Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (7 page)

We were kindred spirits, similarly motivated by a desire to use the law to make things better. But in 1982, I could already see that Eliot had advantages I lacked, which destined him for a high elective office. He had youth. He had been president of the student body at
Princeton—a good sign that he desired public office. Unlike me, Eliot had money. And, as I did, Eliot loved constitutional law. However, he, more than I, believed in the power of government to help people. In 1982, I was still a skeptical outsider relatively new to government. In fact, I was still technically on a “leave of absence” from Legal Services—a psychological security blanket I did not surrender until 1984.

Eliot and I understood our similarities and our differences. I had spent the summer after my first undistinguished year at Columbia Law as a hard hat working on the Manhattan construction site of One New York Plaza, near Battery Park in Manhattan. Eliot spent his summer after election to the Harvard Law Review in my state antitrust office. But we shared similar worldviews, and with the mutual realization that we each had found an ultracompetitive “other” to bump chests with, it was respect and admiration at first sight.

After spending the summer of 1982 principally working on a criminal antitrust prosecution of ambulance companies who had divided the Syracuse region into little monopolies where they would not compete, Eliot returned to Harvard. We stayed in touch, and after Eliot graduated and completed a clerkship for United States District Judge Bob Sweet, I advised him to go directly into government in a prosecutorial role. It took no exceptional analytical skill to see that Eliot would be a great prosecutor. Instead of taking my advice, Eliot went to Paul Weiss, then perhaps the most cerebral of New York law firms. But tardily realizing the wisdom in my advice, Eliot left Paul Weiss in less than a year to join Bob Morgenthau’s staff in the Manhattan District Attorney’s office.

Eliot quickly rose to head Morgenthau’s labor racketeering bureau, and while in that role I deputized him to act as a special assistant attorney general so that he could utilize New York’s antitrust law in a prosecution targeting the Gambino crime family’s control of garment center trucking. The attorney general jealously guarded this
prosecutorial tool, and I had denied other district attorneys’ requests for permission to prosecute criminal antitrust cases. But Bob Abrams and I considered Eliot to be one of our own.

In the early 1990s, Eliot and I both moved to big firms: he to Skadden Arps, and I to McDermott Will & Emery. Neither of us was satisfied. I was conflicted out of representing the big companies that tried to hire me to represent them as plaintiffs’ in antitrust cases. These included American Express, General Electric, Dean Witter and, ironically, Visa, among others. Eliot was merely treading water until his opening to run for elective office.

In early 1994, we commiserated and made a plan. I would leave McDermott to form an antitrust boutique, and he would leave Skadden and enter the Democratic primary for attorney general. I did not expect that Eliot would win. The goal, at least in my view, was to establish his visibility, laying the groundwork for Eliot’s second and real run for statewide office. I proposed that he join my soon-to-be-established firm and promised him that our firm would give him all the room and time he needed to make that expected second run for elective office.

The plan worked perfectly for everybody. Eliot did much better than expected in the 1994 Democratic primary. He did not win, but he got over 20 percent of the votes in a four-way race and earned the endorsement of both the
New York Daily News
and Rupert Murdoch’s
New York Post.
Eliot joined us as one of the name and founding partners of Constantine & Partners (C&P) during the first few months of our existence. For the next three and a half years, Eliot billed about 2,000 hours annually, good years for most lawyers, but about half the time Eliot actually worked during that period. The balance of his time was spent laying the foundation for his next and successful run for New York attorney general. At the firm, Eliot took a major role in representing Liberty Cable, did some antitrust work for Rupert Murdoch,
and most enjoyably represented William “Kid Chocolate” Guthrie, a “contenda” for the World Light Heavyweight Boxing Championship. Guthrie had been deprived of a shot at the title because of alleged restraints of trade involving boxing promoter Don King. When C&P won Guthrie’s antitrust case, the kid got his shot, knocked out the champ, and thanked Eliot and the firm from the ring on national TV.

