Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (14 page)

We petitioned for class certification in April 1999 and were disappointed that Judge Gleeson assigned this crucial motion to Magistrate Judge Mann for initial determination. At the time, we were very unhappy with the magistrate judge. She had delayed the case by more than a year, extending the fact discovery deadline from December 1998 to March 2000. She had rejected what we thought was our absurdly
preemptive proposal of limiting discovery to 300 depositions, allowing the parties instead to engage in an all-you-can-eat discovery orgy. Most of her rulings, primarily procedural, were going against us, and she was making them impatiently and slowly—an annoying combination. We really couldn’t do anything about Judge Gleeson handing off the class action motion to Magistrate Judge Mann except vainly protest and alienate her. So we didn’t.

Our concerns about the magistrate judge deciding the crucial class motion had already been partially validated when we went before her for the December 14–15, 1999, settlement conference. This was eight full months after the motion was filed and five months after it had been fully briefed by the parties. Nevertheless, Magistrate Judge Mann hadn’t even scheduled oral argument of the motion, let alone decided it. After the settlement conference and the attitude shift that we witnessed from her, the class motion was immediately returned to Judge Gleeson. Although this was done without explanation, we were sure that we understood the significance of this act. After the parties convinced the magistrate judge that settlement discussions were pointless, she told both sides that the respective settlement demands were ludicrous. At a separate meeting with us, she asked (and therefore probably asked Visa/MasterCard at their separate meeting) what we believed would get the other side to bargain in good faith. I responded that speedy argument and determination of the class motion would probably do that. I believe that the magistrate judge conveyed this message to Judge Gleeson. Right after that conference, Judge Gleeson took the motion back from the magistrate judge and scheduled oral argument.

The case within the case that this class motion proved to be produced several incidents that showed me how defense counsel, if not the defendants, were beginning to panic and crumble. The first incident involved the defendants’ selection and use of an economist in their efforts to defeat the class motion. The defendants’ counsel, and
principally Heller Ehrman, attempted to defeat the class motion by staging a premature duel of expert economists. Battles between expert witnesses, such as economists, usually occur during the trial or just before the trial during a motion process called “summary judgment.” In the
Merchants’
case, the defendants chose to stage this fight during the class motion, years before trial.

Law has its fashions, like cuisine and fashion itself. Just as “handcrafted” and “artisanal” foods and long, severely pointed women’s shoes are currently in fashion,
Daubert
motions are the defense tactic of the moment in complex litigation, especially in antitrust cases. In a
Daubert
motion, named after a 1993 Supreme Court decision, a party attacks the opposing expert witness on the ground that the expert’s report or testimony amounts to “junk science.” The doctrine applies when a false science, such as phrenology (the interpretation of human head contours) or alchemy, is offered to support the party’s case. The
Daubert
doctrine also applies when a science like physics or economics is offered in a bogus manner or uses flawed methodology.

Instead of using the
Daubert
doctrine as the Supreme Court intended, to prevent an impressionable jury from being swayed by phony science or flawed methodology, defense counsels now routinely make a
Daubert
motion against most opposing experts, even those highly credentialed. The doctrine is now flagrantly overused and abused, especially in attacks on economists. In fairness, it should be said that the squishiness of economic science and the ease with which a well-heeled company can find an economist to support virtually any business practice, no matter how venal, has invited such frequent “junk science” attacks. Truly talented economists with great integrity have suffered in this process.

Heller Ehrman was in the vanguard of this fashionable defense tactic. They were to
Daubert
motions what Dolce and Gabbana are to pointy women’s shoes. Heller Ehrman had packaged a
Daubert
motion
program and actively marketed, to corporate counsel, its ability to knock out plaintiffs’ experts at legal and economic conferences. One of these conferences is held annually at the fancy Bishop’s Lodge dude ranch in Santa Fe, New Mexico, by the National Economic Research Associates, or NERA, a subsidiary of Marsh & McLennan. At this conference, held each year in early July, antitrust lawyers and their significant others are NERA’s all-expenses-paid guests for ridin’, ropin’, square dancin’, the Santa Fe Opry, and drinkin’ with NERA economists, who typically charge 1,000 buckaroos per hour to act as experts in antitrust cases. I was the lead speaker at this conference in 1989, three weeks before filing the
Entree
case. The antitrust cases I was pursuing, and the business practices NERA’s economists were justifying with expert testimony, began to collide. As will be seen, the biggest collision occurred in the
Merchants’
case.

