Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (6 page)

Yeah. And we’re looking at Nakamoto. My sources keep telling me Nakamoto’s going to get hit with a price-fixing suit. Price-fixing is the name of the game for Japanese companies. I pulled a list of who’s settled lawsuits. Nintendo in 1991, price-fixing games. Mitsubishi that year, price-fixing TVs. Panasonic in 1989. Minolta in 1987. And you know, that’s just the tip of the iceberg.

But back in 1990, I realized that if I were to defer my departure until my new cases were over, other cases would just replace them, and I would either never leave or would more likely be kicked out by a new attorney general who would replace Bob Abrams. It was clear by mid-1990 that Bob would run for the Senate in 1992 against Al D’Amato, who was engulfed in a series of scandals that left him vulnerable. So I started looking for a job while trying to get as much done as possible. We sued Mitsubishi before I left. This was the first time in which all fifty states joined to bring an antitrust case. We settled this case on my last day with the New York attorney general’s office, January 7, 1991.

On January 8, 1991, I became a partner in the New York office of the large, Chicago-based law firm McDermott Will & Emery.
That first day, Andy Somers, the general counsel of American Express, had lunch with me and asked me to represent American Express in an antitrust dispute with Visa. He said he had followed the
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case closely and had waited until I left government to hire me. I was ecstatic. When you enter private practice from government, you have no business. You go from being in demand to being the new boy with no clients, nothing to do and no power within your firm. Your impotence continues until you get your own business. And three hours after arriving at McDermott, I thought I had the type of client and business that would give me instant credibility. It also promised to keep me involved in payments systems antitrust—a specialty that I egotistically believed belonged to me.

I never got to represent American Express, because my firm never permitted it. When Amex called, I did a “conflicts check” designed to make sure my work for them would not conflict with the firm’s work for other existing clients. The conflicts check came back clean. But in a large firm like McDermott, every partner gets to see the conflicts check and to consider the proposed representation. They consider whether, in addition to an actual conflict, there may be an “issue conflict” putting the firm on the side of an issue that another client might not like. Other partners in the firm may even consider whether they want the new guy to take on a case that might make it harder for them to get some new business in the future. The possibility of an “aspirational conflict” stopped me from representing American Express.

Three weeks later, Visa hired me to represent them in an antitrust case against Discover. When Visa retained me, I thought it was natural and logical: I was an antitrust star. I knew the industry. As Bennet Katz, Visa’s general counsel at the time, said, “You have just knocked our brains out—I want you on our side, and I think you will agree with Visa on this issue.”

Visa had just been sued in an antitrust case by the Discover credit card network, then owned by Sears Roebuck. A Sears subsidiary had just bought a little bankrupt industrial bank in Utah called the Mountainwest Industrial Loan Corporation. Mountainwest was a member of Visa (and MasterCard, of course) and had issued a few thousand Visa credit cards. Using this little bank, Discover planned to issue millions of Visa credit cards as part of a plan to eventually shift cardholders to Discover, in part by offering them more favorable terms. This would greatly expand the Discover network. Discover’s position, and the gist of its antitrust complaint against Visa, was that competition would be increased if it could issue Visa credit cards as well as Discover credit cards.

When Visa found out about Discover’s plan, it ordered the company licensed to manufacture Visa credit cards to stop the presses. But in trying to stop Discover from becoming a member of Visa, I thought Visa was probably right from the standpoint of competition policy. Regardless of the evil in Visa’s heart and its numerous antitrust sins, especially against Discover and American Express, I viewed a world in which Discover and American Express became members of Visa/MasterCard as a competitive problem. So I agreed to represent Visa on this narrow, but important, antitrust issue along with its usual antitrust firm, Heller Ehrman White & McAuliffe, based in San Francisco. The antitrust points were debatable, the economic theories involved were elegant, and the case was likely to be fun.

