Can John Coffee Rescue the Private Attorney General? Lessons from the Credit Card Wars
Entrepreneurial Litigation: Its Rise, Fall, and Future
John C. Coffee Jr. Harvard, 2015. 307 pages.
I. The Tyranny Paradox and the Limits of Rule 23(b)(2)
Among the questions raised by mandatory class actions seeking consequential injunctive relief is how to account for divergent preferences and agendas among the various members of the represented class. It is easy to say that class-member interests must be “cohesive,” as courts and commentators invariably do37 —but what does that really mean, in kind and degree? After all, significant injunctive-relief class actions will almost always feature some measure of heterogeneity in the goals and agendas of the constituent class members. If we tolerate relatively more heterogeneity in the composition of these mandatory classes—that is, if we allow the private attorney general, like the public attorney general, to represent a group that is at least somewhat heterogeneous in terms of member preferences—then we risk sanctioning a tyranny of the majority. Settlement terms will reflect the preferences of the majority, while releases will snuff out the ability of the minority to pursue its preferred resolutions through litigation. On the other hand, if we tolerate relatively less heterogeneity—that is, if we insist on a truly unitary set of preferences and agendas—then we risk a tyranny of the minority, by which a holdout, gadfly, or other outlier can deprive all class members of important relief to which they are entitled and that they would be unable to obtain in the absence of the class device.
It is not just the degree of heterogeneity that matters, though; courts also need to look at what kind of class-member interests are at stake. Certainly, a Rule 23(b)(2) class can accommodate substantial heterogeneity in class members’ views on litigation strategy or in class members’ varying appetites for trial risk.38 But what about directional interests? Doesn’t the private attorney general have to show that the injunctive relief directionally benefits all members of the class? And is that sufficient? These issues are not new. Back in the 1970s, a class led by basketball star Oscar Robertson reached a settlement with the NBA that “radically modified draft practices” and “virtually eliminated option clauses.”39 Wilt Chamberlain objected that the deal would foreclose his claims for different and better relief—presumably, a true free agency system.40 Is it enough that Chamberlain directionally benefited from the injunction along with the other players? The courts thought so in that case.41
It is difficult in the abstract to assess the degree and kind of heterogeneous interests that the contemporary private attorney general suit can accommodate. So far as mandatory-injunctive-relief cases go, these issues have not been terribly well-developed by courts or commentators.42 Part of the problem, I think, is that context is so important. It is hard to conjure, let alone find, cases that perfectly present the tyranny paradox that I have described here. And yet the Amex ASR case does exactly that.
And so, at the outset, some background on the Amex ASR case is in order.
A. The Amex ASR Claims
In early 2005, plaintiffs’ attorneys began to file class action lawsuits on behalf of merchant clients against Visa, MasterCard, and Amex challenging their no-surcharge and antisteering rules: the rules that prevent merchants from using so-called surcharges and steering to reduce their card-acceptance costs (the “merchant restraints”).43 A surcharge is an extra fee that the merchant can impose on the cardholder to cover the cost to the merchant of the credit card transaction. When credit card networks impose high swipe fees on the merchant, a surcharge allows the merchant to recoup that cost and to induce cardholders—to steer cardholders—to use a cheaper (nonsurcharged) payment product.
The core of the antitrust claims is that the merchant restraints insulate the card networks from having to compete with one another on how they price their services to merchants, who have suffered for years from swipe fees that vastly exceed those elsewhere in the world.44 With the restrictive merchant restraints in place, a merchant faced with high swipe fees cannot respond by using surcharges to steer his customers to use cards that carry lower swipe fees, such as debit cards. But if merchants were able to charge slightly more for high-swipe-fee cards—that is, to impose a surcharge—then customers would rationally move to lower-swipe-fee cards in order to avoid the surcharge. And as a result, the card networks would have incentives to reduce their swipe fees, lest they lose cardholders to the issuers of lower-fee products.
From a policy perspective, the claims also attack the merchant restraints for enforcing a highly regressive system that compels the least-affluent consumers to subsidize more-affluent users of high-rewards cards. Simply put, swipe fees pay for rewards, such as frequent-flier miles, hotel stays, and cash-back programs. Under the merchant restraints, the consumer who chooses to use the high-rewards, high-swipe-fee card (like an Amex charge card) does not bear the cost of that decision.45 Merchants must bake the cost of these expensive perquisites into their prices for all goods and services.46 Consequently, users of cash, debit, and electronic-benefits cards are subsidizing the high-end rewards that affluent consumers earn on their premium-card products, like Amex cards. Thus, Federal Reserve economists have observed that the merchant restraints “produce[ ] a cross-subsidy of consumers who use higher-cost payment methods like credit cards by consumers who use lower-cost methods like cash or PIN debit,”47 and that the users of high-rewards cards—the most-affluent consumers—on average “receive a $2,188 subsidy every year” from users of lower-cost payment forms.48
B. Challenging Amex’s Arbitration Clause
Highlighting these anticompetitive and regressive effects, a putative merchant class brought suit challenging Amex’s merchant restraints in 2005.49 But there was a problem: Amex’s standard-issue card-acceptance contract included an arbitration clause containing a class action waiver. A group of Amex merchants who were subject to the arbitration clause then challenged these provisions on various grounds.50 After the district court upheld Amex’s class action waiver,51 the Second Circuit reversed, holding that—under the “vindication of statutory rights” doctrine—arbitration clauses are generally not enforceable when the prohibitive cost of arbitrating effectively precludes claimants from vindicating federal rights, such as the antitrust claims at issue here.52 The Second Circuit then reaffirmed that ruling three more times in as many years, following intervening Supreme Court precedents.53
But in 2013, in a 5–4 decision authored by Justice Antonin Scalia, the Supreme Court reversed the Second Circuit in Italian Colors.54 The majority held that the vindication-of-statutory-rights doctrine does not apply to invalidate an arbitration clause just because it bars class or group proceedings and would thus force individual claimants to assume prohibitive costs in one-on-one arbitrations.55
In the wake of Italian Colors, Amex moved to dismiss the merchant class action challenging the merchant restraints—the Amex ASR case—and moved to compel one-on-one arbitration. The Amex ASR plaintiffs had, up to this point, sought both class damages and injunctive relief. After the Italian Colors decision, however, the plaintiffs conceded that their multibillion-dollar class damages claim was nonviable.56
But injunctive relief was another matter. The Amex arbitration clause prevents merchants from pursuing market-wide reforms; instead, it provides that the arbitrator may award relief only to the individual claimant.57 Under this clause, a merchant may win the right to impose surcharges on its own transactions in arbitration, but the arbitrator has no power to force Amex to change its rules across the market.58 The Amex ASR class plaintiffs thus resisted the motion to compel arbitration of their injunctive claims based on a distinct vindication-of-statutory-rights challenge that survived Italian Colors59 —namely, that enforcement of Amex’s clause would prevent them from vindicating their rights under the antitrust laws in order to pursue equitable relief that would “effectively pry open to competition a market that has been closed by defendants’ illegal restraints.”60 If the class plaintiffs were to prevail, they would have a live class action that was seeking, for all US merchants, the unfettered right to impose surcharges on Amex transactions.61 If Amex were to prevail, then each merchant would only be able to seek such rights for itself in costly one-on-one arbitrations—meaning that 99 percent of US merchants would be left out in the cold.62
Against this backdrop, with the motion to compel arbitration of the injunctive case sub judice, the parties agreed to settle the case.
C. The Amex ASR Settlement
Under the terms of the proposed class settlement, Amex would allow merchants to impose surcharges on Amex transactions.63 But while the class plaintiffs had sought in litigation the unfettered right to use surcharges, the settlement allowed surcharging only subject to certain restrictions. The main restriction was that a merchant surcharging Amex-branded cards must also impose a similar (or parity) surcharge on all other credit cards it accepts, with one very consequential exception.64 If the merchant wished to impose a so-called differential surcharge—that is, to offer one or more credit card brands on a surcharge-free basis, or to surcharge different credit cards at different amounts—it could do that by applying a surcharge-offsetting discount to the favored brands.65 The settlement also contemplated that merchants might bring individual damages arbitrations—there was no release of any damages claims—and it provided for access to the full class action evidentiary record to aid merchants in this pursuit.66 Finally, the agreement provided for attorney’s fees and certain other costs in an amount to be determined by the court, up to $75 million—a figure representing 84 cents on the dollar of the billable time expended by some thirty law firms over eleven years.67
For the purposes of the settlement—which followed many years of litigation, including more than 160 depositions and over 20 million pages of produced documents68 —the court certified an injunctive class under Rule 23(b)(2).69 The class consisted of all Amex-accepting merchants, including about a dozen large merchants who had been litigating a parallel action against Amex on a nonclass basis alongside class plaintiffs for years, including Rite Aid Corp, CVS Pharmacy, Walgreen Co, and others (“the Rite Aid group”).70 The proposed settlement would have precluded these plaintiffs from pursuing their individual claims, which included seeking the ability to practice unfettered differential surcharging. Under the settlement, members of the Rite Aid group would be able to maintain their own actions for damages, but the injunctive relief they received—the new surcharging rules—would be dictated by the class settlement.
Consequently, the Rite Aid group objected to the proposed settlement, arguing that the unfettered surcharging rights the group had sought for years were markedly superior to the watered-down version obtained by the class.71 The Rite Aid group argued that the difficulties most merchants would face in pursuing these rights absent a class deal—that is, the expense of one-on-one arbitrations—should not limit the Rite Aid group’s ability to bring claims against Amex for the rules reforms that it wanted.72 And because the class settlement took unfettered surcharging off the table, it severely diminished these plaintiffs’ leverage to seek significant monetary relief in their individual damages proceedings.73 Other very large merchants—including 7-Eleven, Wal-Mart, Target, and others—joined the Rite Aid group in leveling these challenges as well.74
In response to these objections, class plaintiffs pointed to data from around the world and argued that the restricted surcharging rights achieved in the settlement were nearly as effective as the unfettered surcharging that the large-merchant objectors sought.75 They also contended that there was a distinct value in having a universal right to surcharge—that is, each merchant benefits if all other merchants have the right to surcharge.76 Further, class plaintiffs maintained that there was no better relief to be had for 99 percent of the 3.4 million Amex-accepting US merchants, because less than 1 percent of merchants could possibly have a sufficient stake to justify one-on-one arbitrations seeking unfettered surcharging on an individual basis.77 And it was undisputed by all that Amex would never agree to unfettered surcharging in a class settlement.
D. The Tyranny Paradox
So how do we analyze a proposed injunctive settlement that would provide a substantial benefit for a strong majority of class members but that a minority of large merchants (less than 1 percent, accounting for 20 percent or so of volume) opposed on the ground that they could do better for themselves if left to pursue their own individual injunctive claims? What is the theoretical font of authority that allows a self-nominated private attorney general to determine that the interests of the majority should foreclose a minority from pursuing its own interests in litigation? On the other hand, what would be the basis for refusing to give vent to the majority’s interests—particularly when that majority is very likely to get no benefit at all in the absence of the mandatory Rule 23(b)(2) settlement?78
1. The problem.
One way to approach these questions is, again, to think about the nature of the divergent class-member interests. Surely, it is one thing for a mandatory class to accommodate some level of heterogeneous class-member preferences and strategic agendas, but it is quite another thing to house, within a single non-opt-out class, members with directionally opposed economic interests. For example, if there were merchants who would affirmatively suffer from an order banning Amex’s antisteering rules, one might well question the cohesiveness of the proposed class.79
But where does that point us here? For present purposes, let’s stipulate to the seemingly obvious point that the large merchants would clearly benefit (vis-à-vis their position today) even from the weaker version of relief obtained by the class; they just would not benefit as much as they would from the unfettered surcharge rights that they might win in individual proceedings. The real complaint, it seems, is that the class is settling for a field goal when the larger merchants want to go for a touchdown. If there were genuine directional conflict here, we might be able to avoid the tough questions. But there isn’t, and we can’t.
What, then, is a private attorney general to do? In the Amex ASR case, the decision was apparently not difficult for class counsel. With no directional conflict blocking the path, they wrapped themselves in the interests of the 99 percent and unabashedly sought to run roughshod over the rights that large merchants would otherwise have in order to seek additional relief.80 For reasons unrelated to Coffee’s abusive-litigation concerns—for surely the Payment Card Cases raise no such concerns81 —I imagine that this aspect of a private attorney general model, this endemic-tyranny phenomenon, is deeply irksome to class action critics. And yet, it seems fair enough for a lawyer to heed the interests of a strong majority of his clients in any group environment.
