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 (8 page)

BOOK: Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel
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Wal-Mart came to me in 1995 because they realized that though they paid less for everything else than any other merchant, they paid exactly the same high prices for Visa and MasterCard services. And like every other store, they were forced to take Visa and MasterCard debit card transactions at credit card prices. When Wal-Mart politely asked Visa’s CEO, Carl Pascarella, to stop forcing its stores to accept these debit card transactions, Pascarella bluntly responded that Visa could force it to. And right after that impolite retort, Wal-Mart hired me and C&P.

Preparing Wal-Mart and The Limited for Battle

Wal-Mart was the best possible plaintiff and class representative for this case but also the most difficult client I have ever represented. But the extraordinary difficulty of the case was one of the things that made it the perfect antitrust case. Dealing with the big egos of all my clients, their various litigation objectives, and the diverse corporate cultures at each huge company was as or more difficult than any other part of the case. So the year of getting Wal-Mart into the gate was good practice for what was to come.

Part of that year (November 1995 to late October 1996) was spent trying to get a government antitrust agency to file its own case. Wal-Mart required that we make this effort. I really didn’t want this to happen because I wanted to control the case. I thought a government agency would interfere with our case and/or screw up its own. However, it was my job to make the effort to get an agency involved, and so I tried.

I met with Joel Klein, who was deputy assistant attorney general and who would later become the head of the Federal Antitrust Division. Joel and I were like a pair of Siamese Fighting Fish. We were two tough
Jewish kids from the same lower-middle-class Queens neighborhood who clashed every time we met. We would each say that we fought because we disagreed, but the real reason was our similarities.

I also met with numerous state attorney general antitrust chiefs. All of these meetings were cordial, but the implicit and sometimes explicit response was that Wal-Mart had the resources to bring its own antitrust case. The fact that Visa’s and MasterCard’s practices hurt millions of small merchants and virtually every U.S. consumer, did not seem to resonate with my former colleagues.

I also made an effort to interest the Federal Trade Commission in this cause, as the FTC shares the federal government’s antitrust jurisdiction with the Department of Justice. I met with Christine Varney, an FTC Commissioner; Bill Baer, the FTC’s Competition Bureau Director; and FTC Chairman, Bob Pitofsky. Pitofsky said that our facts were interesting but that there really wasn’t any tying arrangement involved in Visa/MasterCard’s practices. He said that even though stores were forced to accept signature debit card transactions, they were still free to accept other forms of payment as well. This pronouncement, which contained a basic legal error, confirmed to me that getting the government involved in our cause would be of little help and might actually hurt. Pitofsky, a renowned antitrust scholar, a personal hero, and, in my estimation, the best federal antitrust enforcement official of the last thirty years, remembered that early 1996 meeting. Seven years later, after we won summary judgment on the tying claim, which asserted that stores accepting Visa/MasterCard credit were forced to accept their debit transactions, Pitofsky went out of his way to admit his skepticism and to congratulate me for staying the course. Pitofsky’s admission was doubly gracious, given the fact that after he left the FTC in 2001, he joined Arnold & Porter (A&P), one of the two firms that represented Visa in the

Although Wal-Mart had come to me, it was clear that they weren’t quite sure what they were doing with me. C&P was new, small, and virtually unknown to them. Wal-Mart had gotten a positive reference about our firm from lawyers at the New York law firm, Weil, Gotshal & Manges, but this recommendation helped only so much. C&P was not only an unknown quantity to Wal-Mart, but the role of the injured antitrust plaintiff, a reversal of Wal-Mart’s usual defendant status, made the potential lawsuit, and their leading role in it, seem strange to them. The corporate culture of Wal-Mart identified with defense arguments and the defense bar. On top of this, the case had to be filed as a class action. This was almost too much to bear for a company constantly fending off class actions.

I explained to Wal-Mart and The Limited that once they filed an antitrust case, there would be copycat class actions filed by other antitrust firms representing nominal clients. Unless we preemptively filed the case as a class action, the other firms would turn it into a class action and seize control of the litigation. Wal-Mart would be at the mercy of firms like Milberg Weiss and Hagens Berman. Wal-Mart despised such firms because they believed that plaintiffs’ lawyers were constantly filing frivolous class actions against Wal-Mart. Wal-Mart eventually accepted the fact that our case had to be filed as a class action, but that fact continued to rankle them on principle.

