Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (9 page)

MasterCard could have enjoyed this moment. Visa, not MasterCard, was under government scrutiny. MasterCard got the full benefit of the Visa rule without lifting a finger. Because virtually every Visa bank was also a MasterCard member, the Visa rule effectively prohibited MasterCard’s banks from issuing an American Express, Discover, or any other competitive card. However, MasterCard emulated Visa and stuck its neck out with nothing to gain and everything to lose. MasterCard passed a rule virtually identical to Visa’s, which MasterCard called the “Competitive Programs Policy,” or CPP. The CPP, like Visa’s rule, targeted competitors, but as Visa had exempted MasterCard, Visa was also exempt from MasterCard’s policy. Both companies were brazenly screaming, “We don’t consider each other competitors.”

On March 27, 1997, I had lunch with Joel Klein, who was by then the head of the Antitrust Division. Klein was meeting with progressive antitrust experts to solicit ideas for his newly won stewardship of the division. We discussed the recently filed
Merchants’
case and the investigation of the Visa/MasterCard exclusionary rules that he had inherited from his predecessor, Anne Bingaman. I pointed out the irrationality of MasterCard’s passage of the CPP. I explained that this was an example of MasterCard showing the banks that it would throw itself on the railroad tracks next to Visa in a public demonstration of anticompetitive solidarity. I said it was also a show of confidence that his Antitrust Division would do nothing about it. Boys are boys. Despite the fact that Klein and I were pushing fifty, we were both kids from Queens, each tough in our own way, and I was throwing down a dare.

Klein said he was convinced, and soon after our lunch, an investigation widely viewed as going nowhere started to pick up steam. M. J. Moltenbrey, the attorney supervising the Antitrust Division’s
investigation of Visa and MasterCard, invited me down to Washington, D.C., to pick my brain. This was the first in a series of such meetings where C&P tried to educate the division’s lawyers to think about Visa/MasterCard in the way we did and to overcome the agency’s two-decade inertia borne of its 1975 duality mistake

Nineteen months after my lunch with Joel Klein, and two years after we filed our complaint, the United States sued Visa and MasterCard over their system of duality and also over their exclusionary rules that targeted American Express and Discover. The focus of the United States’ case was the credit card market. The
Merchants’
case had focused on the debit card market and showed how Visa/MasterCard not only blocked Discover and American Express from that market using their exclusionary rules, but also retarded the growth of other competing networks and the competing online PIN debit technology.

A basic article of faith in antitrust is that a better and less costly product will marginalize, if not completely eliminate, an inferior and more expensive product. In a competitive market, the superior product will win quickly. However, this clearly was not a competitive market. As our October 1996 complaint detailed, the comparison between Visa/MasterCard signature debit and PIN debit was qualitatively and quantitatively one-sided.

Signature debit cost merchants roughly $1.50 per $100 transaction, compared to roughly 7 cents: for PIN debit. Signature debit transactions were also seven to ten times more likely to be fraudulent due to the ease of forging a signature. Stores had virtually stopped trying to teach modestly educated sales clerks to even attempt to verify that the signatures on payment cards and sales slips matched. Documents that were later obtained in discovery showed that Visa knew that an attempt to verify a cardholder’s signature occurred only 8 percent of the time.

A signature debit card transaction also took two to three times longer to complete at the checkout counter than a PIN debit transaction. Signature debit took two to five days to transfer money from a shopper’s bank account to the store’s account. PIN transactions between accounts took less than a day, and a hold was placed on the money in the shopper’s account at the time of the purchase. This hold prevented shoppers from inadvertently spending the same money several times and/or spending money they didn’t have. By contrast, the delayed and uncertain clearance time for signature debit transactions caused a significant increase in bounced checks. Banks liked this because they collected fees of $25 or more from both shoppers and merchants for every bounced check. Only the banks—and Visa and Master-Card—benefited. PIN debit was not only much faster, safer, and cheaper, but it was also superior to signature debit in virtually every way.

