Visa and MasterCard Lose Appeals

Visa USA and MasterCard International have not fared well in recent litigation. On October 9, 2001 Judge Barbara S. Jones of the U.S. District Court in Manhattan ruled that the two card associations could not prohibit their member banks from issuing cards of rival companies, most notably Discover and American Express. Visa's General Counsel Paul Allen indicated that the association would appeal.

The decision arose from a suit filed by the U.S. Department of Justice over several alleged anticompetitive practices. Another issue was the Justice Department claim that the associations' governance structure, which allowed member banks to have seats on both the Visa and MasterCard Boards of Directors, served to restrain competition between the two associations, to the detriment of consumers. The Justice Department sought to prevent banks that held a seat on one association's board from issuing the cards of the other association. Judge Jones ruled in favor of the associations in finding that banks that issue cards from both associations could continue to hold seats on the board of either Visa or MasterCard, but not both. In her 157-page opinion, Judge Jones wrote "The court finds that the government has failed to prove that the governance structures of the Visa and MasterCard associations have resulted in a significant adverse effect on competition or consumer welfare." However, in probably the more significant aspect of the suit, the Judge indicated that the government had proved that "the exclusionary rules and practices of the defendants" had harmed consumers.

A number of banks, including such industry leaders as First USA and MBNA, had previously explored partnerships with both American Express and Discover. In a much publicized speech delivered in 1996, former American Express CEO Harvey Golub had publicly invited banks to team with American Express to issue cards. However, Visa already had a provision in its bylaws prohibiting members from issuing cards with either an American Express or Discover brand. MasterCard passed a similar provision shortly after the Golub speech. Because of this prior interest on the part of big card issuers, analysts expect new partnerships to appear soon. Should it stand through the appeal process, the court decision will likely have a significant impact on the market share and growth prospects of the various card brands.

On October 17, Visa and MasterCard suffered another legal setback when the U.S. Court of Appeals for the Second Circuit in Manhattan rejected an appeal from the associations to stop retailers from receiving class certification in a 1996 suit that accuses the associations of using their dominance in credit cards to force merchants to accept their debit cards. The original case pitted major retailers, led byWal-Mart Stores, but also including other retailers, such as Sears, Limited and Safeway, against the two major card issuers. The plaintiffs argued that they should not be required to accept Visa Check and MasterCard debit cards as a condition of accepting credit cards. As noted in an earlier edition of Spotlight, the transaction fee charged to retailers' by the Visa and MasterCard networks is often less when a consumer uses a debit card rather than a credit card. However, that was not the issue in the latest decision. Instead, it was whether the retailers could bring the case as a class action. Since the retailers are seeking $8 billion in damages, should they win, that figure would be tripled to $24 billion under Federal anti-trust rules. Given the narrow decision, attorneys for Visa indicated they would seek a rehearing before the full court and, if necessary, an appeal to the Supreme Court.