Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (3 page)

The first case was called
Jones v. Califano.
I represented a class of thousands of aged, blind, and disabled people suing the United States and New York State for using a bureaucratic technicality to deprive them of part of their public assistance. I had shown that this technicality violated the law. But each time I sued, the government would pay off my client, the individual named plaintiff to necessarily maintain a class action, and thus “moot” the dispute and defeat the class action. So, I kept on filing class actions, and when Federal Judge Kevin Duffy once again denied my class motion and dismissed the case, after Ms. Jones was paid off, I appealed to the United States Court of Appeals for the Second Circuit. I argued that the government and courts were playing a cynical game on the backs of my elderly and disabled clients. In a somewhat novel decision, the Second Circuit agreed with me and thousands of poor people were finally paid their full subsistence benefits.

Toward the end of the
Jones
case, I represented another class, this one comprising all the gay prisoners in the Brooklyn House of Detention, who were suing New York State and New York City for being deprived of certain “privileges” given to straight prisoners. These privileges included access to the prison gym, chapel, library, and dayroom. The excuse for this discrimination was that the gay prisoners were being protected from the straight prisoners. After we sued, the government quickly folded and found ways to allow the gay prisoners to use these
facilities, but four of my clients wanted to continue the suit and obtain money damages for their mistreatment. My co-counsel, Professor Stacy Caplow of Brooklyn Law School, and I told our clients that there was virtually no chance that they would be awarded damages by a typical Brooklyn jury. Our clients were black, gay, convicted felons. One was serving time for a homicide. After a weeklong trial, a jury of white ethnics that included Italians, Greeks, and Jews found for our clients and awarded them $10,000 each—a result that shocked everyone in court and led to a second-page story in the
New York Daily News
that was written in a tone of outrage and intentionally paired with a story about former Miss America Anita Bryant’s anti-gay campaign.

Someone was watching these two class actions. A staff led by activists had been brought in by the new liberal New York Attorney General Bob Abrams. Bob had succeeded a moderately conservative Republican, Louis Lefkowitz. Bob Hermann, a senior lawyer on Abrams’s staff, took note of my victories against the attorney general’s office in these two cases and asked me if I wanted to work in the Abrams administration. Initially, I dismissed the idea, telling Hermann that I wasn’t going to help the state deprive people of their civil rights and welfare payments. But Hermann told me that Abrams had brought in a new team and a new agenda. He said that the AG’s office would now be on the same side as Legal Services and other activist legal groups—most of the time. He said I could prosecute affirmative public interest cases rather than defend the government. I asked what the “affirmative” litigation bureaus were. He named consumer protection, civil rights, environmental protection, securities, and antitrust, and offered me several middle-managerial positions in these bureaus.

Still skeptical, I said I wouldn’t leave my great job in Legal Services for a middle manager’s position. I would accept a bureau chief’s position or nothing. He said they had just replaced all the Lefkowitz bureau chiefs except those in antitrust and observed that I had no credentials for that job.
He was right. Although I had enrolled in an antitrust course at Columbia eight years before, I had actually shown up at precisely one class, reading the cases on my own. That was the totality of my relevant experience. That, and the fact that I slept every night with a former antitrust lawyer for the Federal Trade Commission (FTC), my wife, Jan.

I said I would take that antitrust job or nothing, and convinced Hermann to recommend my hiring to Abrams. My distant, but favorable, recollection of antitrust law involved decisions written by Supreme Court Justice William O. Douglas, the lion of the disenfranchised and oppressed. Justice Douglas’s antitrust decisions read like his civil liberties opinions; they left me with the impression that antitrust was to economic freedom what civil rights and liberties were to social and political freedom. I wanted to test that impression and wanted to test my skills against my high-priced Columbia Law classmates whose meat and potatoes were defending big antitrust cases.

I was scheduled to interview with the attorney general several weeks later. I purchased a new suit and cut my shoulder length hair for the big day. However, the day before the interview, it was “postponed” with the false explanation that Abrams had been called out of town. Years later, I found out that when Abrams had read my résumé, he had refused to interview me and upbraided his staff for sending a person with no experience to head the largest state antitrust office in the country.

After the “postponement” of my initial interview in the early spring of 1980, a young partner at White & Case accepted the job but backed out after his wife realized that the job paid $40,000 (less than half his private sector salary but almost double mine in Brooklyn Legal Services). My interview with Abrams was rescheduled for a new date several months after the cancellation, and I was given another false explanation. Although I didn’t know the real story, I was suspicious
and annoyed, especially about the haircut. This time, I went into the interview long hair and “an attitude.”

When Abrams asked the obvious question about my lack of experience, I attacked. I told him I had done some research and that his antitrust office was doing little or nothing. I told him I was a good litigator, that litigation was litigation, and that I could master a new substantive area quickly. Set back on his heels and somewhat amused, Abrams hired me. Or so I thought. Years later, he admitted that he had hired me because of my knowledge of New York Yankees trivia, revealed during the interview.

My initial ignorance of antitrust law was a great asset. I didn’t understand all the things we weren’t supposed to do, and I didn’t understand the tertiary role of state antitrust offices, well behind the federal antitrust agencies and the private bar. Although antitrust law had once been primarily the province of state attorneys general, by the 1920s, antitrust law was dominated by massive battles among U.S. antitrust agencies and big private law firms. This relegated the states to the occasional small local dispute.