Two hours after I agreed to represent Visa against Discover, a representative of Discover called to ask whether I would help represent Discover in the same case. I declined, explaining that I was already on the other side. In the next hour, I was overcome with self-doubt, not about my agreement to help Visa, but about whether I would have said yes to Discover if they had just called before Visa. Thinking about this was extremely uncomfortable for me at the time. I was still so thoroughly a public interest lawyer that the thought that I would simply agree to represent the first client who called was horrifying. Of course, this is what lawyers frequently do,
and is their job to do. But at forty-three, I was still a litigation virgin. The true answer to the uncomfortable question about Discover is unknown, like most “what ifs.” But I think I would have represented Discover had they called first. The points in the dispute were close and debatable. Visa was an antitrust predator generally, if not in this specific instance. But most importantly, I needed the business and the interesting work.

For the next month, the nastiness was directed at me on three fronts, eventually forcing me to withdraw as Visa’s representation. The first attack came from American Express, who went to my former boss, Attorney General Bob Abrams, complaining that there was something unethical about me representing Visa after so recently suing Visa. One doesn’t have to know anything about legal ethics to understand how silly this charge was. Indeed, representing Discover against Visa soon after the
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case might have given Visa some cause for complaint, as they might have incorrectly inferred that confidential information obtained about Visa in my government capacity was being used against them in a private dispute. But the notion that the expertise attained by a government lawyer can’t later be used by that lawyer in private practice, even in defense of a former opponent of the government, is unknown to the law unless government secrets are being used. Nevertheless, American Express went on a rampage, calling as many of my former colleagues in the states as they could to register complaints against me.

My former colleagues also reacted angrily to my representation of Visa. They seemed ashamed that I was “selling out” just weeks after leaving my post as their leader. They may also have been releasing some pent-up hostility about all the press I had been getting for their efforts. I might have been able to resist all that, but my law firm ordered me to drop the case. A month after the new case had passed a conflicts check, it tardily came to light that one of the McDermott partners in Chicago was doing some tax work for Dean Witter—a corporate affiliate of Discover.

That was that, and it proved to be exceedingly lucky for me. In my unhappy month of representing Visa, I never examined a confidential Visa document, nor did much more than make one trip to Salt Lake City to watch a court argument and one trip to D.C. to talk to the staff at the Antitrust Division and try to defend myself. Had I not been forced out so quickly and stayed long enough to delve into confidential Visa documents, I might not have been able to later represent the merchants in their case against Visa and MasterCard. I became convinced that payment systems antitrust no longer had a place for me. American Express and Discover now hated me. Visa was annoyed that my firm had yanked me almost immediately after my agreeing to represent them. MasterCard? Not after the Rusty Staub’s incident. No way for either side—never!

Later in 1991, a few months after the Visa/Discover fiasco, I got a call from Ralph Spurgin, the head of a private-label credit card business owned by The Limited, Leslie Wexner’s specialty retail empire. Spurgin, an athletically built owner of Harleys and 12-cylinder cars, had heard me speak about the antitrust implications of various payment industry practices and wanted to discuss one of them. He flew to New York from Columbus, Ohio, and met with me and my law partner Larry Fox.

Spurgin, a tough guy, was angry about the tying arrangements that forced The Limited to accept Visa and MasterCard debit card transactions because they accepted Visa and MasterCard credit cards. He complained that the price of the debit transactions was the same as for credit cards, with no justification. He also complained that the debit cards were designed to look like credit cards. Spurgin had conducted a test with help from a bank in Minneapolis. The Limited found out that many of the Visa and MasterCard transactions that The Limited assumed were credit, were in fact debit card transactions. The test also showed that this small problem was
steadily getting bigger. Spurgin complained that these signature debit transactions, which cost The Limited roughly $1.50 for a $100 purchase, were displacing cash and check transactions that cost The Limited only a dime or less. The Limited couldn’t say no to these transactions, nor could they even figure out when they were getting these disguised debit cards, except by getting their bank to do an “after the fact” test.

Spurgin hired me to do an analysis of a potential lawsuit against MasterCard. He and I believed that MasterCard was the weaker of the two associations. It had a much smaller signature debit program and was actively promoting a PIN debit program, and for these reasons, MasterCard was more likely to fold if sued. Larry Fox and I did the analysis and concluded that The Limited had viable antitrust claims against MasterCard.

