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Credit/Debit Tying Cases v. Visa U.S.A. Inc.

COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FOUR
Jan 9, 2012
No. A129672 (Cal. Ct. App. Jan. 9, 2012)

Opinion


CREDIT/DEBIT CARD TYING CASES. RICHARD JOHNS et al., Plaintiffs and Respondents, v. VISA U.S.A., INC. et al., Defendants and Respondents JAMES ATTRIDGE et al., Objectors and Appellants. A129672 California Court of Appeals, First District, Fourth Division January 9, 2012

NOT TO BE PUBLISHED

San Francisco City & County Super. Ct. No. CGC04-436920

Introduction

This appeal arises from the settlement of a consolidated unfair competition class action (the Credit/Debit Card Tying Cases) brought on behalf of California residents who purchased retail goods or services using a credit or debit card affiliated with either the Visa or MasterCard system. The Credit/Debit Card Tying Cases are premised on policies (the credit/debit acceptance policies) adopted by respondents Visa and MasterCard that require merchants who accept their credit cards to accept their debit cards as well. The plaintiffs in the Credit/Debit Card Tying Cases (Class Plaintiffs) characterize the credit/debit acceptance policies as an unlawful tying arrangement. Class Plaintiffs allege that the credit/debit acceptance policies permitted Visa and MasterCard to charge inflated fees to merchants in connection with debit transactions, and that this damaged Class Plaintiffs because the merchants passed along the cost of these inflated fees in the form of higher retail prices. The trial court certified a settlement class in the Credit/Debit Card Tying Cases, and approved the settlement over the objections of appellants, who are members of the settlement class.

Appellants object to the settlement principally on the ground that the release of class members’ claims included in the settlement agreement is overbroad. Specifically, appellants’ concern is that the release covers not only all claims arising from the credit/debit acceptance policies, but also the claims (the Attridge claims) asserted in a separate action brought by objector and appellant James Attridge (the Attridge action).

The Attridge action is based on a different set of policies adopted by Visa and MasterCard. These policies (the exclusion policies) prohibit banks that issue credit cards affiliated with the Visa or MasterCard systems from issuing credit cards affiliated with other systems, such as American Express or Discover. The Attridge action asserts that the exclusion policies diminish competition in the consumer credit card market, thereby permitting banks that issue Visa or MasterCard credit cards (card-issuer banks) to charge inflated interest rates and fees to consumers who maintain revolving balances on their credit card accounts.

We agree with appellants that the release approved by the trial court as part of the settlement agreement in the Credit/Debit Card Tying Cases includes a release of the Attridge claims, and that the trial court erred in approving the settlement without considering whether it included adequate compensation for the release of the Attridge claims. Therefore, we must vacate the order approving the settlement, and remand the matter to permit the trial court to reconsider the fairness and adequacy of the settlement in light of the inclusion of the Attridge claims in the release.

Facts and Procedural Background

Visa and MasterCard Systems and Relevant Policies

The basic structure of the Visa and MasterCard systems is not a matter of dispute on appeal. Accordingly, for background purposes, we adopt the cogent and concise description of the two systems’ operations set forth in the opinion of the Second Circuit Court of Appeals in U.S. v. Visa U.S.A., Inc. (2d Cir. 2003) 344 F.3d 229.

“Visa U.S.A. and MasterCard are two of the United States’s four major network systems in the payment card industry, the other two being Amex and Discover. Visa U.S.A. and MasterCard are organized as open joint ventures, owned by the numerous banking institutions that are members of the networks.... Because MasterCard allows its member banks to issue Visa cards, and Visa U.S.A. likewise allows its members to issue MasterCard cards, many of Visa U.S.A.’s 14, 000 members are also members of the MasterCard network. The networks’ operations are conducted primarily by their member banks. While the member banks engage in the card business for profit, MasterCard and Visa U.S.A. themselves operate as non-profit organizations and are largely funded through service and transaction fees paid by their members. Both make a ‘profit’ on these fees, but their business model is not one that strives to maximize earnings at the ‘network’ level. Rather, the two organizations’ capital surpluses are held basically as security accounts, to pay merchants in the event a member bank defaults on a payment obligation.

For the sake of simplicity, our opinion refers to Visa U.S.A. and its affiliated parties collectively as Visa. Nonetheless, we have retained the Second Circuit’s references to Visa U.S.A. in the portions of its opinion quoted here.

“The member banks of the MasterCard and Visa U.S.A. card networks may function either as ‘issuers’ or ‘acquirers’ or both. A member bank serving as an ‘issuer’ issues cards to cardholders; it serves as the liaison between the network and the individual cardholder. A member bank serving as an ‘acquirer’ acquires the card-paid transactions of a merchant; a particular acquiring bank acts as liaison between the network and those merchants accepting the network’s payment cards with whom it has contracted.

“When a consumer uses a Visa card or a MasterCard card to pay for goods or services, the accepting merchant relays the transaction information to the acquiring bank with whom it has contracted. The acquirer processes and packages that information and transmits it to the network (Visa U.S.A. or MasterCard). The network then relays the transaction information to the cardholder’s issuing bank, which approves the transaction if the cardholder has a sufficient credit line. Approval is sent by the issuer to the acquirer, which relays it to the merchant.