So let’s rephrase the question: What is a district judge to do? The judge in Amex ASR appeared caught between a tyranny of the majority and a hard place. And doctrine was not going to solve his problem.82 The Supreme Court stated the basic rule (which it adopted from Professor Richard Nagareda) in Wal-Mart Stores, Inc v Dukes:83 “The key to the [Rule 23(b)(2)] class is ‘the indivisible nature of the injunctive or declaratory remedy warranted—the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or as to none of them.’”84 But that hardly solves the current problem. Surely, the conduct was unlawful across the board and it could and should be enjoined across the board—but does that mean that the large merchants must abandon their claims for additional relief on top of the available across-the-board relief? Not obvious.
2. A Rule 23(b)(2) opt-out solution?
Faced with these competing plaintiff-side forces, a judge might reasonably be tempted to allow dissatisfied class members to opt out and seek additional relief for themselves. But does the Rule allow for that? The pre–Wal-Mart Stores case law is useless here.85 To the extent that opt-outs have been allowed under Rule 23(b)(2), it has primarily been in the sort of “hybrid” cases that Wal-Mart Stores abolished.86 In Wal-Mart Stores itself, the Court observed that Rule 23(b)(2) “provides no opportunity for . . . class members to opt out,”87 and some courts have suggested that allowing opt-outs in injunctive cases would expose “defendants to varying and possibly inconsistent obligations” and to “the possibility of conflicting judgments,” and that it would essentially “permit limitless collateral challenges [that] would greatly diminish the possibility that complicated class actions for equitable relief would ever settle.”88
But there are ways for a court to effectively allow injunctive opt-outs if it wishes. For example, there is nothing to stop a court from demanding that a release exclude from its coverage any individual claims that the court thinks ought to go forward on a nonclass basis.89 Or—unorthodox as this may be—a court could announce that it is only willing to certify a settlement class under Rule 23(b)(3), even though the relief will be purely injunctive.90 Rule 23 itself contains no prohibition against certifying a class for injunctive relief under the auspices of Rule 23(b)(3), so long as the class meets the higher standards of community, predominance, and superiority demanded by that provision.91 And Rule 23(d)(1)(E)’s broad grant of powers to make appropriate orders arguably gives the court authority to permit opt-outs in Rule 23(b)(2) cases.92 In general, Rule 23 is sufficiently flexible to allow courts to direct that injunctive opt-out rights be provided for cases in which these class members have meaningful claims to better or different relief.93
The more interesting question is whether to allow injunctive opt-outs, at least when the opt-out claim seeks relief that is limited to the particular claimant as opposed to broad classwide relief. The issue is whether opt-out relief would be additive to class relief, or whether it would subject the defendant to fundamentally inconsistent obligations—a question that can be answered only in a case-by-case analysis.94 In this respect, injunctive class action claims seem quite different from the classic mandatory class action vehicle in Rule 23(b)(1), which is applicable to limited-fund cases.95 When there is not enough money to go around for all claimants, then any opt-out claim for individual damages will necessarily conflict with the class action. But there is no such structural reason for assuming that individual injunctive claims conflict with class relief.
And indeed, one could argue that the Due Process Clause demands opt-out rights in claims for truly individualized, additive injunctive relief of the sort that the members of the Rite Aid group sought for themselves in Amex ASR.96 Wal-Mart Stores expanded on prior doctrine by recognizing that due process demands that class members must have the right to opt out from cases involving any nonincidental claims for monetary relief, irrespective of whether the plaintiffs had framed their claims as ones for nominally injunctive or “hybrid” relief.97 It is no giant leap from that argument to say that any claim to remediate or protect against a concrete economic harm—whether framed as a claim for damages or for injunctive relief—demands opt-out rights as a matter of due process. After all, if the Rite Aid group were seeking damages to redress all the past and future harms that it stood to suffer from Amex’s illegal conduct, there would be no question that it could opt out. Why does it have no such opt-out right if it seeks to address that same harm by forcing Amex to change its conduct toward the Rite Aid group? On this view, Wal-Mart Stores is quite possibly not the end point for the expansion of due process–driven opt-out rights. The Rule 23(b)(2) shoe may yet drop.
In any event, we have here the seeds of a potential solution to the tyranny paradox. In an appropriate case, a judge could condition approval of a class settlement on the parties’ agreement to allow individual class members, or some subset of class members, to bring certain defined claims for injunctive relief. Class members seeking exclusion could be compelled to submit a request—perhaps during a narrow opt-out window—proclaiming an intent to seek additional individual relief and even describing the specific relief sought. This brief statement would allow the judge to see that a real class member seeks to vindicate a real interest and would help the judge to ensure that the opt-out relief sought is individualized, additive, and consistent with the class relief.
Defendants, seconded by settling class counsel, will argue that incentives to negotiate injunctive settlements are vitiated if there is a risk that absent class members may be afforded individual opt-out rights.98 And there is much to recommend that view: after all, if the opt-outs will receive the benefit of the class relief anyway, then opt-out injunctive plaintiffs can free ride in ways that the damages opt-outs arguably cannot. But does this remove the incentive to participate in the class deal? In Amex ASR, one could argue that Amex stood to gain a great deal by settling with the class, even if the Rite Aid group and other large merchants were left free to pursue unfettered surcharging rights in individual proceedings. How many merchants will submit requests for exclusion affirming an intent to file an individual injunctive claim? Maybe 1 percent? On those numbers, even assuming that the 1 percent represented some of the country’s largest merchants, Amex would gain the knowledge that 99 percent of US merchants would not adopt the specific surcharging practices that it deemed so dangerous to its business—practices that might otherwise spread across the marketplace.99
On this model, 99 percent of merchants stand to gain the long-sought right to impose surcharges—not the unfettered variety, but meaningful and valuable rights nonetheless. And the large merchants (the 1 percent) will have their opportunity to pass up the field goal and go for the touchdown—and gain significant leverage for use in their individual damages arbitrations. And because those minority interests will be served without scrapping the class settlement, private enforcement of the antitrust laws will play its intended role of “pry[ing] open” markets to competition.100
Coffee’s project of incentive alignment is surely furthered by a limited opt-out right. To the extent that the class contains some diversity of goals and preferences, the opt-out mechanism allows class counsel to align themselves unreservedly with the majority, without adversely affecting the interests of the minority members. In the damages context, Coffee has written that the “value of the right to opt out may lie more in its utility as a checking mechanism than in its ability to protect litigant autonomy,” because when enough members opt out, the “practical net effect might be to torpedo the dubious settlement or force its renegotiation.”101 Here, the opt-out right serves this checking function and gives opt-outs greatly valued autonomy.
Further to Coffee’s project, the potential opt-outs, and specifically their exclusion requests, would serve a valuable monitoring function. As Coffee counsels, judges supervising class action settlements are often “unable or unwilling to monitor the settlement process rigorously” (p 195). These judges “need allies,” he tells us, to help them more effectively supervise privately negotiated pacts (p 195). In Rule 23(b)(2) settlements, courts would glean a great deal from requests for exclusion that briefly describe the individual relief that is sought. These requests would give a court far-greater insight into the merits of a proposed settlement vis-à-vis its real-world alternatives than the court is likely to acquire from the current objection process, which is often obscured by a profiteering objectors’ bar and the murky agendas of objecting parties.102 As Coffee recognizes, “settling parties have a strong desire to blind the court to the imperfections in their settlement, and so lock arms and compliment each other” (pp 138–39). Allowing injunctive opt-outs would certainly disrupt this convivial klatch, but the practice seems well designed to fortify the private attorney general model.
3. Anticlimax: the court’s punt in Amex ASR.
Whether remarked on or not, the tyranny paradox is present to one degree or another in almost all consequential class actions that seek reform. Recent cases—such as those involving NCAA athletes seeking compensation for their services,103 sports fans seeking the unrestricted ability to watch their favorite out-of-market teams,104 Uber drivers (and other “gig economy” workers) seeking employee-type benefits,105 authors seeking royalties for electronic publishing,106 or Silicon Valley engineers challenging antipoaching agreements among employers107 —invariably result in deals struck by class counsel on behalf of all members, notwithstanding the fact that some members, if left to their own devices, might be able to obtain or threaten to obtain superior relief. And in an age in which the ability to obtain money damages via class actions is being restricted because of class waivers and other doctrinal developments,108 the forfeiture of individual equitable claims spells the forfeiture of valuable settlement leverage.
Few cases could have presented these tyranny-paradox issues more starkly than Amex ASR, in which the proposed settlement was exhaustively briefed and argued by highly sophisticated lawyers on all sides. The district judge—Judge Nicholas Garaufis of the Eastern District of New York—was presented with a golden opportunity to address these undertheorized but critical issues.
However, distrust of class action lawyers runs deep. And as I mentioned, when Willkie Farr partner Ravelo was arrested for fraud in December 2014, a search of her e-mails turned up substantial correspondence with Amex ASR lead counsel Friedman, a longtime friend.109 That correspondence was then produced to all of the Amex ASR objectors.110 And while some of those large-merchant objectors (including the Rite Aid group) eschewed any attempt to argue that the Friedman-Ravelo communications provided a reason to reject the deal—instead urging the court to rule on the merits of the settlement111 —others (including 7-Eleven and Target)112 argued that some sort of conspiracy was afoot and that Friedman’s communications with Ravelo, a lawyer for nonparty MasterCard, had tainted the settlement.113
Judge Garaufis rejected the class action settlement.114 As I discuss more fully in Part III, he did so without grappling with the tyranny paradox and without ruling on the merits of the proposed agreement. Instead, the court rejected the settlement based on what I have identified as a distinct “discomfort zone”—a disconnect between normative intuitions about how a lawyer ought to conduct the business of litigation, on the one hand, and the practical, on-the-ground realities of complex, multiforum litigation, on the other.
II. The Public Enforcer
The second discomfort zone revolves around the perceived usurpation of the traditional role of public enforcers by self-appointed private lawyers. These concerns are familiar in the context of Rule 23(b)(3)–damages class cases: Professor Coffee has long noted that the presence of a profit motive distinguishes private and public attorneys general in material ways,115 and class action critics have found it especially galling that private lawyers don the garb of the public enforcer to bring unmeritorious cases in the hopes of shaking down corporate defendants.116
But once we have filtered out suspect claims via Coffee’s prescriptions, what discomfort remains with the private attorney general—in Coffee’s terms, with “a private enforcer performing a public role . . . without authorization by the legislature” (p 152)?
Plenty, as it turns out. In the traditional Rule 23(b)(3)–damages context, a major concern—quite separate from abusive-litigation issues—is the “piling on” problem: when a public enforcer brings an enforcement action uncovering a violation (especially in securities, antitrust, and consumer areas), the private bar invariably responds by filing a spate of copycat damages claims.117 The traditional critique is that these follow-on cases result in overdeterrence: the private bar is not interested in calibrating to some optimal deterrence level; its disposition is always maximalist.118 The politically accountable public enforcer, on the other hand, will tend to seek a point of equilibrium in the public interest.119 And as Coffee shows, for matters in which both private and public enforcers take action against a corporate defendant, the private recoveries vastly outstrip the public recoveries by a margin of more than ten to one (pp 174–75). This fact speaks well to the efficacy of the private bar, but it does nothing to quell concerns regarding overdeterrence.120
In the context of Rule 23(b)(2) injunctive claims, however, the concerns are different. It is not cases in which the government enforcers are acting that present a problem for critics; it is the cases in which they are not.121 When private attorneys seek reforms that public enforcers have not chosen to seek—and maybe even claims that public enforcers have affirmatively chosen not to seek122 —then we are really courting the “who the heck are you” problem. The critique is that the private attorneys are subverting the prosecutorial prerogative of the public enforcer.123 And in consequential injunctive cases, in which remedial orders can look an awful lot like legislation, the perceived usurpation of public-enforcement authority is at its zenith. In this sense, the purest distillation of the private-versus-public problem is not found in the Rule 23(b)(3)–damages class cases at all; it is in the injunctive sphere, where litigation encroaches on traditionally legislative turf—and where court cases that are prosecuted by unelected private lawyers have the effect of rewriting the rules of the road for defendants and sometimes of reforming entire industries.124
How legitimate is this concern with subverting prosecutorial authority? Might not the private attorney general sometimes serve as a “failsafe,” in Coffee’s words, against agency capture and political considerations that lead to the underenforcement of important legal rights (p 6)?125 And how much deference should we accord to agency nonenforcement decisions in the context of broad remedial statutes? Should we be concerned that private actors, in seeking broad structural reform, will be less sensitive than their public counterparts to encroaching on the legislative process—that is, bigfooting their way into areas of ongoing congressional concern? And what is the utility of private attorneys general in cases in which public enforcers do act? Does it matter whether private lawyers are unwelcome interlopers into a government action, as opposed to harmoniously working side by side? How about when the government joins an ongoing private case? For each of these questions, Amex ASR provides a real-world context for examination.