In April 1999, we filed our motion for class certification, asserting that the same Visa/MasterCard rules and contracts that coerced Wal-Mart, Sears, Circuit City, Safeway, and The Limited to accept Visa/MasterCard debit card transactions similarly coerced the millions of other U.S. merchants in the proposed class. We alleged that class members had all been injured by paying more for Visa/MasterCard debit transactions than if they had been able to negotiate a price for debit card acceptance untied from Visa/MasterCard credit card acceptance. We submitted proof that every one of the millions of stores in the class had purchased credit and debit card services from Visa/MasterCard under identical contractual provisions.

We also supported our motion with an expert report from Professor Dennis Carlton. Carlton is a famous economist from the University of Chicago whose values and integrity are such that when his consulting firm won a defamation action against a plaintiffs’ antitrust firm, Dennis donated his entire million-dollar share to charity. The purpose of Professor Carlton’s report was to show how the millions of stores in
the class all suffered similar monetary injury, which could be calculated for each store using the same simple formula. Professor Carlton didn’t say that the amount of damage suffered by all stores was the same, only that all stores’ damages were of a similar nature and could be calculated using the same formula.

Professor Carlton’s expert report also said that the tying arrangements and other anticompetitive conduct had raised the price of signature debit transactions. He reasoned that without the defendants’ conduct, the price of signature debit would have been lower, as it has been since the
Merchants’
case was settled, ending the tie between debit and credit. Carlton demonstrated that if the tying arrangements raised prices by, say, $1 for each $100 in debit transaction dollar volume, then it would be simple to calculate each class member’s monetary damage. If a merchant had been forced to accept only $100 in debit transactions, its damage would be $1 If a merchant had been forced to accept $100,000 in debit transactions, its damage would be $1,000 I am simplifying Carlton’s report and formula, but not by much. The theory was simple, logical and, most importantly, based on facts.

Heller Ehrman decided to attack Professor Carlton, utilizing their prefabricated
Daubert
motion tactic and employing one of NERA’s most renowned economists, Dr. Richard Schmalensee, the dean of the Sloan School of Management at MIT. In 1999, the case was years away from having a jury who needed protection from what the defendants claimed was Professor Carlton’s junk science. Nevertheless, Visa and MasterCard filed a
Daubert
motion, telling Judge Gleeson that he (not a jury) must be protected from naively relying upon Carlton’s report. Carlton, the author of many scholarly books and articles, is so well regarded in the antitrust field that he was one of only two outside economists consulted by the Antitrust Division and the FTC in the formulation of their merger enforcement guidelines. Later, in 2006, he became the Antitrust Division’s chief economist.

The other outside economist who consulted on the federal agencies’ merger guidelines was Dean Schmalensee, a plain-spoken, but intensely intellectual, teacher and eminent industrial organization economist. Heller Ehrman retained NERA and Dean Schmalensee to be their economic consultants on the class motion and to attack Carlton. In truth, just as Heller Ehrman is not really retained by Visa for each antitrust case, neither was Schmalensee really retained by Heller Ehrman. He was already there. Visa and Heller Ehrman had previously used Schmalensee in the 1991
Mountainwest
case, where Discover sued Visa, in the United States’ 1998 case against Visa, and another antitrust case called
Valley Bank v. Visa.

