Judge on Target/MasterCard deal: ‘I just can’t see where that’s fair’

April 29, 2015

When Target announced earlier this month that it had reached a $19 million settlement with MasterCard to resolve data-breach-related claims by banks that issued MasterCard-branded credit and debit cards, lawyers representing a class of financial institutions suing Target put up a loud protest. The MasterCard deal purports to compensate participating banks for the costs they incurred as a result of the breach of Target’s data in 2013, both for fraudulent charges on cards compromised in the breach and for the expense of sending customers replacement cards. But the banks have to agree to drop all of their potential claims in the class action.

Class counsel argued that Target had cut them and their clients – and the court overseeing consolidated data breach litigation – out of the negotiating. They said the company was trying to hijack the class action and use MasterCard to foist a cheap deal on banks beholden to the credit card company.

At an April 27 hearing on a motion to enjoin those releases, the judge overseeing the consolidated Target data breach litigation, U.S. District Judge Paul Magnuson of St. Paul, Minnesota, seemed to sympathize – at least to some extent – with class counsel’s claims that Target was trying to settle the case out from under them and the court.

“Counsel, there was zero representation of the named class members in this proceeding in that negotiation that you did,” he said to Target lawyer Douglas Meal of Ropes & Gray, according to a hearing transcript. “Now, I just can’t see where to cut out the representation of people (with) lawyers, to cut them out and use a third party to force that settlement. I just can’t see where that’s fair.”

The judge also said he was miffed that Target didn’t inform him that it was negotiating a settlement with MasterCard that would require participating banks to release claims in the case before him. But more importantly, he said he was concerned that Target was attempting to use MasterCard to force issuer banks into giving up their claims in the class action.

Meal said MasterCard wasn’t forcing any of the issuer banks to do anything. Despite arguments by class counsel Charles Zimmerman of Zimmerman Reed and Karl Cambronne of Chestnut Cambronne, Meal said MasterCard doesn’t have coercive power over issuer banks and isn’t pushing them to take the deal with Target. The judge had only to listen to recordings of MasterCard’s conference call with issuer banks – which were included in the preliminary injunction filing – to hear that, Meal said. “MasterCard in the call is reaching out to its customers as a friend saying, ‘You are our customers, we care about you. This is an opportunity that we’ve created for you. If you want the deal, take it, but any issuer who doesn’t want the deal is free to pass on it and all of your rights  in this litigation or anywhere will be fully preserved,'” Meal told Magnuson.

The Target lawyer said he was “deeply concerned” that Judge Magnuson considered the company to have been less than candid about talks with MasterCard but the details of their negotiations were confidential and couldn’t be disclosed. In any event, Meal said, Target had no obligation to include class counsel in the MasterCard discussions because the class has not yet been certified. As Target argued in its opposition to the motion for preliminary injunction, Judge Magnuson has not yet certified a class of financial institutions.

“What the plaintiffs are saying is that their judgment as to whether this is a good deal has to be forced on every MasterCard issuer in the country in a situation where there’s no certified class,” Meal said. “How is that fair? How is that fair to a Citibank or a Bank of America that these plaintiffs who think in their opinion this offer isn’t good enough for them get to prevent a Bank of America or a Citibank or Capital One or any of the other 1,300 MasterCard issuers from considering this offer? I would say that’s not fair.”

And according to Meal, the 8th U.S. Circuit Court of Appeals backs Target’s view of its obligations to members of an uncertified class. In Great Rivers Co-Op v. Farmland Indus, Meal said, the 8th Circuit specifically held that defendants are free to reach precertification settlements with members of a proposed but uncertified class. (Judge Magnuson had pressed Zimmerman and Cambronne on that point, asking whether there is actually case law barring Target from excluding them from its negotiations with MasterCard. Zimmerman said there wasn’t directly relevant precedent.)

Class lawyers Zimmerman and Cambronne argued that the notices sent to banks eligible to participate in the MasterCard deal are so misleading that they wouldn’t pass muster in a real class action. According to them, MasterCard has calculated fraud losses based on the Target data breach to be almost $80 million. They also assert that replacing compromised cards costs upwards of $10 per card. Class counsel put issuer banks’ losses from the data breach at $160 million. So according to them, Target’s representation that issuers will recover about 70 percent of their costs in the $19 million MasterCard deal is gravely misleading. They say the recovery is more like 11 percent – and that issuer banks ought to be told they are giving up the chance to recover much more money through the class action if they take the MasterCard deal.

Meal countered that Target believes fraud losses for MasterCard issuers were about $15 million, not $79 million. But he said the aggregate number didn’t much matter, because every issuer will be apprised of its actual fraud losses before deciding whether to accept the MasterCard deal. And because this isn’t a class action settlement, he said, “there isn’t any basis for any kind of fairness type review of the settlement by this Court, and so that’s why all of the fairness arguments that Mr. Cambronne was advancing in terms of this deal is really 11 percent, not 71.4 percent, all those fairness arguments aren’t on the table.”

MasterCard issuing banks are supposed to decide by May 20 whether to participate in the settlement. The agreement includes a provision that permits Target and MasterCard to walk away if issuers of at least 90 percent of eligible MasterCard accounts do not take the deal. (Notably, that doesn’t mean 90 percent of the banks with claims have to agree; the 45 biggest MasterCard issuers account for more than 90 percent of the affected accounts.)

Judge Magnuson said he was mindful of that deadline and would try to issue and order quickly.

One final note from the hearing: Target counsel Meal said in response to a direct question from the judge that the company is not actively negotiating with Visa and hasn’t been for several months.

(UPDATE: This story has been revised. A previous version reported, based on the transcript, that Target believes issuer banks suffered $50 million in fraud losses from the Target data breach. According to a Target representative, its attorney actually said $15 million, not $50 million, at the hearing and the company intends to request a correction of the hearing transcript.)

For more of my posts, please go to WestlawNext Practitioner Insights

Follow me on Twitter

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/