One of the intriguing aspects of the antitrust lawsuit against MasterCard and Visa-and a disconcerting one to credit card bankers-is the Department of Justice's revival of an old war.
The government wants to revisit and presumably eliminate the rules that allow banks to offer both competing brands, a practice known as duality that has been a fixture on the card industry landscape for almost a quarter century.
In contrast to the other part of the suit that would require MasterCard International and Visa U.S.A. to free their members to work with competing brands such as American Express and Discover, the duality portion was ambiguous and its outcome and implications uncertain.
The complaint filed last week in U.S. District Court for the Southern District of New York simply calls for banks with close ties to the associations to become "dedicated" to one. Sources close to the government side said the aim is to put an end to duality among the largest credit card issuers. But legal experts said the Justice Department was intentionally vague so as not to limit its options.
"It is hard to blame Justice for being vague," said Robert E. Litan, a former deputy assistant attorney general in charge of the same antitrust division that filed the charges. The "relief" that the government seeks would "tend to take shape through the course of the trial."
The department has been weighing several strategies on duality, said sources. One would be to prohibit a bank represented on one association's board from issuing the brand of the other. Another might be to stipulate the percentage of a bank's card portfolio that must be of one brand.
Under an anti-duality policy, the most prominent association members would not be allowed to issue American Express or Discover cards. And the Justice Department is also targeting banks that participate on important committees of both associations, even if they do not have board seats.
Any of these measures would force significant changes in MasterCard and Visa practices. "Lots of time and energy would be spent on how to respond," said Michael Auriemma, president of Auriemma Consulting Group of Westbury, N.Y.
Most bankers contacted for this article declined to comment on the record, saying their legal staffs are still trying to understand the suit. Others said they are relying on Visa and MasterCard to speak and act on their behalf.
Some expressed relief that individual banks were not named as defendants but said they were disappointed that a settlement was not negotiated.
"I don't think anyone could be happy with litigation," said Charles M. Hegarty, executive vice president of Wachovia Bank Card Services in Atlanta. "I think it is a time for everyone to sort out what all this means."
Wachovia Corp. was represented on Visa's board until about 18 months ago, but Wachovia executives serve on committees of both associations, which Mr. Hegarty said is "questionable" in Justice's view. "I'm not sure whether we have to align with one association or another."
But Citigroup spokesman John Morris said it does not expect "any real impact" on its business.
Citigroup, through its predecessor Citicorp, has a long-standing Visa board seat. As the biggest card bank, with more than $60 billion of receivables, it wields considerable influence over the entire industry. "It is the real sleeper in this whole thing," said a source who did not want to be identified.
Aside from its size, Citicorp is unique because it owns Diners Club, a competitor of American Express in the business travel market. Like Amex, Diners is an independent brand with its own merchant network. Until now, Citi has been an exception to card associations' competing-brands prohibition.
"Under the broad definition of 'dedicated,' does Citigroup have to shut down Diners or drop out of Visa?" asked one industry executive.
Industry people are asking what an anti-duality rule would do to MasterCard, which has half of Visa's 50% market share and has been a distant No. 2 for almost as long as duality has existed.
The Justice Department believes "there would be a rush to Visa, so the question is what can it do to drive a wedge between the associations" without destroying MasterCard, said Lloyd Constantine, a New York lawyer who, while in the state attorney general's office in the late 1980s, spearheaded a multistate lawsuit that forced MasterCard and Visa to abandon a joint debit card program. Mr. Constantine is currently representing retailers who are fighting a separate antitrust case against Visa and MasterCard over debit card practices.
Some legal experts said the government's approach is "sophisticated and subtle" by allowing banks that do not participate in the governance of Visa or MasterCard to issue both brands, yet forcing more powerful banks to align with a single brand.
The Justice Department claims the common ownership and governance of Visa and MasterCard eliminates competition. It cites numerous statements from industry executives supporting that assertion, some from court testimony in the 1992 and 1994 litigation between Visa and what was then Dean Witter, Discover & Co. over the latter's right to issue Visa, which Visa ultimately won. Other quotations came from depositions during the government's two-and-a-half-year investigation.
MasterCard's executive vice president and general counsel wrote in a 1992 letter to Justice: "When one board acts with respect to a matter, the results of those actions are disseminated to the members ... in both organizations. As a result, each of the associations is a fishbowl, and officers and board members are aware of what the other is doing, much more so than in the normal corporate environment."
In January 1997, MasterCard's U.S. president, Alan Heuer, said, "It is clear that because of duality today you don't see MasterCard and Visa in the marketplace attacking each other ... (T)he owners ... don't want us attacking the other thing they own."
Visa U.S.A. president Carl Pascarella said, "You can't compete in certain areas if you are co-owned."
Proof of collusion is not enough. Antitrust law requires proof that the associations' behavior harmed consumers.
The government argues the absence of competition stifled innovation in such areas as smart cards, corporate cards, and secure Internet transactions.
For their part, MasterCard and Visa have indicated they will accuse the Justice Department of reversing the position, according to a Visa statement last week, that "federal regulators encouraged duality 23 years ago."
Joel I. Klein, assistant attorney general for antitrust, denied that characterization, and Mr. Litan said he has a point. At the same time, the historical fact is that Visa abandoned its anti-duality rule in the 1970s when it did not receive government assurance that its old policy was in the right.
Mr. Litan, a director of the Brookings Institution in Washington, said Mr. Klein has to distance himself from those events. But history "needn't be a killer for them (the government), because they gave their O.K. when the market was in its infancy. The factual situation was different."
Duality stemmed from a 1971 request by Worthen Bank and Trust Co. of Arkansas to issue MasterCard in addition to Visa. It sued Visa but the case was settled out of court. Visa requested a "business review" by the Justice Department, hoping to shield itself from an antitrust suit.
Justice failed to give clearance, because of concerns about how the prohibition on duality would affect merchant-acquiring banks. At that point Visa reversed its position and opened the dual-issuance floodgates.
Justice officials say they were never asked directly about duality-only the opposite of it-and that the department's silence on the matter should not be interpreted as approval.