After reviewing our analysis, Spurgin wanted to file suit. The Limited’s chief financial officer, Ken Gilman, sent threatening letters to both MasterCard and Visa. He demanded that the associations stop forcing The Limited and its sister stores—Victoria’s Secret, Abercrombie & Fitch, Lane Bryant, Lerner, Bath and Body Works, and Bendels—to accept signature debit transactions and demanded some mechanism for his stores to be able to distinguish the debit cards from the credit cards so they could be rejected.

Visa and MasterCard both responded that they could and would continue to force these stores to take their debit card transactions. Because Visa and MasterCard credit cards were the primary credit line of most U.S. shoppers, The Limited really had no choice. Spurgin and Gilman wanted to sue. But Leslie Wexner, The Limited’s CEO and principal owner, had reservations. He knew that a lawsuit against Visa and MasterCard was effectively a suit against virtually every U.S. bank. He had a strong relationship with Banc One of Ohio, one of the biggest Visa/MasterCard banks at the time.

Furthermore, Wexner didn’t have much use for lawyers. At the time, his company had $8 billion dollars in annual sales but did not have a single lawyer on its payroll. There was nothing personal in this, as Leslie later married a lovely lawyer from the New York law firm of Davis Polk and quickly had a bunch of cute kids. One of these, an adorable little girl, climbed all over him years later while I was trying to prepare him to be deposed by Visa and MasterCard. Wexner’s real aversion was not to lawyers, but to litigation. He saw it as a wasteful diversion from The Limited’s mission to sell clothing and be the premiere specialty retailer in the world.

In 1991, Wexner couldn’t see the justification for a big and expensive lawsuit to stop a practice that was only costing The Limited a few hundred thousand dollars in excess charges each year. When he was told that the problem would get bigger, Wexner said that when that happened, then maybe he would sue. More importantly, he asked why, if this was such a big problem, The Limited was the only store willing to stick its neck out by suing the banks. Gilman and Spurgin told me to keep the potential case on my radar screen and that they would keep it on theirs. They would track the increase in forced signature debit card transactions, and I would update the antitrust analysis as the facts and law developed.

During the next four years, I frequently revised the analysis of the potential lawsuit. Moreover, from time to time, at The Limited’s request, I sent the analysis to other large merchants. Each merchant that reviewed the analysis was convinced that the forced acceptance of signature debit card transactions was a growing problem, more than doubling each year. They all praised the analysis. However, each declined to join The Limited in suing Visa and MasterCard. With the exception of the
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case, well-known in the banking industry but little-noticed elsewhere, Visa and MasterCard had a perfect record in fending off antitrust challenges.

While this unsuccessful mating dance with potential litigants against Visa and MasterCard was going on, I decided to leave McDermott Will & Emery and open an antitrust boutique with some friends from various placed I had worked during my career. These included Carol Turner from McDermott as well as several associates from that firm; Bob Begleiter, a guy my age, who, like me, was an ex-legal services lawyer; Jeff Shinder, a young Canadian lawyer; Abby Milstein, a consumer protection lawyer; and Eliot Spitzer.

Eliot and I had known each other at that point for a dozen years. In the summer of 1982, the third year of my decade running New York State’s antitrust office, Eliot, an intern from Harvard Law School, came to work for me in the South Tower of the World Trade Center. Before we met, Eliot’s résumé put me slightly on guard because of my bad experience the previous summer with a similarly configured intern. The 1981 version had been from Yale Law School and, like Eliot, was a member of the law review. The Yalie was a rich kid of famous parentage who had come to work with the attitude that my job was to provide him with a fun summer.

After Eliot strode into my office in June 1982, he needed only five minutes to dispel my preconceptions. We quickly exchanged names, schools, favorite sports and pedigrees, but his subtext was “I am smarter than you, and I can beat you at tennis, squash, skiing, and any other game you want to play.” My subtext was “Good luck—give it your best shot.” Almost three decades later, that unresolved contest continues.