The biggest money-damages antitrust settlement in U.S. history died Thursday at the 2nd U.S. Court of Appeals. Not because of last year’s scandal surrounding leaks to a onetime MasterCard lawyer since charged with fraud, but because the agreement between credit card giants MasterCard, Visa and the merchants suing them for inflating certain fees was fundamentally unfair to some of the retailers.

A three-judge appellate panel at the New York-based federal appeals court reversed U.S. District Judge John Gleeson‘s 2012 approval of the $7.25 billion settlement, holding that the agreement failed to resolve basic conflicts between merchants entitled to money damages and a separate class forced to release future claims in exchange for revisions to some of the rules governing credit card fees.

Lawyers representing the class were awarded $544.8 million based on the money damages they obtained, not based on the rule changes the credit card companies agree to. That dynamic, according to the 2nd Circuit, “sapped class counsel of the incentive to zealously represent” merchants in the injunction-only class, who could not opt out of the settlement. Named plaintiffs and class counsel, the appellate court said, could not adequately represent the interests of the two different groups of merchants.

“Class representatives had interests antagonistic to those of some of the class members they were representing,” wrote Judge Dennis Jacobs for a panel that also included Judges Pierre Leval and Ralph Winter. “The fault lines were glaring as to matters of fundamental importance. Such conflicts and absence of incentive required a sufficient ‘structural assurance of fair and adequate representation,’ but none was provided,” the opinion said, quoting from the U.S. Supreme Court’s landmark 1997 class action opinion, Amchem v. Windsor.

I should point out that the appellate court specifically said it did not intend to “impugn the motives or acts of class counsel,” including lawyers from Robins Kaplan, Robbins Geller Rudman & Dowd and Berger & Montague. “Nonetheless, class counsel was charged with an inequitable task,” Judge Jacobs wrote.

The 2nd Circuit said the Supreme Court’s rulings in Amchem and its 1999 successor, Ortiz v. Fibreboard, compel appellate courts to look skeptically at class action settlements that release defendants from claims by absent plaintiffs. In this case, the court said, the terms of the injunction proved that merchants — including those that haven’t even yet set up shop — were not adequately represented. The rule changes MasterCard and Visa agreed to make would offer no relief at all to large swaths of the class, such as merchants that also accept American Express and those in states that do not allow fee surcharges. Yet the settlement precluded all merchants that accept MasterCard and Visa from ever suing the companies over rules not specifically addressed in the deal.

The appellate opinion called the release “exceptionally broad.” In a concurring opinion, Judge Leval added, “This is not a settlement; it is a confiscation.” He continued: “No merchants operating from November 28, 2012, until the end of time will ever be allowed to sue the defendants, either for damages or for an injunction, complaining of any conduct (other than that enjoined) that could have been alleged in the present suit,” he wrote. “One class of plaintiffs receives money as compensation for the defendants’ arguable past violations, and in return gives up the future rights of others. The Supreme Court has addressed such circumstances and ruled that an adjudication coming to this result is impermissible.”

Precedent in the 2nd Circuit, according to the opinion, discourages approval of class action settlements in which a single set of lawyers attempts to represent two different classes with conflicting interests. Judge Jacobs peppered the decision with references to the 2nd Circuit’s 2011 decision in In re Literary Works, which involved a class action copyright dispute between authors and online publishers. In that case, as in the Visa/MasterCard ruling, the appeals court said the deal did not adequately represent the interests of all class members. (Thursday’s opinion distinguished the facts in those two cases from those in 2013’s Charron v. Wiener, in which the 2nd Circuit upheld approval of multiclass settlement negotiated by a single set of lawyers – but only after the two classes were separately certified.)

Interestingly, the 2nd Circuit emphasized that trial judges cannot paper over basic conflicts among class members by involving themselves or court-appointed mediators in the negotiating process. Judge Gleeson, who has since left the bench in Brooklyn federal court, helped shape the Visa/MasterCard settlement, as did U.S. Magistrate Judge James Orenstein and other mediators. The 2nd Circuit said their involvement didn’t solve the fundamental problem: “One aspect of the settlement agreement that emphatically cannot remedy the inadequate representation is the assistance of judges and mediators in the bargaining process.”

My colleague Jon Stempel has reactions from several of the interested parties in his Reuters piece about the 2nd Circuit’s rejection of the settlement, although Paul Clement of Bancroft — who argued at the 2nd Circuit for class counsel — didn’t get back to him. (Thomas Goldstein of Goldstein & Russell argued for the merchants who objected to the settlement.)

For lawyers, the important message from the ruling is that no matter how hard you work — and no one doubts the incredible effort of the lawyers and judges who slogged through a decade on this litigation, including years of settlement negotiation — the 2nd Circuit is not going to look favorably at class action settlements in which one set of lawyers represents class members with competing interests. Adding more lawyers (and class representatives) complicates settlement talks, especially in an already vast case like this one. But you have to be able to show the 2nd Circuit that everyone’s interests were protected. It’s a lot easier to take care of that before you reach a settlement than to return to negotiations after your proposed deal is struck down.