“Payment requests are sent by the merchant to the acquirer, which forwards the requests to the issuer. The issuer then pays the acquiring bank the amount requested, less what is called an ‘interchange fee’—typically 1.4%. The acquirer retains an additional fee—approximately.6%. Thus, the issuing bank and the acquirer withold an aggregate of approximately 2% of the amount of the transaction from the merchant. This is known as the ‘merchant discount.’ For a $100 sale, the merchant typically will receive $98, the issuing bank retaining $1.40, while the acquiring bank retains 60 cents.

“Both MasterCard and Visa are open joint ventures, meaning that there is no limit to the number of banks that may become members, either as issuers or as acquirers. Any member may serve as both an issuer and as an acquirer. Members agree to abide by their association’s by-laws and other regulations.

“A member of either the Visa U.S.A. or MasterCard network may also be a member of the other network. Thus a bank that is a member of Visa U.S.A.’s network and issues Visa cards may also be a member of the MasterCard network and issue MasterCard cards. On the other hand, both MasterCard and Visa U.S.A. have promulgated rules that prohibit their members from issuing American Express or Discover cards.” (U.S. v. Visa U.S.A., Inc., supra, 344 F.3d at pp. 234-236, fns. & italics omitted.)

The rules described in the quoted text, precluding members of the Visa and MasterCard networks from issuing cards affiliated with other networks, are those referred to in this opinion as the exclusion policies.

Both Visa and MasterCard permit their member card-issuer banks to issue two types of cards that function within the network: credit cards and debit cards. “A credit card, such as a Visa or MasterCard credit card, allows a cardholder to make a purchase and pay off his card-issuing institution off over time.... A debit card allows a holder to access his bank account directly.... A debit card might be an ATM card, which enables the holder to withdraw cash from an ATM, or a ‘POS debit card, ’ which can be used to make a purchase at the ‘point of sale, ’ or both. [Citation.]” (In re Visa Check/Mastermoney Antitrust Litigation (E.D.N.Y. 2000) 192 F.R.D. 68, 72.) As already noted, both Visa and MasterCard adopted policies requiring merchants who accepted credit cards affiliated with their respective networks also to accept those networks’ debit cards as well (the credit/debit acceptance policies).

The Federal Antitrust Litigation

The Federal Credit/Debit Tying Case

In 1996, a group of retail stores, headed by Walmart, sued Visa and MasterCard in federal district court (the federal credit/debit tying case). In the federal credit/debit tying case, the retail stores alleged that the credit/debit acceptance policies constituted illegal tying arrangements in violation of federal antitrust law, and that Visa and MasterCard were using these policies, in conjunction with other anti-competitive conduct, to monopolize the debit card market. As a consequence, the stores claimed that they had incurred supra-competitive interchange fees in connection with transactions charged to Visa or MasterCard debit or credit cards. (See In re Visa Check/Mastermoney Antitrust Litigation, supra, 192 F.R.D. at p. 73.)

The federal credit/debit tying case was certified as a class action, and the case ultimately settled. In December 2003, the district court approved the settlement (In re Visa Check/Mastermoney Antitrust Litigation (E.D.N.Y. 2003) 297 F.Supp.2d 503), and in January 2005, the Second Circuit affirmed. (Wal-Mart Stores, Inc. v. Visa U.S.A., Inc. (2d Cir. 2005) 396 F.3d 96.)

The Federal Exclusion Case

In 1998, while the federal credit/debit tying case was pending, the United States Department of Justice brought a civil enforcement action (the federal exclusion case) in federal district court charging that Visa and MasterCard’s exclusion policies violated the Sherman Antitrust Act. (See U.S. v. Visa U.S.A., Inc. (S.D.N.Y 2001) 163 F.Supp.2d 322.) In October 2001, the trial court in the federal exclusion case entered a judgment against Visa and MasterCard, holding that the exclusion policies operated as a horizontal restraint on trade. (Ibid.)

As the Second Circuit later explained, the exclusion policies were “anticompetitive because they restrict the ability of American Express and Discover to compete with Visa and MasterCard in marketing their ‘network services’ to banks. As a result of [the exclusion policies], American Express and Discover have been effectively foreclosed from the business of issuing cards through banks.... No United States bank has been willing to give up its membership in the Visa U.S.A. and MasterCard networks in order to issue Amex or Discover cards.” (U.S. v. Visa U.S.A., Inc., supra, 344 F.3d at p. 237.) The Second Circuit affirmed the judgment in the federal exclusion case in 2003. (Id. at p. 244.)

The California State Court Litigation

The Credit/Debit Card Tying Cases

On January 26, 2000, while the federal credit/debit tying case was still pending, Richard Johns filed a consumer class action in California state court challenging the credit/debit acceptance policies. The action was stayed, by mutual consent of the parties, pending the resolution of the federal credit/debit tying case.

After the federal credit/debit tying case settled, additional similar cases were filed in California state court. Ultimately, the cases were coordinated under the rubric of the Credit/Debit Card Tying Cases, and in February 2004, San Francisco Superior Court Judge Richard A. Kramer was assigned as the coordination trial judge.

On July 12, 2004, Class Plaintiffs filed a consolidated amended complaint (the Complaint), which remained the operative complaint at the time the case settled. The Complaint alleged that Visa and MasterCard illegally tied the acceptance of Visa and MasterCard debit cards by retailers (referred to in the Complaint as “Vendors” or “merchants”) to the merchants’ acceptance of Visa and MasterCard credit cards, thus “forcing merchants to accept [the debit cards] as a condition to being able to continue accepting the foremost and indispensable Visa and/or MasterCard credit cards.” It further alleged that Visa and MasterCard “charged merchants the same fees for their [respective] debit cards as for their respective credit cards, despite the fact that the expenditures and risks associated with credit cards are far greater than for debit cards, which do not involve an extension of credit.”

