The Second Circuit’s decision highlights that, whenever there are groups of plaintiffs that will obtain different categories of relief as a part of a settlement, both plaintiffs and defense counsel should seriously consider whether the classes need separate counsel in order to adequately protect the interests of the plaintiffs.

Recently, the U.S. Court of Appeals for the Second Circuit rejected a $7.25 billion class action settlement of a lawsuit, initially filed in 2006 and brought by merchants against Visa and MasterCard, on the basis that there was an unacceptable conflict between certain members of the class and the class representatives and counsel.

Background and Proceedings

The antitrust class action was brought on behalf of approximately 12 million merchants that accept Visa and MasterCard, as well as issuing and acquiring banks. The plaintiffs alleged a conspiracy to inflate interchange fees in violation of section 1 of the Sherman Antitrust Act. Specifically, the plaintiffs claimed that several of Visa and MasterCard’s network rules, including the “honor all cards” and “anti-steering” rules, were anticompetitive.1 The “honor all cards” rule requires merchants that accept a network’s credit cards to accept all of that network’s credit cards, regardless of the differences in interchange fees. The “anti-steering” rules include the “no surcharge” and “no discount” rules, which prohibit merchants from charging different prices at the point of sale based on the means of payment.

The plaintiffs alleged that these rules allowed banks issuing the cards to impose artificially inflated interchange fees and that merchants had little choice but to accept the dictated terms. After multiple rounds of settlement negotiations, the parties eventually agreed on a settlement that divided the plaintiffs into two classes: (1) the Rule 23(b)(3) class of merchants accepting Visa and/or MasterCard from 2004-2012 and (2) the Rule 23 (b)(2) class of merchants that accepted (or will accept) Visa and/or MasterCard from 2012 onward. The proposed settlement provided for distribution of the $7.25 billion fund to the Rule 23(b)(3) class, while providing only for injunctive relief that changed Visa and MasterCard network rules to the Rule 23(b)(2) class. Because the Rule 23(b)(3) class would receive money, instead of injunctive relief, its members had the ability to opt out of the class and to pursue direct actions. Meanwhile, because the Rule 23(b)(2) class would benefit in the form of injunctive relief, its members could not opt out. The district court gave final approval to the settlement in December 2013. Since the Second Circuit’s decision rejecting class settlement, the parties in favor of the class settlement have sought an extension of time in which to file a writ of certiorari to the Supreme Court. At the district court level, motions are currently pending on the appointment of new class counsel.

The Decision and the Conflict

A group of objectors, including several large retailers, appealed the district court’s approval of the settlement. Relying on the U.S. Supreme Court’s decisions in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), the Second Circuit held that the representation of both classes of settlement plaintiffs was inadequate because “the class representatives had interests antagonistic to those of some of the class members they were representing.” In re Payment Card Interchange Fee & Merchant Discount Antitrust Litig., No. 12-4671, 2016 BL 210542, at *9 (2d Cir. June 30, 2016).

The court determined that there was an inherent conflict between the two classes because the Rule 23(b)(3) class would want to maximize its compensation for past harm, while the Rule 23(b)(2) class would want to maximize the restraints on the Visa/MasterCard network rules to prevent harm in the future. As a result, the class counsel and representatives who negotiated the settlement agreement impermissibly exchanged benefits between each class in negotiations. The Second Circuit ruled that, after Amchem and Ortiz, “a class divided between holders of present and future claims requires division into homogenous subclasses [each] with separate representation.” Id. at *10.

The court explained that this conflict was particularly apparent when considering the $544.8 million in fees that class counsel stood to receive as part of the settlement. The court held that it cannot assume class counsel adequately represented a given group’s interests when “‘the potential for gigantic fees’ is within counsel’s grasp” for representation of one group but only if counsel can resolve another group of plaintiffs’ claims. Id. at *10.

The court was also concerned with the adequacy of class representation because the Rule 23(b)(2) plaintiffs that would receive the benefit of injunctive relief did not have the ability to opt out of the class. However, the court also pointed out that the ability to opt out of the Rule 23(b)(2) class would not have necessarily resolved the conflict problems.

The court went on to say that its ruling was not intended to suggest that the (b)(3) and (b)(2) classes can never be combined into a single case or that they always require separate counsel. Rather, the distinct problems in this case arise when the (b)(2) and (b)(3) classes seek distinct relief, do not have separate counsel, have non-overlapping membership, and are certified for settlement only. The court explained that, when a class is certified for settlement only, “the class is especially vulnerable to conflicts of interest because the imperatives of the settlement process, which come to bear on the defendants, the class counsel, and even the mediators and the court itself, can influence the definition of the classes and the allocation of relief.” Id. at *12.

In addition to the inadequacy of class representation, the court also held that the settlement did not substantively protect the interests of many members of the (b)(2) class. While courts have an interest in approving class action settlements to bring finality to large class action cases that can create “nearly limitless liability” for defendants, courts must continue to ensure that class members’ due process rights are protected through adequate representation. See Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., 396 F.3d 96, 106 (2d Cir. 2005). Because of recent changes in the laws governing credit card networks and the specific terms of the settlement, some members of the (b)(2) class did not stand to receive an “appreciable benefit from the settlement,” yet agreed to “release virtually any claims they would ever have against the defendants.” In re Payment Card Interchange Fee, No. 12-4671, 2016 BL 210542, at *14. Essentially, this was “a matter of class counsel trading the claims of many merchants for relief they cannot use: they actually received nothing.” Id. at *15.

Takeaways

The Second Circuit’s decision highlights two important issues to consider in the resolution of class action cases. First, whenever there are groups of plaintiffs that, for whatever reason, will obtain different categories of relief as a part of a settlement, both plaintiffs and defense counsel should seriously consider whether the classes need separate counsel in order to adequately protect the interests of the plaintiffs and to preserve any potential settlement. Second, the parties need to scrutinize the terms of any deal that could appear to provide little or no benefit to any class of plaintiffs and still requires those plaintiffs to give a broad release as part of the settlement. Third, if it appears that certain groups of class members would receive less value, the parties must explain clearly why such a disparity is appropriate or why no disparity actually exists under the circumstances of the case.