Months of discussion about the fee arrangement then ensued. Wal-Mart was famous for buying everything—including the services of law-yers—cheaper than anyone else. When my friends at Weil Gotshal called to tell me that they had sung my praises to Wal-Mart, they implicitly warned me to be careful for what I wished for. They said that Wal-Mart would relentlessly force me to lower fees and swallow costs. Armed with this knowledge, I counterpunched as
soon as Wal-Mart demanded fees lower than our normal billing rates. Our rates were low for New York, but higher than Wal-Mart was accustomed to paying firms based in Fayetteville and Little Rock, Arkansas.

I told Wal-Mart I would take the case on a contingency fee basis, meaning that they would pay no legal fees unless they recovered damages. Our fee would come from their recovery, if any. I believed that the idea of being a class representative in a big contingency fee class action was so alien to Wal-Mart that they really didn’t know what to do except say yes. I informed The Limited that since Wal-Mart would go the contingency fee route, they should as well, and they agreed.

Seven years later, an attorney representing one of the class members objecting to our attorneys’ fee application told the judge:

What Class Counsel did here seems to be to be a little bit crazy. They risked the firm. It was a bet the firm case on a case that really seemed to be a negative lawsuit. It really looked like a huge longshot.

When it became clear in 1996 that no government antitrust agency would file its own case, I was authorized by Wal-Mart and The Limited to finalize a complaint. We went through fourteen drafts, including one several hundred pages long with an extensive set of annotations detailing the proof supporting each allegation. Many lawyers consider a complaint something like a lob serve in volleyball. They don’t use it as a weapon but merely as a device to get the game going. The conventional view is that the complaint should be a short and simple document setting forth just enough facts to meet the requirement of putting the defendants on notice about the nature of the legal claims being made against them. I use a different type of complaint, a “singing complaint,” which
exhaustively details the facts and tells a story. A complaint like this gives the judge an immediate education. It gives reporters something to write their stories with and contrasts favorably with the typically opaque and formulaic “deny, deny, deny” mantra in defen-dants’ answers.

In the
case, there would be extensive press coverage. The names of the parties alone would be newsworthy. The fact that corporate giants were suing, instead of being sued, in a class action, was offbeat in a “man bites dog” way. The issues were important but hard to explain. We needed to explain them to a class of millions of U.S. stores that we purported to represent. We would never be able to directly communicate with even a small fraction of these stores. The best we could do was to allow the story to be told simply and clearly in the press and to create court documents that reporters could easily use to write their own stories.

The complaint was going to be the first of these court documents. In the thirteenth and penultimate draft complaint, like in the first twelve, Wal-Mart and The Limited sued Visa and MasterCard in a purported class action on behalf of every merchant in the U.S. that accepted Visa and MasterCard credit cards. The complaint called the plaintiffs “merchants,” a term more expansive than “stores” or “retailers.” Merchants included entities such as colleges, charities, and government agencies that also accept plastic cards for payment.

The fourteenth version of the complaint, which was filed in the U.S. District Court for the Eastern District of New York in Brooklyn on October 25, 1996, named Visa as the only defendant. The complaint plainly said that MasterCard was equally culpable for the antitrust violations alleged, but treated MasterCard as an unsued, but named, coconspirator.

At the last minute, Wal-Mart asked that MasterCard be given a chance “to do the right thing.” To its credit, Wal-Mart, the most frequently sued business in the world, really didn’t like litigation.
Its conservative and Southern worldview considered litigation a breakdown in polite business dealings. The people at Wal-Mart are genuinely polite, from Rob Walton, Wal-Mart’s Chairman, to the cashiers whom Wal-Mart gracefully calls “sales associates.” These associates make up almost 1 percent of the U.S. workforce. In 1996, Wal-Mart had just allowed the Chase Bank to issue a MasterCard credit card cobranded with the Wal-Mart name. Wal-Mart had received a lot of money for allowing its name to be used by Chase and MasterCard in this way. It didn’t seem right to Wal-Mart to take that money and then quickly turn around and sue MasterCard on an unrelated antitrust claim, not without giving them the chance to do the right thing. Wal-Mart was sure that when MasterCard was asked politely by its biggest customer, it would stop forcing Wal-Mart to accept unwanted MasterCard signature debit cards. Wal-Mart’s Steve Hunter had previously made the same request of Visa. Visa’s CEO, Carl Pascarella, had responded by saying that Visa could force Wal-Mart to accept the unwanted signature debit cards. Wal-Mart thought MasterCard would be different. I knew better. MasterCard would not back off, even at the request of Wal-Mart. MasterCard had earlier responded to a similar request by The Limited with a condescending refusal couched in terms almost identical to Visa’s. Moreover, it would have been a very good move for MasterCard to grant Wal-Mart’s request. That is why Visa wouldn’t permit MasterCard to do it.