The Complaint defined the plaintiff class as all California purchasers of products or services from Vendors that accepted Visa and MasterCard credit cards, and that “have therefore been forced to accept Visa and MasterCard debit cards..., and to pay unreasonably high charges for acceptance of [those debit] cards.” The Complaint alleged that the questions of law and fact common to the members of the class included: “(a) Whether defendants and their co-conspirators tie the acceptance of [Visa and MasterCard debit cards] to the Vendors’ acceptance of Visa and MasterCard credit cards; [¶] (b) Whether defendants’ tying arrangements are unlawful; and [¶] (c) The amount of supra-competitive fees paid by the Vendors with respect to [Visa and MasterCard debit cards], and passed on by the Vendors to class members in the form of higher prices for the Vendors’ [p]roducts and [s]ervices.”

The Complaint went on to describe the nature and operations of Visa and MasterCard, and their allegedly anticompetitive conduct. As part of that description, the Complaint mentioned the exclusion policies, citing U.S. v. Visa U.S.A., Inc., supra, 344 F.3d 229. It also briefly discussed other actions allegedly taken by Visa and MasterCard to hinder competitors from gaining market share in the general purpose credit card market, including charging higher fees to merchants for processing credit card purchases using card acceptance terminals associated with American Express. This section of the Complaint ended by alleging that “[a]fter Visa and MasterCard... assured their control of the credit card market, they began to pursue other payment systems, ” which “included POS [point of sale] debit cards.”

The bulk of the factual allegations in the Complaint consisted of a description of the operations of Visa and MasterCard’s debit card systems, and how the credit/debit acceptance policies, together with other policies and practices, enabled Visa and MasterCard to charge assertedly excessive, supra-competitive fees to merchants for processing payments tendered via Visa or MasterCard debit cards. Finally, the Complaint alleged that “[m]erchants pass on to consumers the higher costs associated with their losses, including forced payment of [Visa and MasterCard debit card] interchange fees, and the higher costs associated with the much slower transfer of consumers’ funds into the merchants’ bank accounts” when those debit cards are used in lieu of on-line debit cards (i.e., those tied directly to customers’ bank accounts, rather than processed through the Visa or MasterCard “off-line” debit card system).

The Complaint alleged six causes of action: (1) violation of the Cartwright Act (Bus. & Prof. Code, § 16720 et seq.) by Visa, based on the credit/debit acceptance policies, resulting in artificially high fees to Vendors, and damaging plaintiffs because those fees were passed on to them in the form of higher prices charged the Vendors; (2) violation of the Cartwright Act by MasterCard, based on the same allegations made with respect to Visa, and resulting in the same damages; (3) conspiracy by Visa and MasterCard to violate the Cartwright Act in the manner alleged in the first two causes of action, and resulting in the same damages; (4) violation of the Unfair Competition Act (Bus. & Prof. Code, § 17200) by means of the antitrust violations alleged in the first three causes of action, resulting in unjust enrichment of the defendants; (5) violation of the Unfair Competition Act by means of the business acts or practices alleged in the first four causes of action, which were alleged to be in violation of public policy, immoral, unethical, oppressive, unscrupulous, and substantially injurious to consumers, resulting in unjust enrichment of the defendants; and (6) violation of the Unfair Competition Act by means of fraudulent business acts, including the “adoption of elaborate measures to deceive merchants into believing they were receiving Visa and MasterCard credit cards, when in fact they were receiving... debit cards....” The complaint requested that the court certify the action as a class action; find that the defendants’ conduct amounted to a violation of the Cartwright Act and the Unfair Competition Act; and award injunctive relief; treble damages for the Cartwright Act violation; restitution; other equitable relief; and attorney fees. Nowhere in the Complaint’s description of the damages to consumers caused by the defendants’ conduct is there any mention of inflated fees paid to card-issuer banks by credit card holders who maintain revolving balances on their accounts, which is the type of damages sought in the Attridge action.

On October 14, 2004, the trial court sustained Visa and MasterCard’s joint demurrer to the first, second, and third causes of action for violation of the Cartwright Act, but overruled their demurrer to the fourth, fifth, and sixth causes of action for violations of the Unfair Competition Act, and denied their motion to strike portions of the complaint relating to those causes of action. On December 6, 2007, the trial court ruled that the findings recited in a partial summary judgment order issued by the federal district court in the federal credit/debit tying case would not be given collateral estoppel effect, because the federal court’s order was interlocutory, and the case was ultimately settled before the order became final.

The Attridge Action

In December 2004, after the Second Circuit’s affirmance of the judgment against Visa and MasterCard in the federal exclusion case, appellant James Attridge filed a class action in the San Francisco Superior Court alleging that the exclusion policies violated the Cartwright Act and the Unfair Competition Law. As of August 2009, the operative complaint in the Attridge action (the Attridge complaint) was the third amended complaint, filed on December 2, 2005, as amended by an amendment naming a Doe defendant, which was filed on December 14, 2007.

