A Second Circuit panel rejected the settlement reached between defendants Visa, MasterCard, and various banks, and plaintiffs, approximately 12 million merchants who alleged the principally identical network rules of Visa and MasterCard were anti-competitive in contravention of Section 1 of the Sherman Act. The Second Circuit held that class plaintiffs were inadequately represented in violation of Rule 23(a)(4) and the Due Process Clause.
After nearly 10 years of litigation, the district court approved a settlement and certified two settlement classes. The first class was a Rule 23(b)(3) class in which class members received monetary relief of up to $7.25 billion as compensation for alleged harms that occurred prior to the date of settlement approval. The second was a Rule 23(b)(2) non-opt-out class, in which class members received only prospective injunctive relief consisting of changes to certain network rules for a period of approximately nine years.
The Second Circuit was troubled by conflicts between the Rule 23(b)(3) and Rule 23(b)(2) classes, and, to a lesser extent, within the Rule 23(b)(2) class itself. It noted that the Rule (b)(3) plaintiffs would want to maximize retrospective monetary relief, while the Rule (b)(2) plaintiffs would want to increase future restraints on the operation of network rules.
The panel expressed particular concern that the interests of the Rule 23(b)(2) class were being sacrificed to maximize recovery for the Rule 23(b)(3) class, a problem that was exacerbated by the fact that the Rule 23(b)(2) class members could not opt-out, but were “stuck with this deal and this representation.” Furthermore, the panel noted, class counsel received $544.8 million in fees, which were calculated on a graduated scale only according to the amount of monetary relief the Rule 23(b)(3) class received. While the panel was careful not to “impugn the motives or acts of class counsel,” it held that “class counsel was charged with an inequitable task,” and that the classes should have been represented by separate counsel.
The panel also called into question the value of the injunctive relief afforded the Rule 23(b)(2) class in relation to the grant of a broad release that, in most respects, operated in perpetuity in favor of the defendants. It held that the “bargain struck between relief and release on behalf of absent class members is so unreasonable that it evidences inadequate representation.” The most significant part of the relief given to the Rule 23(b)(2) class, the panel noted, was a nine-year suspension of the network rule precluding merchants from assessing a surcharge for using Visa and MasterCard credit cards. This relief, however, was of no value to many class members because New York, California, and Texas outlaw surcharging. The panel, moreover, noted that this relief was also illusory as to the many merchants who accept American Express because American Express’s network rules prohibit surcharging and, further, prohibit other card issuers from being treated more favorably under a “most favored nation” clause. In a sharply worded concurrence, Judge Leval stated that “[t]his is not a settlement; it is a confiscation.”
The panel vacated the district court’s certification, reversed approval of the settlement, and remanded for further proceedings not inconsistent with its opinion.