I knew that Visa had more than four times as many signature debit card transactions as MasterCard. MasterCard had tried, years before, to emphasize the much safer, much faster, and much less expensive PIN debit technology using a new network it had formed, called Maestro. The tying arrangements that forced merchants to take Visa and MasterCard signature debit and suppressed PIN debit helped Visa much more than MasterCard. Most rational businesses in MasterCard’s position would
have granted Wal-Mart’s request, realizing that it would force Visa to match this position or risk a massive defection of stores. But because of duality, MasterCard couldn’t possibly say yes to a strategy that would benefit MasterCard but hurt Visa.

The merchants’ October 25, 1996, complaint against Visa was purportedly filed not just for Wal-Mart and The Limited, but on behalf of millions of stores. It explained the history and facts of duality and began to teach the court, the press and the unwitting merchant victims how Visa/MasterCard fronted for a U.S. bank cartel. The complaint alleged that thousands of banks were coconspirators. They owned both Visa and MasterCard and forced merchants to accept both brands of debit card transactions with contracts that included identical tying arrangements. The largest of these banks, such as Citibank, Bank of America, and Wells Fargo, called the shots in both associations.

Although banks didn’t simultaneously sit on the boards of both Visa and MasterCard, it was common for a bank on the Visa board to serve on a governing body of MasterCard or vice versa. A good example of this was Norwest Bank, which served on the Visa board while at the same time serving on MasterCard’s so-called Business Committee, a group with significant clout within the MasterCard association. Banks also hopped right out of one bed and into the other, like Citibank, which went directly from the Visa board to the MasterCard board. Flaunting these facts before the Federal Antitrust Division, MasterCard’s general counsel, Bob Norton, had asked the Department of Justice to exempt MasterCard and Visa from the law that bars simultaneous service on the boards of two competing businesses. In his letter seeking an exemption from the law concerning such “interlocking directorates,” Norton argued that MasterCard and Visa “simply do not compete in any conventional business sense.”

You don’t have to be an antitrust expert to realize how foolish it was to say this to the Antitrust Division. For sheer stupidity, it was the MasterCard analog of Visa’s CEO sending a boycott telegram to 5,500 banks and invoking their membership in MasterCard. Norton made this request in a letter to the Department of Justice in 1992, three years after the events at Rusty Staub’s. Norton sent a copy of his letter to his outside antitrust counsel, Stanley Robinson, at the Kaye Scholer law firm. That was three years after Robinson’s law partner had told me that Stanley was about to retire as part of his plea that I not press ethical charges against Robinson or Kaye Scholer.

The merchants’ complaint also explained how almost identical exclusionary rules adopted by Visa and MasterCard kept American Express and Discover from entering the debit card market, and how these rules also marginalized the Discover and American Express credit card businesses. Echoing Bob Norton’s statement to the Antitrust Division, these exclusionary rules blatantly proclaimed that Visa and MasterCard were not competitors. They shouted this by exempting each other from rules designed to block the expansion of competing payment card businesses.

In May 1991, for example, Visa had adopted By-law 2.10(e), a rule that barred its banks, meaning virtually every bank in the United States, from issuing an American Express or Discover brand credit or debit card or the cards of any other network that Visa considered to be a competitor. Visa said that its banks could issue MasterCard credit cards, meaning that Visa didn’t consider MasterCard a competitor. Visa didn’t allow banks that issued Visa branded debit cards to also issue MasterCard branded debit cards because of the injunction terminating my earlier case involving the Entree debit card network. Visa’s enactment of By-law 2.10(e) finally got the Antitrust Division off the dime, ninetten years after the division had acted as the midwife for “duality.” In 1994, the division began an investigation focused on Visa’s exclusionary and inflammatory by-law.

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