United States: Approval Of Huge Class Settlement Reversed Based On Conflict Of Interest Of Class Counsel Representing Subclasses With Diverging Interests

Last Updated: July 29 2016
Article by Todd R. Seelman and Peter T. Shapiro

In In Re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, on June 30, 2016, a three-judge panel of the Second Circuit Court of Appeals issued an important class action ruling in a massive class action that involves 12 million class member merchants who sued Visa, Mastercard and various issuing and acquiring banks, alleging a conspiracy in violation of Section 1 of the Sherman Act (governing unlawful monopolization). The Court overturned the district court's approval of a class settlement on the grounds that the class representatives' counsel were conflicted in that they did not adequately represent the diverging interests of the members of the two settlement classes at issue. The settlement would have provided $7.5 billion to at least some members of the class. As explained below, this ruling underscores the importance of making sure that all class members' interests are adequately considered and represented before effectuating a global class settlement lest that deal be subject to disapproval by the court, or approved but then scuttled by an appellate court.

Plaintiffs' antitrust claims alleged that the defendants adopted rules that allowed the banks issuing credit cards to impose an artificially inflated interchange fee that merchants had little choice but to accept. The litigation commenced in 2006 and was litigated heavily until, with court supervision, a settlement was reached in 2012 and approved in 2013. The settlement divided the plaintiffs into two classes. The first class was certified pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure, and included merchants who accepted Visa or Mastercard from a date in 2004 to a date in 2012 who were entitled to $7.25 billion in monetary relief. The second class was certified pursuant to Rule 23(b)(2) and covered merchants that accepted Visa and Mastercard from the date in 2012 onwards forever, who would receive only injunctive relief in the form of rule changes. Based on the provisions of the rules, members of the first class were permitted to opt out of the settlement, whereas members of the second class had no opt out rights.  In addition, only members of the second class were required to forfeit certain rights to challenge Visa and MasterCard in the future.

The Second Circuit overturned the approval of the settlement based on its conclusion that members of the second class were not adequately represented by counsel, which had acted on behalf of both subclasses. The Court concluded that counsel's conflict violated both Rule 23(b)(4) and the United States Constitution's Due Process Clause. That conclusion was based on analysis of the traditional factors examined under Rule 23(a)(4) to determine the adequacy of representation; viz, that the class representative have an interest in vigorously pursuing the claims of the class and have no interests antagonistic to the interests of other class members. The Court reviewed Supreme Court guidance as to adequate representation in the settlement class context. Essentially, in many circumstances, it is necessary to create subclasses and have different counsel act for each such subclass. In this case, however, the two classes were represented by the same counsel despite the conflicting interests of the class members. Members of the class who sought only monetary relief would want to maximize cash compensation for past harm, while the members who were obtaining only injunctive relief would focus on maximizing the restraints on the network rules to prevent future harm. The Court relied on the Supreme Court's guidance, Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997), and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), to conclude that such divergent interests require separate counsel in view of the impact on the essential allocation decisions concerning plaintiffs' compensation and defendants' liability, particularly because members of the second class could not opt out. Meanwhile, the Court pointed out that class counsel had an enormous incentive to conclude this deal, which represented the largest ever cash settlement in an antitrust class action and which was to net counsel $544.8 million in fees. That incentive suggested that counsel may have been motivated by a desire to consummate the deal, with seemingly less concern for the interests of the clients in the second class.

This case provides important lessons for litigants and counsel in the class action context particularly in federal court. It would be a best practice for counsel on either side to  give serious consideration to whether separate counsel is required in any case in which subclasses must be certified in order to achieve a class settlement. This will be a particular concern in cases such as this one, in which some class members eek monetary relief to recover past damages while other class members seek only equitable relief to improve the conditions under which they will continue to operate. Structural protections, such as the formation of subclasses with separate counsel, are necessary to protect all class members' interests.

While class counsel were perhaps the most directly impacted participants as a result of this settlement being scuttled, the failure to consider this issue prejudices all parties which have reached good faith settlements after extensive negotiation and then are faced with the prospect of incurring still more legal fees and facing the considerable risks of future litigation when the court rejects the settlement based on the conflict of interest of class counsel. Since virtually any settlement that involves subclasses where the interests of the class members may diverge could be threatened, counsel for both sides will necessarily have to consider this teaching of this case as a threshold issue before embarking on a path towards settlement. Necessarily, consideration will have to be given to how procedurally to introduce and obtain the court's approval of new counsel for a proposed settlement subclass that has not yet been certified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Todd R. Seelman
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