Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (18 page)

The articles that appeared in the
Wall Street Journal,
the
New York Times,
and scores of other papers after Judge Gleeson unsealed the file, cast the defendants and their case in a very bad light. These articles, first published on November 14, 2002, analyzed unsealed Visa/MasterCard documents showing, among other things, that in 1988, Visa had asked MasterCard to remove the markings on debit cards that allowed merchants and consumers to distinguish debit cards from credit cards, and that MasterCard had agreed to this request. The
Times
quoted unsealed portions of the deposition testimony of Edward Hogan, a MasterCard executive, about the Visa/MasterCard meeting where the agreement to remove the markings had occurred.

The
Journal
and
Times
also reported evidence showing how Visa and MasterCard had deceived merchants about the identity of their cards, and, as the
Journal
wrote, “exploit[ed] widespread customer confusion about their branded debit cards.” Electronic identifications embedded in the cards were scrambled to prevent merchants from identifying the type of Visa/MasterCard plastic card being used, as the
Journal
reported. The
Times
spotlighted MasterCard documents showing that MasterCard knew that 72 to 78 percent of cardholders confused MasterCard debit cards with MasterCard credit cards.

Other articles focused on Visa documents declaring war on the competing regional debit networks; documents discussing a plan to “block or disrupt formation of super-regional networks that may undercut Visa’s brand dominance”; a Visa plan to “restrict deployment of PIN pads [in stores] until regionals are gone”; “‘stealth’ efforts by Visa to get banks to drop rival regional-network cards”; and a $30 million payment from Visa to the Bank of America as part of the plot to destroy the competing regional debit networks. The
New York Times
also quoted from one of my favorite documents, a 1991 Visa memo recording what was described as “Wes’s vote.” This was a vote taken by Visa executive Wesley Tallman among bankers attending a Visa
meeting to “wait and be sued” over the tying arrangement rather than change the practice. When Judge Gleeson unsealed the “Wes’s Vote” document, he also unsealed the videotaped testimony about this vote, which I extracted from Tallman when I deposed him in San Francisco.

The
Wall Street Journal, New York Times,
and
Associated Press
articles were then picked up by hundreds of other media outlets in the week following the November 14 press coverage. I don’t believe it was coincidental that on November 20, 2002, just six days after these press reports first appeared, Magistrate Judge Mann issued a 21-page decision rejecting Visa’s claim of privilege and unsealing a pivotal 50-page document. This single document was almost as damaging to the defendants’ case as the thousands of documents unsealed by Judge Gleeson’s order issued five months earlier. In the decision, the magistrate judge ruled that a key Visa document was not privileged and had not been mistakenly produced to us in the discovery process by Heller Ehrman, as Visa contended. Magistrate Judge Mann alternatively ruled that even if the document was privileged, that privilege had been forfeited through Heller Ehrman’s negligence. I believe that the magistrate judge’s timing, if not the substance of her ruling, was influenced by press reports from November 14 about the Visa/MasterCard unsealed documents. The motion to unseal this additional document had been sitting on her desk for almost two and a half years. Although the motion had been argued by my partner Matt Cantor in August 2000, Magistrate Judge Mann issued her decision on November 20, 2002.

Judges read newspapers. The fact that some of the worst Visa/ MasterCard conduct had been revealed to everyone reading these
Journal
and
Times
articles changed the case from a banks versus merchants dispute in a courthouse into a matter of general knowledge. Moreover, these and other newspapers summarized, highlighted and accented the most venal Visa/MasterCard conduct.
Magistrate Judge Mann’s decision followed less than a week after these conspicuous newspaper articles first appeared.

