On The Case

Should SCOTUS review nixed $7.2 billion credit-card antitrust settlement?

(Reuters) - Depending on which side you believe, when the 2nd U.S. Circuit Court of Appeals rejected the biggest antitrust class action settlement in history last June, the appeals court either: drastically misread U.S. Supreme Court precedent in a way that will make it much more difficult and expensive to resolve big cases requesting both money damages and an injunction; or squelched a novel strategy that served the interests of the defendants while cutting off the rights of unrepresented future plaintiffs.

Thomas Goldstein and Eric Citron of Goldstein & Russell make a strong argument for the second option in their just-filed Supreme Court brief for objectors to the $7.2 billion settlement killed by the 2nd Circuit – a deal for cash and injunctive relief between the credit card companies Visa and MasterCard and merchants who accept the cards.

The settlement, as you probably recall, was the product of years of litigation and negotiation between the card companies and retailers who wanted to be free to charge customers extra or otherwise discourage them from using credit cards with high usage fees for merchants. The deal was structured as a pair of class action settlements. An opt-out class of merchants would be paid billions of dollars for supposed fee overcharges, and a substantially – but not entirely - overlapping class would receive the benefit of structural changes in the credit card companies’ fee regimen. Retailers could not opt out of the injunction-only class, even though the settlement required them to agree to a broad release of their rights to sue Visa and MasterCard in the future.

The 2nd Circuit ruled in June that the retailers in the injunction-only class were not adequately represented by the lead plaintiffs or class counsel, whose compensation was pegged only to the cash part of the overall deal. (An important point: The appeals court specifically said it was not impugning the motives of class counsel, including lawyers from Robins Kaplan, Robbins Geller Rudman & Dowd and Berger & Montague. The trial court awarded those lawyers $545 million in fees.)

Citing the U.S. Supreme Court’s class action decisions in Amchem v. Windsor and Ortiz v. Fibreboard, the 2nd Circuit said there was a “glaring” conflict between the interests of merchants entitled to money and those of retailers in the no-opt-out class – who may not even have set up shop yet or may not have benefited from the card companies’ reforms but would still be bound by the settlement’s “exceptionally broad” releases.

“The fault lines were glaring as to matters of fundamental importance,” the appeals court said. “Such conflicts and absence of incentive required a sufficient ‘structural assurance of fair and adequate representation,’ but none was provided.”

The credit-card companies and class counsel had argued that outside mediators and the federal judge and magistrate overseeing the litigation, who kept close watch over settlement talks, was enough protection against potential conflicts of interest. The 2nd Circuit disagreed. It held that the only way to safeguard the interests of the retailers in the injunction-only class would have been to appoint counsel for them.

When the case went back to the trial court after the 2nd Circuit ruling, that’s what happened: The judge appointed interim lawyers for the injunction class. But in November, class counsel also petitioned the Supreme Court to review the 2nd Circuit decision. In December, Visa and MasterCard filed a brief supporting the petition for certiorari.

The briefs argue that the 2nd Circuit misread Amchem and Ortiz to require separate counsel for classes with substantially overlapping membership and interests. Those cases, according to the certiorari briefs, involved conflicts between groups of plaintiffs competing for settlement money. There’s no such conflict in the credit-card-fee litigation.

“It is nonsensical to impose a rigid rule of separate representation when there is substantial overlap between the two purportedly antagonistic classes,” wrote counsel of record for the class lawyers, Paul Clement of Kirkland & Ellis. “The rule adopted by the 2nd Circuit threatens the commonsense practice of having a class seeking both damages and injunctive relief represented by class counsel, just as they would in individual litigation. The 2nd Circuit’s novel rule has nothing to recommend it, and will significantly increase the complexity and cost of class-action litigation.”

Both Clement and counsel of record for the credit-card companies, Carter Phillips of Sidley Austin, claimed the 2nd Circuit’s ruling was at odds with decisions from the 3rd and 7th Circuits, but their most forceful argument was that the 2nd Circuit had upended standard operating procedures for big class actions.

But in this week’s brief, objectors to the settlement argue effectively that the credit-card dealmakers didn’t follow standard operating procedures. This settlement was apparently unique in class action annals, according to the objectors. “The settlement structure used below was completely novel: No prior class-action settlement in history has made a similar use of (a no opt-out injunctive class) to bind absent and objecting plaintiffs to a global settlement release by a different (monetary recovery) class - let alone done so without even providing them with their own, unconnected counsel,” the brief said. “Claims that this case is legally important or will imperil class-action settlement thus ring hollow.”

Visa and MasterCard, according to the objectors, tried to get away with an untested strategy that would have allowed them to duck future antitrust litigation by retailers without delivering any benefits to absent class members. All the 2nd did in its decision to overturn the settlement was disallow the “abusive” tactic, the objectors’ brief said.

“The decision below has no effect on any case where plaintiffs properly limit themselves to seeking (opt-out class) certification in cases seeking money damages,” the brief said. “And it has no effect on those seeking to obtain both injunctive and monetary relief through a single (opt-out) class. All it prevents is lawyers seeking $545 million in fees based on a cash settlement for (an opt-out) class from closing that deal by simultaneously using a different (no opt-out) settlement to give away other plaintiffs’ claims. That is not behavior this court should encourage. Certiorari should be denied.”

I’m sure that lawyers for the class and the credit card companies will have something to say about the objectors’ aggressiveness but it’s going to be hard to argue with the main point: If you are the only one using a particular device, you can’t claim the rest of the world will suffer if you can’t use it.