The Attridge complaint described the exclusion policies, and alleged (citing the trial court’s findings in the federal exclusion case) that they had reduced competition in the “general purpose card network services market, ” which permitted Visa and MasterCard, in combination with their member card-issuer banks, to charge supra-competitive prices for network services. The complaint sought certification of a class defined to include California Visa and MasterCard holders with revolving balances (“revolver cardholders”). The Attridge complaint further alleged that the exclusion policies damaged revolver cardholders, because the affected banks had passed on the cost of the inflated network service fees to their customers in the form of higher prices for “general purpose card network services.” On the basis of these allegations, the Attridge complaint pleaded one cause of action for violation of the Cartwright Act and three causes of action for violation of the Unfair Competition Act.

After the Attridge action was filed, it was designated as complex, and assigned to Judge Kramer. Attridge timely disqualified Judge Kramer under Code of Civil Procedure section 170.6, however, so the case was redesignated as a single-assignment case. The Attridge action was not included among the cases coordinated as the Credit/Debit Card Tying Cases.

In the Attridge action, as in the Credit/Debit Card Tying Cases, the defendants’ demurrer to the Cartwright Act causes of action was sustained, but their demurrer to the Unfair Competition Law causes of action was overruled. During the hearing on the demurrer, counsel for Attridge confirmed that the court was correct in describing the claims asserted in the Attridge action as follows: “The wrong that is alleged is the alleged conspiracy among the Visa members, among the MasterCard members, and between Visa and MasterCard to shut out competition at the network service level, thereby driving up network service costs beyond what they would have been had Discover and American Express or others been permitted to enter the market, thereby increasing... the finance charge that banks are able to charge their customers....”

As of the fall of 2009, the defendants in the Attridge action had filed a motion for summary judgment or summary adjudication. The motion for summary judgment was denied, but the motion for summary adjudication had not yet been ruled upon. No class certification motion had been filed.

The Settlement and the Settlement Approval Proceedings

By August 2009, the Class Plaintiffs in the Credit/Debit Card Tying Cases had settled with both Visa and MasterCard. The parties then requested the trial court to grant preliminary approval of the settlement. Attridge objected to the settlement, and was permitted to participate as an amicus curiae in the preliminary approval proceedings.

On January 5, 2010, the trial court entered an order preliminarily approving the settlement, provisionally certifying the settlement class, ordering that notice to the class members be published and posted on the Internet, and providing an opportunity for class members to object, or to opt out. Prior to final approval, the settlement agreement was amended several times. In its final form, the settlement agreement provided that Visa and MasterCard would pay a total of $31 million into an escrow fund, from which attorney fees, litigation costs, class representative incentive awards, and administration costs would be paid. The amount remaining was to be distributed to nonprofit organizations selected by the parties and approved by the court, to be used by those organizations for financial literacy education, or other purposes relating to advocacy for children, or the indigent.

On August 6, 2010, the trial court held a hearing on final approval of the settlement. In addition to Attridge, appellants Marilene Selvaggio, John Metzger, and Melvin Salveson, all of whom stated that they were members of the settlement class, filed objections.

Except where it is necessary to distinguish among objectors Attridge, Selvaggio, Metzger, and Salveson, we will refer to them collectively as appellants. In this court, Selvaggio and Metzger have filed joint appellants’ briefs, and Attridge and Salveson have each filed their own appellant’s briefs.

At the settlement approval hearing on August 6, 2010, counsel for appellant Salveson argued that the amount of the settlement was inadequate in light of the scope of the release, and that Class Plaintiffs’ counsel “should get a much, much better deal from these [d]efendants who have already been found to have violated the antitrust laws... because of their agreements to exclude competing cards and competitors, which... will be released by [Class] Plaintiffs for no money at all.” Counsel went on to point out that Visa and MasterCard had been found to have “by agreement... prevented... their [card-issuer] bank members from participating with American Express, Discover and other competing cards, ” and noted that claims based on this conduct were being released as part of the settlement. As the trial judge paraphrased it, Salveson’s position was that the settlement would “releas[e] all antitrust claims no matter how they would come about, and other anticompetitive claims arising out of the existence of the Visa and the MasterCard interchange system.”

The trial judge then invited counsel for the settling parties to inform the court whether Salveson’s counsel’s interpretation of the scope of the settlement agreement was correct. He noted that at the preliminary approval stage, he had “raised the point on the record that this release should only cover claims that would arise out of what this lawsuit’s about, ” and that this was the way he had interpreted the release. In response, Visa’s counsel and counsel for the Class Plaintiffs represented that the “standard release language” in the settlement agreement was not intended to be “any broader than claims based on conduct which was alleged... or claims which could have been brought based on the conduct which was alleged in this case.”

Later during the hearing on August 6, 2010, counsel for plaintiffs in the Attridge action stressed that two different injuries were involved in the two cases. As counsel explained, the Credit/Debit tying cases involved “merchants who have charges imposed on them for debit [cards], passing them on to all purchasers” in the form of higher retail prices paid by everyone who bought retail products and services, regardless of the form of payment they used. The Attridge case, in contrast, involved the “network service fee injury” which “involves Visa and MasterCard imposing charges on the [card] issuing banks which then pass them on to revolver credit card holders in their credit card statements.” Counsel for the Class Plaintiffs responded that the harm alleged in the Attridge action was “part of this case, ” noting that members of the putative class in the Attridge action would, of necessity, also be members of the settlement class in the Credit/Debit Tying Cases, and pointing out that he had submitted declarations from class representatives averring that they had paid finance charges on their credit cards.

