The news that one of their lawyers was collaborating with the enemy has given many retailers — already angry that they didn't get enough from settlements with credit card issuers — their best argument yet for why the deals should be scuttled.
And the fallout from the controversy is starting to spread.
Late Wednesday attorneys for about 100 merchants, including Walmart, Starbucks and Best Buy, asked the U.S. District Court for New York's eastern district to reject a settlement with American Express that was reached two years ago, arguing that the retailers were betrayed by their attorney into taking a bad deal.
The day before lawyers for a different group of retailers had already asked a court to strike down on similar grounds the $5.7 billion swipe-fee settlement reached in 2013, after eight years of litigation, with Visa and MasterCard.
Both class-action settlements had been opposed by many — if not most — retailers involved in the suits since virtually before the ink was dry. Powerful retailers and industry lobby groups argued that the deals are too favorable to the card companies, and many opted out of the final agreement.
But efforts to block the settlements have new momentum after the revelation, first made in February, that an attorney who worked for the retailers in both cases appears to have shared confidential client data with an attorney working for the credit card issuers.
Gary Friedman of the Friedman Law Group, who was the merchants' lead counsel in the Amex case and played a lesser role on the merchants' side in the Visa and MasterCard case, is alleged to have passed key information to Keila Ravelo, who had represented MasterCard while working for the law firms Willkie Farr & Gallagher and Hunton & Williams.
Whether Friedman's and Ravelo's correspondence imperils the settlements is unclear, because their emails are concealed from the public. Attorneys in both cases have reviewed their emails, but the documents are sealed and excerpts from them are redacted in court filings.
The pro- and anti-settlement sides characterize the leaks very differently, and both sides say they are confident they will win.
MasterCard Chief Executive Ajay Banga said on a Wednesday earnings call that the new challenge to the settlement is a longshot because the misbehaving attorneys played a small role in the case.
"We're pretty confident that settlement will stand," Banga said. "We'll see how it goes."
It seems clear, however, that the latest development will prolong the litigation around the settlements and cause higher legal costs for card issuers — potentially much higher, if it results in the scuttling of settlements that took nearly a decade, and countless billable hours, to reach. Attorneys don't expect a resolution of the matter before yearend.
Undoing the settlements, even after two years, would not present untenable logistical problems, lawyers say. Because it's on appeal, the Visa-MasterCard settlement money hasn't been paid out yet.
More consequential would be undoing the industry reforms these settlements put in place. Both settlements allow merchants to impose surcharges for cards that cost them more to accept, though opponents of the settlement say there are still too many restrictions to make surcharges practical.
These opponents say the news about Friedman confirms what they had suspected: that their lawyers sold them out by taking a bad deal.
Legal filings describe Friedman's alleged acts in the fiery language of combat and espionage. Attorneys for a group of retailers in the Amex case accused him of "helping the enemy" by "peddling American Express' confidential trade secrets" in a legal filing last week.
Others have been more measured, if no less scathing.
"Even though he knew what he was doing was wrong, Friedman shared work product and confidential American Express materials with his close friend to help her counsel MasterCard," wrote attorneys with the firm Constantine Cannon in their Wednesday request that the proposed settlement be rejected. "The handiwork of such an ethically compromised and plainly inadequate lead counsel should not be approved."
Visa declined to comment for this story. Echoing Banga's comments, a MasterCard representative wrote in an email that the "settlement was arranged by a great many people with the close involvement of the judge; we believe the settlement will stand." Neither Friedman nor his lawyer could be reached.
An Amex representative declined to comment. But in a court filing last month, the company said that while Friedman's emails showed "extremely poor judgment," they did not prove that he had betrayed his loyalty to his clients.
"Th[e] negotiations were facilitated by a respected, experienced mediator who confirmed the integrity of the settlement process," Amex's attorneys wrote.
The correspondence between Friedman and Ravelo would likely have remained unknown if not for Ravelo's arrest last November. Federal prosecutors said she and her husband set up fake legal-support companies and bilked MasterCard, Wilkie Farr and Hunton & Williams out of more than $5 million for work that they never actually performed. They have pleaded not guilty.
Her husband, Melvin Feliz, in an unrelated case pleaded guilty in February to trying to ship cocaine from California to New Jersey.
Wilkie Farr discovered Ravelo's correspondence with Friedman in an internal review following her arrest, and notified the court in February, it said in court documents.
Much remains unclear — or "baffling" and "astounding," in the language of recent filings — about Friedman's actions, from which documents he sent to what motivated him to send them.
According to documents, Ravelo and Friedman had been good friends since working together as junior attorneys at Sidley Austin in the early 1990s, and they and their families have remained very close. They were also unusually diligent correspondents: the courts are now reviewing more than 4,000 emails they exchanged comprising 18,000 pages of documents — a haul that omits strictly personal or confidential missives.
The opposing parties with access to the emails describe them very differently. In their Wednesday filing, attorneys for the merchants in the Amex case said that "Friedman treated Ravelo as a member of his team, sharing all aspects of the case—from draft complaints to damages analyses to appellate strategy" about both settlement talks.
On the other side, Friedman's attorney, Theresa Trzaskoma of Brune & Richard, wrote in a Wednesday filing that "[f]ar from showing any collusive or compromising relationship that could have affected the settlement in this case," the correspondence shows two close friends who regularly talked shop and sought out one another's advice.
Also in dispute is how important a role Friedman played in crafting the Visa-MasterCard settlement. His importance as lead counsel for the plaintiffs in the Amex case has so far not been questioned.
K. Craig Wildfang of Robins Kaplan was the lead attorney for the retailers in the Visa-MasterCard settlement, and he argued that Friedman didn't play a big role in shaping the final agreement.
"We are highly confident that the motion [to dismiss the settlement] will be denied," he said. "The motion is meritless because the objectors have not demonstrated that these communications had any effect whatsoever on the settlement."
The judge in the Visa-MasterCard case, James Orenstein of the U.S. District Court for New York's eastern district, seemed to buttress the argument that Friedman played a relatively small role in the case, saying, at a February meeting, that he couldn't recall what role the attorney had played.
"I just don't recall Mr. Friedman's role," he said, according to a court transcript. "His name does not stand out as the one who was primarily involved."
Yet Friedman's firm did bill $32 million for its work on that case — a sum that would suggest its role was significant. A group of retailers sought this month to have those payments blocked.
Friedman's behavior will likely become clearer in the coming months as litigation continues. In the meantime, his behavior has put wind in the sails of merchants who want the settlement rejected, said Mark Horwedel, CEO of the Merchant Advisory Group, an industry group.
"They felt fairly confident in their case to begin with, and this additional information gives credibility to their concerns about the case and raises their confidence," he said.