Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (30 page)

Discussing the fifth factor, “the relationship of the fee to the settlements,” Judge Gleeson said that “the settlements are so large,
particularly considering the injunctive relief, that even the exorbitant fee I award seems small in comparison.” That’s the way it seemed to us. We believed that the fee we requested was appropriate in comparison to the results we produced. Inasmuch as Judge Gleeson said that this was not merely the perception but the truth, why would he call our request “absurd”? Judge Gleeson was not applying the law, but instead applying his own idiosyncratic standards. He was also writing for the Second Circuit, which he knew would once again be reviewing his work product.

Why should the public care? Aside from the experts, who all supported the fee petition, there was also a good deal of public reaction to the settlement. David Balto, former chief of policy at the FTC, described the
Merchants’
settlement in this manner:

Once in a generation an antitrust case offers a chance to restructure an industry. Twenty years ago the settlement of the Justice Department suit against AT&T Corp. led to a proliferation of consumer choice, more innovation, dramatically lower prices, and major telecommunications-industry restructuring. The Wal-Mart settlements offer the promise of many of those benefits.

Professor Robert Lande of Baltimore University Law School stated:

The nation’s merchants re-cently won a stunning $3 billion antitrust victory against Visa and MasterCard. But the ultimate winners will be consumers. . . . As eye-catching as the $3 billion settlements are, the future savings to consumers from this case are likely to be even larger, and the new choices even more important.

Even
Credit Card Management,
a banking industry publication that generally adheres to the industry line, understood the signifiance of the settlements and reported:

The retailers obtained in the settlements everything they had sought since the suit was filed more than six years ago. The honor-all-cards policies are now gone. The plaintiffs will be $3 billion richer. And their most important goal, lower card-acceptance costs, was achieved, as both associations are lowering off-line debit interchange by about a third for most of the rest of 2003.

Confronted with all this expert and industry reaction to the settlement and his own assessment that the case and result were off the charts in terms of difficulty, risk, and results, Judge Gleeson awarded the lowest fee as a percentage of recovery of any “megafund” federal antitrust settlement in history, meaning settlements of $100 million or more. Moreover, it was a record low fee without considering the massive injunctive relief, which Judge Gleeson said was more important and should elevate the fee.

Prior to Judge Gleeson’s December 19, 2003 decision, there were twelve federal antitrust megafund settlements.

The average fee awarded in these cases was 24.5 percent. Judge Gleeson said he awarded a 6.511 percent fee. This was the lowest fee as a percentage, and slightly above one-quarter of the average megafund fee. Judge Gleeson made this record low award despite recognizing that our case had been the riskiest and most difficult and had recovered more than the combined total recovered in the eight previous highest antitrust settlements in history, without taking into account the massive injunction.

Judge Gleeson said he was awarding a 6.511 percent fee, but it is obvious that he didn’t do what he said. The fee he awarded,
$220,290,160.44,
was exactly 3.5 times the $62,940,045.84 that we submitted as the lodestar in our fee application. You can take the 6.511 percent that Judge Gleeson said he awarded at face value or
conclude, as I have, that he just multiplied the lodestar by 3.5. The favored method of computing an attorneys’ fee in the Second Circuit is the percentage-of-recovery method. Judge Gleeson purported to use the method favored by the Court of Appeals. Judge Gleeson could have been candid about his use of the less-favored method and given some justification for using it. That would have been the proper course for a judge of his stellar qualities, who otherwise did his job with great skill.

Judge Gleeson’s fee determination also stated his concern for the class, which he said was “not fully informed” and was not “able to negotiate collectively” over the amount of the attorneys’ fee. Judge Gleeson knew that C&P had negotiated a fee with fully informed giant retailers who had much more bargaining power than an eight- lawyer firm, our size at the time of the agreement. These giants, including Wal-Mart, are well known for driving a hard bargain. We told Judge Gleeson point-blank that the fee we applied for was well below the fee we had negotiated at arm’s length with Wal-Mart, Sears, Safeway, Circuit City, and The Limited.

We calculated what applying our fee arrangement with these five retailers would have yielded for the entire class. It yielded an attorneys’ fee of roughly $1 billion. We rejected the use of these negotiated fee arrangements as the basis for our request, although case law says that such a fee arrangement, which comes from arm’s length negotiation, should weigh heavily in a court’s decision. Beyond that, we told the Big Five retailers we would waive the agreements and collect whatever the court ultimately awarded. In doing this, C&P voluntarily agreed to collect millions of dollars less from these five giant merchants than they had agreed to pay us. Judge Gleeson knew all this but just chose to ignore it.

After reading Judge Glee-son’s decision, including all the praise that he had generously showered on the case, the settlement, and the
performance of C&P, my personal disappointment about the size of the fee was short-lived. The decision was brought to me at the beginning of a family dinner at the Redeye Grill in Manhattan by one of our paralegals, Kevin Potere. By the end of the dinner, I had gotten over it. I got over the amount of the award in less than two hours, but Judge Gleeson’s one paragraph of very nasty comments about the “excessive” and “absurd” request still rings in my ears, because they were so unfair and delivered by a judge who knew better.

I never thought about asking John Gleeson to reconsider his fee award, but I wanted him to change that brief passage in his decision. I wrote to him asking for reconsideration of the wording only in this single paragraph of his 37-page opinion. The letter was short, polite, and deferential. My letter gently reminded him of the fact that through the mediator Eric Green, we had told him that we didn’t want to ask for any specific fee and proposed that the matter be left totally to his discretion.

In an order worded as if it were a responsive letter to me, Judge Gleeson denied my request to change the language. He implicitly chastised me for not being able to take his criticism but excused me because I probably didn’t have the “callouses” he had developed “after two decades of Brooklyn litigation.” He reminded me of how “frequently” and “lavishly” he had expressed his “admiration for the forensic abilities, the ethics and the good faith of all the attorneys.”