The trial judge then commented that in his view, the problem had been taken care of by notifying the class members in the Credit/Debit Tying Cases that the settlement could affect their rights in the Attridge action, advising them to seek the advice of counsel, and offering them the opportunity to opt out. He declined to “make an express interpretation of the release in this context, because [he did not] have facts in front of [him].” Instead, he was “just going to leave it for any situation that might arise and may not arise in the future, ” even though he understood the Attridge plaintiffs’ contention that, as their counsel put it, “the reference that’s in the release is specific enough to give us a lot of trouble” due to the reference to the federal exclusion litigation on which the Attridge action is based.

At the end of the hearing on August 6, 2010, the trial judge directed the parties to revise the settlement so as to distribute the entire settlement amount (net of attorney fees and costs) to charitable organizations, rather than using a portion of it to develop a “financial literacy toolkit.” Once the parties had done so, on August 23, 2010, the judge signed an order finally approving the settlement, over the objections of appellants. Judgment was entered on the same day. Appellants each filed timely notices of appeal.

Discussion

Judicial Review of Class Action Settlements

When a class action is settled, trial court approval of the settlement is required, because the court has a fiduciary responsibility as guardian of the rights of the absentee class members. (Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116, 129 (Kullar).) “[I]n the final analysis it is the court that bears the responsibility to ensure that the recovery represents a reasonable compromise, given the magnitude and apparent merit of the claims being released, discounted by the risks and expenses of attempting to establish and collect on those claims by pursuing the litigation.” (Ibid.)

“The well-recognized factors that the trial court should consider in evaluating the reasonableness of a class action settlement agreement include ‘the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, the risk of maintaining class action status through trial, the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of the class members to the proposed settlement.’ [Citations.] This list ‘is not exhaustive and should be tailored to each case.’ [Citation.]” (Kullar, supra, 168 Cal.App.4th at p. 128.)

A “presumption of fairness exists where: (1) the settlement is reached through arm’s-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small. [Citation.]” (Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1802.) Even when these factors are present, a court cannot “determine the adequacy of a class action settlement without independently satisfying itself that the consideration being received for the release of the class members’ claims is reasonable in light of the strengths and weaknesses of the claims and the risks of the particular litigation.” (Kullar, supra, 168 Cal.App.4th at p. 129.) In particular, “[a]ny attempt to include in a class settlement terms which are outside the scope of the operative complaint should be closely scrutinized by the trial court to determine if the plaintiff genuinely contests those issues and adequately represents the class. [Citation.]” (Trotsky v. Los Angeles Fed. Sav. & Loan Assn. (1975) 48 Cal.App.3d 134, 148 (Trotsky).) Moreover, if an objector questions the fairness of the settlement based on a difference of opinion with class counsel regarding a “legal point [which] significantly affects the valuation of the case for settlement purposes, ” then “the trial court is obliged, at a minimum, to determine whether a legitimate controversy exists on [that] legal point.” (Clark v. American Residential Services LLC (2009) 175 Cal.App.4th 785, 803 (Clark); see also id. at pp. 801-804.)

The scope of this court’s review of the trial court’s approval of a class action settlement is limited. “Our task is not to make an independent determination whether the terms of the settlement are fair, adequate and reasonable, but to determine ‘only whether the trial court acted within its discretion.’ [Citation.]” (Kullar, supra, 168 Cal.App.4th at pp. 127-128.) In making this determination, “[g]reat weight is accorded the trial judge’s views.” (7-Eleven Owners for Fair Franchising v. Southland Corp. (2000) 85 Cal.App.4th 1135, 1145.) “[G]iven that ‘so many imponderables enter into the evaluation of a settlement’ [citation], an abuse of discretion standard of appellate review is singularly appropriate.” (Id. at pp. 1166-1167.)

This does not mean, however, that we are obligated to rubber stamp the trial court’s judgment. “ ‘The abuse of discretion standard is not a unified standard; the deference it calls for varies according to the aspect of a trial court’s ruling under review. The trial court’s findings of fact are reviewed for substantial evidence, its conclusions of law are reviewed de novo, and its application of the law to the facts is reversible only if arbitrary and capricious.’ [Citation.] Moreover, ‘ “[t]he discretion of a trial judge is not a whimsical, uncontrolled power, but a legal discretion, which is subject to the limitations of legal principles governing the subject of its action, and to reversal on appeal where no reasonable basis for the action is shown. [Citation.]” ’ [Citations.]” (Cellphone Termination Fee Cases (2009) 180 Cal.App.4th 1110, 1118.)

Analysis

In the present case, all appellants argue, in essence, that the trial court abused its discretion by approving the settlement, because including the Attridge claims within the scope of the release rendered the settlement unfair. Attridge claims, in addition, that a subclass should have been certified, and separate class representatives and counsel appointed, because there was a conflict between the settlement class and those of its members who also were putative class members in the Attridge action. Selvaggio and Metzger additionally argue that even as to the core claim asserted in the Credit/Debit Tying Cases, the settling parties did not submit sufficient evidence to support the finding that the settlement was adequate.

