State Attorneys Explore Antitrust Case Options

As the federal antitrust investigation of the MasterCard and Visa associations drags on, attorneys general from several states are beginning to bear down.

The state officials held a 75-minute conference call last Tuesday with executives from Visa, according to a source familiar with the discussions, as they consider options for taking action against the card association's membership rules and other policies.

The U.S. Department of Justice has spent nearly two years probing the rules that preclude members of MasterCard International and Visa U.S.A. from also offering competing brands, such as American Express and Discover.

The attorneys general are "exercising their option to act if the Department of Justice doesn't," said Lloyd Constantine, head of the New York law firm Constantine & Associates, at a card industry conference last week in New Orleans sponsored by the newsletter and magazine publisher Faulkner & Gray.

Mr. Constantine was the New York State assistant attorney general for antitrust for 11 years. In that role, he spearheaded a multistate consortium-much like the one that might be drawn into the currently brewing antitrust action-that through a 1989 lawsuit forced MasterCard and Visa to abandon plans to develop a joint debit card known as Entree.

At the time of the Entree case, a Republican administration in Washington had only sparingly been initiating antitrust enforcement actions and the state attorneys general saw themselves as filling a void. The Clinton administration has been more activist in this area, notably against Microsoft Corp. and its allegedly coercive marketing of an Internet browsing system-an issue that has similarly sparked state enforcers' interest.

The Wall Street Journal reported April 9 that the state lawyers were conversing about the bank card companies. Executives at American Express Co. and Morgan Stanley, Dean Witter & Co., which owns the Discover and Novus brands, called the development encouraging.

"We are pleased that both the DOJ and the attorneys general are taking this subject so seriously and we will cooperate in any way we can," said American Express spokeswoman Gail Wasserman.

The attorneys general, according to sources in a position to know, have hired an economist to serve as a consultant.

People close to the Justice Department investigation are saying that the states mobilized because they suspected that the federal agency's antitrust division was close to a decision on suing MasterCard and Visa. If it brought a suit, the states-as yet unnamed-presumably would want to participate.

Mr. Constantine said there is a 50% chance the Justice Department will take action, most likely in the third or fourth quarter.

"The states will support what DOJ does," the antitrust specialist said. "But if DOJ drops the ball," the states could be poised to take their own action.

Mr. Constantine said he believes that if the government takes on the associations, it will be over more than their membership rules.

"It would seek to drive a wedge between Visa and MasterCard," he said. And he sees it likely to want to dismantle duality, the practice dating back to the mid-1970s of allowing a bank to issue both card brands.

The initial target of the current federal probe was Visa bylaw 2.10E, which bars member banks from offering nonbank competitors' products.

It has been pointed out that the Justice Department never seemed overly concerned until MasterCard announced an analogous policy.

"MasterCard could have sat by and watched Visa get subpoenaed," Mr. Constantine said. "Why would MasterCard throw itself in front of a moving government vehicle?

"Then the government said, 'Holy mackerel! There must be some collusion.'"

From that point, the federal inquiry "broadened into a full investigation of Visa, MasterCard, duality. On the menu at DOJ is a full range of options."

Mr. Constantine said the federal investigation may move to the back burner as antitrust officials assess the competitive implications of the most recent spate of bank mergers. "The slowness of federal investigation may spur the states on," he said.

A source close to Justice characterized its status as "we are close to a decision but need to look at one more thing."

"They do seem to be trying to arrive at closure, but they have been at that stage for some time," the source said.

Michael Auriemma, president and chief executive officer of Auriemma Consulting in Westbury, N.Y., said some bank card issuers are interested in offering American Express products. Some are ambivalent, others hostile toward the MasterCard and Visa restrictions.

The consultant quoted one bank executive as having called the associations "Frankenstein's monsters."

Mr. Auriemma said American Express has made inroads with some Latin American banks but seems to be approaching the U.S. market more gingerly than it did two years ago, when it openly invited bankers to explore comarketing opportunities.

Mr. Auriemma said a banker he knows "is interested in hearing Amex's sales pitch" but has not been called in the course of a year at his present employer.

Speaking to the Faulkner & Gray crowd, Mr. Constantine provided an update on another pending legal matter-the lawsuit filed by major retailers such as Wal-Mart, The Limited Inc., and Sears seeking to strike down the MasterCard and Visa rules requiring them to accept debit cards.

The retailers object to having to accept MasterMoney and Visa Check and paying fees on the transactions comparable to those on credit cards.

The process is "in the middle of the heaviest part of discovery," which should be completed by yearend, said Mr. Constantine, who represents the retailers.

The likelihood of a settlement is "virtually nil," he said. "The retailers are getting madder and madder as this goes on. They feel they are getting fleeced and their customers are getting fleeced."

Mr. Constantine said the case could go to trial in late 1999 or early 2000.

Should his clients prevail, MasterCard and Visa banks could be on the hook for considerable monetary damages.

"It is inevitable that the day of reckoning is coming," he said. "My advice to (card association) members is to start setting aside reserves to pay for the damages."

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