Lawyer Excoriated as AmEx Deal Unravels

BROOKLYN, N.Y. (CN) - Tearing up the long-awaited settlement Tuesday between American Express and major U.S. corporations, a federal judge found that improper emails between the lead class counsel and an attorney for MasterCard tainted the entire process.

The emails - in which the two attorneys traded confidential information and legal strategies - were a clear conflict of interest, and led to a settlement with worse terms for the class than they might have secured otherwise.

Slamming the communications between the attorneys, U.S. District Judge Nicholas Garaufis said "the improper and disappointing conduct of co-lead class counsel Gary B. Friedman has fatally tainted the settlement process."

"This smacks of blatant collusion," Garaufis wrote. "Have class counsel lost sight of the fact that they purport to represent merchants?"

As in a related enforcement action that the U.S. government and attorneys generals of 17 states brought against AmEx in the same court, the class action at hand challenged nondiscrimination provisions of contracts that AmEx makes retailers sign to process transactions involving its credit cards.

After a seven-week bench trial in the related case, a federal judge agreed with the government that nondiscrimination policy prevents the 3.4 million merchants that take AmEx credit cards from steering customers to other methods of card payments, which are typically less expensive.

Unlike the government, however, the retailers expressly did not challenge the anti-surcharging rules that the settlement reached in 2013 modified.

Objections from almost one-fifth of the class members - two groups led by 7-Eleven and Target - failed to block tentative approval of the settlement, which was expected to about $75 million in attorneys' fees for class counsel.

A number of the objections contended that the settlement benefited only some class members and failed to boost competition between credit cards.

Opponents of the deal found more ammunition when attorneys for MasterCard at Willkie Farr & Gallagher discovered that one of their lawyers, Keila Ravelo, had documents from the AmEx case subject to a protective order though MasterCard was a not a party to the action.

An investigation soon revealed Friedman had been communicating about the case with Ravelo, his friend since 1992 when they were associates at the same law firm.

The two vacationed also together with their families, according to court documents.

Ravelo was arrested this past December on charges that she and her husband, Melvin Feliz, had for over two years conspired to overbill and defraud Willkie, MasterCard and the law firm of Hunton & Williams of millions of dollars.

Judge Garaufis noted Tuesday that the court relied partly on the "honesty and integrity" of class counsel to determine the settlement's appropriateness.

Precedent dictates that class counsel misconduct requires denial of class certification.

The court's opinion, which contains several redactions, finds that Friedman committed several "blatant violations" of protective orders by sending dozens of emails to Ravelo containing American Express' confidential information.

In one case, the attorney for the class sent Ravelo a copy of the proposed settlement's material terms two weeks before it was executed.

Friedman also asked Ravelo's advice on discovery process, damages approaches and settlement strategy, the court found.

One email shows Friedman telling Ravelo that an attorney for Amex called the proposed settlement amount "a huge f'ing number that made him 'gag,'" while Friedman confided in Ravelo in a different email that the "Amex negotiation has gotten crazy."

At the end of many of the emails, Friedman wrote "burn after reading."

Garaufis noted that the settlement Friedman reached was the same "fantasy resolution" for AmEx he described in a November 2011 email to Ravelo: one that included parity surcharging, where MasterCard and Visa were charged alongside American Express.

"Amex would be thrilled" by such a settlement, Friedman wrote.

Garaufis said he was "troubled" by the fact that it was Friedman who signed the response to the allegations of impropriety between him and Ravelo, and that the attorney remained co-lead counsel for the plaintiff class on the date of his judgment.

Merchants objecting to the settlement say the emails show that Friedman treated Ravelo as a "sounding board," but should not have been talking so freely with counsel for MasterCard, which had completely different interests than his clients had.

In a July brief, Friedman and co-counsel argued that Friedman had sought Ravelo's expertise as a defense-side attorney, and that her insight had helped benefit class members.

Saying that the objecting merchants "can point to nothing that would remotely substantiate such a serious allegation," they claimed that there was no basis for the allegations of impropriety and an interattorney conspiracy to water down the Amex settlement.

Garaufis found that claim hard to swallow Tuesday, ordering Friedman's removal as co-lead counsel and calling on the other attorneys involved in the case to prove why they should continue as interim class counsel, given the fact that they allowed Friedman to remain involved after the emails came to light.

Those attorneys have a Sept. 8, 2015, deadline to prove their integrity.

"The court questions whether not only Friedman, but also the other co-lead class counsel, have the independence, judgment, and integrity necessary to serve as class counsel for a mandatory class," Garaufis wrote.

American Express called the order disappointing. "We continue to believe the agreement is fair to merchants, providing them with additional flexibility while ensuring our card members are treated fairly at the point of sale," the company said in a statement. "We believe we have strong defenses against the merchants' claims and will continue to fight our case in court."

Performance Labs initiated the class action against AmEx in 2006, with companies like Rite Aid and Walgreen signing on over the years.

American Express often tacks on an additional 1 percent or 2 percent processing surcharge on goods paid with by an American Express credit card. Some stores prefer to "steer" consumers to use other credit cards to avoid this surcharge.

Ravelo had defended MasterCard against similar claims in a class action that ended in a $7.25 billion settlement in 2013.

Follow @NickRummell

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