The document that the Magistrate Judge unsealed had been prepared by Andersen Consulting (now known as Accenture) for Visa in December 1997, a little more than a year after the merchants sued Visa/MasterCard and a little less than a year before the United States sued them. The document bore no title but had the names Visa and Andersen Consulting on the cover. Also on the cover were six cartoonish pictures in a style suitable for hanging in a kindergarten classroom. One was of a lower case letter “i,” one of three horses, one of children’s letter blocks, one of a diamond shape within a square, one of fingers “walking” across a surface and one of a smiling shark with its teeth bared. At C&P, the untitled document was called “The Shark.” The transcript of the January 10, 2003, summary judgment argument notes me asking Jason Lipton, our paralegal, to “put The Shark up” on a huge video screen for Judge Gleeson and the packed courtroom to see. The Shark asked and answered two basic questions about our case. First, how had the tying arrangement helped Visa suppress competition? Second, what would happen if Visa were to lose the
Merchants’
case and be required to stop tying debit to credit and stop forcing merchants to accept Visa debit transactions?

Andersen Consulting, then a division of Arthur Andersen, had worked with Visa on its debit card strategy for more than two decades. Various witnesses described Andersen’s role in Visa’s debit program as being Visa’s “arms and legs.” The infamy of Andersen’s name (fresh from its starring role in the Enron scandal) and its long and intimate connection to Visa’s debit strategy raised more than a few eyebrows at the mock trials we conducted in 2003. The Shark showed that Andersen was asked two questions by Visa’s general counsel Paul Allen: (1) What would happen if Visa lost the
Merchants’
case? (2) What did the tying arrangement between debit and credit mean for Visa’s business? We
viewed Paul Allen (not to be confused with the President of Microsoft, who was having his own antitrust problems at the time) as Visa’s Darth Vader. His dour demeanor contrasted with the otherwise sunny and upbeat Visa persona. Many legal plots and strategies that we had uncovered had been traced to Allen. At one point in the litigation, the parties had agreed to exempt from deposition a total of just three executives from both sides. Each party had an opportunity to “hide” the executive whose deposition could create the most damaging testimony. With its one selection, Visa protected Paul Allen, not Carl Pascarella, its CEO. Visa clearly feared the prospect of me deposing Allen.

After the settlement, Mr. Allen and Visa quickly parted ways. At dinner one night, Pascarella ran into Phil Bronstein, the editor of the
San Francisco Chronicle,
and Eve Burton, the general counsel of Hearst, which owns the
Chronicle.
When Pascarella told them that Visa was looking for a new GC to replace Paul Allen, Burton asked, “What about Lloyd Constantine?” Pascarella almost lost his dinner.

In 1997, Andersen’s Shark responded to Paul Allen’s questions about what the tying arrangement meant to Visa by saying that the “Honor All Cards” tying arrangement was “a fundamental tenet of the Visa association” and “a cornerstone to the success of Visa” that had given Visa “a major competitive advantage,” erected a “significant entry barrier for new players,” and created the “ability of members to leverage strong Visa brand equity for all member Visa products.” These answers, unfortunately for Visa and MasterCard, were not only the truth but contained many powerful buzzwords in antitrust law. Specifically, the references to “competitive advantage,” “entry barrier,” and allowing Visa to “leverage” power from the credit market into the debit market were the touchstones of an illegal tying arrangement.

After setting out the anticompetitive advantages of Visa’s conduct, Andersen’s Shark pointed out the predicament that Visa would face
if the merchants were to win the case and the tying arrangement were prohibited. The Shark said that “Merchants will be able to choose which card products to accept and may potentially refuse Visa’s current debit (and commercial) products.” Here, Andersen dared to consider a world in which Visa’s customers actually had a choice.

The Shark said that without the tying arrangement, competition would increase as it “strengthens relative position of regional network[s] in online environment.” It also said that ending the tying arrangement would “increase pressure on Visa to effectively end [its] ban on participation in competing national marks,” including the competing American Express and Discover networks, which could not do business with Visa members under Visa By-law 2.10(e). The Shark estimated that if the tying arrangement were eliminated, Visa would lose 80 percent of its signature debit card volume and that “Visa may effectively be confined to the consumer credit market and no longer be a leader in the overall payment system market . . . threatening [the] overall viability of the Visa association.”

