Second Circuit Vacates Largest Antitrust Settlement in U.S. History

In July 2014, the parties in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litig., No. 12-4671 (E.D.N.Y.) announced what was widely reported to be the largest antitrust settlement in U.S. history.  Two years later, the Second Circuit dismantled this landmark, and issued a caution to class action attorneys regarding the importance of Fed. R. Civ. P. 23 in the context of settlement.

The Interchange plaintiffs, merchants that accepted credit cards, alleged that Visa and MasterCard colluded through issuing banks to keep merchants from mitigating credit-card costs by, for example, steering consumers toward using cash, or cards with lower merchant fees.  As a result, the card issuers were able to impose inflated fees that the merchants could not avoid.

The resulting settlement, reached after eight years of intense litigation and mediation conducted by both third-parties and the court, called for two sub classes.  The first class consisted of merchants who accepted cards from January 1, 2004 through November 28, 2012.  These merchants would be part of a Rule 23(b)(3) class (from which opting out is permitted) sharing in up to $7.25 billion in monetary relief.  The second class covered all merchants who accepted cards beginning after November 28, 2012 and “onward forever”.  These merchants would be part of a Rule 23(b)(2) class (opt-outs not permitted), and would receive the benefit of certain injunctive relief modifying some, but not all, of the contested rules imposed on merchants.  This injunctive relief would remain in effect through July 20, 2021.  In return, members of both classes released defendants in perpetuity from all claims that arose, or would arise, in connection with the challenged rules, regardless of whether those rules were modified by the agreed-upon injunctive relief.  The district court approved the settlement on December 13, 2012.

On June 30, 2016, the Second Circuit sent the parties back to the drawing board.  See In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., 2016 U.S. App. LEXIS 12047 (2d Cir. June 30, 2016) (publicly available here).  The focus of the Circuit Court’s concern was Fed. R. Civ. P. 23(a)’s adequacy requirement: that the interests of class representatives be in line with those of class members, such that the representatives are encouraged to vigorously pursue the claims of all class members.  This requirement, along with the other Rule 23 certification factors, is to be assessed independently of the fairness of the settlement.  In fact, when settlement and certification proceed together, the Second Circuit cautioned that the latter’s requirements “demand undiluted, even heightened attention.” Id. at *17, quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997).

The creation of sub-classes under Rule 23 permits the court to create homogenous groups among class members whose claims arise from the same conduct, but who may be differently situated for purposes of appropriate relief.  Importantly, 23(a)’s adequacy analysis is to be conducted separately for each sub-class, and their counsel, in order to guard against divergent, or even antagonistic, interests between these sub-classes.  In Interchange, it was the failure of the District Court to separately assess the needs of each sub-class which undid the approval of the settlement.

Between these sub-classes, “[t]he fault lines were glaring as to matters of fundamental importance.”  The (b)(3) class “would want to maximize cash compensation for past harm” and the (b)(2) class “would want to maximize restraints on network rules to prevent harm in the future.”  These disparate interests created an essential tension between the subclasses regarding how the overall value of the settlement would be allocated.  This conflict was exacerbated by the fact that membership in the injunctive class was fluid, and growing, and included entities not yet even in existence.  Merchants that began accepting cards only after November 2012 would receive only injunctive relief.  And where the identity of merchants eligible to share in the cash settlement was fixed and ascertainable, new merchants would constantly be added to the injunctive class.  As the composition of the classes grew more and more diverse to each other, the conflict between them would sharpen.

This same allocation concern also created an economic conflict that could ensnare class counsel – counsels’ $544.8 million fee was based solely on a percentage of the cash settlement fund, while the value of the injunctive relief (the only benefit to be received by many (b)(2) class members) was not factored in counsels’ fee request at all.  Counsel could thus be incentivized to maximize the cash settlement, even at the potential expense of the injunctive relief.

Though the Second Circuit expressly found there was no reason to “impugn the motives or acts of class counsel,” under these circumstances unitary class counsel could not represent the interests of both subclasses.  The settlement approval is thus vacated, and remanded for further proceedings.  However, the Second Circuit is careful to note that its holding does not mean that (b)(3) and (b)(2) classes could never be combined, nor that such combined classes cannot be represented by single class counsel.  Nor does the Second Circuit read into Rule 23 any heightened scrutiny for such classes.

Instead, Interchange represents a “perfect storm” of tensions – subclasses with increasingly divergent memberships seeking distinct forms of relief which cannot be easily compared or relatively valued, with certification sought against the backdrop of settlement where the court is obligated to be especially vigilant of potential conflicts between counsel and class.  Even under these circumstances, certification may still be appropriate, provided that these (potentially) opposing subclasses have independent representatives appropriately positioned to vigorously advance the strongest arguments in favor of the sub-class’s claims. Interchange then is the Second Circuit’s reminder that class counsel, and class representative, must be vigilant to protect the (sometimes changing) interests of all class members through the entire life of an action.

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About Adam Steinfeld

Adam Steinfeld is senior counsel with the firm’s antitrust practice group, focusing on anticompetitive conduct in the pharmaceutical industry.

Posted by Adam Steinfeld

Partner at Faruqi & Faruqi, LLP
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