Lawyer misbehavior caused a judge to torpedo American Express' interchange-fee settlement with retailers, a decision that imperils a similar settlement with Visa and MasterCard.

Disclosure of confidential client information by the retailers' lead counsel "fatally tainted" the 2013 settlement between American Express and a group of retailers, Judge Nicholas Garaufis of the U.S District Court for New York's Eastern District ruled today.

Garaufis tossed out the settlement, which had allowed retailers to add surcharges to accept Amex cards but was widely considered favorable to the card company. The settlement had been controversial since it was signed, and many retailers had urged the court to reject it.

Calls to toss the agreement intensified in recent months after it came to light that Gary Friedman of the Friedman Law Group, who was the merchants' lead counsel in the Amex case, had been exchanging confidential client information by email with Keila Ravelo, formerly an outside counsel for MasterCard in a similar antitrust suit between Visa and MasterCard and major retailers. Friedman also represented the plaintiffs in that case, but in a lesser role.

The correspondence between Friedman and Ravelo created "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," Judge Garaufis wrote. "This risk requires the court to deny approval of the settlement."

Friedman and Ravelo discussed their clients' litigation strategies extensively, Garaufis wrote. Friedman's emails showed he was well aware that their discussions were confidential – writing in at least two cases, "Burn after reading," and in another, after acknowledging that an email he was forwarding to Ravelo contained confidential information, adding "hahahahahaha."

Judge Garaufis ruled Wednesday that this correspondence had corrupted the settlement talks. He removed Friedman as the lead counsel and denied his fees. Garaufis ordered all the parties in the case to meet on Oct. 5 to discuss what to do next.

The decision undoes the four years of work it took to reach a settlement and leaves Amex in a quandary. The company has said it intends to take action against Friedman, Judge Garaufis wrote in his opinion. A company representative did not immediately respond to a request for comment.

Judge Garaufis' decision is a bad sign for the Visa-MasterCard class-action settlement, which retailers are also trying to have thrown out on the basis of Friedman's emails. The judge in that case has not yet ruled on whether the settlement will be rejected. A Visa representative declined to comment.

“Today’s ruling does not have an impact on us,” a MasterCard representative wrote in an email. “We believe our settlement will stand.”

Garaufis' opinion suggests that the two settlements, Amex's and the joint Visa-MasterCard settlement, are tightly linked. Both were settled in late 2013, and the negotiations were conducted at the same time.

The emails between Ravelo and Friedman "appear to reveal Friedman's own understanding that the two settlements were substantively linked," Garaufis wrote, and that settlement terms in one case could affect the other.

The correspondence between Friedman and Ravelo came to light after Ravelo, a former partner with Willkie Farr, was arrested last year for allegedly setting up fake legal-services companies that she and her husband used to collect around $5 million in fees from MasterCard and her firm for work they didn't perform. She and her husband pled not guilty.

After her arrest, Willkie Farr discovered her correspondence with Friedman during an internal review, and then informed the court. The firm handed over 4,000 emails, which have been reviewed by the parties in each case but have not yet been made public.

It's not clear what motivated Friedman and Ravelo to exchange confidential client information. Court documents show they were very close, having been friends since working together as junior associates in the early 1990s.

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