Assuming Visa would lose the
Merchants’
case, Andersen answered Visa’s question about what it would then have to do to survive. The Shark set out a range of options. The stated disadvantages of certain options were as damning to the defendants’ case as the plan of action that Andersen recommended. One option was to do nothing and just leave the price of signature debit where it was. The Shark concluded that this would result in the “[r]ejection of Visa CheckCard as payment” by merchants. This was consistent with Andersen’s prediction that 80 percent of Visa’s signature debit volume would be lost.

A second option was for Visa to respond by forcing the removal of competing PIN debit networks marks and functions from bank debit cards. At that time, December 1997, ATM/debit cards issued by banks usually had both the marks of networks like STAR, NYCE, Shazam,
and PULSE on the back and either the Visa or MasterCard mark on the front. Most still do. This permits the card to be used as either a signature debit card or a PIN debit card. Andersen envisioned a future in which merchants were no longer forced to take signature debit but might not have the effective ability to accept the safer/faster/cheaper PIN debit because the PIN debit function had been removed from the card. When The Shark analyzed this option in December 1997, he also pointed out that there would be a threat of additional “litigation” if Visa were to take this step. This reference in the middle of the 50-page Shark speaks volumes about the tunnel vision of Visa and Andersen and the incestuous relationship of these two companies in the long and ongoing debit wars.

Although the settlement, approved by Judge Gleeson six years after this analysis was completed, prohibited Visa from pursuing this option of “mandat[ing] competing online marks off cards” (removing “STAR” etc. from the cards), Visa actually tried to remove the marks from the cards in 1998. Visa and Andersen seemed oblivious to the second and equally important Sherman Act claim in our case. The merchants claimed that Visa and MasterCard were attempting to remove competing debit marks from ATM/debit cards and thereby attempting to monopolize the debit card market. So in the midst of the
Merchants’
case and into the teeth of this allegation, Visa plowed ahead. Visa used a new product that it called “Visa Checkcard II.” Checkcard II, or “deuce” as it was called internally at Visa, set a price on PIN debit transactions more than five times the prevailing marketplace rate for these transactions. But for a bank to be able to charge that quintupled price to merchants, it had to remove all of the competing debit network marks from the cards. Visa gave the banks a 400 percent price increase as a reward for destroying Visa and MasterCard’s competitors. This would also
force merchants to accept the higher Visa PIN debit price, because the alternative competing networks would disappear from the backs of ATM/debit cards.

C&P quickly got wind of this plan and alerted the Federal Trade Commission. The documents surrounding this Visa Checkcard II gambit were among the most damaging to Visa and played a prominent role in our summary judgment submissions. The FTC investigated and, later, so did the Antitrust Division. Visa was forced to back down from this plan a year later. However, it did so only after all this additional evidence had been created and severe damage was done to its defense in the
Merchants’
case. Visa did all this after being warned by The Shark that if it were to take these steps, additional litigation would likely ensue.

Making an awful situation worse, Visa even constructed a cover story. An unsealed, handwritten Visa document from 1999 stated that the real reason that Visa would capitulate and rescind the rule forcing competing debit network names and functions to be removed from the cards was because of the Department of Justice investigation and the merchants’ lawsuit. However, the document also said that Visa should explain the change in policy as merely Visa reconsidering the action and deciding that it didn’t make sense. The unsealed deposition testimony of Visa’s CEO, Carl Pascarella, shows that when I asked him why Visa had dropped the rule, he answered with a variation of this cover story.

Andersen’s Shark also recommended several other actions Visa could take if it were to lose the
Merchants’
case. These options were legally less risky and more realistic. One recommended option involved developing a so-called Visa “brand extension” for debit cards, meaning that in addition to the Visa name, the word “debit” or another word conveying the meaning of debit would appear on every Visa debit card. The recommendation also required Visa to
lower the interchange price for signature debit transactions so that merchants, who were free to reject the transactions, would have an incentive to continue accepting them.

The Shark was crucial during the litigation because it showed Andersen telling Visa that the merchants’ allegations about the predatory nature of the tying arrangements were correct. By being so specific about how the tying arrangements hurt merchants and consumers, The Shark gave Judge Gleeson a clear road map for the relief he should grant in order to protect them in the future.