After Keila Ravelo, then an outside counsel for MasterCard, heard what American Express had agreed to give up to settle a massive, multi-year class-action suit with thousands of retailers, she sent the retailers' attorney a two-word text.

"That's it?"

There was good reason for Ravelo's surprise: The plaintiffs had agreed to accept rule changes that would likely provide retailers little to no tangible benefit, according to testimony of the court's expert advisor. Amex, meanwhile, would be freed from legal liability over its interchange-fee rules, while paying nothing to the merchants.

The result is what the retailers' lead attorney, Gary Friedman of the Friedman Law Group, called "Amex's fantasy resolution," in a confidential email quoted in court documents.

But now that deal is dead, due to communications like the ones above. Ravelo and Friedman exchanged thousands of emails, including masses of confidential information, that "fatally tainted" the 2013 settlement agreement, according to Judge Nicholas Garaufis of the U.S. District Court for the New York's Eastern District, who tossed out the settlement – and tossed Friedman off the case – in a ruling Aug. 4.

Now, retailers will have a second bite at the apple, and the major card brands are in danger of losing their dream settlements.

The attorneys' misconduct also threatens the 2013 settlement between Visa and MasterCard and retailers, on which Friedman and Ravelo represented opposing sides. Merchants have asked a judge to rip up that settlement, too.

The judge's decision in the Amex case provides an opportunity for retailers to "dismantle the card companies' cartel and have real competition," said Mallory Duncan, general counsel for the National Retail Federation, a merchants' lobbying group that strongly opposed both settlements.

The news that a lawyer on their side was leaking key information shows that "both settlements are even worse than we feared they were," he said. In addition to being unfair in substance, the settlements "were grievously flawed as well, because extraordinarily confidential information and strategy were compromised."

Lawyers involved in the Amex case, who are not authorized to speak publicly, said they don't know what's going to happen next. Some large retailers want to reopen the legal fight. The sides will meet in court in early October to decide the next step.

Amex said it was "disappointed" in the ruling but plans to keep fighting in court.

"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," the company said in a statement emailed Aug. 5.

Judge Garaufis' ruling explains why the settlement matters so much not just for Amex, but for its competitors as well. While noting that he was expressing no opinion about the Visa-MasterCard settlement, Garaufis argued that the two settlements, the Amex and the joint Visa-MasterCard pact, are linked in important ways.

Together, the two settlements sharply limit retailers' ability to impose surcharges when customers use cards – ostensibly the card networks' main concession in the settlements. The surcharge rules together mean that "Amex, Visa, and MasterCard credit cards can be surcharged all at the same level, or not at all," according to an expert's report quoted by Garaufis.

That's due to the inclusion of so-called level-playing-field provisions in the settlements, the terms of which Ravelo and Friedman discussed extensively, according to Judge Garaufis' order. Their emails – some 4,000 of which have been released to the courts – are sealed, but quoted in some court documents.

In one email from 2011, Friedman told Ravelo that "Amex would be thrilled" by a Visa-MasterCard settlement that included a level-playing-field provision, noting that Amex's "fantasy resolution" would be rules allowing merchants to surcharge but only if they surcharge every card at the same level.

"This 'fantasy resolution' for Amex is, of course, the resolution that Friedman ultimately agreed to on behalf of all class members," Garaufis noted.

For the bank card networks, however, the dream is not yet dead. The Visa-MasterCard settlement is more likely to survive challenges based on Friedman's misconduct than the Amex case, lawyers say. While Friedman was lead attorney for the Amex plaintiffs, he played a smaller role in the other case. Also, the Visa-MasterCard case has already been approved by a judge, and is now on appeal, while the Amex case was never approved.

A MasterCard spokesman wrote in a statement that the Amex ruling "does not have an impact on us." 

"We believe our settlement will stand. It is the result of an extensive negotiation among many lawyers on both sides, with the close involvement of the court," he wrote. A Visa representative declined to comment.

A New York appeals court will review the Visa-MasterCard settlement in the coming months. If the deal is thrown out, merchants could have another shot at doing away with the level-playing-field provision they detest, or win the right to steer customers to lower-cost cards by other means.

The Amex ruling also appears to echo an argument that some retailers have been making since before the settlements were official: that the case was hijacked by fee-hungry attorneys who had lost sight of their clients' interests.

In unusually scathing language, Judge Garaufis blasted Friedman and his co-lead counsels at Patton Boggs and Reinhardt, Wendorf & Blanchfield. A settlement that would pay them $75 million in fees while giving their clients no cash smacked of "blatant collusion" with the card company, he wrote.

"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."

The criticism bolsters an argument that Duncan, and other retailers and merchant advocates, have been making for years. Duncan said he hopes the judge in the Visa-MasterCard will be as receptive to it.

"The Visa-MasterCard case should fall on its own, but this is just icing on the cake," he said.

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