Discover Financial Services' antitrust lawsuit against Visa Inc. and MasterCard Inc. cleared an important hurdle last week when a judge ruled that there could be no dispute that consumers had been harmed by rules its rivals imposed.
The decision moves the case closer to a single issue: how much in damages Discover could be entitled to collect, one observer said.
Visa and MasterCard have already agreed to pay American Express Co. up to $4.05 billion to settle a similar lawsuit brought by the New York credit card company. At issue is a rule that Visa and MasterCard had imposed for years, barring their issuers from doing business with other networks.
MasterCard said in a July 31 filing with the Securities and Exchange Commission that Discover has alleged more than $6 billion in damages.
Discover, a Riverwoods, Ill., card company, has claimed it is eligible for "treble damages," which, if upheld, would mean any penalty imposed at trial could be tripled.
In a note to clients last week, Sanjay Sakhrani, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., wrote that he was sticking with his estimate that the litigation would cost MasterCard of Purchase, N.Y., about $350 million, based on its share of the card market, and on Visa's $650 million reserve put aside to to cover costs related to this case.
"However, we would not be surprised if final settlement amounts end up being higher for both, given that it appears that" Discover "seems to be willing to go to trial," which is currently scheduled for Oct. 14.
Many people in the industry expect the case to be settled before then, however, and have noted that it is hard to specify how much Discover could reasonably expect, either in a settlement or at trial.
Judge Barbara S. Jones of U.S. District Court for the Southern District of New York presided in the Amex case and the Justice Department's antitrust prosecution of Visa and MasterCard and is also hearing the Discover lawsuit.
In her order last week, she applied a range of key findings from the Justice Department lawsuit to the Discover case, including a finding that the exclusionary rule harmed competition by "limiting output of Discover cards in the U.S.," "restricting Discover's competitive strength by restraining merchant acceptance levels and their ability to distribute new features through exclusion from the network services market," and "foreclosing Discover from competing to issue offline debit cards."
In past SEC filings both Visa and MasterCard have said that, if the court were to apply "one or more" of the conclusions from the Justice Department case, an award against them would become more likely.
K. Craig Wildfang, a partner in the Minneapolis office of Robins, Kaplan, Miller & Ciresi LLP, said the decision "was a clear victory for Discover" that "simplifies the trial" because "the jury is instructed that certain things are to be found to be true."
"There are still important questions that Discover would have to prove," Mr. Wildfang said. "In an antitrust case, there are two parts to proving damages … . You have to show that you were harmed in some respect. As I read the court's ruling, that has basically been established … . What Discover now has to do is to take the next step and quantify what that harm is … . That basically comes down to a battle of the experts."
The size of the Amex settlements "doesn't really provide much guidance for a jury decision because the settlements are not admissible and presumably a jury is not going to know" about them, he said. Discover is asking for a big number, "and juries have great latitude to decide what the damages are. In antitrust cases, there is a relaxed standard of proof of the amount of damages because the courts have said it's hard to prove what would've happened absent the anticompetitive conduct."
Mr. Wildfang is the lead counsel in a pending group of suits brought by merchants against Visa and MasterCard over interchange fees.
Discover filed its lawsuit the day the Supreme Court declined to review a decision, in a 1998 action brought by the Justice Department, ordering Visa and MasterCard to drop their issuer rules, known as exclusionary rules. Amex filed its suit about a month later.
Last week, Discover said: "Judge Jones' decision will prevent the defendants from relitigating her prior rulings" and give "the jury an opportunity to hear the case and assess Discover's damages."
Judge Jones did rule in favor of motions made by Visa to dismiss debit monopolization claims against it and by MasterCard to dismiss debit-related claims against it.
Visa said in a statement that it "believes it will be clear to a jury that it is Discover's own business model and decisions — not the actions of competitors — that have limited its options in the marketplace. Discover has been free to engage in bank-issuing partnerships since 2004 but has yet to demonstrate that it can do so in a meaningful way."
MasterCard said in a statement: "In no way does Judge Jones' ruling change the fact that Discover will have to establish that MasterCard and Visa, rather than its own business decisions, caused the damages it alleges … . Public results of Discover's business performance after the" exclusionary rules were "withdrawn show that Discover has not seen any increase in its overall percentage of the credit card volume share from third-party issuance."