Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (31 page)

Another important result of the case was the wedge it drove between the once inseparable Vi-sa/MasterCard. The
finger-pointing and recriminations that began in the weeks after their summary judgment fiasco intensified after the settlement, as each association scrambled to raise the money necessary to pay the more than $3 billion in cash required. Surprisingly, Visa had the tougher time convincing its banks to bail it out and came very close to going bankrupt. MasterCard had a somewhat easier time, although it made a publicly reported appeal to the European banks of Europay, with which it had merged.

All of the Visa/MasterCard banks were unhappy, and lawsuits started to fly. In one, TCF, a large Midwest bank, sued Visa over the terms of the settlement, which required Visa and its banks to lower their rates while requiring these banks to effectively advance additional money to Visa so that it could pay for the settlement. Visa adopted an exit penalty called the “Settlement Service Fee” to prevent its banks from dropping out of Visa and thus avoid paying their “fair share” of the settlement. Prior to the
Merchants’
case, there had been sporadic antirust litigation by financial institutions trying to force Visa to admit them as members. The 1991
Mountain West
case was one these. After the Merchant’s settlement, Visa had to erect barriers to thwart banks from jumping the Visa ship. MasterCard then sued Visa, claiming that this exit penalty was an antitrust violation. The day that pleading was filed was a great day for antitrust law. Visa and MasterCard, formerly united in conspiracy, were now divided in defeat and began to really compete, using the legal weapons that real competitors use against each other.

Although it is arbitrary to designate any one day or event for this honor, and the result that has come to pass, I believe that the day when MasterCard sued Visa was the day the Visa/MasterCard bank cartel breathed its last.

In the wake of the
Merchants’
settlement, well over a hundred new class actions were filed, driven by lawyers attempting to hit it big, as they thought we had. And while none of these cases seems to have
either the legal talent, the client commitment, or the other attributes that formed the basis of our victory, the amount of money claimed in those cases, still pending against Visa and MasterCard, is in the hundreds of billions of dollars.

In addition to those hundred-plus class actions, two important new individual cases were also filed against Visa and MasterCard—one by American Express and one by Morgan Stanley’s Discover Card network. These cases were the grandchildren of the
Merchants’
case. I and my firm assumed a primary role in this follow-on litigation.

As Judge Gleeson and the Second Circuit explained in their opinions, the United States’ case against Visa/MasterCard “piggybacked” on the discovery and legal and economic theory earlier developed in the
Merchants’
case.

The U.S. case focused on allegations, first made in the
Merchants’
case, that Visa/MasterCard had pummeled competitors American Express and Discover, using anticompetitive rules to marginalize those competing card networks. The Shark predicted that Judge Gleeson would invalidate Visa’s rule. However, with our help, the United States got to trial first and invalidated those particular Visa and MasterCard rules targeting Amex and Discover.

After the U.S. case was successfully concluded, Amex and Discover auditioned counsel and prepared to file suit to collect monetary damages that the court found those networks had suffered, but without specifying the amount. I entered a beauty contest to be Amex’s lead counsel but lost out when the starstruck financial services giant hired the legal giant David Boies. I then accepted the offer of Morgan Stanley to be lead counsel for the Discover Card’s lawsuit. Morgan Stanley’s then CEO, Phil Purcell, had been in the audience for my 2002 “Dance of Death” speech in Brussels and had not forgotten how I made detailed predictions about the coming final year of the
Merchants’
case and made good on those predictions.

The
Amex
and
Discover
cases were coordinated for most purposes in coordinated proceedings before a single judge, Barbara Jones. Judge Jones had presided over the United States’ case against Visa and MasterCard. In these new coordinated cases, Boies and I faced new counsel hired by Visa/MasterCard to replace the huge law firms tiny C&P had routed in the
Merchants’
case. Visa hired John Keker, a famous San Francisco-based trial practitioner, and MasterCard retained Simpson Thacher, a firm that had been brought in at the conclusion of the
Merchants’
case, to negotiate an honorable surrender for MasterCard.

These new cases, though very large, should have been straightforward and brief collection actions. All the key facts and legal conclusions had previously been developed in the
Merchants’
and U.S. cases. A quick victory was my expectation as Boies, Keker, Kevin Arquit (who had moved to Simpson Thatcher), and I argued the major pretrial motions prior to my departure to join the Spitzer administration. As expected, though much more slowly and painfully than warranted, the
Amex
and
Discover
cases settled after two more grueling years, in 2008, with Visa and MasterCard agreeing to pay more than $7 billion to the plaintiffs.

Considering both the cash and the more significant and valuable structural and injunctive relief granted in these three cases, the
Merchants’
case, the
Amex
case and the
Discover
case are, in order, the three largest antitrust settlements in U.S. history. But one ironic effect of the
Merchants’
settlement was to make it much easier for Visa and MasterCard to pay for the Amex and Discover settlements than the earlier
Merchants’
payout. That is because the networks were awash with cash as a result of the IPOs they both launched in the wake, and as a result, of the
Merchants’
case.

In August 2005, MasterCard announced that it would abandon its status as a membership corporation owned by the banks and offer its stock to the public. Visa was later forced to follow suit, reversing the
historical trend of MasterCard reluctantly following, or being forced by the banks to follow, Visa’s lead. These IPOs were wildly successful, providing the networks enough cash to pay for all three multibillion dollar antitrust settlements. The IPOs are also an effort to place an obstacle between the banks and any future antitrust judgments that might result from the hundred-plus class actions, claiming hundreds of billions, all filed because of our success in the
Merchants’
case.