A. Amex ASR
In 2009, the Antitrust Division of the DOJ was coming out of an eight-year torpor, having not initiated any conduct cases during all of President George W. Bush’s administration.126 But early that year, the DOJ served Visa and MasterCard with substantive civil investigative demands relating to their merchant restraints.127 Meanwhile, also in early 2009, the Second Circuit in In re American Express Merchants’ Litigation128 cleared the Amex ASR class plaintiffs to proceed by invalidating Amex’s class action waiver.129 As they commenced a daunting discovery process, Amex ASR class counsel then approached the DOJ, urging it to expand its investigation to include Amex.130 Among other things, counsel hoped that the DOJ’s involvement might serve to unearth higher-quality documents in the discovery process and to put additional pressure on the defendant.131
In October 2010, after completing investigations and negotiations, the DOJ announced a consent decree with Visa and MasterCard and filed a lawsuit against Amex.132 Like the private cases, the DOJ actions challenged the three networks’ antisteering rules, but unlike the private cases, the Government’s cases stopped short of challenging the rules against surcharging, which presented a politically sensitive issue. To hear the private lawyers tell it, the government attorneys fully understood and agreed that rescission of the no-surcharge rules was a key component of industry reform, and yet they backed off at the last minute because the issue of credit card surcharging promised to become a political hot potato.133 Card networks have attempted for decades to spin surcharging as “anticonsumer.” Visa in particular has widely employed faux grassroots organizations—with names like “Consumers Against Penalty Surcharges”—to get out the message that surcharges are anticonsumer checkout fees.134 And while merchants and major consumer organizations have long understood that no-surcharge rules are anticompetitive and regressive, it is reasonable to assume that the Obama administration was concerned with political backlash.135
Still, while it did not attack the no-surcharge rules, the DOJ did go forward aggressively with the claim against Amex’s other antisteering restraints—for example, the prohibitions against merchants advertising “We Prefer Discover” or offering their consumers a discount for using Visa.136 For four years, DOJ lawyers worked shoulder to shoulder with counsel for the merchant plaintiffs—sharing time at depositions, discussing strategies, and keeping one another apprised of developments. Ultimately, the DOJ proceeded to a full-blown seven-week bench trial against Amex, which the DOJ won, resulting in an injunction rescinding Amex’s antisteering restraints.137 However, the DOJ trial win did not deliver to merchants the long-sought right to impose card surcharges—and so the private plaintiffs soldiered on.
And at this point, two aspects of the private-public partnership bear note. First, there is a legislative story. Large merchants had been lobbying Congress for years to enact legislation capping swipe fees.138 And quixotic as the quest for blunt price regulation usually is, in the United States, these merchants had recently enjoyed spectacular success: in 2010, § 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act139 (“the Durbin Amendment”) effectively capped swipe fees on debit card transactions, and merchant lobbyists wanted to extend rate regulation to credit cards.140 But when the private antitrust settlements were announced in the Payment Card Cases—promising merchants the ability to use surcharging to inject price competition into the market and to discipline swipe fees—the proponents of legislative rate regulation became alarmed. Durbin’s senior counsel wrote to the head of the National Retail Federation (NRF) (the de facto leader of the objecting merchants’ group) and warned darkly that the proposed settlements will “foreclose the prospect” of rate-capping legislation and that the “efforts to have Congress rein in credit-card swipe fees will be imperiled” unless the objectors manage to derail the settlements.141 And indeed, as of this writing, the NRF and its fellow objectors remain on the warpath.142
Second, there is a story here about private-public complementarity. In the typical coattail class action, private damages claims follow on the heels of a government-enforcement case. That is, the private remedy—and the deterrent wallop that it packs—is cumulative of the public remedy. And the normative question, identified with Coffee’s scholarship, is whether the cumulative remedy overdeters. But here, where the private remedy and the public remedy are injunctive, the dynamics are quite different.
In Amex ASR in particular, the injunctive remedies were complementary. The proposed class settlement delivered the right to surcharge credit cards but not the right to do so differentially.143 The DOJ injunction, meanwhile, gave merchants the right to treat credit cards differentially, but it did not deliver the right to surcharge.144 Putting the two together, the class settlement provided that if the DOJ were to win at trial, then—but only then—merchants could surcharge differentially, subject to certain restrictions.145 This unique structure allowed the parties to settle what they could and to not be stymied by posturing over points that would be settled one way or the other in the then-upcoming DOJ trial.
B. The Private Attorney General and the Public Enforcer
So now back to our questions. Should deference be paid to agency nonenforcement decisions in the context of remedial statutes? Coffee suggests that the private attorney general may sometimes serve as a failsafe against political considerations that can lead to the underenforcement of important legal rights.146 And certainly, the facts of Amex ASR bear that concept out in spades. But I would go further and reject the argument—pressed by some defendants147 —that private lawyers are subverting prosecutorial prerogatives by pursuing reforms in cases where the public enforcer has taken a pass. Once we filter out abusive litigation via Coffee’s reform proposals, there is no clear rationale for ignoring Congress’s provision of enforcement rights to private actors based on executive enforcement decisions.148 And certainly, in the Payment Card Cases, the price of deference to an agency nonenforcement decision would have been to sacrifice the quest for surcharge reform.
To the extent that we are concerned about reform litigation encroaching on legislative turf in particular, there may not be much real-world difference between private and public enforcers. The remedies that they achieve are the same, and the turf that they invade is the same. And in the Payment Card Cases, the merchant lobbyists and Durbin’s staff could just as easily have warned that an impending government consent decree imperiled their legislative agenda, as they warned that the private class action settlements did. The concern, at bottom, is with reform litigation (by whomever) subverting legislation—and not properly with the private attorney general model.
To be sure, skepticism with the private attorney general model will linger in the context of Coffee’s coattail or follow-on class actions. But as the Payment Card Cases show, there are many other models of private-public partnership, and they need not implicate any such skepticism. And here, Coffee and I would add one more salutary private-public model to the mix. In an earlier work, I made the argument that, following the Supreme Court’s class action–killing decisions of recent years, “state attorneys general [should] make broad use of their parens patriae authority . . . to represent the interests of their citizens in the very consumer, antitrust, wage-and-hour, and other cases that have long provided the staple of class action practice.”149 And to tackle these complex cases, state attorneys general should retain private class action lawyers with serious “expertise in originating, investigating, and prosecuting class actions, as well as financing them.”150 In Entrepreneurial Litigation, Coffee expands on this theme of the “semi-private attorney general” (p 195). Observing that the private attorney general has often been “much more effective than public enforcement” in extracting significant monetary settlements (p 174), Coffee suggests that “the entrepreneurial energy of the plaintiff’s bar [could] be harnessed” by the public attorney general (p 175).151 As Coffee posits, this form of private-public partnering would “add teeth to public enforcement,” allowing regulators to bring more and bigger cases than their budgets currently allow (p 175). And the combination would provide oversight of class actions by public agencies, which are “better able to monitor the private attorney general than can private clients” (p 175).152
III. When Realism Met Formalism
As the third discomfort zone, I have identified a sort of frustration that jurists encounter when their normative intuitions about how lawyers ought to conduct the business of litigation conflict with the practical, on-the-ground realities of complex, multiparty litigation. As Professor Coffee reminds us, lawyer-driven class litigation has never fit comfortably with the fundamental assumptions that our legal system makes about the role of lawyers, including the premise that “clients, not their attorneys, should define litigation objectives.”153 As such, Coffee observes, ethical firestorms are bound to erupt over the conduct of private attorneys who “wield[ ] a degree of public power, but [are] motivated by powerful economic incentives, and yet subject to only limited accountability” (p 2).
Bracing themselves against Coffee’s classic critique that they do not represent “real” clients who perform a meaningful monitoring function, class action lawyers go to great lengths to project the appearance of traditional attorney-client relationships. But, of course, the relationships are different—and the day-to-day activities of class counsel in large, sprawling cases often bear little resemblance to the conventional paradigm.154 The class lawyer’s activities can look more like those of a shadowy diplomat, engaging in constant temperature-taking and idea-floating in order to broker viable deals among willing players in opposing camps. Indeed, it is hard to see how complex, multiparty settlements could occur without these sorts of communications.
The essential tug-of-war here is between realism and formalism. On one side stands a pragmatic philosophy concerned with the reality of how complex deals are closed, a realism emblemized by Coffee’s tireless inquiry into what entrepreneurial lawyers actually do and why they do it. And on the other side stands a formal philosophy concerned with preserving a traditional conception of how lawyers behave, a formalism that looks to ex ante rules to ensure fidelity to that traditional form. This tug-of-war plays out in dramatic fashion in the Payment Card Cases.
A. Amex ASR and the Collusion Theory
As discussed above, some of the nation’s largest megamerchants were committed to stopping settlement of the Payment Card Cases at all costs. These objectors lost round one, as the Visa-MasterCard settlement won lower court approval.155 And the objectors looked to be in further trouble as the Amex ASR settlement moved toward court approval in late 2014. But then came a thunderbolt from out of the blue: Ravelo’s arrest, the search of her files, and the dissemination of eighteen thousand pages of materials—including hundreds of personal and professional e-mails spanning many years with a longtime friend, Friedman, who was lead counsel for the plaintiffs in Amex ASR and who was active in negotiating the no-surcharge reform in MDL 1720. The objectors sensed an opportunity and moved to derail the settlements.
In Amex ASR, the district court ordered the objectors and class plaintiffs to simultaneously submit ten-page, double-spaced briefs addressing how, if at all, the disclosed communications should affect the court’s determination of the proposed settlement.156 On the appointed day, Friedman’s class plaintiffs submitted a conventional legal brief that emphasized the merits of the proposed settlement and its value to the 3.4 million merchants in the class.157 The various objectors, meanwhile, made several coordinated submissions asserting that the Friedman-Ravelo communications reflected serious misconduct.158 Some objectors alleged an elaborate conspiracy.159 Others suggested something darker—that Friedman and Ravelo were both criminals hiding behind the Fifth Amendment: “Since Ms. Ravelo has been charged criminally and both she and Mr. Friedman have criminal attorneys representing them, the ability to examine this issue is unlikely.”160
In the early evening of the day that the briefs were due, the court issued an extraordinary and unprompted order directing that neither side would be permitted to file responsive papers.161 In other words, whatever allegations were made or charges levied against Friedman by the objectors, he and his team would be foreclosed from responding, denying, or explaining their conduct.
Friedman has since written that his team “did not anticipate,” and could not have foreseen, the “distorted narrative that the objectors would wring out of the 18,000-page record,” and he has complained that he had no opportunity to rebut the “incredible allegations” made by the objectors.162 According to Friedman, the objectors’ intentions were to “goad[ ] the [court] to latch onto the familiar narrative of a plaintiffs’ class action lawyer selling out his clients’ interests.”163 If Friedman is correct, the goading worked: the court rejected the settlement just days after shutting down the briefing. And the court did not base its decision on an evaluation of the proposed relief; instead, the court rejected the Amex settlement because it found class counsel’s conduct so contrary to traditional notions of legal professionalism that it could not countenance approval.164
So what was the conduct that the objectors alleged and that the court found so abhorrent that it warranted scrapping a settlement that sought to provide substantial benefits to 3.4 million Amex-accepting merchants in the United States?
