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After secret communications were revealed between opposing counsel in credit card litigation, Eastern District Judge Nicholas Garaufis rejected a far-reaching settlement between retailers and American Express, citing “egregious conduct” by a plaintiffs counsel.

Gary Friedman of the Friedman Law Group

In a stunning decision Tuesday describing the communications, Garaufis assailed plaintiffs counsel Gary Friedman for talking behind the scenes with Keila Ravelo, a former partner at Willkie Farr & Gallagher who represented MasterCard in a separate but similar lawsuit brought by the same retailers.

“The improper and disappointing conduct of [Friedman] has fatally tainted the settlement process,” said Garaufis in In re: American Express Anti-Steering Antitrust Litigation, 11-MD-2221.

The judge removed Friedman from the case and also criticized his co-lead class counsel.

Friedman, of Friedman Law Group, has been plaintiffs counsel in both American Express case and a class action by retailers against Visa and MasterCard and various banks, In Re Payment Card Interchange Fee And Merchant Discount Antitrust Litigation, 05-MD-01720.

While at Willkie, Ravelo was among the defense counsel for MasterCard in Interchange.

Keila Ravelo, former partner at Willkie Farr & Gallagher

In December, the U.S. Attorney’s Office in New Jersey charged Ravelo and her husband, Melvin Feliz, with conspiracy to commit wire fraud. Prosecutors said the couple used two vendors to fraudulently obtain more than $5 million from Willkie, her former law firm Hunton & Williams, and her client, MasterCard, by submitting fake invoices.

Ravelo resigned from Willkie on Nov. 14. She and Friedman have known each other since they worked together at Sidley Austin as associates in the 1990s.

After the U.S. Attorney’s Office subpoenaed Willkie for documents and the firm conducted an internal review, it found communications between Ravelo and Friedman and notified parties. In particular, Willkie said it found emails about the American Express litigation, where Ravelo was not involved.

In American Express, Garaufis gave preliminary approval last year to a settlement that would have altered American Express rules to permit merchants to impose a separate fee, or “surcharge,” on all credit and charge card transactions and thus to steer transactions to debit cards, which are not subject to surcharge.

Garaufis said the result would be a world in which a merchant could impose a consistent surcharge, such as 1 or 2 percent of the purchase price, on all transactions completed with a credit or charge card of any and all brands.

This is referred to as parity surcharging, as opposed to differential surcharging, which contemplates a merchant imposing a surcharge on transactions completed with a specific brand.

Under the settlement, American Express would have paid attorneys fees up to $75 million.

Retailers who already objected to settlements in both American Express and Interchange seized on the communications as proof the settlements were not fair.

Judge Garaufis

Garaufis said that although he has serious concerns about the settlement’s substantive fairness, he didn’t need to reach the merits of retailer objections because the communications reveal “egregious conduct” by Friedman.

Garaufis cited “blatant violations” of protective orders in American Express. Friedman improperly sent emails to Ravelo with confidential information that American Express produced subject to a protective order that was prohibited from further dissemination, the judge said. Ravelo was counsel for MasterCard, American Express’ major competitor and not a party to the protective order.

Garaufis said these were not inadvertent violations.

“In at least two of them, Friedman writes, ‘Burn after reading,’ and the content of others indicates his contemporaneous recognition of the confidential and highly confidential nature of the materials,” Garaufis said.

Friedman improperly sent Ravelo confidential information and attorney work product of individual merchant plaintiffs, Garaufis said.

“This evident disloyalty to class members gives the court more pause than does the dissemination of American Express’ information,” Garaufis said.

“The documents indicate that Friedman and Ravelo were in frequent, possibly constant, communication regarding the negotiating process and status” of both Interchange and American Express.

The communications are so problematic, he said, because the American Express settlement interacts with Interchange settlement “in a very important way.”

The resolution of the American Express action effectively determines “for the entire credit card industry whether parity, differential or no surcharging will occur,” he said.

Garaufis said he questioned whether the combined result of the two settlements “might itself amount to an anticompetitive agreement,” limiting competition among the credit card brands on the merchant side of the market.

This interaction between the Interchange and American Express settlements “illustrates why Friedman’s apparent collaboration with Ravelo is so troubling,” the judge said.

Friedman bringing MasterCard into the negotiating process created a conflict between class members and class counsel, “specifically a risk that Friedman, with Ravelo in his ear, negotiated settlement terms that are worse for class members than the terms he might have negotiated absent that conflict,” Garaufis said.

He added that co-lead class counsel “shockingly” have not extricated Friedman from the ranks, but submitted a brief signed by Friedman and other class counsel, including Mark Reinhardt, of Reinhardt Wendorf & Blanchfield, and Read McCaffrey, formerly of Patton Boggs.

“Apparently, co-lead class counsel are willing to let Friedman describe or characterize the communications as he wishes,” the judge said. “This gives the appearance that Friedman’s co-counsel may be more interested in protecting Friedman, their settlement, and their attorneys’ fees application, than they are in protecting the merchant class that they purport to represent.”

Reinhardt told the Law Journal that his number one priority has always been “to protect the class I represent” and he and his firm will respond to the judge’s orders.

Denying class counsel’s request for attorneys fees, Garaufis ordered McCaffrey, Reinhardt, Squire Patton Boggs and others to show cause in writing why they should continue as interim class counsel.

Friedman and his attorney, Theresa Trzaskoma, of Brune & Richard, did not return a message seeking comment.

American Express, represented by Philip Korologos, a partner at Boies, Schiller & Flexner, said it was disappointed in the decision. “We continue to believe the agreement was fair to merchants, and would provide them with additional flexibility while ensuring our card members are treated fairly at the point of sale. We believe we have strong defenses against the merchants’ claims, and will continue to fight our case in court.”

Meanwhile, the communications also threaten to unravel Interchange. In that case, after eight years of litigation, Eastern District Judge John Gleeson in 2013 gave final approval to a $5.7 billion settlement.

Lawyers for objecting Interchange retailers recently served a motion to vacate the judgment approving the settlement.

Jeffrey Shinder, a partner at Constantine Cannon, which represents a group of large retailers that objected to the settlements, said Garaufis’ decision will be relevant to their motion to undo Interchange.

“It validates that something substantially very problematic occurred with both settlements and that Gary Friedman was in the middle of it,” he said. “We consider it to be an important bellwether decision for both settlements.”