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A federal judge on Tuesday nullified a pending settlement between American Express Co. and merchants in a class-action lawsuit over AmEx’s anti-steering rules because of improper conduct by a co-lead attorney for the merchants. The decision immediately cast a shadow over the $5.7 billion settlement Visa Inc. and MasterCard Inc. struck with merchants over interchange and merchant rules because the same lawyer played a role in forging that agreement.
In a 44-page decision, Judge Nicholas G. Garaufis of U.S. District Court in Brooklyn, N.Y., said he could not give final approval to the AmEx settlement, and he removed the lawyer in question, Gary B. Friedman of New York City-based Friedman Law Group LLP, from the case. Garaufis scheduled a status conference for Oct. 5 to determine what steps are next.
Friedman passed emails with confidential information about the AmEx case to a lawyer friend, Keila Ravelo, who was one of the attorneys working for MasterCard on a settlement in the class action known as MDL 1720, which was also forged in the Brooklyn federal court but under the supervision of different judges.
New York City-based AmEx issued a statement saying, “We are disappointed in the court’s decision to deny final approval to the settlement. We continue to believe the agreement is fair to merchants, providing them with additional flexibility while ensuring our cardmembers are treated fairly at the point of sale. We believe we have strong defenses against the merchants’ claims, and will continue to fight our case in court.”
The settlement did not award damages but included $75 million in attorneys' fees to Friedman and other lawyers, and $5 million in costs. The plan would have permited merchants to assess surcharges on AmEx transactions under certain conditions.
Merchants opposed to the Visa-MasterCard settlement, which is on appeal, said the emails could have compromised negotiations by giving MasterCard insights about AmEx’s defense strategy in the unconnected but parallel cases over merchant-acceptance rules and interchange. Discovery of a trove of emails from Friedman to Ravelo after she left her old law firm last year prompted lawyers for a group of merchants last week to file a motion to have the MDL 1720 settlement, which gained court approval in December 2013, overturned.
Garaufis said he could not give final approval to the AmEx settlement because Friedman’s “improper and disappointing conduct” had “fatally tainted the settlement process.”
“The court cannot thoughtfully assess its substantive fairness without assurance that the [merchant] class was properly represented in the negotiations thereof,” the judge wrote.
Friedman knew he was giving Ravelo confidential information covered by a protective court order, according to Garaufis. In at least two emails, he wrote “burn after reading,” the judge said.
Friedman could not be reached for comment Wednesday. In light of last week’s motion, how big of a role he played for MasterCard in forging the MDL 1720 agreement will be the subject of intense scrutiny.
“This week’s ruling does not have an impact on us,” a MasterCard spokesperson said in an emailed statement. “We believe our settlement will stand. It is the result of an extensive negotiation among many lawyers on both sides, with the close involvement of the court.”
One of the merchants’ lead attorneys in MDL 1720, K. Craig Wildfang, a partner at Robins Kaplan LLP in Minneapolis, told Digital Transactions News last week that Friedman was “one of many” attorneys working for MasterCard and that his actions shouldn’t scuttle the pending agreement.
Payments consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures, says the controversy over Friedman gives merchants opposed to payment card interchange another reason to keep fighting current card-acceptance pricing practices.
“Even if this [motion] goes nowhere, they’re going to continue to try to attack fees, they want interchange to be zero,” Grover says.
Ravelo, meanwhile, faces federal criminal charges for allegedly defrauding her former New York law firm, Willkie Farr & Gallagher, in addition to MasterCard and the law firm where she worked before coming to Willkie Farr, Hunton & Williams.