The nub of the collusion theory—advanced by the objectors and uncritically accepted by the district court—was that Friedman shared information with Ravelo in a bid to induce Visa and MasterCard to structure their settlements with a “level playing field” clause, thereby setting the stage for Amex to later settle on a parity-surcharging basis.165 According to the court, this structure served to insulate all three networks from “differential surcharging.”166
In support of this theory, the court pointed to three areas of communication. First, the court identified seven documents that Friedman shared with Ravelo, allegedly in violation of a protective order and in an effort to influence MasterCard’s settlement.167 Second, the judge pointed to “email discussions and outlines regarding 1720 MDL settlement negotiations, status, strategy, and proposed provisions.”168 By these communications, the theory holds, Friedman sought to steer defendants to include the level playing field provision and pave the way for Amex to settle on a parity basis. And third, the court was perturbed by numerous communications between Friedman and Ravelo after the MDL 1720 settlement that related to the Amex ASR settlement.169 In general, the court was struck by Friedman and Ravelo’s relationship, which over the years had included family vacations, discussions of investment opportunities, and personal loans.170 The judge was especially alarmed at their close communications regarding the Amex ASR settlement negotiations, pointing out that “Friedman consulted Ravelo at what appears to be every step along the way.”171 The court reasoned that Friedman’s ability to be a zealous advocate for the class was compromised by his “collaboration with counsel for MasterCard, an entity with interests divergent to those of the class,” and that “there [was] reason to be concerned he was not acting solely in the class’s interests.”172
Friedman saw things differently. Complaining that he never had an opportunity to address these charges in court—and unable to appeal the decision173 —Friedman published an open letter, arguing that the entire collusion theory was illogical for several reasons. First, he noted, each of the seven allegedly confidential documents that the judge identified was transmitted only after MasterCard settled and thus could not have influenced MasterCard’s settlement.174
Second, Friedman argued that the “negotiation e-mails” he sent to Ravelo were part and parcel of legitimate negotiations—a process that, to Friedman’s mind, involved sharing strategic thinking with the adversary in these serious and complex cases.175 According to Friedman, he worked to “help forge approvable deals in cases with multiple players and agendas.”176 That “work entailed no shortage of sidebars, and it required relationships of trust between individual lawyers in opposing camps.”177
Moreover, far from scheming to implement a level playing field provision in MDL 1720 to pave the way for a parity-surcharging resolution in Amex ASR, the level playing field provision was not Friedman’s innovation at all; rather, according to all parties to the settlement, it was thrust on the litigants by the mediators, and, indeed, Friedman led the charge to get rid of it.178 Further, the judge was mistaken in his characterization of the settlement terms: the Amex ASR settlement in fact permitted differential surcharging, and not just parity surcharging, as discussed above.179 If the conspiracy was aimed at achieving a pure parity deal, it failed miserably.
Third, as for communications with Ravelo regarding the Amex settlement well after MasterCard had settled, Friedman argued that, protective order violations aside, there was nothing wrong with these communications.180 As a defense-side lawyer with fifteen years of directly on-point experience under her belt, Ravelo was a useful confidante, benefiting Friedman and, by extension, his clients.181
Additionally, Friedman alleged that the court misstated facts in order to portray him as a lawyer selling out his clients’ interests. According to Friedman’s open letter, documents relied on by the court show that Friedman had demanded a “huge f’ing number” for class damages—before Italian Colors, when damages were still on the table.182 In the decision, however, the judge wrote that Friedman, in settling the injunctive case, demanded this “huge” number for attorney’s fees—a withering allegation of moral bankruptcy, in the world of entrepreneurial lawyers.183 Similar or worse allegations abound in the report submitted by the 7-Eleven objectors’ questionable ethics expert, albeit in somewhat more cartoonish language.184
I do not pretend to be neutral or unbiased here.185 But the evidence suggests that a respected federal judge was successfully goaded to latch onto a “lawyer sells out client” story even though it was contravened by all of the known facts. Which raises the question of why—an inquiry that surely holds implications for my thesis. What lessons can be drawn from all this about our enduring discomfort with entrepreneurial lawyers?
B. The Clash between Realism and Formalism
One take on the collision between Friedman and Judge Garaufis is that it is a proxy war for the conflict between realism and formalism. By realism, I have in mind the philosophy that Coffee practices in his writing, particularly in Entrepreneurial Litigation. His judgments are informed by the practical realities of lawyering.186 Coffee is tireless in trying to understand what entrepreneurial lawyers actually do and why they do it. To understand actions, he wants to understand interests. Motivations are everything; labels mean little. And when ethical questions arise, Coffee’s question is always: Who was harmed and how? In discussing the case of famed securities class action lawyer Mel Weiss, who was prosecuted in 2008 for making side payments to figurehead class action clients, Coffee’s question is pointed: “[E]ven if the[ ] behavior was sleazy and the pattern of misconduct long-standing, the question remains: who was really injured by the payments to professional plaintiffs?” (p 76). And he digs until he finds satisfactory (if surprising) answers—in the case of Milberg LLP, Coffee identifies rival law firms as parties harmed by the side payments (pp 76–77). At any rate, the question for Coffee is actual harm: the effects of actions on interests in the real world.
On the other side of the spectrum is what I am calling formalism. Judgments in this realm are based on ex ante rules or precepts.187 When written rules exist, the formalist is at his happiest—relieved of bothering with an after-the-fact inquiry into how a person’s actions may have affected the real-world interests of other parties.188 When rules do not exist, the formalist relies on a sort of intuition to tell him what the ex ante rule would be if there were a rule.189 Whatever else these intuitions may draw on, they are surely informed by a platonic form of traditional lawyering, in which one lawyer represents one client and negotiates against one adversary.
The work of contemporary class action lawyers in complex cases—the shadowy work of “forg[ing] approvable deals” with “multiple players and agendas”—bumps into these formal precepts.190 For instance, Friedman regularly generated memoranda and discursive e-mails that he sent to his team regarding positions and ideas on rules-reform issues that cut across all three networks in both sets of cases, and he regularly sent this thinking along to various co-counsel and sometimes opposing counsel as well, including Ravelo.191 Friedman defended this practice—forwarding sent e-mails, often sprinkled with comments—as an efficient way to communicate.192 The court saw it differently. Friedman’s e-mails and memoranda to his team were attorney work product, in formal terms, and his sharing them was seditious leaking.193 One person’s collaborative attempts at problem-solving are another person’s collaboration, in the Vichy sense of the word.
As I said earlier, this case gives us a rare backstage pass, a chance to observe in real time the reaction of a traditional and well-respected jurist—albeit under stress test conditions fomented by uniquely powerful and motivated objectors—to some of the below-the-surface practices of entrepreneurial lawyers in complex cases. One can only imagine the reaction if other aspects of contemporary class practice were on display in similarly candid e-mails. I have in mind, for example, e-mails concerning the favor-trading deals that are often made in arranging for class leadership,194 or e-mails regarding the operation of document-review mills, in which the difference between treating the reviewer as an expense (like a photocopying vendor) or a lodestar-generating associate may determine the financial viability of the case.195 Or consider case funding, in which entrepreneurial lawyers in complex commercial cases often tap equity capital from wealthy tort lawyers, litigation-finance operations, or even British insurance companies.196 Private e-mail communications on these sorts of issues—especially if they shared the irreverent and profane tenor of the Friedman-Ravelo e-mails197 —would surely offend traditional judicial sensibilities, stretching and perhaps breaching the boundaries of what courts recognize as the practice of law.
In a formalist fashion, the court’s reaction to the Friedman-Ravelo e-mails does not ask what the effects of the lawyers’ actions were on actors in the real world. The court did not engage in an analysis of Friedman’s motivations or of the real interests of the parties, nor did it engage in the Coffee-esque inquiry of locating real harm:
Whether Friedman exchanged confidential and/or privileged materials with Ravelo and consulted with her regarding these actions for financial reasons, out of personal loyalty, due to a misplaced sense that her advice would in fact benefit the merchant class and was not improper, and/or for some other reason(s), is something this court cannot currently, and need not, determine.198
Friedman’s response challenges precisely this formalism, saying that “[i]t was a terrible mistake for the Court not to inquire into the reason for my actions, once they were called into question.”199 Friedman frames the conflict, almost explicitly, as one between Coffee’s realism and the court’s formalism: “If Judge Garaufis wants to argue that it does not matter whether my confidential consultation with Ravelo helped the class . . . I’d expect him to point to some hard-and-fast rule that says ‘even if it helps your clients, you can’t have communications like x, y or z.’”200
So, can Professor Coffee rescue the private attorney general? I agree with him that the abusive-litigation problem, as he sets it up, is the core problem posed by contemporary class action litigation. One side of the class action debate obsesses over the abusive-litigation problem, while the other side obsesses over the doctrinal devastation that has been wrought by judicial overreactions to that problem (I know that I do). As for Coffee’s prescriptions, I will not put my partisan credentials on the line by endorsing a loser-pays system anytime soon, but I take his point—and I would be genuinely interested to see specific proposals for the alignment of incentives and for how to make “the merits . . . matter more” (p 122).
But the assumption of public-enforcement-like powers by self-nominated private lawyers will continue to drive a “who the heck are you” type of skepticism, even if the case inventory of the class action bar is cleansed of abusive litigation. The nets of Coffee’s “bottom fishers” may empty out, but discomfort abounds. Objections to the arrogation of power by majority groups and the usurpation of public functions will not soon abate, although the concrete problems that they pose seem solvable with thoughtful consideration. Where I am less sanguine is in the realm of perspective and disposition; I fear that the attitudinal residuum of our decades-long policy debates consigns us to conflict.
- 37See, for example, Lemon v International Union of Operating Engineers, Local No 139, AFL-CIO, 216 F3d 577, 580 (7th Cir 2000) (“Rule 23(b)(2) operates under the presumption that the interests of the class members are cohesive and homogeneous such that the case will not depend on adjudication of facts particular to any subset of the class nor require a remedy that differentiates materially among class members.”).
- 38See, for example, Robert G. Bone, The Misguided Search for Class Unity, 82 Geo Wash L Rev 651, 707 (2014) (observing that “subjective preferences or goals” do not count for class cohesion because if they did, “[Rule 23(b)(2)] class actions would not qualify as strongly cohesive,” but remarking that “[e]ven a civil rights class action can include class members with different preferences about the scope of injunctive relief and different views on the desirability of suing at all”); Allan Erbsen, From “Predominance” to “Resolvability”: A New Approach to Regulating Class Actions, 58 Vand L Rev 995, 1023–24 (2005) (“Different class members often act with different degrees of reasonableness, intent, and knowledge, are injured to different extents, value their losses differently, and have differing goals for the outcome of litigation, but these differences are not necessarily relevant or material in every case.”).
- 39Robertson v National Basketball Association, 556 F2d 682, 686 (2d Cir 1977).
- 40Robertson v National Basketball Association, 72 FRD 64, 68 (SDNY 1976).
- 41Id at 70–71 (holding that the settlement protected the interests of both players and owners and noting that it would help facilitate peaceful and stable labor relations “for many years to come”).
- 42Professor Coffee, for example, has previously written on divergent class interests in the context of Rule 23(b)(3)–damages suits. Coffee, 100 Colum L Rev at 389–90 (cited in note 6) (noting that risk attitudes affecting litigation and settlement preferences are bound to vary across any group of claimants). A handful of other scholars have examined these issues in the Rule 23(b)(2) context, but they have primarily focused on the paradigmatic case of discernible class conflicts, in which some class members support specific reforms and others support directionally opposite reforms. See, for example, Bone, 82 Geo Wash L Rev at 677–87 (cited in note 38); David Marcus, The Public Interest Class Action, 104 Georgetown L J 777, 789–95 (2016); Samuel Issacharoff, Preclusion, Due Process, and the Right to Opt Out of Class Actions, 77 Notre Dame L Rev 1057, 1077–80 (2002).
- 43See, for example, The Marcus Corp v American Express Co, 2005 WL 1560484, *1 (SDNY). When a consumer uses a credit card, the merchant pays a fee ranging from a few cents to a flat percentage amount of the transaction—usually between 1 and 3 percent, depending on the card type. The acquiring bank keeps some portion of this fee, and the remainder of the fee goes to the network and the issuing bank as the interchange fee. See Demystifying Credit Card Processor Fees (PayPal), archived at http://perma.cc/K4YR-2T5M. See also Adam J. Levitin, Payment Wars: The Merchant-Bank Struggle for Control of Payment Systems, 12 Stan J L, Bus & Fin 425, 431–33 (2007).
