Supreme Court Refuses to Hear Interchange Settlement Appeal

By: Anita L. Boomstein

The U.S. Supreme Court denied a request to review the U.S. Court of Appeals for the Second Circuit's ruling overturning a $7.25 billion settlement agreement in a case brought by retailers against the card networks and banks, ending any question as to whether that agreement would survive court challenge in its current form.

What happened

In 2013, a New York federal court judge signed off on the deal in consolidated actions filed by merchants against the payment processors and various banks. The estimated 12 million plaintiffs alleged the network rules established by the defendants (such as the default interchange fee and honor-all-cards rule) allowed issuing banks to impose artificially inflated interchange fees that merchants had no choice but to accept.

Originally filed in 2006, the action spanned years of litigation, including 400 depositions, 17 expert reports, 32 days of expert deposition testimony, and the production of over 80 million pages of documents. After repeated mediation sessions and settlement negotiations, the parties reached a deal in 2012, which was finally approved by the district court in December 2013.

The settlement agreement divided the plaintiffs into two classes: one under Federal Rule of Civil Procedure 23(b)(3) covering merchants that accepted either payment processor from January 1, 2004 to November 28, 2012, and a second class under Rule 23(b)(2) for merchants that accepted or will accept payments from either payment processor from November 28, 2012 and onward.

Members of the (b)(3) class would be eligible for a portion of the $7.25 billion in monetary relief provided by the defendants, while the (b)(2) class would receive injunctive relief in the form of changes to the network rules. Under the federal rules, members of the first class (those that received money damages) could opt out of the settlement and bring their own actions for damages, but those in the second class could not. That essentially meant that all U.S. merchants were forced to accept the injunctive relief—whether it was meaningful or not—in exchange for a broad (and highly objectionable) general release of all past and future claims.

Despite substantial objections to the deal by merchants, the district court approved the settlement as fair and reasonable. Numerous objectors and opt-out plaintiffs appealed and the Second Circuit vacated the district court's certification of the class action and reversed the approval of the settlement.

The Second Circuit unanimously held in its decision that class members of the injunctive relief, or Rule 23(b)(2) class, were inadequately represented in violation of Rule 23(a)(4) and the Due Process Clause, because the same attorneys provided representation to both classes of plaintiffs despite the conflict of interest between the two.

"The conflict is clear between merchants of the (b)(3) class, which are pursuing solely monetary relief, and merchants in the (b)(2) class, defined as those seeking only injunctive relief," the court explained. "The former would want to maximize cash compensation for past harm, and the latter would want to maximize restraints on network rules to prevent harm in the future."

Such divergent interests, the appellate court held, require separate counsel when it impacts the "essential allocation decisions" of plaintiffs' compensation and defendants' liability. Class counsel and class representatives were in the position to trade diminution of (b)(2) relief for an increase of (b)(3) relief, the panel said.

"Unitary representation of separate classes that claim distinct, competing, and conflicting relief creates unacceptable incentives for counsel to trade benefits to one class for benefits to the other in order to reach a settlement," the court wrote. "Divided loyalties are rarely divided down the middle."

Supporters of the deal filed a writ of certiorari asking the Supreme Court to take the case for review, arguing there was no guarantee that the objectors could get a better deal and that the need for different representation of the injunctive relief and damages classes would require a lot of work for little benefit. The payment processors, in pushing for the Supreme Court to take the case, contended that the Second Circuit decision presented a new interpretation of the rules governing class action settlements. But the justices declined to hear the case, with Chief Justice John Roberts and Justice Samuel Alito taking no part in the decision.

To read the Supreme Court's order list, click here.

Why it matters

In denying to review the case, thereby affirming rejection of the deal, the Supreme Court has sent the parties back to the drawing board to create a new agreement or face the possibility of a trial on the merits of the case. The continuation of the case has significant implications for merchants, card networks and banks since it is unclear where the settlement of this highly contentious case is now headed. In a related action, it also has implications for retailer plaintiffs that brought actions in four states challenging the ban on charging a surcharge on credit card transactions at the point of sale. The U.S. Supreme Court recently held that the New York no-surcharge statute may violate the retailers' First Amendment rights.



pursuant to New York DR 2-101(f)

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