The Attridge Claims Are Not Subsumed Within the Credit/Debit Tying Cases

Respondents contend that the Attridge claims are subsumed within the claims of the Plaintiff Class in the Credit/Debit Tying Cases, because both cases plead unfair competition claims based on many of the same facts regarding Visa and MasterCard’s duopolistic market power. We agree that both the Credit/Debit Card Tying Cases and the Attridge action are based on the same general background allegations that Visa and MasterCard possessed and abused duopolistic economic power. They also both plead causes of action based on the unfair competition law, and there is considerable overlap among the putative class members. Nonetheless, contrary to the position of the plaintiffs in the Credit/Debit Card Tying Cases, the Attridge action is not a mere “copycat” action. The two actions involve different instrumentalities of harm—i.e., the credit/debit acceptance policies versus the exclusion policies—and different types of damage—i.e., inflated retail prices charged by merchants to those who purchase goods or services using credit or debit cards, versus inflated fees charged by card-issuer banks to their customers who carry outstanding credit card balances.

Class Plaintiffs stress that their Complaint is based in part on the exclusion policies, which are the instrumentalities of harm relied on in the Attridge action. This is so, however, only insofar as the Complaint alleges that the exclusion policies contributed to placing Visa and MasterCard in the dominant market position that enabled them to impose the credit/debit acceptance policies on merchants. Class Plaintiffs also point to their evidence that some class members paid interest on revolving credit card balances. We do not doubt that there is considerable overlap between the settlement class in the Credit/Debit Card Tying Cases and the putative class in the Attridge action. This fact in and of itself, however, does not justify requiring the release of the Attridge claims.

This principle is illustrated by Trotsky, supra, 48 Cal.App.3d 134. Trotsky was a class action that originally challenged three provisions of a specific form of trust deed used to secure mortgage loans made by the defendant. Later, the plaintiffs filed an amended complaint that withdrew any challenge to one of the three challenged provisions. Meanwhile, another borrower, Barwig, filed a class action involving the same deed of trust. Barwig’s action challenged only the provision that the Trotsky plaintiffs had deleted from their amended complaint. When the Trotsky parties then settled the class action in an agreement that released the defendant from liability relating to all three provisions, including the one that been abandoned by the Trotsky plaintiffs, Barwig objected to the settlement, arguing that it might be given collateral estoppel effect and bar Barwig’s own class action. Despite the obvious overlap among the class members in the two cases, the Court of Appeal in Trotsky reversed the trial court’s approval of the settlement on various grounds, including that the Trotsky plaintiffs could not settle the claims of a class of plaintiffs they did not represent. (Id. at pp. 146-152.)

Similarly, in the present case, even though the Class Plaintiffs may also be members of the purported class in the Attridge action, this is not sufficient to establish that the trial court acted within its discretion in approving a settlement that releases the Attridge claims. Admittedly, in Trotsky, supra, 48 Cal.App.3d 134, the Court of Appeal relied in part on the fact that the named plaintiffs did not allege that they themselves had incurred damages based on the provision at issue in Barwig’s action (see id. at p. 147), whereas here, Class Plaintiffs have provided evidence that they are indeed members of the putative Attridge class. However, this is a distinction without a difference. “It is the fact that the class plaintiff’s claims are typical and his representation of the class adequate which gives legitimacy to permitting him to bind class members who have notice of the action. [Citations.]” (Id. at p. 146, italics added.)

Thus, the issue is not just whether the class membership overlaps, but in addition, whether Class Plaintiffs have adequately represented not only the interests they assert in the Credit/Debit Tying Cases, but also the separate interests asserted in the Attridge action. (See Trotsky, supra, 48 Cal.App.3d at pp. 146-147.) Otherwise, the settlement “carries with it substantial dangers of injustice to [the Attridge] class members who may be deprived of their rights by the actions of the class plaintiff[s]” in the present case. (Id. at p. 149, citing City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 458-459.) Therefore, if the settlement includes a release of the Attridge claims, the trial court was obligated to consider whether Class Plaintiffs had adequately represented the interests of Visa and MasterCard customers in their capacity as members of the putative class in the Attridge action before approving the settlement.

As the Second Circuit recently pointed out in reversing an order approving a class action settlement, the fact that some class representatives have the same claims as those belonging to the objecting plaintiff class does not necessarily mean that the representatives will fairly and adequately represent the interest of all class members. (Literary Works in Elec. Databases Copyright Litig. (2d Cir. 2011) 654 F.3d 242, 251-255.) The court reasoned that when a class action covering more than one type of claim is settled, the “named plaintiffs... [are] obligated to advance the collective interests of the class, rather than those of the subset of class members whose claims mirror their own.” (Id. at p. 252.) Thus, the court held that even where “class members can and do hold claims in [multiple] categories” (id. at p. 251), subclasses for each type of claim should be created, in order to ensure adequate representation in the settlement negotiations of those class members who hold only one type of claim. (Id. at pp. 251-257.)

The Attridge Claims Fall Within the Scope of the Release

In the course of the proceedings regarding the settlement, in response to the objections posed by counsel for Attridge, the trial judge suggested that the settling parties remove from the agreement a provision expressly releasing the claims asserted in the Attridge action. The release provision was revised accordingly. However, as already noted, the trial judge declined to make a ruling, both at the class notice stage and at the final settlement approval hearing, as to whether the release provision ultimately included in the settlement agreement did or did not extinguish the claims asserted in the Attridge action.