- 44According to estimates by the Merchants Payments Coalition, US merchants pay swipe fees that are many times the fees that are paid by Europeans. See Oliver Tree, The Great Plastic Robbery Continues: Visa, MasterCard Still ‘Ripping Off’ US Consumers (International Business Times, Aug 3, 2012), archived at http://perma.cc/F57Q-5S5F. See also Levitin, 12 Stan J L, Bus & Fin at 427 (cited in note 43) (“In 2006, U.S. merchants paid nearly $57 billion to accept payment card transactions.”); id at 428–29 (observing that “the cost of accepting payment cards has increased” such that “for many merchants, payment card acceptance has become the fastest growing cost of doing business”).
- 45See Levitin, 12 Stan J L, Bus & Fin at 434 (cited in note 43) (noting that “consumers are not forced to internalize the costs of their choice of payment system” and that “[a]s rewards cards have risen from less than 25% of new card offers in 2001 to nearly 60% in 2005, merchants find themselves performing more and more of their transactions on costlier cards”) (citation omitted).
- 46See id at 427–28 (“Merchants are unable to pass along the relative costs of different payment systems to consumers because the rules of the major payment card networks—MasterCard, Visa, American Express, and Discover—functionally require merchants to charge all consumers the same price, regardless of payment system.”).
- 47Scott Schuh, et al, An Economic Analysis of the 2010 Proposed Settlement between the Department of Justice and Credit Card Networks *6 (Federal Reserve Bank of Boston, July 8, 2011), archived at http://perma.cc/4KL6-9537.
- 48Scott Schuh, Oz Shy, and Joanna Stavins, Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations *21 (Federal Reserve Bank of Boston, Aug 31, 2010), archived at http://perma.cc/CG5U-K33V.
- 49See In re American Express Merchants Litigation, 2006 WL 662341, *1–2 (SDNY).
- 50Id. At the time that the merchants challenged Amex’s clause, it was only small merchants that were subject to arbitration. Thus, other larger, non-arbitration-bound merchants were allowed to proceed with their litigation, even as their smaller brethren fought the arbitration clause. See, for example, Marcus Corp, 2005 WL 1560484 at *1. By the time of the Italian Colors decision, however, Amex had successfully required more than 99 percent of its merchant base to agree to class action–waiving arbitration provisions. For a full account of the various strands of the Amex merchant litigation, see Class Plaintiffs’ Memorandum of Law in Support of Motion for Final Approval of Class Action Settlement, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *13–14 (EDNY filed Apr 15, 2014) (“Class Plaintiffs’ Opening Brief on Final Approval”).
- 51In re American Express Merchants Litigation, 2006 WL 662341 at *1.
- 52In re American Express Merchants’ Litigation, 554 F3d 300, 320 (2d Cir 2009) (“Amex I”). See also id at 312, 316–17 (describing the expert report of economist Dr. Gary French, who concluded that “it would not be worthwhile for an individual plaintiff . . . to pursue individual arbitration or litigation where the out-of-pocket costs, just for the expert economic study and services, would be at least several hundred thousand dollars, and might exceed $1 million”).
- 53See In re American Express Merchants’ Litigation, 634 F3d 187, 189 (2d Cir 2011) (“Amex II”) (finding that the Supreme Court’s decision in Stolt-Nielsen SA v AnimalFeeds International Corp, 559 US 662 (2010), did not mandate a different result); In re American Express Merchants’ Litigation, 667 F3d 204, 212 (2d Cir 2012) (“Amex III”) (finding that the string of Amex decisions “rests squarely on ‘a vindication of statutory rights analysis’”—an issue untouched by AT&T Mobility); In re American Express Merchants’ Litigation, 681 F3d 139, 139 (2d Cir 2012) (“Amex IV”) (“[T]he limited holding in this case is not governed by the Supreme Court’s reasoning in AT&T Mobility LLC v. Concepcion.”).
- 54Italian Colors, 133 S Ct at 2312.
- 55Id at 2311. In a scathing dissent, Justice Elena Kagan complained that the majority’s response to the reality that an arbitration clause would impose burdens on a claimant that rendered the vindication of rights impossible was, put simply, “[t]oo darn bad.” Id at 2313 (Kagan dissenting).
- 56See Friedman, Friedman Open Letter (cited in note 36) (asserting that class counsel “persisted in demanding class damages right up until the Supreme Court took that option off the table in its June 2013 Italian Colors decision, when it upheld Amex’s class action waivers,” and that the damages demand “started at $2.2 [billion] and after cert was granted in Italian Colors, [it] moved to $1.3 [billion]”) (quotation marks omitted). See also Class Plaintiffs’ Opening Brief on Final Approval at *13 (cited in note 50) (“The Supreme Court’s June 2013 ruling in Italian Colors . . . upholding Amex’s collective action ban made it clear to Class Counsel that no damages class action was realistically feasible in Amex ASR.”).
- 57See Card Acceptance for American Express *12 (Amex Merchant Services, Oct 2012), archived at http://perma.cc/R9HY-3W6G (providing that “[t]he arbitrator will have no power or authority to alter th[e] Agreement or any of its separate provisions” and that the agreement purports to ban broad injunctions on behalf of or awarded to merchants beyond merely the named claimant).
- 58See Myriam Gilles, Individualized Injunctions and No-Modification Terms: Challenging “Anti-reform” Provisions in Arbitration Clauses, 69 U Miami L Rev 469, 471–73 (2015) (describing “anti-reform” provisions in arbitration clauses, which “prohibit an individual arbitral claimant from seeking to end a practice, change a rule, or enjoin an act that causes injury to itself and to similarly-situated non-parties”).
- 59In Italian Colors, Scalia made clear that, despite upholding the Amex class waiver, a vindication-of-statutory-rights challenge could still be asserted against “a provision in an arbitration agreement forbidding the assertion of certain statutory rights,” and particularly a “prospective waiver of a party’s right to pursue statutory remedies.” Italian Colors, 133 S Ct at 2310. Post–Italian Colors cases have followed the same logic. See, for example, Parisi v Goldman, Sachs & Co, 710 F3d 483, 487 (2d Cir 2013), citing Paladino v Avnet Computer Technologies, Inc, 134 F3d 1054, 1062 (11th Cir 1998) (“[L]anguage [in an arbitration clause] insulating [a defendant] from damages and equitable relief renders the clause unenforceable.”). This opening allowed the class plaintiffs to argue that Amex’s arbitration clause was unenforceable to the extent that it would ban merchants from seeking classwide reform of Amex’s rules and practices.
- 60Reply Memorandum of Law in Further Support of Class Plaintiffs’ Motion for Final Approval of Class Action Settlement, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *59 (EDNY filed July 14, 2014) (available on Westlaw at 2014 WL 8480960) (“Class Plaintiffs’ Reply Brief on Final Approval”), quoting Zenith Radio Corp v Hazeltine Research, Inc, 395 US 100, 133 (1969).
- 61See, for example, Gilles, 69 U Miami L Rev at 472–73 (cited in note 58) (asserting that “[t]hese legal arguments are serious and the stakes are high” because corporate defendants do not want a regime in which “a single claimant could enjoin widespread injurious practices in arbitration” or in which “arbitrators wielding unchecked authority [could] issue broad and diverse injunctions in individual arbitrations”); id at 473:
[Q]uestions surrounding the enforceability of anti-reform clauses are just as important to putative defendants as the class action bans they have spent years defending; depending on the context, divesting individual claimants of the power to enjoin or reform a market-wide policy or practice may be even more critical than the threat of monetary liabilities.
- 62See Class Plaintiffs’ Reply Brief on Final Approval at *34–35 (cited in note 60) (observing that if the class were to lose the motion to compel arbitration of its equitable claims, “each merchant [would] only be permitted to seek relief for itself in arbitration, and would not be able to seek a rule change benefiting any other merchant,” and therefore concluding that “rejection of the Settlement would consign all merchants to a world where each merchant may only seek to change the contractual rules that bind that merchant alone,” despite the fact that “meaningful relief requires an injunction that benefits merchants across the market-place”).
- 63Exhibit A: Class Settlement Agreement, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *20 (EDNY filed Apr 15, 2014).
- 65In essence, the offsetting-discount approach allows a card network to contract with merchants to absorb some or all of the surcharge on its branded cards. See Class Plaintiffs’ Memorandum in Response to Question Number 1 Posed by the Court in Its Order Dated April 30, 2015, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *4 (EDNY filed June 1, 2015). Amex presumably believes that it would fare well competing in this way because it is able to contract more nimbly with merchants than its competitors are. The merchants’ ability to employ this strategy (that is, using surcharge-offsetting discounts as a way to do differential surcharging) was contingent on the DOJ winning its trial and invalidating Amex’s no-discount rule, which it did in 2015. See United States v American Express Co, 88 F Supp 3d 143, 238–39 (EDNY 2015). See also text accompanying notes 81–84 (describing the public enforcer’s role in the Payment Card Cases).
- 66Because the settlement contemplated that merchants might bring individual damages arbitrations, it provided access to the full class action evidentiary record. As such, the settlement released only future claims for injunctive relief, and it did not release past claims for damages. Class Plaintiffs’ Opening Brief on Final Approval at *16 (cited in note 50) (stating that there is no release for past claims and that arbitral claimants are entitled to the entire evidentiary and litigation record from these cases).
- 67See Memorandum of Law in Support of Class Counsel’s Motion for an Award of Attorneys’ Fees and Costs and for Leave to Distribute Service Awards, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *12–13 (EDNY filed Apr 15, 2014).
- 68See Class Plaintiffs’ Opening Brief on Final Approval at *19–20 (cited in note 50) (describing in detail the exhaustive discovery process and multiple rounds of appellate court briefing conducted over more than ten years before class counsel reached a settlement agreement).
- 69Class Settlement Preliminary Approval Order, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *5–6 (EDNY filed Feb 11, 2014).
- 70These merchants were not subject to Amex’s arbitration clause. See generally Rite Aid Corp v American Express Travel Related Services Co, 708 F Supp 2d 257 (EDNY 2010) (involving individual claims arising from merchant agreements not falling within the scope of Amex’s arbitration clause). But despite this enviable position, the Rite Aid group did not offer to seek broad relief for the benefit of all merchants or otherwise to “assume fiduciary duties to merchants.” Class Plaintiffs’ Reply Brief on Final Approval at *5 (cited in note 60).
- 71See Class Plaintiffs’ Reply Brief on Final Approval at *4–6 (cited in note 60).
- 72See id.
- 73See Exhibit A: Transcript of Civil Cause for Status Conference before the Honorable Nicholas G. Garaufis United States District Judge, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action 11-MD-02221, *19 (EDNY filed Jan 25, 2014) (noting that counsel for the Rite Aid group argued to the judge that if he gave “final approval to the class settlement, it would extinguish [its] ability to challenge [Amex’s] rules on the injunctive relief” and asked that it “be exempted from any release on the final judgment that they’re doing with the class”); id at *21 (“We, our clients, have come forward because we had individual interests to vindicate here, but we can’t get full vindication just with damages. . . . So there may well be a clash between us and the class on the injunctive part.”); Class Plaintiffs’ Reply Brief on Final Approval at *2 (cited in note 60) (“Understandably, the [Rite Aid objectors] want a live injunctive claim so they can lever the greatest possible monetary settlement from Amex.”).
- 74Class Plaintiffs’ Reply Brief on Final Approval at *2 (cited in note 60) (listing prominent objectors and asserting that their real goal was to derail the MDL 1720 settlement by arguing that the surcharging relief in that case would be valueless if merchants were not also free to surcharge Amex, despite their previous lack of interest in suing at any time).
- 75Id at *5–6.
- 76Id at *11.
- 77Id at *6 (“Class Plaintiffs have been forthright that, yes, it would have been desirable to achieve for the six million class members the ability to engage in differential surcharging. . . . But desirable and achievable are two different things.”).
- 78See Class Plaintiffs’ Opening Brief on Final Approval at *7 (cited in note 50) (“The alternative to this settlement is not a better settlement; it is no settlement.”).