After we filed the
Merchants’
case in 1996, Visa commissioned Schmalensee and Dr. David Evans, his NERA colleague, to write a book called
Paying with Plastic,
which attempted to justify the practices that were the subjects of the
Merchants’
case and the case against Visa/MasterCard, which the U.S. government was likely to file, and later did. I looked forward to cross-examining Schmalensee about his book at trial. It was published replete with the Dean’s thanks and acknowledgments to Visa’s general counsel and the lawyers at Heller Ehrman. It seemed that Visa and Heller Ehrman had the same idea as we had at C&P, meaning: “If you do everything, you will win.” But in my mind, paying for a book to be written by an economist who will be your expert fell into the category of doing everything to make sure you will lose. Experts are supposed to approach their assignments without preconceived conclusions and with the ability to maintain scientific objectivity.

Dean Schmalensee arrived in Boston during the spring of 1999 for his task of discrediting Professor Carlton, but with a major handicap. It wasn’t fatigue from the trip across the Charles River in Cambridge, where MIT is located. At that moment, Schmalensee was
overwhelmed by his obligations as Microsoft’s economist in the antitrust case that the United States and twenty-one state attorneys general were pressing against the computer software monopolist. In that case, the lead economist for the United States was Dr. Franklin Fisher, also an economics professor at MIT.

Professor Fisher was also our lead economist in the
Merchants’
case, having been retained for our assignment a year before beginning his work on the
Microsoft
case. Frank Fisher is a handsome septuagenarian with a full crown of brilliant white hair. He has served as the lead economist in many of the most important antitrust cases of the last half century, including the
IBM
case, which the Reagan Antitrust Division abandoned after a dozen years of hard work by previous administrations. After we hired Frank, he began his work as chief economist in
Microsoft.
Fisher had been retained by the United States to oppose his MIT protégé, Dick Schmalensee. Schmalensee had been retained by Heller Ehrman to oppose his mentor, Professor Fisher, in our case. This double
mano a mano
was not coincidental.

Fisher and Schmalensee are two of a small number of the elite industrial organization economists likely to testify in antitrust cases of the magnitude of the
Merchants’
case and
Microsoft
. These two cases shared many similarities. The
Merchants’
case was premised on the assertion that Visa/MasterCard, which were already dominant in credit cards, were leveraging their monopoly power into the newer debit card market through tying arrangements and other predatory conduct. Nineteen months later, the
Microsoft
suit alleged that Microsoft was leveraging its operating system monopoly power into the market for Internet browsers, where its Internet Explorer browser had been a distant second to Netscape’s Navigator browser. After tying the Internet Explorer browser to Windows, Microsoft’s browser quickly became dominant. Microsoft achieved this dominance because of the tying arrangement and other anticompetitive conduct. It was nice, or as
economists say, it was efficient for the United States to have Professor Fisher develop his theory of tying predation on somebody else’s dime. For us, that “dime” eventually amounted to $7,355,071.33, which was the fee we paid to Charles River Associates, Professor Fisher’s economic consulting firm.

C&P, unlike Heller Ehrman, decided not to expose its chief economist at the class motion stage of the
Merchants’
case. We wanted to see how the Fisher versus Schmalensee duel played out in the
Microsoft
case first. Despite being filed after the
Merchant
case, the
Microsoft
case would get to trial much faster. It was a government case, there was no jury, and all affirmative testimony was done in writing with live and video-taped cross-examination. Moreover, despite the media circus, the
Microsoft
case was a smaller case than ours. In terms of the logistics alone, the Microsoft judge had wisely limited the number of depositions to 93 and the number of trial witnesses to 24, compared to the nearly 400 depositions and the 730 potential trial witnesses listed in our pretrial order.

Not only was Heller Ehrman exposing Schmalensee before his performance in the
Microsoft
case could be fully assessed, I already had most of his
Microsoft
testimony in written form and could explore and exploit any inconsistencies between what he said about tying arrangements in that case and what he said about the same subject in our case. I was going to get two shots at deposing and discrediting Schmalensee, once at the class motion stage and again after his final liability and damage reports were filed in our case and after the
Microsoft
outcome was known. I wasn’t going to give Visa/ MasterCard the same chance against Professor Fisher. So we used Professor Carlton at the class motion stage, reserving Fisher for the actual trial.