I brought to my new job the fervor and self-righteousness of a “poverty lawyer.” I knew that my new causes and clients were right. Their goals of economic and market freedom were closely related to those of my former clients fighting for their civil rights and liberties. My new role as head of Antitrust Enforcement for New York State felt very much like my old job, and I started to rebuild my new shop on the model of a Legal Services office, hiring my old colleagues.

During the next eight years, as the Reagan administration effectively abandoned antitrust enforcement and tried to repeal the laws through legislation and court advocacy, we took over. I began a movement in the antitrust offices of the state attorneys general. The AGs adopted uniform enforcement guidelines, which I wrote, that made it possible to collectively enforce the antitrust laws in cases and
investigations involving groups of states. I was lead counsel in many of these. In the late 1980s, most of the difficult, visionary and cutting edge antitrust cases emanated from the states. My student intern, Eliot Spitzer, witnessed these early efforts and got his first taste of how the states could flex their muscles and supplant federal agencies that were asleep at the switch. In some of these cases, five or ten states would band together. In one case, nineteen states, in others, more than forty.

On my last day on the job, January 7, 1991, I filed and settled a case where, for the first time, all fifty state attorneys general joined together in a single antitrust case and sued Mitsubishi for fixing the price of video equipment. And the year prior to that, I led the fourteen states that had filed suit against Visa and MasterCard for merging their debit card operations as described in the opening of this book. That 1989 lawsuit, now referred to in the industry as the
Entree
case, forced Visa and MasterCard to abandon their joint debit card operation and laid the groundwork for the
Merchants’
case. The
Merchants’
case was the contest that I had been training for all my life.

T
HE PLAN TO boycott American Express was recklessly broadcast in a telegram sent on March 11, 1987, to 5,500 U.S. banks by Visa’s CEO, Charles Russell. Russell warned the banks, members of both Visa and MasterCard, that American Express had just entered the credit card market with a revolving credit card called Optima. Russell’s telegram, sent from Visa’s sprawling, campus-like headquarters in the San Francisco Bay area, urged the banks to boycott American Express, to stop selling Amex Travelers Cheques, and to terminate other business relationships with Amex.

Lawyers for American Express sent me a copy of the Visa telegram. Two things startled me: the blatancy of its call for a boycott of American Express and the explicit address to MasterCard banks as well as Visa banks. I soon learned that Visa and MasterCard were not really competitors. Visa and MasterCard then were, and still are, card networks and brands that also process electronic payment transactions. The same
big
banks—such as Citibank, Bank of America, Wachovia, Wells Fargo, and Chase—called the shots at both credit
card companies. These big bank owners/members of both companies offered virtually identical products. Some of these products were labeled Visa and others MasterCard, but other than the paint job, the products were the same.

In what I learned was called Visa and MasterCard “duality,” these same big banks ran Visa and MasterCard under virtually identical rules that specified the way that cardholders, stores, and banks use their cards and networks. In fact, the networks held regular meetings to align these rules. This noncompetitive and anticompetitive system of duality was also bank jargon for the fact that virtually every bank that offered Visa credit cards to its customers also offered MasterCard credit cards on the exact same terms and price. Every store that accepted Visa credit accepted MasterCard credit. The two products functioned identically and were priced almost identically, despite the different names and advertising attempting to convey the impression that they were different.

Under duality, it made sense that Visa’s CEO would explicitly call on “MasterCard” banks to boycott American Express. It made sense, but doing it so publicly was stupid. To an antitrust enforcer, it was like a front-page ad in the
Wall Street Journal
that said, “Just in case you were wondering, Visa and MasterCard don’t really compete.” That, precisely, was my interpretation of the Russell telegram.

Within days, I got the backing of most state attorneys general to threaten Visa and the banks with antitrust action unless the incipient boycott was called off. Within weeks, the banks that were in the process of terminating business relationships with American Express backed down, and the few who had already stopped selling Amex products rescinded their actions. Barry Brett, one of the outside counsel for Visa, described the Russell telegram to me as “an orphan with nobody willing to admit authorship.”

Although the venality, misrepresentation, and smugness of these companies was no worse than other industries I took on (cable television
springs to mind), Visa and MasterCard had something that set them apart for me. It was the sheer audacity of the cartel that they jointly coordinated: It comprised virtually every U.S. bank. Economics taught that cartels—organizations in which companies that would otherwise compete agree to fix and coordinate their prices and the products they offer—are unstable and that the greater the number of participants, the greater the instability. Visa and MasterCard allowed thousands of banks to act together to fix prices, to promote inferior standardized products, and to suppress competitors and competing technologies.

Initially, one group of big banks ran Visa, and another MasterCard. After duality, the same banks owned and ran both, allowing this massive cartel to operate and remain stable. The fact that this grand conspiracy was unconcealed and that neither the Department of Justice, the Federal Reserve, nor anyone else seemed to care, told me that this was my chance at improving something that affected every American.

Our brief investigation of the boycott also disclosed that Visa and MasterCard had agreed to join forces in an emerging market by forming a new debit card network called Entree. In explaining the competitive significance of this action to my staff and the state AGs, the best analogy I could come up with was a hypothetical merger of Coke and Pepsi to monopolize a new beverage market, one that would be much bigger than cola. The problem with that analogy was that Coke’s and Pepsi’s cola products really competed, while in 1987 Visa’s and MasterCard’s credit card products in reality did not.