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Collusion Course: Allegations Muddle Interchange Settlements

  • By Andrew Deichler
  • Published: 8/11/2015
CardsThe controversial $5.7 billion settlement between Visa, MasterCard and retailers over interchange might be in jeopardy, thanks to collusion charges against two of the lawyers who were working on opposite sides of the case. Collusion charges against the same two attorneys have already quashed a smaller settlement between American Express and merchants, and retailers are vying for the Visa/MasterCard deal to be similarly defeated.

Retail treasurers who weren’t fans of the multibillion dollar deal—and there are a lot of them—should be paying close attention. Many merchants felt that the Visa/MasterCard settlement did not have merchant’s best interests in mind, and this new revelation only adds fuel to that fire. Treasurers opposed to the settlement should reach out to retail trade groups now and lobby for the settlement to be thrown out.

Nearly 100 merchants have already appealed to the courts to overturn the Visa/MasterCard settlement, which won court approval in December 2013. Following a criminal investigation of Keila Ravelo, a lawyer who had represented MasterCard in the case, it was revealed that she had exchanged improper emails regarding the settlement with Gary L. Friedman, a lawyer who represented the merchants. Ravelo was arrested last year for allegedly conspiring to defraud her former law firm, another firm and MasterCard out of millions of dollars.

The Visa/MasterCard settlement was already largely unpopular with merchants; it was originally intended to be $7.25 billion but decreased significantly after Wal-Mart and about 8,000 other retailers dropped out of it. Retailers were concerned that the settlement would have barred them from taking and future legal action against card brands and issuers.
Additionally, retailers asserted that the $5.7 billion settlement did not even begin to cover the costs of interchange. Just last year, Wal-Mart sued Visa for $5 billion for allegedly colluding with banks to fix the cost of interchange fees. America’s largest retailer said at the time that interchange and network fees generated more than $350 billion for Visa at the expense of merchants and consumers.

The Amex settlement received preliminary approval in September 2014 after four years in court. It would have granted merchants the right to surcharge Amex users. There would have been no financial settlement for the plaintiffs, however the lawyers involved were set to make $75 million in fees. However, Judge Nicholas Garaufis of Brooklyn denied final approval over “blatant collusion”. Friedman, lead attorney for the merchants in the Amex case, allegedly shared confidential information about the settlement and fees with Ravelo.

“Have Class Counsel lost sight of the fact that they purport to represent merchants?” the judge wrote. “The court is concerned that none of the Co-Lead Class Counsel were, or are, acting in the class’s best interests, as opposed to their own interests in effectuating this settlement agreement and collecting a fee.”

With Amex’s interchange settlement overturned over collusion charges, Visa’s and MasterCard’s deal, which was hailed as “historic” at the time it was announced, has more of a chance than ever of being thwarted.

So what does this mean for the controversial Visa/MasterCard settlement? Is this the straw that finally breaks the camel’s back?

Anand Goel, CEO of Optimized Payments Consulting, believes that Judge Garaufis’ logic in tossing out the Amex settlement makes sense; Friedman was the plaintiffs’ co-lead lawyer and he compromised the fairness of the agreement by sharing confidential information with Ravelo. However, he’s not sure that the collusion charges are enough to derail the Visa/MasterCard settlement.

“It remains to be seen if Mr. Friedman played an equally central role in the Visa/MasterCard interchange settlement,” Goel said. “A Wall Street Journal article noted that Mr. Friedman played a lesser role in the interchange settlement, and there were a significant number of lawyers involved on both sides.”

Added Goel: “I completely understand the case retailers are making against the flawed interchange settlement, but my sense is that it is not a given or even likely that the interchange settlement will be tossed out like the Amex settlement.”
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