The October 1996 complaint in the
Merchants’
case lists Eliot as one of the five lawyers representing the plaintiffs. The fee petition I filed seven years later details Eliot’s 1.5 billed hours. Eliot actually billed another hour, but I wrote it off along with thousands of other hours when I prepared the attorneys’ fee petition. Eliot frequently tells me that his were the crucial ninety minutes in the case.

Constantine & Partners, the firm Eliot, Carol, Bob, Abby, I, and the others had started to build in 1994 had its genesis in a conversation between me and Howard Milstein, the husband of Abby Milstein, one of the other founding partners. Howard claimed that Time Warner was trying to destroy Liberty Cable, a wireless cable company that, using microwave technology, competed with Time Warner in New York City. Liberty, which delivered superior service at a lower price, had started to make serious inroads into Time Warner’s New York City cable monopoly until it was blocked by what Milstein claimed was a variety of predatory practices.

Howard Milstein, like my partner, Abby, was a Harvard Law graduate. He also had an economics degree from Cornell, graduated
summa cum laude,
and held a Harvard MBA. He was a billionaire and a tenacious competitor. Howard convinced me to start C&P so that he could have the lawyer and champion he wanted and a law firm conceived and dedicated to winning his big antitrust case.

In early 1994, there was a final meeting to discuss the pros and cons of starting the firm. The attendees were Abby, Howard, me and my wife Jan, who was then the general counsel of Rupert Murdoch’s News America Marketing and Publishing. Jan had been an antitrust lawyer at the Federal Trade Commission years before I entered the antitrust
field. She is an experienced trial practitioner and deal lawyer and was there to protect me and our family.

When the financial side of forming C&P was acceptable to Jan, we all shook hands and kissed, and Howard said that C&P would be the perfect firm to win his perfect antitrust case against Time Warner. I told Howard that his case was good, but I cautioned that it would be a very tough case against very tough opposition—Time Warner and their excellent antitrust counsel, Cravath, Swaine & Moore. I also predicted that Leslie Wexner and The Limited would eventually become clients of our new antitrust boutique and that C&P would file and win an even tougher case, one that I considered to be the “perfect antitrust case,” the one that would become the
Merchants’
case.

In 1995, a year after C&P opened, The Limited got back in touch with me, this time through their very first lawyer and general counsel, Sam Fried. As promised, The Limited and I had kept the problem of signature debit on our respective radar screens and tracked its rapid expansion. Leslie Wexner was now convinced that The Limited should sue Visa and MasterCard. However, Wexner still wanted at least one other merchant to join him in the lawsuit.

In November 1995, right after the Veterans Day weekend, I got a call from Steve Hunter, Wal-Mart’s payment guru, who had received my antitrust analysis from The Limited. Hunter is the epitome of what has made Wal-Mart so successful. He is a big, smart, no-non- sense country boy, who abandoned luxury and high compensation at GE Capital for Arkansas and the Spartan conditions and equity stake that Wal-Mart offers its employees. Hunter agreed with my analysis, and he wanted to retain C&P and consider joining The Limited in a suit against Visa and MasterCard. I had been working toward this day for years and had a draft complaint almost ready to file. However, it was nearly a year later—October 25, 1966—when we filed the
Merchants’
case. During that year, C&P began to learn what it would be like to represent Wal-Mart.

N
OW WITH THE active litigation over, I can see how important Wal-Mart was to the effort. It was at once our biggest asset and our biggest challenge. Representing them was frequently a pleasure and honor but often as difficult as opposing Visa and MasterCard and, at times, more difficult, painful and frustrating. All of that is clear now, but at the beginning I saw neither how important Wal-Mart would be, nor how difficult. I really didn’t see it as being any more important than the other big merchants I represented. That had to do more with my ignorance and Manhattan tunnel vision than with reality.