Our October 1996 complaint explained why stores faced with this disparity between signature and PIN debit on price, safety, and speed didn’t and couldn’t “just say no” to Visa and MasterCard signature debit. Visa and MasterCard debit was tied to their credit card transactions. Stores couldn’t stop accepting Visa/MasterCard credit, because doing this would eliminate the stores’ ability to access the primary credit account of virtually every U.S. shopper. By 1996, there were very few stores that didn’t accept Visa and MasterCard credit cards. The complaint alleged that once such a holdout store started to accept Visa/MasterCard credit, there was no turning back. That allegation, made on instinct and personal observation, proved true. In the hundreds of depositions of Visa/MasterCard executives and experts that followed in the coming years, not one could name a single store that started to accept Visa or MasterCard and then stopped. And not one executive could name a single store that accepted Visa credit cards but not MasterCard credit cards, or vice versa. The merchants’ inability to
say “no” explained why despite the fact that PIN debit was far superior in all these ways, Visa/MasterCard signature debit had more than twice the market share of the more than fifty competing PIN debit networks. Indeed, signature debit’s market share was increasing, despite its qualitative inferiority and much higher price.

The complaint also alleged that identical tying arrangements between Visa/MasterCard credit transactions and signature debit transactions were at the core of the competitive problem. The tying arrangements forced merchants to take an unwanted product. These tying arrangements, which Visa and MasterCard called their “Honor All Cards” rules, made it less likely that the PIN debit networks would expand to challenge Visa/MasterCard in the lucrative credit card market. The merchants’ complaint also explained two additional predatory tools used by Visa/MasterCard. One was a massive campaign to prevent merchants from being able to tell the difference between a credit card and a debit card, and the second the defendants’ anti-steering rules.

When we filed the complaint, we knew that most merchants had no idea they were even accepting Visa/MasterCard signature debit transactions. The minority of stores that knew still could not distinguish debit cards from credit cards at the checkout counter. We were aware that the defendants had taken steps to deceive merchants, but we were not aware of the full extent of the deception. We also didn’t know that the defendants understood that cardholders were also being badly confused, resulting in bounced checks and other consumer problems. The defendants did little to alleviate these problems because cardholder confusion was a necessary consequence of deceiving merchants about the identity of Visa/MasterCard debit cards. We found out about all this later, during the pretrial discovery process.

The rare merchant who figured out that it was getting a Visa/ MasterCard debit card transaction, instead of a credit card transaction, was
barred under the defendants’ “anti-steering” rules from taking any action to discourage the use of the debit card or encourage the shopper to pay with a different form of payment, such as PIN debit. These rules dictated that a store couldn’t ask for another form of payment, surcharge the Visa/MasterCard debit transaction, or even give a discount for an alternative form of payment, except to give a discount for cash. The rules were backed by the sanction of a store losing the “privilege” of accepting Visa and MasterCard credit cards.

When we sued in October 1996, these Visa/MasterCard anti-steering rules were absolutely clear on these points. However, after we sued, the defendants invented a defense, indeed their primary defense, based upon the supposed ability of stores to “steer” shoppers away from using Visa/MasterCard signature debit cards if the stores didn’t want to accept signature debit transactions. The defendants said that if Miss Jones tried to pay for her lingerie at Victoria’s Secret with a Visa or MasterCard debit card, the sales clerk could ask her to pay with a different card or a check or cash, and maybe give her a discount if she did. The defendants never denied that the stores had to take Visa/MasterCard debit transactions, but they claimed that the stores really wanted to take them. If they didn’t, Visa/MasterCard argued, the stores would simply ask for a different form of payment or offer a discount for one, and most times that tactic would work.

As discussed, this type of steering was clearly prohibited by the defendants’ rules. But after we sued, the defendants adopted elaborate cover stories claiming that these antisteering rules didn’t mean what they said and were never enforced. The defendants’ steering defense, which involved a crude and obvious effort to change the facts, eventually became a bigger problem for Visa/MasterCard than the antisteering rules themselves. The cover-up is usually worse than the “crime.”

