Read Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel Online

Authors: Lloyd Constantine

Tags: #Antitrust, #Business & Economics, #History, #Law, #Nonfiction, #Retail

Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (5 page)

BOOK: Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel
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The Antitrust Division’s position was more important than Arkansas’s support for Worthen. Lacking any government backing, Visa repealed its anti-duality rule. In the next few years, every large bank and most medium-sized banks in the United States became owner/members of both associations and issued both brands of credit cards. The fact that the Department of Justice was principally to blame for this problem was not lost on anybody, least of all Visa. Visa capitalized on the elimination of MasterCard as a competitor and gleefully pointed out that the Antitrust Division had “made us do it.”

Visa used this argument as a defense in many antitrust cases and government investigations. The tactic worked well at the federal agency level, where the lawyers seemed to be traumatized by the doctrinal sins of their predecessors. An investigative file given to the States by the Reagan Antitrust Division discussed the “creeping merger” of Visa and MasterCard but concluded that the Division would not do anything about this until there was an actual merger. While the associations crept closer together, the federal agencies slept. They acquiesced in the Plus and Cirrus acquisitions, and when an “actual” merger came along in the form of Entree, the federal agencies again did nothing. This federal laxity gave the states and me our opening.

During the
pre-complaint negotiations with the associations, Visa and MasterCard tried “the United States made us do it” defense on me, but only half-heartedly. It was common knowledge that the states, under my direction, had set themselves up as a de facto national agency to fill the void left by federal non-enforcement of the antitrust laws. At the time, business periodicals reported frequently on this clash of “antitrust federalism.” In fact, on March 11, 1987, the day that the infamous Russell telegram was sent to the 5,500 Visa and MasterCard banks, I was flying back from Washington with Bob Abrams and reading the
Wall Street Journal’
s coverage of an “in your face” action we had spearheaded the day before, when the States had adopted the Horizontal Merger Guidelines I had written. The

In an unusual attack on the Reagan administration’s antitrust-enforcement policies, the National Association of Attorneys General unanimously adopted merger guidelines intended to slow the pace of major corporate takeovers. The move, announced by a bipartisan group of eight attorneys general representing every
region of the country, indicates the extent of state opposition to the administration’s generally hands-off approach to merger enforcement. It also sets the stage for a more aggressive and better coordinated effort by States to challenge merger proposals in Court.

Though our story grabbed Bob Abram’s attention, he was soon distracted by his discovery that Phylicia Rashad was sitting right in front of us. I ended any attempt to discuss with Bob our next move in the states-versus-feds antitrust wars.

My colleagues and I laughed during the July 1989 meetings when Visa and MasterCard told us that the federal agencies had encouraged duality and had acquiesced in the formation of Entree. But after we filed the
complaint, we were concerned that “the federal government made us do it” defense might work with Judge Leval, who had earned his spurs at Cleary Gottleib, a big firm whose mainstay was defending large antitrust cases.

Another obstacle to the success of our case was the fact that all of the mergers—Visa, MasterCard, Cirrus, Plus, and Interlink—attacked in the
complaint had been consummated before we went to court. In 1989, the U.S. Supreme Court had not yet decided whether a state attorney general could get a federal court to require the breakup of a completed merger, even if the AG could prove that the merger had been illegal and was causing harm to the marketplace. The remedy of a breakup or divestiture was only clearly available to the federal antitrust agencies back then, and those agencies wanted to keep that divestiture remedy exclusively to themselves. They weren’t challenging very many of the enormous corporate mergers of the 1980s, and that neglect, from which our economy still suffers today, was intentional. It created many of the “too big to fail” companies that taxpayers are now being forced to bail out.

The federal agencies didn’t want anyone else to enforce the anti-merger law either and had gone to court to narrow the scope of private enforcement of these laws. They had even gone to Congress unsuccessfully seeking what effectively would have been repeal of Section 7 of the Clayton Act the anti-merger provision of the antitrust laws. Directly to the point, on the day we filed the complaint seeking the disintegration of
the United States government was in the Supreme Court trying to block the California attorney general from getting a group of stores divested from the Lucky and American Stores supermarket chains, which had merged illegally.

We also faced widespread judicial hostility to undoing completed merger transactions. Courts simply didn’t (and still don’t) like to require a breakup after a deal has closed. They refer to it as “unscrambling eggs.” This reluctance gets stronger the more time passes. The courts ask, “Where were you when this was all happening? Why didn’t you stop it before it got to this point?” And the answer to those questions has to be very compelling to have any chance of success. My potential answers in 1989 were not persuasive. My most candid answer would have been that “when this was happening, we weren’t thinking about Visa and MasterCard and were naively relying on the federal agencies to enforce the antitrust laws.”

The most important thing we had figured out in our investigation was that Entree was designed as much to retard the development of the debit card market as to make Visa/MasterCard the dominant force in a rapidly expanding business. Although expansion of the debit market was inevitable, the pace of expansion could be slowed by a monopolist. Visa and MasterCard wanted to suppress PIN debit when they formed Entree. The banks feared that PIN debit transactions would replace many lucrative credit card transactions, especially where a plastic card was being used merely for convenience and not to obtain credit. The banks understood that PIN debit was faster, safer and cheaper
than their signature debit card systems and, if allowed to grow, would quickly put the Visa/MasterCard signature debit card programs out of business.

