Jessica Karmasek Aug. 6, 2015, 9:11am


BROOKLYN, N.Y. (Legal Newsline) - A federal judge has thrown out a settlement with American Express in a class action lawsuit over merchant fees, citing the “improper and disappointing conduct” of the lead plaintiffs attorney.

The plaintiff retailers in the case -- among them, 7-Eleven, Wal-Mart and Target -- had objected to the deal ahead of Judge Nicholas Garaufis’ ruling, filed Tuesday, striking down the deal and $75 million in attorneys’ fees.

Among their concerns, the objectors argued the cohesion necessary for certification was “lacking” because the proposed relief potentially benefits only some class members and/or does not benefit all class members equally.

Surcharging currently is prohibited in 10 states, making it so merchants in those states could not implement the relief.

The objectors also took issue with the “substantive fairness” of the settlement agreement.

They argued the ability to impose parity surcharges -- the core of the relief -- is of zero value to many, if not most, class members and therefore class members would be worse off under the settlement than they are under the status quo.

“The court does have serious concerns about the Settlement’s substantive fairness,” Garaufis, for the U.S. District Court for the Eastern District of New York, wrote in his 44-page ruling.

“But the court need not, and does not, reach the merits of these aforementioned objections today, because it concludes that the improper and disappointing conduct of Co-Lead Class Counsel Gary B. Friedman has fatally tainted the settlement process.”

The judge continued, “The procedural unfairness and failure of adequate representation (as this conduct bears on both inquiries) revealed by the Friedman/Ravelo Communications requires disapproval of the Settlement; the court cannot thoughtfully assess its substantive fairness without assurance that the class was properly represented in the negotiations thereof.”

Friedman apparently shared confidential information with Keila Ravelo, an attorney for American Express competitor MasterCard.

Ravelo, formerly a partner at Hunton & Williams LLP and then Willkie Farr & Gallagher LLP, was arrested in December on charges that she participated in a conspiracy to defraud the law firms and MasterCard of several million dollars.

Ravelo resigned from Willkie in November, shortly after the law firm learned she was under investigation.

In the course of an internal review of Ravelo’s conduct, the firm discovered certain documents in her possession that Willkie perceived to be subject to the protective order entered in the class action which MasterCard was not a party.

In February, Willkie informed the parties to the American Express class action and certain objectors about what it had found.

After being informed of Willkie’s discovery of these communications, the 7-Eleven and Target objector groups alerted the federal court and noted their concern that the information provided indicated the proposed settlement may have been “compromised.”

The settlement agreement, which resolved two class action lawsuits, had received preliminary approval in 2013.

The class plaintiffs -- all merchants that accept American Express cards at any location in the U.S. as of or after Feb. 12, 2014, onward -- claimed American Express violated the antitrust laws by imposing rules that limited merchants from steering their customers to other payment methods and that required merchants that want to accept any American Express cards to accept all American Express cards.

The class plaintiffs claimed these rules insulated American Express from competitive pressure to lower merchant fees and caused an upward spiral in merchant fees for American Express, Visa and MasterCard. American Express denies these claims.

Garaufis, in his order, seems shocked by the alleged collusion between Friedman and Ravelo.

“As a matter of course, Friedman improperly sent emails containing confidential and highly confidential information of American Express that was produced subject to a protective order that prohibited its further dissemination to Ravelo, counsel for MasterCard, American Express’s major competitor and not a party to the protective order(s),” he wrote.

“The emails unequivocally reveal that this was not an inadvertent violation: In at least two of them, Friedman writes, ‘Burn after reading,’ and the content of others indicates his contemporaneous recognition of the confidential and highly confidential nature of the materials.”

As the judge points out, Ravelo was not merely a third party who was “unentitled” to receive the materials that were sent to her by Friedman.

“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,” he explained.

“The documents indicate that Friedman and Ravelo were in frequent, possibly constant, communication regarding the negotiating process and status of both the 1720 MDL settlement and the Class Settlement Agreement. As Class Plaintiffs themselves describe it, ‘Mr. Friedman consulted [Ms. Ravelo] as a confidante and sounding board on strategic issues, drawing on her defense-side insights to help advance the interests of the merchant class.’”

Garaufis said the reason or reasons behind Friedman’s conduct and for involving Ravelo in the class actions are unknown. But the judge said it is “undisputed” that Friedman and Ravelo have a “longstanding personal relationship.”

They have been friends since 1992 when they were associates together at large law firm. They even vacationed together, Garaufis noted in his order.

“Whether Friedman exchanged confidential and/or privileged materials with Ravelo and consulted with her regarding these actions for financial reasons, out of personal loyalty, due to a misplaced sense that her advice would in fact benefit the merchant class and was not improper, and/or for some other reason(s), is something this court cannot currently, and need not, determine,” the judge wrote.

“Whatever his reason for doing so, Friedman’s bringing MasterCard’s counsel into the negotiating process created a conflict between class members and Class Counsel, and specifically a risk that Friedman, with Ravelo in his ear, negotiated settlement terms that are worse for class members than the terms he might have negotiated absent that conflict. This risk requires the court to deny approval of the Settlement.”

Garaufis ordered that Friedman and his law firm, Friedman Law Group LLP, be removed as counsel in the class actions.

The judge also ordered that fellow class counsel Read McCaffrey and Christopher Hellmich of Squire Patton Boggs LLP and Mark Reinhardt of Reinhardt Wendorf & Blanchfield to show cause in writing, by Sept. 8, why they should continue in their capacities and if they should remain, to propose a replacement for Friedman.

“The court is concerned that none of the Co-Lead Class Counsel were, or are, acting in the class’s best interests, as opposed to their own interests in effectuating this settlement agreement and collecting a fee,” Garaufis wrote.

Should the class plaintiffs, with replacement counsel, and American Express seek to return to mediation, the judge directed them to obtain a different mediator “who is experienced in antitrust law,” and to seek court approval.

Friedman could not immediately be reached for comment.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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