The forced displacement of safer, faster and much cheaper forms of payment had already cost merchants hundreds of millions of dollars, and those losses were escalating. In drafting the complaint, I first confronted an issue I believed would be a key jury problem in the trial expected to occur three years later (not nearly seven years as it turned out). Merchants who were forced to pay excess costs covered them by raising the prices charged to all shoppers. I believed this fact would be important to the jury, but I was uncertain which way it would cut. The jury would be mad at Visa/MasterCard because consumer prices had been unfairly and illegally raised by these tying arrangements. However, they might also conclude that if shoppers were the primary victims, it was unnecessary and even wrong to award a large monetary recovery to the merchants. Then again, a juror might argue that if they didn’t award damages to the stores, Visa/MasterCard would essentially get away with murder. Skillfully presenting this fact to a jury would be very difficult.

Within weeks of filing, the case got the attention of other merchants and trade associations. Many stores called me and asked to join the case as named plaintiffs alongside Wal-Mart and The Limited, rather than continuing to be unnamed and passive class members. The named plaintiffs, also called “class representatives,” get to exercise significant influence and control over the litigation. We said yes to those who we thought would help the case by adding weight, commitment, and good facts.

C&P agreed to represent Sears, then the largest department store; Circuit City, then the largest consumer electronics chain; and Safeway, then the nation’s second largest supermarket. I knew that Safeway understood the issues as well as or better than any store in the country. In the five-year period between The Limited hiring me and the filing of the complaint, Safeway had approached me and indicated their awareness and concern about these issues and some
inclination to sue. However, instead of suing Visa, Safeway had brokered a deal with Visa for lower credit card rates for themselves and all supermarkets. That deal had proven a disaster. Even at the lower supermarket credit card rates, much cheaper cash and check transactions were replaced by Visa/MasterCard credit and debit transactions. Moreover, people didn’t buy more broccoli just because they could use a credit card. Safeway and the other supermarkets were locked in, and they couldn’t stop accepting Visa and MasterCard credit cards after making this Faustian deal. Safeway came into the case sadder and wiser.

All of the many stores that asked me to allow them to join Wal-Mart and The Limited in the caption had similar motivations—the potential for achieving lower debit card rates and freedom from Visa/MasterCard coercion. Sears and Circuit City also had their own special reasons. Sears was a major player in the credit card industry, having created the Discover network and sold it profitably. It also owned the massive Sears credit card business, which was then more profitable to Sears than the sale of merchandise. Sears also hated Visa, because it believed that Visa had tried to destroy Discover from the moment it went into business. Circuit City had a general counsel named Steve Cannon, who formerly was chief counsel of the U.S. Senate’s Antitrust Subcommittee, chaired by his boss, Senator Strom Thurmond. Cannon also had been the Number Two enforcement official in the Reagan Antitrust Division. He wanted a piece of a high-stakes antitrust case to spice up his steady diet of shopping mall leases, corporate work, and cases where Circuit City was the defendant.

C&P took on the additional representation of Safeway, Sears, and Circuit City but rejected several large store chains because we didn’t like their motives for wanting to enter the case. Some of them seemed starstruck and anxious to join what they thought was a litigation dream team. Plaintiffs should enter litigation soberly and reluctantly. These volunteers reminded me of the joyous young confederate soldiers in one of the opening scenes
Gone With The Wind.

We also rejected some strong and resolute stores, including Kroger, then the largest U.S. supermarket, since surpassed by Wal-Mart. Kroger was a sober, serious, and well-informed potential litigant. However, the case was getting unwieldy. C&P had only eight lawyers when the
Merchants’
case was filed. I realized that representing five of the largest merchants in the world, searching their documents, defending their executives at depositions, and learning the intricacies of each of their companies would be difficult enough. Kroger did not provide anything to the case that Safeway hadn’t already provided. Kroger, however, was adamant and suggested that if C&P wouldn’t represent them, they could find other counsel. I flew to Cincinnati, met with Kroger’s CEO, general counsel, CFO, and chief information officer and spent two days successfully dissuading them from entering the case. I promised Kroger that because the
Merchants’
case was a class action, Kroger would be treated as well as the named plaintiffs. I told them they would actually be treated even better, because Kroger’s documents wouldn’t be searched, nor their executives deposed, nor would they encounter all the unpleasant and onerous obligations of a class representative carrying the banner of the entire retail industry.