The banks also viewed those hundred-or-so little ATM/debit networks around the country, like NYCE, MAC, STAR, and Shazam, as not only debit card competitors that had to be stopped but competitors who might expand and, in the future, challenge their lucrative credit card monopoly. These ATM/debit card networks already had banks issuing their cards, consumers carrying them and merchants accepting them. They also had card-processing facilities. All they had to do was expand from local to regional to national networks and then enter the credit card market. Their credit cards could be then authorized by a PIN rather than a signature, which was safer, faster and more efficient. While Visa/MasterCard and their banks had lots of reasons to retard the growth of debit and to dominate that business once it became big, their most important objective was to protect Visa/MasterCard’s credit card monopoly. The overarching allegation in the
complaint was that the new network was not really designed to operate actively so much as serve as an obstacle to the expansion of other fledgling debit card networks.

Entree fell apart as soon as we filed the complaint. Visa and MasterCard beat their breasts and made noises about fighting until vindicated. In truth, this was just posturing, and the associations’ lack of resolve soon became apparent. I believe one reason they quickly threw in the towel was MasterCard’s post-traumatic stress, resulting from our discovery of their discussion about threatening me. Bob Norton, the MasterCard general counsel, absented himself from meetings and court appearances. MasterCard didn’t seem to want to litigate against me, presumably because of their fear that I would use the Rusty Staub’s incident against them at some crucial juncture in the litigation.

A second reason had to do with the sibling rivalry that had developed between Visa and MasterCard because of duality, a rivalry that was further exposed by the Entree merger. Each sibling was constantly trying to show their bank parents that they were the smarter kid, and each believed that the other was holding her back. The result was numerous disputes about seemingly trivial issues. One such dispute involved a fight about whether an Entree debit card could also display the Visa or MasterCard logo. Visa wanted its proud and handsome logo on the cards. MasterCard, somewhat hysterically, predicted that putting Visa’s or its own nondescript MasterCard logo on a card that also had the Entree brand would set in motion a sequence of events that ultimately would destroy the lucrative Visa/MasterCard card networks. Consultant Booz Allen Hamilton was hired to arbitrate this dispute, ultimately deciding in favor of Visa’s point of view. This unleashed a torrent of recrimination by MasterCard against both Booz Allen and Visa, the likes of which had not been heard since Regan was ragging on sister Goneril to King Lear. Killing Entree would momentarily separate the siblings and give each the opportunity to show the banks which network could develop the debit card market more profitably. For fans of the TV show
think of J. R. and Bobby Ewing vying for Jock’s affection by showing who could make more money for “Ewing Oil.”

A third reason Visa and MasterCard folded so soon after the
complaint was their desire to limit their loss to Entree and not jeopardize the previously completed acquisitions of Cirrus and Plus or the imminent consummation of Visa’s purchase of Interlink. Another likely reason for Visa/MasterCard’s spiritless and quickly abandoned defense of Entree was their fear of what the states would uncover if full pretrial discovery were to go forward. Lots of very nasty stuff from the 1980s was produced a decade later during the pretrial exchange of documents and depositions in the
All of that and much more would have come to light a decade earlier had the
case gone forward.

With little fanfare, and before a single document was produced, or a single deposition taken or any motions filed by either side, the defendants told me that they would abandon Entree if our case would go away. In a series of meetings held separately with Visa and MasterCard, though no longer attended by the hibernating MasterCard general counsel Bob Norton, we negotiated the
consent decree, which was signed on May 8, 1990. The
decree also required Visa and MasterCard to give the state attorneys general expedited notice and disclosure of various actions, which raised competitive red flags—such as Visa/MasterCard joint activities and acquisitions of competing debit, credit, or ATM systems.

At a credit card industry conference in Denver, Colorado, on October 4, 1990, three days after the death of Entree, I took a victory lap and delivered a requiem for the network. I also spoke about other antitrust issues facing the payment systems industry. I told the audience of bankers, merchants, and payment network executives that the
case was just the first of a series of antitrust cases that would confront the plastic card industry in the coming decade.

Going Private

FTER ENTREE WAS terminated, I decided to leave the New York attorney general’s office. I had been there for more than a decade, and it was time to move on. For one thing, the State antitrust movement and our quest for recognition as a “national” agency was becoming a cult of personality—mine. The focus on me was symbolized by MasterCard’s crude and naive assumption that threatening me would make the states go away. It also trivialized and devalued the work of scores of talented people in state attorneys general offices around the country. I could feel the resentment of colleagues welling up and wanted to leave while things were still friendly.

At the same time, the pull of new cases was making it difficult for me to leave. By mid-1990, my office was spearheading a forty-four-state investigation of a joint venture in which the largest U.S. cable TV systems, including Time Warner, TCI, Cox, Comcast, and Continental, had joined forces with General Electric in the “K-Prime,” later called “PrimeStar,” Direct Broadcast Satellite (DBS) system. Our theory about PrimeStar was similar to our claims about Entree. We claimed
that this satellite venture was an attempt by cable television monopolists to slow the pace of a competing technology (DBS) and monopolize the new satellite technology when it finally developed.

My office was also leading multi-state investigations of alleged price-fixing by Mitsubishi and Nintendo, the third and fourth of our multi-state price-fixing cases against Japanese consumer electronics conglomerates in three years. We had successfully sued Panasonic and Minolta the previous two years. Years later, I would get the attention of my antitrust students at Fordham Law School by reading aloud from Michael Crichton’s
The Rising Sun,
where a character refers to four of my cases and says:

BOOK: Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel
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