group LLP), Joel C. Meredith (Meredith & Associates), and Mark Reinhardt (Reinhardt Wendorf & Blanchfield) for Firefly Air Solutions, LLC. Gary B. Friedman (Friedman Law Group LLP), and Mark Reinhardt (Reinhardt Wendorf & Blanchfield) for Plymouth Oil Corp. Peter T. Barbur (Cravath Swaine Moore LLP) for American Express Travel Related Services Co., Inc., and American Express Co.

Companies: American Express Anti-Steering Rules Antitrust Litigation, NO II; Rite Aid Corp.; Rite Aid HDQTRS Corp.; Walgreen Co.; Firefly Air Solutions, LLC; Plymouth Oil Corp.; American Express Travel Related Services Co., Inc.; American Express Co.

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