As of November 1995, when Steve Hunter, Wal-Mart’s payment director, contacted me after reading the antitrust analyses I had written for The Limited, I had never been to a Wal-Mart store. There weren’t any in Manhattan (or, indeed, anywhere in New York City), where I was born, raised my three children, and will call home until I die. Eliot and his wife, Silda, were fans of Wal-Mart, buying all the stuff for one of C&P’s summer outings at the Wal-Mart
in Kingston, New York. So I finally went to a Wal-Mart in 1998, two years after we filed the
Merchants’
case, and then only because I thought it prudent to visit the stores of each of our clients and personally inspect the checkout areas where they accepted payment. When I finally got there, I quickly realized what all the applause and boos were about.

I don’t need to describe what a Wal-Mart looks like, how low the prices are, or the appearance and demeanor of its sales associates. Most of my readers will know and knew about this before me. However, my experiences during that first visit to a Wal-Mart stayed with me. One thing that favorably impressed me was the large number of variously disabled workers. The second was the palpable devotion of Wal-Mart shoppers.

While there, my wife Jan and I bought an upright vacuum cleaner and a folding table with four chairs. At first, we couldn’t select a vacuum cleaner because they were all so inexpensive that despite the name brands, we doubted their quality. Another shopper, sensing our confusion, literally took us by the hands, helped us find a very good machine, and delivered an unsolicited, but heartfelt, commercial for Wal-Mart. She told us that Wal-Mart allowed her family to live a better life and have better things in their home than they ever had before. She said her daughter had asthma, but that with the excellent Eureka vacuum that she had purchased at Wal-Mart (and persuaded us to buy), her daughter’s attacks were less severe. We found the folding table on our own, the kind that stores four chairs inside, folds up, and rolls on its own wheels. Two decades before, we had purchased a similar table from Hammacher Schlemmer for $500. It was a nice, serviceable piece, made with wood veneers, and had fallen apart after many years of use. Twenty years later, at Wal-Mart, we were buying a better, sturdier, solid-wood version for $120. Everything else about Wal-Mart is as simple and as complicated as that.

The low retail prices are not merely the product of the low prices that Wal-Mart pays its suppliers and the low wages it pays its employees. Wal-Mart systematically eliminates excess costs from every step in the distribution chain. They are not hypocrites, unlike so many other companies I have encountered. They walk the walk. Rob Walton, Sam Walton’s son and Wal-Mart’s chairman, works in a small, windowless office. When I started visiting Wal-Mart’s home office in Bentonville, Arkansas, in 1997, the entire corporate headquarters contained only one conference room, called the “Quail Room,” which proudly displaying Mr. Sam’s hunting photos.

Low wages are paid to Wal-Mart executives and lawyers, as well as to Wal-Mart sales associates, but Wal-Mart stock and options are widely distributed to employees at every level. Employee equity, which has created loyalty and devotion to Wal-Mart and to its customers, is widespread and palpable. You can’t buy a Wal-Mart executive a meal or a drink or send her a Christmas present. After our holiday gifts were politely returned, C&P switched to making donations in honor of all our clients and friends to charities such as City Harvest and Meals on Wheels. Wal-Mart employees, generous and polite themselves, will afford you every courtesy and give you the shirts off their backs.

Wal-Mart’s obsession with cost-cutting works well, except in discrete situations such as the purchase of lawyers’ services. Wal-Mart thinks that hiring outside counsel is like buying tube socks. It’s not, and Wal-Mart has paid dearly while learning that lesson, having been sanctioned in numerous courts for discovery abuses, such as failing to turn over relevant documents and evidence. I don’t know whether those claims about Wal-Mart “hiding the ball” in other litigation were true or not. In our case, Visa charged that Wal-Mart had destroyed relevant evidence. C&P’s experience successfully defending against that claim—which, had it been successful, might have derailed our case—showed
no venality or bad intent on Wal-Mart’s part. It did show rampant cost-cutting in litigation expenses—a realm where the platitude “penny wise, pound foolish” usually fits.