- 79But even then, we would need to ask: Suffer in what way? In litigation, Amex argued that many business owners carried Amex rewards cards and so were net beneficiaries of the no-surcharge policies that redistributed wealth from cash payers to premium-rewards-card users. I assume that any such exogenous consideration is simply irrelevant to the cohesion analysis. Likewise, I would not regard merchants who own Amex stock as having interests that are opposed to those of the class.
- 80See Class Plaintiffs’ Reply Brief on Final Approval at *8–9 (cited in note 60) (“To be sure, class members have varying personal preferences. Some have stated they would prefer to pursue claims for full-blown differential surcharge rights, even at the risk of losing all surcharge rights.”); id at *11:
[G]iving six million merchants the right to do simple surcharging does more good for U.S. merchants as a whole than giving each of 15 or 50 (or 500 for that matter) well-resourced and motivated merchants the right to initiate an individual arbitration at which, if the merchant wins, it may seek for itself alone the right to engage in full-blown differential surcharging.
- 81In Coffee’s argot, abusive litigation is characterized by weak or meritless claims brought by unsophisticated lawyers who invest no time or effort in the claims and instead simply exploit the litigation cost differential, potential delay, or fear of crippling class liability to press a nuisance value settlement. Coffee, Entrepreneurial Litigation at 222 (cited in note 7). The Payment Card Cases do not qualify as abusive even under this broad definition.
- 82Nor does the text of the rule get us too far: Rule 23(b)(2) is satisfied so long as the defendant “has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief . . . is appropriate respecting the class as a whole.” FRCP 23(b)(2).
- 83131 S Ct 2541 (2011).
- 84Id at 2557, quoting Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 NYU L Rev 97, 132 (2009).
- 85For the leading pre–Wal-Mart Stores case, see Allison v Citgo Petroleum Corp, 151 F3d 402, 411 (5th Cir 1998) (allowing some monetary claims for back pay to be brought under Rule 23(b)(2)).
- 86But see William Rubenstein, Alba Conte, and Herbert B. Newberg, 2 Newberg on Class Actions § 4:36 at 144 (West 5th ed 2015) (observing that while opt-outs are not required in Rule 23(b)(2) class actions, “they are discretionary, may be permitted, and have been employed”).
- 87Wal-Mart Stores, 131 S Ct at 2558.
- 88In re Colt Industries Shareholder Litigation, 566 NE2d 1160, 1166 (NY 1991). See also In re A.H. Robins Co, 880 F2d 709, 728 (4th Cir 1989) (“[N]o member has the right to opt out in a [Rule 23(b)(1)] or (b)(2) suit.”).
- 89See FRCP 23(b)(3), (c)(2)(B)(iv) (providing the certification process for classes and allowing for exclusions upon request).
- 90Traditionally, injunctive claims are classed under Rule 23(b)(2), while damages claims proceed under Rule 23(b)(3). See Charles Alan Wright, Arthur R. Miller, and Mary Kay Kane, 7A Federal Practice and Procedure § 1775 at 470 (West 2d ed 1986) (“If the Rule 23(a) prerequisites have been met and injunctive or declaratory relief has been requested, the action usually should be allowed to proceed under subdivision (b)(2).”); Jefferson v Ingersoll International Inc, 195 F3d 894, 898 (7th Cir 1999) (“Rule 23(b) begins by saying that an action ‘may’ be maintained as a class action when the prerequisites of subdivision (a) and a part of subdivision (b) have been satisfied; it does not say that the class must be certified under the first matching subsection.”). Indeed, courts have often granted injunctive relief in the context of Rule 23(b)(3) claims, at least when equitable and monetary damages are both sought. And when this occurs, opt-outs from the Rule 23(b)(3) class are free to seek individual injunctive relief. See, for example, Wal-Mart Stores, Inc v Visa U.S.A. Inc, 396 F3d 96, 112 (2d Cir 2005).
- 91FRCP 23(b)(3).
- 92Rule 23(d)(1)(E) endows district courts with discretion to “issue orders that . . . deal with similar procedural matters.” FRCP 23(d)(1)(E). This discretion is meant to facilitate “the fair and efficient conduct of the action.” FRCP 23, Advisory Committee Notes to the 1966 Amendments. See also County of Suffolk v Long Island Lighting Co, 907 F2d 1295, 1304 (2d Cir 1990) (finding that then–Rule 23(d)(5)—now Rule 23(d)(1)(E)—provided ample authority for a district court’s decision to allow class members to opt out of a “limited fund” class action brought under Rule 23(b)(1)(B)).
- 93See Ryan C. Williams, Due Process, Class Action Opt Outs, and the Right Not to Sue, 115 Colum L Rev 599, 652 (2015) (suggesting that “the determination of whether opt-out rights are required should turn [ ] on the relationship between the individual claims of absent class members and the scope of the defendant’s remedial obligation” rather than on a “sharp distinction between equitable claims and monetary claims”); McReynolds v Richards-Cantave, 588 F3d 790, 800 (2d Cir 2009), quoting Eubanks v Billington, 110 F3d 87, 94 (DC Cir 1997) (allowing a Rule 23(b)(2) plaintiff who objected to the settlement to opt out, stating that “[t]he right of a class member to opt-out in Rule 23(b)(1) and (b)(2) actions is not obvious on the face of the rule; however, ‘the language of Rule 23 is sufficiently flexible to afford district courts discretion to grant opt-out rights in (b)(1) and (b)(2) class actions’”); Long Island Lighting, 907 F2d at 1302–05.
- 94Professor Jay Tidmarsh provides an economist’s definition of “additive,” suggesting that “court[s] should [ ] extend the privilege of opting out to all class members who can demonstrate that the marginal expected net loss to the value of the class action from their departure will be offset by the marginal expected net gain as a result of their ability to proceed alone.” Jay Tidmarsh, Auctioning Class Settlements, 56 Wm & Mary L Rev 227, 243 (2014).
- 95Rule 23(b)(1) allows class actions when
prosecuting separate actions by or against individual class members would create a risk of: (A) inconsistent or varying adjudications with respect to individual class members that would establish incompatible standards of conduct for the party opposing the class; or (B) adjudications with respect to individual class members that, as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.
- 96By contrast, in MDL 1720, objectors argued only that the injunctive relief was insufficient consideration for a broad release and not that any objector had additive, individual injunctive claims that he wished to bring on his own. So the rationale for injunctive opt-out would be lacking in MDL 1720, unless one buys into the argument, which seems dubious, that Rule 23(b)(2) is simply unconstitutional because it lacks opt-out rights. See, for example, Mark C. Weber, Preclusion and Procedural Due Process in Rule 23(b)(2) Class Actions, 21 U Mich J L Ref 347, 394 (1988) (“The problem of the Rule 23(b)(2) class action is that binding absent class members without giving them notice and the right to opt out violates due process.”).
- 97Wal-Mart Stores, 131 S Ct at 2559. In Phillips Petroleum Co v Shutts, 472 US 797 (1985), the Supreme Court held that “due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court.” Id at 812. Wal-Mart Stores built on Phillips Petroleum to the extent of noting the “serious possibility” that absence of notice and opt-out violates due process, which would “provide[ ] an additional reason not to read Rule 23(b)(2) to include the monetary damages claims” in that case. Wal-Mart Stores, 131 S Ct at 2559.
- 98Of course, in any given case, the defendant could decline the court’s invitation to modify the agreement to include opt-out rights (or carveouts), thus effectively scrapping the agreement. But that is a risk we should gladly tolerate to eliminate the tyranny paradox. And I think the risk is an unavoidable one, unless we are prepared to mandate opt-out rights—the way that we do with Rule 23(b)(3)—which in many cases would mean that we were gutting the class relief to allow the individual claims. Also, if opt-out rights were truly mandatory—that is, if defendants had no right to back out of the deal—it would be too risky in many cases for the defendant to negotiate a settlement in the first place.
- 99See Class Plaintiffs’ Reply Brief on Final Approval at *11 (cited in note 60) (discussing the “snowball effect,” in which the practice of surcharging—both parity and differential—spread in Australia after the no-surcharge rules were invalidated there in the early 2000s).
- 100Zenith Radio, 395 US at 133.
- 101Coffee, 95 Colum L Rev at 1450 (cited in note 5).
- 102See Coffee, Entrepreneurial Litigation at 138 (cited in note 7) (describing members of the professional-objector bar as “unloved figures” who appear to be “motivated by the hope that either (1) they can convince the court to award them a portion of the amount by which the court cuts the proposed plaintiff’s attorneys’ fee award or (2) they will be paid off by class counsel not to appear at the hearing”).
- 103See O’Bannon v National Collegiate Athletic Association, 802 F3d 1049, 1053 (9th Cir 2015) (affirming that NCAA regulations are subject to antitrust scrutiny, issuing a decision in aid of the 1 percent, and finding that rules prohibiting scholarships up to the cost of attendance were invalid while rules prohibiting payment to student-athletes for the use of their images or other commercial activities were not).
- 104See Laumann v National Hockey League, 105 F Supp 3d 384, 388, 400 (SDNY 2015) (certifying a Rule 23(b)(2) antitrust class challenging agreements entered into by the MLB, the NHL, regional sports networks, DirecTV, and Comcast that “limit options, and increase prices, for baseball and hockey fans who want to watch teams from outside the home television territory [ ] where the fans live,” and rejecting the existence of a fundamental intraclass conflict between “winners and losers” in which injunctive relief would benefit some fans in some markets but have no effect on others).
- 105See O’Connor v Uber Technologies, Inc, 2015 WL 5138097, *12 (ND Cal), quoting Defendant Uber Technologies, Inc.’s Opposition to Plaintiffs’ Motion for Class Certification, O’Connor v Uber Technologies, Inc, Civil Action No 13-03826, *30 (ND Cal filed July 9, 2015) (available on Westlaw at 2015 WL 4554634) (noting the defendant’s argument, in opposition to the certification of a Rule 23(b)(3) class of Uber drivers alleging that the company failed to pay tips and other perquisites, that putative class representatives sought “a remedy—an employment relationship with Uber—that irreconcilably conflict[ed] with the interests of countless drivers”).
- 106See In re Literary Works in Electronic Databases Copyright Litigation, 654 F3d 242, 252 (2d Cir 2011) (rejecting a class settlement governing future uses of authors’ works—including those with registered and unregistered copyrights—in electronic publishing when “named plaintiffs with only Category C claims were obligated to advance the collective interests of the class, rather than those of the subset of class members whose claims mirrored their own”).
- 107See In re High-Tech Employee Antitrust Litigation, 2015 WL 5159441, *3–4 (ND Cal) (approving a damages settlement over the objections of individual employees asserting that the settlement formula did not provide them with full recovery and that they could do better at trial).
- 108See, for example, Coffee, Entrepreneurial Litigation at 15–17 (cited in note 7); Myriam E. Gilles, The End of Doctrine: Private Arbitration, Public Law and the Anti-lawsuit Movement *7–21 (Benjamin N. Cardozo School of Law, Aug 2014), archived at http://perma.cc/D8H6-C5HQ (describing recent legislative and judicial efforts to limit or eliminate class actions).
- 109Amex ASR, 2015 WL 4645240 at *6–7.
- 110Id at *7.
- 111Class Plaintiffs’ Memorandum in Response to Question Number Two Posed by the Court in Its Order Dated April 30, 2015, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *3 (EDNY filed July 29, 2015) (available on Westlaw at 2015 WL 7252727) (“Class Plaintiffs’ Memorandum in Response to Question Number Two”) (noting that the Rite Aid group did not join in the other objectors’ “conspiracy theory”).
- 112Id at *1. Commentators have taken note of the agendas of these large-merchant objectors in attempting to derail the MDL 1720 settlement at all costs. See, for example, Todd Zywicki, Consumers Are the Winners in the Visa/Mastercard Antitrust Settlement (Forbes, Aug 21, 2012), archived at http://perma.cc/Y26D-Q53T:
What explains the opposition of this group? Most likely, simple self-interest. . . . By blowing up the litigation settlement, the big box retailers can perpetuate litigation uncertainty and preserve the political option of extending the Durbin Amendment’s punitive price controls to credit cards, giving them a regulatory edge as they roll out their new payment network.
- 113See The 7-Eleven Objectors’ Submission regarding the Impact of the Friedman-Ravelo Communications on the Court’s Review of the Proposed Settlement, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *1 (EDNY filed July 29, 2015).
