The feds have the power to prevent the bank-card interchange lawsuits from becoming a national class action of 6 million merchant plaintiffs, and they should use it. The risk of certification - destabilization of the banking system - is too great to ignore.
The strategy of the plaintiffs' lawyers is well known. They want to certify the class to panic equity markets, disintermediate tens of billions of dollars from thousands of U.S. and foreign banks, liquidate the card associations, reorganize key sectors of the retail payments system, and force massive repricing for cardholders.
Sadly, this isn't hyperbole. It's from the complaints against the banks, related public comments by the plaintiffs' lawyers and economists, and MasterCard's SEC filings.
The process works this way. The lawsuit starts with a few plaintiffs who ask the court to let them represent everybody else whose alleged harm at the defendants' hands is similar to theirs.
If the court says OK, the few become a class - a virtual army - of enormous proportions, and potential damages skyrocket.
In the interchange cases, where the adversaries are whole industries - 6 million plaintiff merchants against 10,000 defendant banks - and the damages sought are Homeric in size, certification implicates more than the defendants. It threatens the banking system and the economy in general.
Think of that with respect to discovery: scores of the plaintiffs' lawyers over the next couple of years hammering thousands of bank officials and probing millions of bank documents.
In scope it could end up exceeding any similar proceeding against the banking system ever. It is why the feds must intervene to block the cases from becoming a class action.
As it is, the feds often upend class actions by asserting preemption powers. They don't directly attack the class certification issue; they just object to the whole lawsuit. They say to the court: Congress gives us exclusive power over the issues in the case.
We can guess some of the reasons they would be reluctant to do so in the interchange cases. Politics is one; the plaintiffs are another industry subject to other regulators, whose sympathies might be with the merchants. The same problem could surface with Congress.
To avoid these consequences, the feds might argue that they can intercede only on substantive issues - for example, when the contest involves the statutory powers of a bank. Certification of a class, they will say, is a procedural matter that belongs exclusively to courts. While that may be true in most cases, the safety-and-soundness risks of a national class of merchants is a substantive issue as a matter of banking law.
As such, a fed challenge to certification would present a familiar clash of competing federal laws: court procedure rules versus the power of regulators.
Two decades ago, in the landmark Chevron decision, the Supreme Court told courts what to do when this happens.
It told them to defer to the reasonable interpretations and expertise of federal regulators concerning the proper application of their own power.
Ever since, all of the federal regulatory agencies, especially the bank feds, have used Chevron to assert paramount authority over scores of issues. Because the Supreme Court has strengthened Chevron in recent years, there is no reason that the feds can't use it to justify blocking class certification in the interchange cases.
A recent article on Chevron written by Cass Sunstein of the University of Chicago Law School, the leading authority on the constitutional power of federal agencies, for the AEI-Brookings Joint Center lends credence to this idea.
Lawyers for all sides in the interchange cases should read it. (The article, "Beyond Marbury: The Executive's Power to Say What the Law Is," appears online at http://www.aei-brookings.org/ about/advisorybio.php?id=15.)
Although Sunstein focuses on litigation in general and not class actions, his treatise would support an aggressive agency role in those lawsuits. The feds should take it to heart.
For starters, they could use Chevron to block a class status for the interchange cases or, as I suggested in a previous Viewpoints article, to wrestle the case totally away from the judge in Brooklyn.
It is inconceivable that Congress intended to allow private lawsuits in the guise of class actions to undermine the stability of the banking system, much less to usurp the authority of the feds to regulate it.
If Congress had intended such a result, class-action law would have allowed for the creation of industrywide defendant classes. It did not. And that's because in other legislation it created regulatory agencies like the feds to manage the behavior of whole industries.
If the feds decide to make this argument, they will prevail, turning the interchange cases into a blessing in disguise: a precedent-setting tool for all federal agencies to counter abusive litigation.
