The judge assigned to the federal antitrust case against MasterCard and Visa said he is stepping aside, sending the potentially landmark litigation back to square one.
Less than a month after Milton Pollack, a senior U.S. district judge in New York, first met with the attorneys in the case and set a trial date of Oct. 29, 1999, he said this week that he would accede to a request from government lawyers who cited possible conflicts of interest.
As required by law, Judge Pollack filed a disclosure statement in July detailing his net worth. He listed American Express Co., Chase Manhattan Corp., and Citigroup among his stock holdings.
The Department of Justice asserted in a memorandum filed Tuesday that the shareholdings are grounds for the judge to disqualify himself. He expressed his intention to do so the same day, attorneys for both sides reported.
They are waiting for a new judge to be assigned.
The memo said the three companies could be materially affected by the outcome of the litigation filed Oct. 7 against MasterCard and Visa. It questioned the propriety of Judge Pollack's continuing to preside, and cited a number of precedent cases in which judges have stood down.
"Citibank and Chase, because of their substantial ownership and governance rights in the defendants, might be considered as the equivalent of 'parties' to this litigation," the Justice Department said.
The memo said Citibank, now a unit of Citigroup, has ownership and voting rights amounting to more than 10% of Visa and 20% of MasterCard. Because of its market share, Citibank has the right to appoint two directors to Visa's board.
Chase was said to own 5% of each association.
Judge Pollack's disclosure statement did not reveal the number of shares he owns in the financial companies, said Melvin Schwarz, a lawyer representing the Department of Justice.
Before the bombshell, the people involved in the case were trying to size up their prospects in Judge Pollack's courtroom in U.S. District Court for the Southern District of New York.
One lawyer, who said he had appeared before Judge Pollack, said the judge "would have been a tough taskmaster on the government, given his views on antitrust matters." The lawyer asked not to be named.
A 92-year-old jurist in semiretirement, Judge Pollack was appointed by Lyndon Johnson in 1967 and has a reputation for moving cases along quickly and for engineering settlements.
Legal experts say Judge Pollack in his scheduling had already placed the proceedings on a fast track.
An early hint about his desires came in the meeting with representatives of the government and bank card associations Oct. 16. According to a transcript, Judge Pollack emphasized speed, saying the trial could begin even before the date he had ordered.
Lawyers quoted anonymously in the 1998 Almanac of the Federal Judiciary described him as "brilliant," "no-nonsense," "a bully," and a "control freak." One said, "he makes his mind up right away and then directs the case in such way that the way he's made up his mind comes out."
One source said the judge is also known to push for settlements, especially in a suit like the Justice Department's against MasterCard and Visa, in which previous negotiations had occurred.
In his no-nonsense fashion, he rejected a memorandum, submitted by Visa's counsel, that offered some background information about the case. Judge Pollack turned it back after reading just one paragraph, calling it a "one-sided view."
While conceding that he knows little about the field, Judge Pollack said he did not want "an indoctrination about the case which goes beyond the complaint." Representing Visa, Stanley S. Arkin of Arkin, Schaeffer & Kaplan countered that the government's perspective was fully represented in its formal complaint. "It was only my hope to give you some background," Mr. Arkin said.
Paul Allen and Bennett Katz, the in-house counsels of Visa U.S.A. and Visa International, respectively, were accompanied by seven lawyers from three firms. MasterCard International was represented by its in-house attorney, Noah J. Hanft, and four others from the New York firm of Rogers & Wells.
Also present was an executive representing American Express Co., which is not a party to the suit but has been playing an active behind-the-scenes role. For example, American Express hired former federal appellate judge Robert Bork to lobby the Justice Department in favor of filing the antitrust suit.
Sources reported-and Citigroup confirmed-that its co-chief executive officer, John S. Reed, tried to stave off the litigation in a meeting with Assistant Attorney General Joel I. Klein. (See related article below.)
The high-profile court battle between the Department of Justice and Microsoft Corp. may provide insight into how the credit card case could shape up. The Justice Department is wielding a powerful tool with its videotaped deposition of Microsoft chairman William H. Gates. Conflicts between his testimony and e-mail messages have been used to question his credibility.
As in U.S. v. Microsoft, the government has plenty of testimony from its investigative stages. It also must prove that consumers were harmed as a result of products that never existed or were delayed in coming to market.
Legal experts said a passage in the memo on Judge Pollack this week has echoes of the government's Microsoft reasoning: "Acting together, the banks that govern both Visa and MasterCard ... have made it impossible for competing card networks to utilize the card distribution services of banks. This barrier is particularly significant in a network industry, where increased usage leads to increased merchant acceptance, which in turn leads to increased usage, in a continuing cycle that economists call network effects."
An attorney for one of the bank card associations said the industry is facing an unprecedented amount of litigation. Also of particular concern is a lawsuit filed against Visa and MasterCard last year by the retailing industry, led by such big-name plaintiffs as Sears, Roebuck and Co., Wal- Mart Stores Inc., and The Limited Inc. The retailers allege that the card associations illegally force merchants to accept debit cards at roughly the same price as credit cards.
Lloyd Constantine, the lead attorney representing the retailers and a longtime nemesis of the bank card groups, said he expects his case to be tried shortly after the Department of Justice's case is completed.
"It's a nightmare for them to be doing these cases back-to-back," said Mr. Constantine. The New York-based lawyer said there is a lot of overlap between his and the government's suits, and many of the same witnesses will be called.
"The basic allegation is that Visa and MasterCard are abusing their market power," he said.
Visa counsel Paul Allen disputed Mr. Constantine's prediction on timing. He said Visa expects the retailing case to be tried "sometime in 2000, with the emphasis on 'sometime.'"
Meanwhile, Mr. Constantine's case has caught the eye of the Federal Trade Commission and a group of state attorneys general investigating the debit card allegations.