- 114Amex ASR, 2015 WL 4645240 at *1.
- 115Coffee, Entrepreneurial Litigation at 221 (cited in note 7) (describing many within the plaintiffs’ class action bar as having “the incentive to overreach and litigate every profitable opportunity, regardless of its merit”). See also Coffee, 42 Md L Rev at 220–28 (cited in note 5).
- 116See, for example, William B. Rubenstein, On What a “Private Attorney General” Is—and Why It Matters, 57 Vand L Rev 2129, 2147–48 (2004) (cataloguing critiques against the private attorney general model, with a focus on class action lawyers that supplement public-enforcement actions).
- 117Indeed, Coffee has long inveighed against the inefficiencies of piggyback class actions. See, for example, Coffee, 42 Md L Rev at 228 (cited in note 5) (describing the “spectacle . . . in which the filing of the public agency’s action serves as the starting gun for a race between private attorneys, all seeking to claim the prize of lucrative class action settlements, which public law enforcement has gratuitously presented them”); id at 222 (observing that plaintiffs’ class action lawyers “simply piggyback[ ] on the [enforcement] efforts of public agencies . . . in order to reap the gains from the investigative work undertaken by these agencies”). See also John C. Coffee Jr, Understanding the Plaintiff’s Attorney: The Implications of Economic Theory for Private Enforcement of Law through Class and Derivative Actions, 86 Colum L Rev 669, 681 (1986) (describing the substantial number of class actions that are sparked by government investigations).
- 118See, for example, Coffee, 42 Md L Rev at 223 (cited in note 5) (observing that follow-on class actions do not result in a broader “scope of law enforcement” or better deterrence but only in an intensified penalty); Beisner, Shors, and Miller, 57 Stan L Rev at 1453–54 (cited in note 2) (“The reason class action lawyers prefer to follow—rather than to lead—government investigations is simple: those lawyers prefer ‘no research’ lawsuits that appear likely (from the investigation itself) to yield lucrative settlements with only a minimal investment of time and money.”).
- 119See Coffee, Entrepreneurial Litigation at 191 (cited in note 7) (describing the SEC’s response to the “Coffee proposal” as arguing for greater use of private counsel by public enforcers and noting that “the SEC’s general goal is [not] to sue as many deep-pocketed parties and collect as much in penalties as possible” but instead to “aggressively [ ] uphold the law and serve the interests of justice”) (quotation marks and citation omitted); id at 17 (“Entrepreneurial enforcement is . . . seldom constrained by the same principles of prosecutorial discretion that guide public enforcers.”).
- 120In this vein, Judge Jed S. Rakoff of the Southern District of New York compares a series of “relatively paltry” SEC settlements with the tremendous success of private securities class actions brought by specialized and well-resourced plaintiffs’ firms, which suggests that the class action is “a much better vehicle for bringing justice to the victims of the alleged fraud.” Jed S. Rakoff, The Cure for Corporate Wrongdoing: Class Actions vs. Individual Prosecutions (The New York Review of Books, Nov 19, 2015), archived at http://perma.cc/82L8-38AV. But, as Rakoff rightly observes, “the monies awarded to the victim shareholders” in class suits “are paid not by the executives responsible for the frauds, but by the companies themselves.” Id. As such, Rakoff concludes that private “class actions are no real substitute for criminal and regulatory prosecution of the individuals actually responsible for corporate misconduct.” Id.
- 121See, for example, Beisner, Shors, and Miller, 57 Stan L Rev at 1454 (cited in note 2):
Some private class actions combine the worst of both worlds—they are “coattail” lawsuits and they supplant the reasoned decisions of state officials. Many class actions, for example, are filed precisely because a state or federal regulatory agency has investigated an alleged problem and concluded that no punishment or remedial action is called for under the circumstances. Class action lawyers then “piggyback” on the factual work undertaken by the agency and simply use the class action vehicle as a way to relitigate the decision whether remedial action is required.
- 122See Coffee, Entrepreneurial Litigation at 17 (cited in note 7) (“[T]he plaintiff’s attorney does not simply supplement public enforcement but extends and drives the law’s development, sometimes pushing it in directions that public enforcers would not have gone.”).
- 123See Beisner, Shors, and Miller, 57 Stan L Rev at 1455 (cited in note 2) (“[W]hen class action lawyers file lawsuits state officials have not filed . . . [they] perform the antidemocratic function of usurping the role traditionally entrusted to expert regulatory agencies and state attorneys general.”).
- 124In fact, Coffee tells us, the primary reason that other countries have not generally adopted US-style aggregate-litigation systems is discomfort with the concept of a “private enforcer performing a public role in order to solve collective action problems but without authorization by the legislature.” Coffee, Entrepreneurial Litigation at 152 (cited in note 7).
- 125See also id at 6 (“Private enforcement thus plays a failsafe function, arguably protecting society against the danger that important legal rules . . . may, from time to time, be quietly underenforced.”).
- 126See, for example, Jonathan B. Baker and Carl Shapiro, Reinvigorating Horizontal Merger Enforcement, in Robert Pitofsky, ed, How the Chicago School Overshot the Mark: The Effect of Conservative Economic Analysis on U.S. Antitrust 235, 244 (Oxford 2008) (observing that the Bush administration was “more permissive on antitrust issues than any administration in modern times”); Albert A. Foer, ed, The Next Antitrust Agenda: The American Antitrust Institute’s Transition Report on Competition Policy to the 44th President 58–65 (Vandeplas 2008) (reporting that the Bush administration had initiated no monopolization cases and describing this practice as a “virtual interment of Section 2 [of the Sherman Act]”).
- 127See Jessica Dye, AmEx to Fight DOJ on Merchant-Fee Antitrust Claims (Law360, Oct 4, 2010), archived at http://perma.cc/F7PY-USRX (reporting that the DOJ and various state attorneys general issued civil investigative demands on Visa and MasterCard relating to their card-acceptance-fee rules).
- 128554 F3d 300 (2d Cir 2009).
- 129See text accompanying notes 49–62 (discussing challenges to the Amex class action waiver). See also Class Plaintiffs’ Opening Brief on Final Approval at *12 (cited in note 50) (“Because the merchants challenging Amex’s anti-steering rules were all subject to the arbitration clause, the Amex ASR case was largely stayed from its inception in 2006 until the Second Circuit ruled in Italian Colors in January 2009. At that point, the parties commenced discovery in earnest.”).
- 130See Class Plaintiffs’ Opening Brief on Final Approval at *12 (cited in note 50) (“Class Counsel submitted to the Justice Department—whom it understood was investigating Visa and MasterCard’s rules relating to merchant steering—a white paper entitled ‘Why The Antitrust Division Should Challenge American Express’s Anti-Steering Rules.’”).
- 131See Peter Eichenbaum, Visa Says Justice Department Weighing Antitrust Suit (Bloomberg, July 29, 2010), archived at http://perma.cc/BZ4M-FZSR (quoting MDL 1720 lead counsel K. Craig Wildfang as saying that “[h]aving another government agency conclude that these things are anticompetitive . . . and to have the DOJ weigh in on this, would be, in the grand scheme of things, helpful to the private plaintiffs”).
- 132Competitive Impact Statement, United States v American Express Co, Civil Action No 10-04496, *2 (EDNY filed Oct 4, 2010) (available on Westlaw at 2010 WL 10912947). See also Justice Department Sues American Express, Mastercard and Visa to Eliminate Rules Restricting Price Competition; Reaches Settlement with Visa and Mastercard (DOJ, Oct 4, 2010), archived at http://perma.cc/W2LN-ZBHH.
- 133It is unclear at what level the DOJ’s surcharging case was kiboshed, but there was broad speculation as to what might have caused the about-face. At the time, I heard from two different sources the rumor that the Antitrust Division gave a green light to the attack on the no-surcharge rules but that senior White House officials nixed the plan, fearing potential political fallout if the administration were perceived to be imposing checkout fees on US consumers. Compare Justice Department Sues American Express, Mastercard and Visa (cited in note 132) (noting that the complaint focused on “rules that prohibit merchants from encouraging consumers to use lower-cost payment methods”), with U.S. District Court Rules That American Express Violated Antitrust Laws (DOJ, Feb 19, 2015), archived at http://perma.cc/UF2A-ZQU3 (noting that “[t]he trial focused on . . . ‘swipe fees’”).
- 134In a 1987 internal memorandum, the public relations firm Hill+Knowlton bragged that its agents, and specifically veterans of its tobacco campaigns, had “put together ‘Consumers Against Penalty Surcharges’ for a coalition of credit card companies.” Exhibit C: Hill and Knowlton Memorandum, Italian Colors Restaurant v Harris, Civil Action No 14-00604, *2 (ED Cal filed Aug 15, 2014). See also Discover Card Abandons Cardholders in Battle against Check Out Fees (PR Newswire, Feb 14, 2006), available at http://perma.cc/E59B-DJRQ (describing “merchant imposed check out fees” as unfair and anticonsumer, and disclosing that the organization “enjoys the financial support of VISA USA”).
- 135Major consumer organizations, including Consumer Action, the National Association of Consumer Advocates, the National Consumers League, and the US Public Interest Research Group, have submitted numerous amicus curiae briefs in support of merchant efforts to strike down laws against surcharging, emphasizing that such rules essentially impose highly regressive wealth transfers. See, for example, Motion of Amici Curiae Consumer Action, National Association of Consumer Advocates, National Consumers League, and U.S. Public Interest Research Group for Leave to File a Brief as Amici Curiae in Support of Plaintiffs’ Motion for Summary Judgment, Italian Colors Restaurant v Harris, Civil Action No 14-00604, *1 (ED Cal filed Nov 19, 2014).
- 136See United States v American Express Co, 21 F Supp 3d 187, 193, 197 (EDNY 2014) (denying Amex’s motion for summary judgment and finding that its “anti-steering rules, which limit the ability of merchants to ‘steer’ customers toward the use of another card,” may violate the antitrust laws).
- 137United States v American Express Co, 88 F Supp 3d 143, 152, 238–39 (EDNY 2015). See also Christie Smythe, American Express Loses Antitrust Suit over Merchant Rules (Bloomberg, Feb 19, 2015), archived at http://perma.cc/7ULR-KRU6 (reporting that the case “went to trial in July and was held without a jury” and that “[m]ore than 30 witnesses testified, including representatives from airlines, retailers and hotel companies”).
- 138See, for example, Swipe Fees: Latest News (NRF), archived at http://perma.cc/Q6WS
-JDPS (“[The National Retail Foundation] has led the retail industry’s fight over swipe fees for a number of years, seeking legislation that would introduce transparency and competition that would bring fees down to a reasonable level.”). The National Retail Federation was a strong objector in the MDL 1720 settlement, arguing that the settlement “fail[ed] to reform the cartel-like system” established by Visa and MasterCard because it allowed “fees [to] be passed along to consumers in the form of a surcharge” rather than to be absorbed by the networks. Id.
- 139Pub L No 111-203, 124 Stat 1376, 2068–74 (2010), codified at 15 USC § 1693o-2.
- 140On July 21, 2010, Congress passed legislation to address the rise of debit card fees. Sponsored by Illinois Senator Richard Durbin, the Durbin Amendment directs the Federal Reserve to establish a rate cap for debit card swipe fees—a cap that the Fed has since set at a level that is well under half the level of swipe fees applicable to credit card transactions (which are unregulated). See 15 USC § 1693o-2; Declaration of Alan S. Frankel, Ph.D., In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *13–14 (EDNY filed Apr 15, 2014).
- 141Matt Townsend and Dakin Campbell, Durbin Sees Visa Accord Thwarting Push to Cap Card Fees (Bloomberg, Aug 13, 2012), archived at http://perma.cc/NX3V-LDY6. See also Zywicki, Consumers Are the Winners in the Visa/Mastercard Antitrust Settlement (cited in note 112) (reporting that Durbin “blast[ed] the . . . settlement” as a “stunning giveaway” to the credit card networks and that he had “tak[en] the extraordinary step of intervening in a private legal action to lobby retailers to reject the settlement”).
- 142See Swipe Fees (cited in note 138) (“NRF is still pursuing legislation that would increase transparency by requiring card companies to clearly disclose the fees charged by each type of card and boost competition by ending Visa and MasterCard’s cartel-like practices in setting the fees.”).
