Merchants Have New Ammo To Blow up Interchange Settlement—But Is It Enough?

By Jim Daly

Citing what they say were improper communications between two lawyers on opposing sides of a $5.7 billion settlement between merchants and Visa Inc. and MasterCard Inc., attorneys for a group of about 30 merchants gave notice to the networks Tuesday that they want to have the settlement overturned.

Whether they will succeed is unclear. According to people familiar with the case, a motion that will be filed under seal in U.S. District Court in Brooklyn, N.Y., reportedly says information shared by one of the attorneys may have compromised the process leading up to the controversial settlement of the massive litigation announced in July 2012, seven years after the first lawsuit leading to it was filed. But the co-lead attorney for the merchant class that favors the settlement calls the motion “a complete sideshow.”

It may be weeks before a hearing on the motion is heard. A redacted version of the sealed motion might be made public at some point, according to attorneys.

The two lawyers at the center of the controversy were long-time friends. One, Keila Ravelo, who was one of MasterCard’s lawyers, 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, according to a March 19 post on a Reuters legal blog. The other lawyer is Gary Friedman of New York City-based Friedman Law Group LLP, who represented merchants in the Visa-MasterCard case and was lead counsel in a merchant class action against American Express Co. involving disputes over AmEx’s acceptance rules.

The merchant group seeking to undo the Visa-MasterCard settlement might also try to scuttle a pending $79 million settlement in the AmEx case because of Friedman’s actions, according to The Wall Street Journal.

Ravelo resigned in November from Willkie Farr. After learning that Ravelo was under investigation by the U.S. attorney’s office in Newark, N.J., Willkie Farr officials came across emails and documents exchanged between her and Friedman, communications that subsequently became the main topic of discussion of a meeting among lawyers on both sides of the Visa-MasterCard case. Friedman allegedly sent Ravelo information about the AmEx case, some of which was reportedly confidential, according to Reuters. While his communications reportedly didn’t directly divulge information about the Visa-MasterCard litigation, Friedman may have given Ravelo hints about the payment card networks’ defense strategies.

“It’s hard to say how these [emails and leaked documents] affected each and every provision [of the settlement], but if you gave the other team your playbook, you wouldn’t know how it affected each individual play but you’d expect it would affect the outcome of the game,” a person with close knowledge of the case tells Digital Transactions News. The person asked to remain anonymous.

U.S. District Judge John Gleeson approved the settlement in December 2013, but the planned $5.7 billion in distributions—funded by Visa, MasterCard and banks—to class merchants still have not been made. Many large merchants, including Wal-Mart Stores Inc. and others, objected to or opted out of the damages portion because accepting them would prevent them from pursuing their own lawsuits against Visa and MasterCard over interchange. Some merchants are appealing the settlement before the Second U.S. Circuit Court of Appeals in New York.

K. Craig Wildfang, co-lead attorney for the class merchants and a partner at Robins Kaplan LLP in Minneapolis, noted that the lengthy settlement process was closely supervised by the Brooklyn federal court.

“It [the motion] is a complete sideshow generated by some of the lawyers for the objectors,” Wildfang tells Digital Transactions News. “Essentially they objected to improper communications between one of the many lawyers for the class and one of the many lawyers for MasterCard. They’re grasping at straws, which I take as a sign that they don’t have a lot of confidence in their appeal.”

For his part, MasterCard chief executive Ajay Banga indicated in remarks Wednesday that the card network doesn’t expect this latest twist in the long merchant-litigation saga to have much effect. “If these allegations [of lawyer misconduct] are true, that is conduct that’s pretty disappointing. We’re pretty confident the settlement will stand. We’ve been aware of this for some time,” Banga told analysts during a conference call to discuss MasterCard’s second-quarter results.

But long-time critics of the interchange settlement have a different view. The improper lawyer communication “is extremely disturbing and throws the validty of the settlement into question,” Mallory Duncan, senior vice president and general counsel at the National Retail Federation, tells Digital Transactions News. The NRF was not a party to the motion filed Tuesday, though Duncan says some of its members were. He says he has seen ethical breaches by attorneys in his time, but adds, “I personally have never seen anything that has gone this far.”

The expected hearing on the motion likely will be presided over by Magistrate Judge James Orenstein. According to the Reuters blog post, Orenstein was skeptical at a February court hearing that the Ravelo-Friedman communications could undo the entire deal.

Ravelo and her husband, Melvin Feliz, were charged by the U.S. Attorney’s office in New Jersey with wire fraud by allegedly trying to set up two dummy companies to obtain $5 million through bogus billings to Willkie Farr and Hunton & Williams, according to Reuters. Feliz pleaded guilty in February to a drug charge for his alleged role in a plan to transport more than 40 pounds of cocaine from California to New Jersey, and could be sentenced to life in prison, according to The Wall Street Journal.

Neither Ravelo nor Friedman could be reached for comment.

–With additional reporting by John Stewart