The presiding judge in the Justice Department's antitrust lawsuit against Visa and MasterCard denied the card associations' request to have the case thrown out but said in a pretrial hearing Thursday that they had "strong arguments."
"We need a trial," said Judge Barbara S. Jones after hearing defense lawyers argue for summary judgment and lawyers for the government present portions of their case.
The hearing, a curtain-raiser for the trial scheduled to begin Monday in U.S. District Court for the Southern District of New York, in Manhattan, offered a taste of the issues and arguments likely to be raised at trial. It also confirmed that the three defendants - Visa U.S.A., Visa International, and MasterCard International - will all remain parties to the litigation.
In one decision, Judge Jones denied Visa International's request to be removed as a defendant. Visa International's outside counsel, Michelle Connaughton, argued that her client's inclusion in the trial is unwarranted since the issues the government raised in its complaint are relevant only to the U.S. market.
Ms. Connaughton said that the government is seeking to overturn a rule, known as 210e, that only applies to the United States.
But Visa International is the governing entity of Visa U.S.A., as well as of Visa's other geographic subsidiaries, and Melvin A. Schwarz, lead counsel for the Justice Department, pointed this out when he disputed Ms. Connaughton's argument. Moreover, he said, officials at Visa have not promised that Visa International would be "bound by what happens in [this] court."
Judge Jones agreed with the government, telling Visa International, "I think you are a necessary party" here.
In a courtroom packed with reporters and representatives of American Express Co. and Morgan Stanley Dean Witter & Co., MasterCard International's outside counsel, James C. Egan, argued for summary judgment of the lawsuit. He said the government could not prove that the governing structures of Visa and MasterCard inhibit competition in the credit card industry.
The card associations did win some legal ground. The government, which in 1976 made a decision that played an important role in the history of the credit card industry, had wanted to keep that history out of the trial. Judge Jones ruled that Visa and MasterCard "should not be denied" the right to present evidence of the government's role in shaping the industry. In 1976 the government had a chance to stop duality, or the joint governance of Visa and MasterCard, and did not. Today the government's objections to duality are at the heart of the trial.
The government contends that the bankers who serve on the associations' boards of directors are not "dedicated" enough to the companies they govern, Mr. Egan said. But Mr. Egan, of the New York law firm Rogers & Wells, said the government has not "clearly defined" the term "dedicated." There is no proof, he argued, that the governing structure proposed by the Justice Department will promote more competition between Visa and MasterCard.
"Our bylaws are benign and neutral," Mr. Egan said, adding that there was no evidence of a "conspiracy" between the joint members of Visa and MasterCard to inhibit competition.
The government wants banks that are represented on the card companies' boards to have a card portfolio 80% dedicated that brand, Mr. Egan said. Then he brought up the example of Household Bank, which, when it joined MasterCard's board 10 years ago, was predominantly a Visa issuer - 55% of its portfolio was Visa cards, and 45% of it was MasterCard cards. In the ten years that Household has sat on MasterCard's board, though, the balance shifted dramatically, until 80% of Household's cards bore the MasterCard brand.
"Under the government's theory, [Household's situation ten years ago] would have been anti-competitive," Mr. Egan said. "Did it stop being a conspiracy" when Household's portfolio reached the 80% threshold? Mr. Egan asked.
In the years since the government's lawsuit was filed in 1996, Mr. Egan said, Citigroup, Chase Manhattan Corp., and Household have signed contracts with MasterCard to become what the "government would characterize as dedicated."
"The government has concluded that the world would be a better place if some members were not permitted to be on the MasterCard board," Mr. Egan said.
Mr. Egan said there were other examples of vigorous competition between Visa and MasterCard, including a $150 million investment MasterCard made in a smart card company, Mondex. MasterCard views this investment as a way "to get ahead of Visa," he said.
In his counterargument, Mr. Schwarz, the Justice Department lawyer, brought up a letter that MasterCard's general counsel had written several years ago to the Justice Department, in which he said that that banks view the associations as "complementary," and that, in accordance with the wishes of their member banks, "MasterCard and Visa do not compete." The letter, written by Robert Norton, was a request for the government to offer an opinion on how it would view a situation in which MasterCard and Visa had the same board members.
MasterCard officials said in an interview that Mr. Schwarz was referring to the letter out of context. The letter, they said, also detailed the ways in which Visa and MasterCard do compete.
Mr. Schwarz pointed to Providian Financial Corp.'s membership on MasterCard's board as an example of a competitive problem. He said Providian, which is no longer a member of MasterCard's board, was 90% dedicated to Visa when it joined the board of MasterCard. Mr. Schwarz said Providian was invited to join the MasterCard board because Robert Selander, the chairman and chief executive officer of MasterCard, hoped Providian would change its mind.
"That's the only reason they were there," Mr. Schwarz said. Nevertheless, other members of MasterCard's board contended that Providian's closer ties to Visa were a problem, Mr. Schwarz said.
Mr. Egan responded: "The question is, did it harm MasterCard in anyway having Providian on the board?"
Mr. Schwarz said that the government "will have lots of statements like Norton's letter. There is a raft of evidence that is why we are going to have a major trial."
Visa's outside counsel, M. Laurence Popofsky, of the San Francisco law firm Heller, Ehrman, White & McAuliffe, said the government's case smacked of "deju vu." He was referring to six-year-old litigation between Visa and Morgan Stanley Dean Witter & Co. over whether the owners of the Discover card could issue Visa cards. Visa won that case, known as the MountainWest trial, in 1994. "Every fact I have raised was raised in the MountainWest" trial, he said.
Visa's 210e bylaw is a "loyalty rule," Mr. Popofsky said. It says essentially, "You are with us or you are against us."
Much of Mr. Popofsky's argument centered on American Express and Morgan Stanley Dean Witter's viability as profitable and fierce competitors. The government argues that Amex and Discover have been excluded from an "important channel of distribution," Mr. Popofsky said. "We accept that they could be better competitors," if they were able to partner with Visa's member banks, Mr. Popofsky said. But, American Express and Discover have the same access to consumers as do banks, he concluded.
Mr. Schwarz said the only real competition on what is called the network level - the entity that markets and controls a card brand as opposed to issuers of cards - is between American Express and Morgan Stanley Dean Witter.
The latter two companies are harmed by Visa's and MasterCard's membership rules because they can't provide "one-stop shopping" Mr. Schwarz said. Consumers, in turn, are harmed by the fact that they cannot get an Amex card from the bank where they maintain a checking account or a Visa account.
Mr. Schwarz also alluded to an unnamed Visa product that will have both credit and debit functions. The ultimate effect of this product "will be to shut out" Amex and Discover from the debit card market, he said. Debit cards, though not officially part of the government's case, are expected to figure prominently.
Mr. Schwarz said the credit card market is more competitive in other parts of the world, precisely because the membership restrictions that Visa and MasterCard have in the United States do not exist elsewhere.
"In other parts of the world, Visa developed a number of competitive programs because they had to compete for the loyalty of the banks," Mr. Schwarz said.
Commenting on the day's court proceedings and the denial of summary judgment, Kelly Presta, a spokesman for Visa U.S.A., said, "Today's ruling was not unexpected, but what is surprising is the blatant role Amex is playing in this litigation. In their arguments today, the government's lawyers relied almost completely on Amex's woes to make their case."
Andrea Cooper contributed to this story.