With Visa and MasterCard (no longer Visa/MasterCard) converted to public companies, their ability to coordinate and conspire will become even more severely limited than it became after the
Merchants’
settlement. The competition between Visa and MasterCard, the additional competition provided by the recently unshackled American Express and Discover, and the innovation that will occur in a newly competitive environment are likely to produce benefits to the public that will far surpass even the record-setting benefits explicitly required by the
Merchants’
settlement. That is the way competition and well-crafted antitrust remedies are supposed to work, and once in a generation do.

The
Merchants’
case had its antecedents in the nonpartisan and collective efforts of state antitrust enforcers to fill the void created when the Reagan administration decided that the antitrust laws had outlived their usefulness. That same spirit motivated the massive dismantling of regulatory supervision at numerous agencies that began under President Reagan and reached full and tragic fruition under President George W. Bush.

In 2005, I served as the keynote speaker at The Federal Reserve’s International Payments Policy Conference in Santa Fe, New Mexico. At 7:00 AM on the morning of May 5, 2005, a contingent of three officials from the Kansas City Fed, who had received a copy of my prepared remarks, knocked at my hotel room door. When I invited them into my room, they asked me to change my speech. They implored me
to remove some of my harsh criticism of the Fed’s abdication of its role to supervise America’s payment system and its laissez-faire attitude toward banks that were pillaging American merchants and consumers. I told these Fed officials that I would reconsider the tone, though not the substance, of the speech they had invited me to give as the keynote speaker of their conference. For the courtesy I gave them by toning down the speech, these Fed officials later rewarded me by refusing to publish an article, on the same subject, that they had solicited from me. The article was later published in two forms by the business schools at Columbia and New York University.

My speech delivered later that day at the Fed conference reported the evolving results of the
Merchants’
case. I said that the case showed why the Fed should use its existing powers to supervise the American payment system, as it did beginning in 1914, during a period of rapid expansion of interstate commerce. The Fed officials in the audience were polite, but taking my advice was not in the cards for a Fed led by Chairman Alan Greenspan. Mr. Greenspan understood “irrational exuberance” but failed to see that unqualified trust in market forces is also irrational when the market has been distorted by monopoly and market power—which result from lax antitrust enforcement.

As I conclude this book, the Obama administration is in formation. One promise it has made is to revitalize federal antitrust enforcement. Another is to revive regulation and regulatory oversight where it is truly needed. The Obama team, therefore, takes office with opportunities, demonstrated by the
Merchants’
case, at both the Fed and the federal antitrust agencies.

As of the end of 2008, four waves of settlement checks had been sent to the merchants in the class. Some of those checks are small, but many are in the thousands, tens of thousands, hundreds of thousands, millions, or tens of millions of dollars. Every member of the class who has filed a claim form has been paid the full amount of their signature
debit and credit card claims. After that, PIN debit claims will be paid. Then additional checks will be sent to the same claimants from money left over, due to the fact that not all eligible class members filed claims. With each check that is sent, there is a note from Constantine Cannon reminding the merchant why it is receiving the money and how it has benefited and can benefit from the more important injunctive relief that is permanent. The note also thanks merchants for staying the course in the historic case against the now defunct Visa/MasterCard bank cartel.

And finally, in July 2005, two months after the Supreme Court declined to hear the
Merchants’
case for the second time, the lawyers got paid. This was almost nine years after the case was filed and more than fourteen years after I began preparing it.

A lot of people received a lot of money that July day—in many cases, the biggest payday they will ever experience. That certainly was true at our law firm. Payday included every person in the firm’s New York office, including, lawyers, paralegals, and clerical and administrative staff. Many of these people did not work on the case, and others actually joined the firm after the case settled. I wanted it to be a nice day for everybody who worked there.

The payment to me was especially large, though not nearly as large as many people believed or continue to. Luckily, coming to me at the age of fifty-eight, the money did not do any permanent damage. Some ephemeral and superficial things changed for the worse, and some for the better. On the negative side, I got to experience a shift in the way some people related to me. Up until payday, people who sought me out usually did so for some skill or knowledge they thought I possessed. After payday, I was deluged with the crudest appeals for money. I got personal calls from presidential candidates whose staffs maintain a list of people who are perceived to have the money and the inclination to give it away. Causes came out of the woodwork, often
with strident reminders of my responsibility to them. On the positive side, Jan and I were able to increase our support for people and causes we really believed in. We took several dream trips, purchased a few luxuries, and then went back to a life remarkably similar to the life we lived prior to payday—and a very good life it was, and is.

With the closing paragraphs of this book, I have also reached emotional closure on this “Great Auk’s Egg” of a case, borrowing a phrase from Ford Madox Ford about his proudest and longest literary work. I think that I understand why I undertook the
Merchants
’ case, why it was successful, and what it means to me. We tell ourselves stories about who we are and why we do things. Sometimes an event provides insight into whether those stories are true. The truth is that I needed this case. I am the son of a brave woman and a brave man, who was also a great athlete. I don’t have my father’s athletic ability or either of my parents’ courage. But they left something in me that compels me to stretch what I have toward their example.

The
Merchants’
case required me and my colleagues at C&P to stretch way beyond the former boundaries imposed by our limited skills of organization, diplomacy and advocacy. From the outset, it felt like an epic athletic contest. My father, who was also a WWII hero, and other real soldiers who faced real bullets, will forgive my frequent use of military metaphors. I used them because the case also felt like a long war to me.

The
Merchants’
case gave me what I needed, but it was useful for me to have that assumption confirmed. At the moment that I realized I would eventually receive enough money that I never had to work again, I also realized that I must continue working. I thought that I needed to win the case. Though I’m very happy that we won, as I am happy about the money, I didn’t really need the victory. I needed the game, the battle and the stretch. I needed to have a case in which we needed to do, and did, everything. I needed the work.