The release included in the final settlement agreement ultimately approved by the trial court provides that class members who do not opt out agree to release Visa and MasterCard (referred to as Released Parties) from all liability “arising out of or relating in any way to any conduct or failure to act of any Released Party alleged or which could have been alleged in the Consolidated Amended Complaint..., including any claims based on rules, by-laws, regulations, policies, practices, network service fees, interchange fees, merchant discount fees, finance charges, or charges of any kind of any Released Party, and including any claims based on theories of tying, attempted monopolization, monopolization, exclusionary conduct, price-fixing, or any other restraint of trade, or of any unfair, deceptive, or fraudulent practice or failure to disclose, and including any claims that arise under or relate to California’s Unfair Competition Law..., and including any claims based in any way upon the tying or other conduct alleged in [the federal credit/debit tying case] or upon the Visa By-law 2.10(e) or MasterCard Competitive Programs Policy or other conduct alleged in United States v. Visa U.S.A., Inc., et al., ... [i.e., the federal exclusion case] (including any impact that such conduct had on retail product or service prices).” (Italics added, except as to case title.)

Because the trial court did not resolve any conflicts in the evidence regarding the parties’ intent in drafting this release provision, we interpret it de novo based upon the contractual language. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865; Nelson v. County of Kern (2010) 190 Cal.App.4th 252, 276.) The language italicized in the quotation in the preceding paragraph includes within the ambit of the release all claims that are based on “finance charges, or charges of any kind, ” and that involve “theories of... attempted monopolization [and] exclusionary conduct.” Coupled with the explicit reference to claims based on the conduct alleged in the federal exclusion case, the wording of the release leaves no room for doubt that it encompasses the claims asserted in the Attridge action. Tellingly, respondents’ briefs on appeal implicitly adopt this interpretation of the scope of the release. Thus, contrary to respondents’ assertions, appellants’ challenges to the release provision in the settlement agreement cannot be dismissed on the basis that the release provision is nothing more than the standard broad release language commonly used in class action settlement agreements.

Respondents argue that it was proper for the release to include the Attridge claims, and they do not contend that those claims fall outside its intended scope. At oral argument in this court, counsel for Visa confirmed Visa’s position that the release includes the Attridge claims.

On June 10, 2011, class counsel requested that this court take judicial notice of four class action settlements approved by other courts, in cases not substantively related to this one, after the judgment was entered in the trial court in the present case. Class counsel has not established that any of these other settlements implicate the issue that appellants raise here, i.e., that the settlements included a release of claims asserted in a different, concurrently pending case, and were approved over the objections of persons representing putative class members in that other case. For that reason, the request for judicial notice is denied, on the ground of lack of relevance.

Moreover, the release goes on expressly to exempt from its scope all claims that are (1) based on the releasing party’s acceptance, as a merchant, of Visa or MasterCard credit or debit cards; (2) based on an entitlement to settlement funds in specified litigation relating to currency conversion fees; or (3) “based upon a routine individual dispute with the financial institution that issued [the claimant] a Visa- or MasterCard-branded payment card regarding payment of [the claimant’s] personal account statement.” The inclusion of these explicit exceptions to the scope of the release demonstrates that if the parties to the Credit/Debit Tying Cases had wished to exempt the claims asserted in the Attridge action from the ambit of their settlement, they could and would have done so. Conversely, the omission of such an exception from the release makes it even clearer that, if allowed to stand, the release would operate as a bar to the further prosecution of the Attridge action, or to the assertion of the same claims in any other litigation. (See Villacres v. ABM Industries Inc. (2010) 189 Cal.App.4th 562, 585-590 [holding individual plaintiff’s claims barred by release provision in prior class action settlement agreement which included all claims that could have been asserted in that action, based in part on fact that agreement included exceptions to scope of release, and plaintiff’s claims were not listed as exception]; Stephenson v. Drever (1997) 16 Cal.4th 1167, 1175 [under maxim expressio unius est exclusio alterius, where parties’ contract expressly provided that certain consequences would flow from termination of plaintiff’s employment, this tended to negate inference that parties also intended another consequence to flow from same event].)

The Release of the Attridge Claims Renders the Settlement Unfair

Because we conclude the Attridge claims are included within the scope of the release, the overall fairness of the settlement of the Credit/Debit Tying Cases depends in part on a “ballpark” estimate of the value of the Attridge claims. (See, e.g., Kullar, supra, 168 Cal.App.4th at p. 133 [trial court approving class action settlement “must at least satisfy itself that the class settlement is within the ‘ballpark’ of reasonableness”].) In other words, the parties seeking approval of the settlement were obligated to present the trial court with evidence that the relief provided was adequate to compensate not only for the inflated retail prices allegedly paid to merchants as a result of the credit/debit acceptance policies, but also the inflated interest and fees allegedly paid to card-issuer banks by those credit card holders with revolving balances, as a result of the exclusion policies.

In an effort to demonstrate that the settlement did not include fair compensation for the Attridge claims, Attridge submitted a declaration by an expert economist, Dr. Andrew Safir, regarding the amount of damages suffered by the putative class in the Attridge action. Safir explained that he had been asked to calculate the damages caused by the “former Visa and MasterCard loyalty rules in place from 1991 through October 2004, ” which “enabled these companies to set, fix and establish supra-competitive prices for network service fees charged to banking institutions issuing Visa and Master[Card] [c]ards to the general public”—fees which Safir asserted “were, in turn, passed on to specific bank card customers, who incurred greater costs in obtaining revolving credit.”

