AmEx $79M card fee settlement nixed; $6B Visa-MC deal imperiled

Misbehavior by a lawyer who represented merchants in the American Express (NYSE:AXP) multimillion dollar class action suit over interchange fees, led the judge to reject the $79 million settlement this week—imperiling a $6 billion settlement with MasterCard (NYSE:MA) and Visa (NYSE:V).

Attorney Gary Friedman improperly shared thousands of pages of confidential documents and strategy with rival attorney Keila Ravelo, who represented MasterCard and sat in on the American Express case, the Wall Street Journal reported. Friedman and Ravelo were reportedly "close friends" and had previously worked for the same law firm.

The settlement in the Visa-MasterCard case resulted in the $6 billion settlement that has received final approval, although lawyers representing the merchants are seeking to undo that agreement based on the discovery of the communications between Friedman and Ravelo.

U.S. District Judge Nicholas Garaufis last year granted preliminary approval to the AmEx settlement, but struck it down this week in a 44-page decision that removed Friedman, of the Friedman Law Group, from the case. It cited "improper and disappointing conduct" that "fatally tainted the settlement process."

This has been a difficult year for AmEx, which lost Costco as an exclusive partner as the retailer negotiated significantly lower interchange fees with Visa and Citigroup. In another blow, Judge Garaufis ruled earlier this year that AmEx's rules that prevented merchants from steering consumers to less expensive cards were "anticompetitive." AmEx is appealing that decision.

Ravelo was formerly with Willkie Farr & Gallagher and has been charged by the U.S. Attorney's Office with conspiracy to commit wire fraud, after allegedly trying to get $5 million from Willkie Farr and another law firm. Friedman and Ravelo did not comment, although Ravelo's attorney Steve Sadow said in a statement, "we will not be in a position to comment publicly until there is a ruling on the Visa/MasterCard settlement."

AmEx and the merchants signed the $79 million settlement in 2013. Beyond the settlement, the deal would have given merchants the right to surcharge customers who use an AmEx card.

AmEx said in a statement it was 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 intends to continue to fight the case in court.

MasterCard does not expect the ruling to affect its settlement, which was "the result of an extensive negotiation among many lawyers on both sides, with the close involvement of the court."

A lawyer who played a major role representing the merchants in the MasterCard-Visa case, K. Craig Wildfang of Robins Kaplan, said he believes $6 billion settlement will stay in place.

Friedman led a group of plaintiff lawyers in the AmEx case, and held a smaller role in the Visa-MasterCard case, although some of his clients in the Visa-MasterCard case have filed a motion to vacate any fees he might earn in that matter, an estimated $32 million.

Judge Garaufis' decision revealed details about the correspondence between Friedman and Ravelo that hadn't been previously disclosed. For example, Friedman sent many communications to Ravelo's personal email address, "suggesting an intention to keep the communications from being discovered," the judge wrote. Friedman also wrote "burn after reading" in at least two of the messages, the judge wrote, describing the lawyer's conduct as "egregious."

"This lawyer was conflicted and he acted on those conflicts in ways that were clearly antithetical to the interests of merchants and competition overall," said Jeffrey Shinder, a lawyer at Constantine Cannon, who represents merchants opposing the Visa-MasterCard settlement.

For more:
-See this Wall Street Journal article
-See this article

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