The U. S. Department of Justice's (DoJ) antitrust trial against Visa and MasterCard, which at presstime was entering its third week, has captured the attention of legal experts around the country. Although cautious about predicting its outcome, they said it could redefine the legal and economic parameters of business competition.
Assuming the trial goes to completion, the ruling could sweep away ambiguities surrounding antitrust law, experts said. "The economics is hazy and difficult. The law is a mess. Efforts to try to bring sense to the law here are always to be encouraged," said Lawrence White, professor of economics at the Stern School of Business, New York University.
There is often little correlation between the historical and legal significance of antitrust cases. The AT&T case, for example, although a landmark in the history of the telecommunications industry, was legally unimportant, said Stephen Calkins, professor of law at Wayne State University. "There were no rulings, no decisions, no analysis, no law that was applied."
Still, the Visa and MasterCard case is special enough that the court might issue rulings having more general applicability, observers said. For one thing, the alleged conspiracy in the case took place not in private, but in board meetings and other semi-public settings, and was carried out through published bylaws and memoranda. "The structure of this industry is wide open. Everyone knows what the rules are when you issue Visa and MasterCard," said Spencer Waller, professor at Brooklyn (N.Y.) Law School.
It also involves the question of whether two organizations can compete when they are controlled by the same individual or group of individuals. Such corporate governance cases are rare nowadays, observers said.
The government charged Visa and MasterCard with having overlapping memberships on their boards. This practice, known as duality, allegedly restrains the associations from competing in brand development and new product initiatives like smart cards, commercial cards and Internet payme nts. The government also charged the associations with making "exclusivity" rules that prevent American Express and the Discover/Novus network, owned by Morgan Stanley Dean Witter, from issuing their cards through member banks.
The associations have said they compete vigorously for brand awareness among merchants and consumers, with each mounting multi-million dollar advertising campaigns around major events like the Olympics and Super Bowl. They claim they've made heavy investments in their separate clearing and settlement systems, as well as in new product development and technology.
The associations also maintain that American Express and Discover have been successful in signing up merchants and consumers on their own through direct mail and telephone solicitations, and don't need banks to distribute their cards.
According to the associations, if American Express and Discover were allowed to issue cards through member banks, they would gain access to business plans, trade secrets and other confidential information of Visa and MasterCard.
Independent observers, although declining to predict the outcome, said the government has a strong argument on the duality question. "Justice has a good story, especially on the governance structure of the two organizations," said NYU's White. "You've got this intertwining so that major banks are involved in decisions on both sides. Restricting a bank to a single board of directors is reasonable."
"What they're saying is the way the Visa network is intertwined with the MasterCard network prevents pro-competitive arrangements from happening," said Brooklyn Law School's Waller.
The second part of the case - whether banks should be allowed to offer American Express and Discover cards along with Visa and MasterCard - is more problematic. In vertical restraint cases, the government has to show that an entity used its muscle to prevent downstream customers from doing business with rivals. In this case, it has to show that Visa and MasterCard used their dominant positions to enjoin member banks from doing business with American Express and Discover, and that this harmed consumers and merchants.
The government's case on this question is substantially weaker than on the governance question, said White. "The associations are going to have two arguments. One is that they don't want to let a competitor in under their tent. The second is that Amex has tons of other means of distributing their product."
The government's argument is potentially contradictory, according to Waller. "Partly what the government alleges is that the banks have put this restraint on themselves. But they're also telling the story that the restraint is being forced on them by some higher-up network. You have to sort out who's doing what to whom to understand whether that's even a plausible theory."
The case hinges on how the court perceives the relationship between the associations and banks. "Is it that there's this entity called Visa and MasterCard saying to the issuing banks, 'Be in our network and don't be in anyone else's?' That could be anti-competitive if they have enough power in the marketplace," Waller said.
The Visa and MasterCard brands control an estimated 75% of the overall market for card issuance and merchant acquisition. But that's split up among some 6,000 issuing and acquiring banks, the largest of which - Citibank - controls no more than 5% of the market.
American Express - in addition to being a network - is the world's largest issuer and acquirer, with about 15% of the market.
Pre-1970: Visa and MasterCard are controlled by separate banks.
1070'S: Associations permit overlappping ownership (duality).
1980s: American Express offers Optima credit card; Sears creates Discover network.
1991: Visa adopts Bylaw 2.10(e), which prohibits member banks from offering Amex and Discover card; MasterCard adopts similar policy in 1996.
1992: American Express announces its intention to issue cards through banks.
October 1998: Justice Dept. sues Visa and MasterCard for alleged antitrust violations.
June 2000 - Trial begins in U.S. District Court in Manhattan.