- 143See Class Plaintiffs’ Opening Brief on Final Approval at *13–14 (cited in note 50).
- 144American Express, 88 F Supp 3d at 163.
- 145See Friedman, Friedman Open Letter (cited in note 36) (explaining how the DOJ and class relief would interact to permit a potent form of differential surcharging and further describing the “bet” on the DOJ: “[i]f DOJ were to win [at trial], the No-Discount Rule would be rescinded,” while “[i]f DOJ were to lose, my team reasoned, then we would never have won this point anyway”).
- 146See note 125.
- 147See note 123.
- 148Any argument that private enforcers ought to yield to decisions by public agencies must rest on concerns of profit-driven overdeterrence and a related belief that the public enforcers’ interests are better aligned with the public’s interests. Professor Amanda M. Rose, for example, makes this argument, asserting that private follow-on class actions undermine the “non-profit-driven private enforcers[’] [decision] . . . to engage in a form of discretionary nonenforcement.” Amanda M. Rose, Reforming Securities Litigation Reform: Restructuring the Relationship between Public and Private Enforcement of Rule 10b-5, 108 Colum L Rev 1301, 1338 (2008). But even this staunch supporter of exclusive public enforcement acknowledges that the SEC and other agencies may be subject to “political whims,” “behavioral biases,” “laxity and inefficiency,” and resource restraints. Id at 1340–41. See also Coffee, 42 Md L Rev at 227 n 25 (cited in note 5) (“Although the public prosecutor lacks any profit motive that might lead him to bring weak or marginal cases for their nuisance value, a prosecution can be motivated by ideological, political, and careerist motives, and it is an open question as to which set of perverse incentives is more dangerous.”).
- 149Myriam Gilles and Gary Friedman, After Class: Aggregate Litigation in the Wake of AT&T Mobility v Concepcion, 79 U Chi L Rev 623, 630 (2012). See also id at 660 (“Parens patriae suits are not subject to Rule 23 or contractual waiver provisions, and so avoid the majority of impediments to contemporary class actions.”).
- 150Id at 630. See also id at 669 (observing that, politics aside, “there is little to stop state AGs from engaging private law firms on a contingent fee basis to pursue claims in parens patriae on behalf of injured state residents,” so long as the attorneys general retain “total control over all key decision making”).
- 151See also Coffee, 42 Md L Rev at 226 (cited in note 5) (asserting that the private attorney general may be both more efficient than governmental machinery and more consistent, in that it is immune from changes such as vacillating political will or the vagaries of the public-budget process).
- 152In commenting on Coffee’s “semi-private attorney general” concept, Rakoff pointed to an additional benefit: that government agencies employing private lawyers to bring securities enforcement actions would enjoy the political latitude to “direct that more attention be paid to pursuing individuals,” such as executives who actually committed the alleged misconduct, thereby packing a greater deterrent wallop. Rakoff, The Cure for Corporate Wrongdoing (cited in note 120).
- 153Coffee, 86 Colum L Rev at 677 (cited in note 117). See also Coffee, Entrepreneurial Litigation at 6 (cited in note 7) (“[T]his notion of the lawyer as an entrepreneur is normatively troubling to many, and it cannot be easily reconciled with traditional legal ethics, which views the attorney as an agent and insists that the client is entitled to make all significant litigation decisions.”).
- 154See, for example, Coffee, Entrepreneurial Litigation at 28 (cited in note 7) (observing that the adoption of the class action device “changed the fundamental relationship between lawyers and their clients in plaintiff’s litigation in the United States”).
- 155See In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 986 F Supp 2d 207, 213–14 (EDNY 2013). The class settlement provided for (1) “[t]he creation of two cash funds totaling up to an estimated $7.25 billion (before reductions for opt-outs)”; (2) “Visa and MasterCard rule modifications to permit merchants to surcharge on Visa- or MasterCard-branded credit card transactions at both the brand and product levels”; (3) “[a]n obligation on the part of Visa and MasterCard to negotiate interchange fees in good faith with merchant buying groups”; (4) “[a]uthorization for merchants that operate multiple businesses under different ‘trade names’ or ‘banners’ to accept Visa and/or MasterCard at fewer than all of its businesses”; and (5) “[t]he locking-in of the reforms in the Durbin Amendment and the DOJ consent decree with Visa and MasterCard, even if those reforms are repealed or otherwise undone.” Id at 217.
- 156See Order re: Motion for Final Approval of Class Action Settlement, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221 (EDNY filed Apr 30, 2015).
- 157See Class Plaintiffs’ Memorandum in Response to Question Number Two at *1 (cited in note 111).
- 158Amex ASR, 2015 WL 4645240 at *7–9, 13 (outlining the arguments for why Freidman’s interactions with Ravelo constituted “egregious conduct”).
- 159See Class Plaintiffs’ Memorandum in Response to Question Number Two at *3–4 (cited in note 111).
- 160Friedman, Friedman Open Letter (cited in note 36).
- 161See Scheduling Order, In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221 (EDNY filed July 28, 2015) (“The court is in receipt of the supplemental memoranda filed today by [certain objectors] regarding . . . communications exchanged between Gary Friedman and Keila Ravelo. . . . No other related submissions will be permitted by any other parties or objectors.”).
- 162Friedman, Friedman Open Letter (cited in note 36).
- 164Amex ASR, 2015 WL 4645240 at *11:
[T]he court need not, and does not, reach the merits of these aforementioned objections today, because it concludes that the improper and disappointing conduct of Co-Lead Class Counsel Gary B. Friedman has fatally tainted the settlement process. The procedural unfairness and failure of adequate representation . . . requires disapproval of the Settlement.
- 165Id at *5, 11. Under the level playing field clause in MDL 1720, a merchant may surcharge Visa and MasterCard transactions only if it also surcharges Amex transactions. Under parity surcharging, a merchant may surcharge Amex transactions only if it also surcharges Visa and MasterCard transactions. The allegation was that Friedman got Visa and MasterCard to agree to the level playing field clause to pave the way for settling with Amex on a parity-surcharging basis. Id at *11.
- 166Id at *17.
- 167Id at *13–16.
- 168Amex ASR, 2015 WL 4645240 at *15.
- 169Id at *18.
- 171Id at *15.
- 172Amex ASR, 2015 WL 4645240 at *17.
- 173The court’s order dated August 4, 2015, dismissed Friedman as lead counsel, provisionally decertified the proposed settlement class, and invited the remaining lawyers to re-present an untainted settlement. Id at *21. Friedman had no standing to appeal the rejection under Rule 23(f), as it was not a final judgment. Further, I believe any attempt to appeal the lead counsel ruling under Rule 23(g) might have been harmful to the class, as the interests of class members before this particular district judge were clearly not best served with this particular lead counsel.
- 174Friedman, Friedman Open Letter (cited in note 36). Friedman acknowledged sharing with Ravelo, in this post-MasterCard-settlement time frame, a handful of documents covered by a protective order—mostly court papers that he should have transmitted only in redacted format. Id. Friedman did not dispute that these transmissions likely amounted to a violation of the protective order, but he contended that the violation was “inconsequential” and “technical” because in briefs and accompanying documents filed with the court under seal, the defendant networks and banks averred that Ravelo never shared these documents with anyone on the defense side; she had agreed to be bound to confidentiality, like any consultant. Id.
- 175See id.
- 178See Class Plaintiffs’ Opposition to Rule 60 Motions to Vacate Judgment, In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Civil Action No 05-MD-01720, *24–29 (EDNY filed Sept 1, 2015). As the defendants in MDL 1720 put it: “Objectors assert that in 2011 Mr. Friedman caused the level playing field provision to be part of the Settlement so that he could then manipulate the American Express settlement to include ‘parity surcharging.’ Not true.” Defendants’ Memorandum of Law in Opposition to Objectors’ Motion to Vacate Judgment, In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Civil Action No 05-MD-01720, *1 (EDNY filed Sept 1, 2015). The defendants went on to point out that the clause originated from their negotiations with the DOJ and was then adopted by the mediators, all before Friedman became involved in the settlement negotiations. Id at *1–3.
- 179See text accompanying notes 132–45 (discussing the interaction between the DOJ relief and the proposed settlement).
- 180Friedman, Friedman Open Letter (cited in note 36).
- 181See id (“In the years following the MDL 1720 settlement, I consulted Ravelo regarding the settlement process, the approval process and possible individual merchant arbitrations, among other things. . . . She brought a deep and unique understanding of how the GCs of large payment card networks think.”).
- 183Amex ASR, 2015 WL 4645240 at *15.
- 184Without reviewing any of the pleadings in the case—indeed, without even reviewing the terms of the settlements—the expert, retired Professor Roy D. Simon of Hofstra University School of Law, pronounced that Friedman was a “double agent” and a “turncoat,” “representing the plaintiff merchant classes by day and the defendant MasterCard by night” and giving “aid and comfort to the enemy.” Exhibit 1: Declaration of Professor Roy D. Simon, Jr., In re American Express Anti-steering Rules Antitrust Litigation, Civil Action No 11-MD-02221, *5–6 (EDNY filed July 29, 2015).
- 185See text accompanying note 34 (disclosing the relevant relationships with the parties).
- 186See, for example, Coffee, Entrepreneurial Litigation at 22–23 (cited in note 7) (discussing the practical origins of the so-called American rule against fee-shifting).
- 187See Frederick Schauer, Formalism, 97 Yale L J 509, 510 (1988) (“At the heart of the word ‘formalism,’ in many of its numerous uses, lies the concept of decisionmaking according to rule.”).
- 188See id (“Formalism is the way in which rules achieve their ‘ruleness’ precisely by doing what is supposed to be the failing of formalism: screening off from a decisionmaker factors that a sensitive decisionmaker would otherwise take into account.”).
- 189See Lon L. Fuller, Consideration and Form, 41 Colum L Rev 799, 801 (1941) (observing that, even in the absence of a rule, judges should consider what rule might be desirable to ensure that parties perform in a particular manner).
- 190Friedman, Friedman Open Letter (cited in note 36).
- 193Amex ASR, 2015 WL 4645240 at *14 (“Friedman was bound to keep confidential, and agreed not to disclose to third parties, any work product or confidential information of the [individual merchant plaintiffs] shared with Friedman. His emails to Ravelo violated those agreements.”).
- 194See, for example, Coffee, Entrepreneurial Litigation at 67–68 (cited in note 7) (discussing favor trading, egregious overstaffing, coalition building, “featherbedding,” and “log-rolling practices” common among class counsel in brokering lead counsel positions).
- 195See, for example, Gilles and Friedman, 155 U Pa L Rev at 147–51 (cited in note 1) (examining the traditional business model for lawyers in class action lawsuits).
- 196See, for example, Rachel M. Zahorsky, Third-Party Litigation Funding Picks Up as UK Investors Eye US Cases (ABA Journal, June 4, 2010), archived at http://perma.cc/FKE5-KJS3 (discussing the entrance of UK-based litigation-finance investors into the US market, potentially including the class action market); Elizabeth Chamblee Burch, Financiers as Monitors in Aggregate Litigation, 87 NYU L Rev 1273, 1298–1300 (2012) (discussing alternative litigation financing of cases involving the drug fen-phen and other mass tort litigations).
- 197For example, Friedman e-mailed Ravelo a term sheet of the Amex settlement three days before it was made public with a note “Burn after reading.” Amex ASR, 2015 WL 4645240 at *13. He also e-mailed Ravelo an unredacted copy of the class’s reply brief to those objecting to the class settlement with the note “hahahahahaha.” Id. As to the latter, Friedman said he was merely offering “insincere condolences” because the “Miami Heat had that day lost LeBron James back to Cleveland.” Friedman, Friedman Open Letter (cited in note 36). The court noted these infractions multiple times in its denial of the class settlement and seemed more perturbed by their tenor than by their content. Amex ASR, 2015 WL 4645240 at *13–17.
- 198Amex ASR, 2015 WL 4645240 at *18.
- 199Friedman, Friedman Open Letter (cited in note 36).
- 200Id (“[I]f some exogenous rule of ethics is so very compelling that it warrants depriving 3.4 million U.S. merchants of meaningful tools . . . then I think it is incumbent upon a judge to write a decision explaining what that rule might be.”).