W
HEN I BEGAN writing this book in November 2003, I predicted that the
Merchants’
case would not really be over for many years. That prediction proved accurate. As I write these closing thoughts five years later, work on the case continues. For the first two years, we were busy with constant disputes over interpretations of various provisions, appeals of the settlement and Judge Gleeson’s attorneys’ fee award, and attempts by some merchants, who had excluded themselves from the Class, to belatedly claim some of the money.

Among the group of merchants, who were never in the class or who had excluded themselves but had second thoughts, were AT&T Wireless and the United States, which accepts plastic cards for payment at various facilities. We blocked the phone company’s efforts, because acquiescing in its request might have opened up the settlement fund to a larger group of merchants who wanted to have it both ways.

Coming along even later, in March, 2006, was the United States, in a category by itself. In 2002, almost a year before the settlement,
the United States had stated it was not a class member, could not be one, and had the right to bring its own antitrust lawsuit against Visa/MasterCard for money damages. However, during the George W. Bush years, the Federal Antitrust Division lost its will to enforce the laws that protect competition, even on behalf of itself. So the parties acquiesced in Uncle Sam’s plea for some settlement money after a round of preliminary fighting. Let’s call it our small contribution to a “bailout package” for the federal government.

In January 2005, the U.S. Court of Appeals for the Second Circuit upheld Judge Gleeson’s approval of the settlement and his award of more than $244,000,000 in attorneys’ fees and costs. The decision included lavish praise for the result, its historic significance and our efforts in achieving it, while still approving Judge Gleeson’s fee award, a record high in absolute terms, and a record low as a percentage of the result achieved. Appellate judges are generally protective of their lower court colleagues, even when they disagree with the lower court’s opinion. The Second Circuit’s carefully worded affirmance, written skillfully by Judge Richard Wesley, did not criticize Judge Gleeson but tellingly ended with as much of an apology to lawyers receiving almost a quarter of a billion dollars in fees as is ever likely to be given by overworked judges earning $179,000 a year. The final paragraph of Judge Wesley’s opinion concerning the fee award states:

A final word is in order here. Measuring the difficulties of a large antitrust action and the degree of success by counsel in forging a settlement is not an easy task. In our view the district court carried out its responsibility with admirable care and thoroughness, and with an eye to a just result. There is no doubt the case dominated the lives of all involved for many years. In approving the district court’s fee award, we recognize the sacrifice and commitment plaintiffs’ counsel made to its clients while preserving as much as possible for those who were harmed.

In 2005, Constantine &Partners became Constantine Cannon, opening a Washington, D.C., office headed by our former client Steve Cannon. Steve was the general counsel of Circuit City, one of the lead merchants in the case. Throughout the case, Steve, a leader in the antitrust bar, had the respect of the other powerful outside general counsel in our client group. He was able to explain to them what C&P was attempting to do and why it was taking so damn long. Steve enjoyed and admired the
Merchants
’ case enough to leave what was then a safe and lucrative position for the rough and tumble of high-stakes litigation.

In November 2006, I took a leave of absence from Constantine Cannon to cochair the transition of New York Governor-Elect Eliot Spitzer, reprising the role I had played as chair of his 1998 transition to attorney general. The leave became “permanent,” or so I thought, when Eliot appointed me his senior advisor in early 2007. When Judge Gleeson read about the appointment, he called to congratulate me. Judge Gleeson knew that I had been highly critical of him in a brief to the Second Circuit, supporting the judge’s settlement approval, but objecting to the fee award and the language it was couched in. He made the congratulatory call anyway, showing both his tough skin and generosity of spirit.

The
Merchants’
case has reshaped the industry, but not necessarily in ways that could have been predicted by any of the litigants while it was being fought out. The prices paid for Visa and MasterCard signature debit card transactions declined significantly after the settlement. The price decreases came in two forms. For all merchants, there was a substantial, but not huge, price drop. The price drop was larger at Visa than MasterCard. Visa had, and has, much more debit card transaction volume than MasterCard. For reasons we understood two decades ago, debit cards will soon overtake credit cards in all meaningful categories. The deep economic recession has merely accelerated the dominance of debit, as people must now pay for things with money they actually have.

For a smaller group of very large merchants, perhaps the top hundred or so store chains in the United States, the debit card prices dropped a lot more than the lowered “list prices.” Many of these merchants, led by Wal-Mart, threatened to stop accepting Visa and MasterCard debit card transactions unless they got prices much lower than the already decreased prices that the associations adopted in early 2004 as a response to the settlement. Visa and, separately, MasterCard, negotiated these lower rates individually with each of these very large merchants. Many of these deals included lower prices, not only on Visa and MasterCard debit transactions, but on their credit card and PIN debit transactions as well. Wal-Mart’s deals lowered that chain’s transaction costs by an amount publicly estimated to be upward of $10 billion in just a ten-year period.

The total amount of all these posted and privately negotiated price decreases over the decade is unknown at this time but likely will be comfortably in the range, predicted by the court, of $25–$87 billion during just that period.

Still, the merchants could have saved and gained even more, had they exercised the same discipline in victory as they did during the long litigation. By and large, they quickly forgot their resolve during the case to stop accepting Visa and MasterCard debit transactions unless the prices dropped even more. Only Wal-Mart and the other hundred or so large merchants made good on that threat, and only they and their customers will get the full benefit of that resolve. Taking an analogy from my early days as a civil rights lawyer, you can win the right to vote for people who have been disenfranchised, but it’s up to them to exercise those rights at the polls. The good news is that those small and medium-sized merchants perpetually have that “right to vote” that was fought and won in the
Merchants’
case.