Safir opined that “over the period from 1991 until the unfair competitive practices were terminated in October of 2004, Visa revolving charge card holders suffered approximately $177 million in damages” (not including interest) and that “[o]ver this same period, revolving credit customers holding MasterCards were damaged by $80 million” (again, not including interest). Safir opined that the retail charge market was sufficiently competitive that “any reduction in network fees charged by Visa and MasterCard to their banking clients would have been rapidly passed on to end use customers.” Safir explained that he was still awaiting additional discovery material that would enable him “to calculate the specific extent of the ‘pass-on’ of network fee value from the bank to the retail card level, and specifically that amount which should be appropriately allocated to revolving charge customers.” Safir estimated that if the members of the putative class in the Attridge action received their damages in full, “each class member would receive more than $36.” (Fn. omitted.)

In response to Safir’s declaration, counsel for the Class Plaintiffs submitted the declaration of a rival expert economist, Dr. Gustavo Bamberger. While conceding that it was “not possible to fully evaluate [Safir’s] damage estimate” due to the lack of supporting detail, Bamberger opined that it did “not appear to be consistent with the available evidence.” Specifically, Bamberger indicated that contrary to Safir’s analysis, publicly available data did not show a fall in network service fees after Visa and MasterCard revoked their anticompetitive policies in October 2004. Bamberger also explained that even if the “challenged conduct” substantially raised the fees charged by Visa and MasterCard to their member card-issuer banks, Safir had not demonstrated that “those higher fees had a substantial effect on the cost to consumers who used credit cards as a source of revolving credit.” Bamberger noted that card-issuer banks that are members of the Visa and/or MasterCard networks could have passed on higher network service fees in other ways than via increased interest on revolving balances. He also noted that such banks set their own fees and interest rates, which “could vary substantially across issuing banks.” (Fn. omitted.)

The dueling expert declarations of Safir and Bamberger created a significant conflict in the evidence as to the value of the claims asserted by the putative class in the Attridge action. Moreover, Safir’s and Bamberger’s declarations each indicated that the respective declarants had reached their conclusions based on a limited amount of available information. Yet in discussing the reasons that he found the amount of the settlement to be fair and reasonable, the trial judge did not resolve—or even mention—the conflict between the two declarations. Nor did he address the question whether counsel for the Class Plaintiffs, before agreeing to the settlement, had adequately investigated and assessed the factual and legal strengths and weaknesses of the Attridge claims. Under Kullar, supra, 168 Cal.App.4th 116, and Clark, supra, 175 Cal.App.4th 785, it was an abuse of discretion to approve the settlement without determining whether the evidence in the record justified a finding that the settlement’s terms were fair notwithstanding the inclusion of the Attridge claims in the release.

Based on his comments at the settlement approval hearing on August 6, 2010, the trial judge appears to have believed that Attridge’s objections were adequately resolved by the fact that the class members, including the Attridge plaintiffs, had been notified of the pending settlement, and given the opportunity to opt out. However, opting out would have preserved only the Attridge plaintiffs’ right to pursue their individual claims. It would not have permitted them to maintain the Attridge action as a class action, because the members of the putative Attridge class generally were also members of the class in the Credit/Debit Tying Cases, and therefore would be barred from pursuing their claims if they had not opted out of the present settlement. (Cf. Villacres v. ABM Industries Inc., supra, 189 Cal.App.4th at pp. 581-590 [plaintiff who was member of class in prior action and did not opt out of settlement was barred by res judicata from bringing subsequent action raising claims that fell within scope of release given in prior action].)

Moreover, the opportunity to opt out merely put the absent class members to a Hobson’s choice: participate in the settlement in the Credit/Debit Tying Cases, and give up their claims in the Attridge action; or opt out of the settlement, and litigate their Attridge claims separately. A settlement that requires absent class members to give up one set of claims in order to retain other, independent claims should not be approved as fair and equitable unless and until the value of the latter claims has been assessed by the trial court, at least within a “ballpark” for settlement purposes. (See generally Clark, supra, 175 Cal.App.4th 785; Kullar, supra, 168 Cal.App.4th 116; Trotsky, supra, 48 Cal.App.3d 134.) Thus, the fact that the notice to the absent class advised them of the potential effect of the settlement on the Attridge claims and allowed them to opt out does not resolve the problems with the settlement that appellants have identified.

Because we are reversing the judgment approving the settlement, this case will proceed to trial unless the parties agree to revise the settlement agreement and resubmit it for court approval. Thus, we need not address appellants’ other challenges to the fairness of the existing settlement agreement. To the extent appellants may have similar objections to the terms of any future settlement agreement that are similar to the ones raised here and not addressed in this opinion, they remain free to assert those objections in the course of the proceedings for court approval.

Disposition

The judgment approving the settlement agreement is REVERSED, and the matter is remanded for further proceedings consistent with the views expressed in this opinion, including but not limited to reconsideration of the fairness and adequacy of the settlement in light of the inclusion of the Attridge claims in the scope of the release. Appellants are awarded their costs on appeal, as a joint and several obligation of respondents.

We concur: REARDON, J.SEPULVEDA, J.


Summaries of

Credit/Debit Tying Cases v. Visa U.S.A. Inc.

COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FOUR
Jan 9, 2012
No. A129672 (Cal. Ct. App. Jan. 9, 2012)
Case details for

Credit/Debit Tying Cases v. Visa U.S.A. Inc.

Case Details

Full title:CREDIT/DEBIT CARD TYING CASES. RICHARD JOHNS et al., Plaintiffs and…

Court:COURT OF APPEAL OF THE STATE OF CALIFORNIA FIRST APPELLATE DISTRICT DIVISION FOUR

Date published: Jan 9, 2012

Citations

No. A129672 (Cal. Ct. App. Jan. 9, 2012)