When MasterCard International adopted a rule barring member banks from working with American Express or other nonbank brands, it did so over the objections of at least six of its own board members, said H. Eugene Lockhart, the former chief executive officer of MasterCard International, in testimony Tuesday in the antitrust trial.
The MasterCard membership rule - known as the competitive programs policy - was adopted in June 1996. That rule and a similar one established by Visa U.S.A. lie at the heart of the U.S. Department of Justice's lawsuit against the card associations: The government contends that these rules stifle competition and thus harm consumers.
M. Laurence Popofsky, Visa's attorney, said the dissenting board members included executives from Metris Cos. Inc. (formerly Fingerhut), GE Capital, Advanta Corp., and AT&T Universal Card Services, all of which had discussed partnerships with American Express Co.
Mr. Lockhart, who presided over MasterCard from March 1994 to May 1997, said he had initially sided with the dissidents and that he feared an anti-Amex rule might prompt important MasterCard banks to defect.
At the time, Mr. Lockhart said, American Express was talking with several MasterCard banks about buying their card portfolios, and there was talk that Citigroup might buy Amex. If either of these things happened and MasterCard had a restrictive membership policy in place, MasterCard could have lost major banks, Mr. Lockhart said.
Because of these concerns, MasterCard adopted a "rule" rather than a policy as Visa had done, to remain more flexible, Mr. Lockhart testified.
"We wanted to let members do what they felt was material to their businesses," said Mr. Lockhart, who is now chief executive officer of The New Power Co., a Greenwich, Conn., utility company.
MasterCard had been considering a more flexible rule that would have allowed members to work with Amex if they met certain criteria, Mr. Lockhart said. He said he thought permitting such arrangements with Amex would have been a way for MasterCard to differentiate itself from Visa.
After this testimony, MasterCard's deputy general counsel, Noah Hanft, released a statement giving the official word on what Mr. Lockhart had said. It said that Mr. Lockhart "led the board through vigorous discussions of the issue, and ultimately adopted a policy that protected the core integrity of the joint venture MasterCard had built with banks over the last 30 years."
Mr. Lockhart also presided over MasterCard during the development of the Secure Electronic Transactions protocol for secure Internet payments, and the events related to SET occupied a good portion of Tuesday's proceedings.
The government alleges in its complaint that MasterCard stopped Visa from entering into a separate SET initiative with Microsoft Corp., because such an alliance would have left MasterCard at a competitive disadvantage.
Mr. Lockhart testified that he had been "suspicious" of Visa's intended partnership with Microsoft, fearing, he said, that the result would not be an open industry standard in which all payment brands could participate. Mr. Lockhart said Visa appeared to be reneging on its 1995 promise to not make SET a competitive issue.
"I had no concrete evidence," Mr. Lockhart said of his suspicions, "just a lot of circumstantial evidence that led me to believe certain things."
"I wanted a standard, and I didn't want my largest competitor to have an advantage," Mr. Lockhart said. He said he had called the chief executive officers of companies that compete with Microsoft, to garner support and commitments and to develop software that would match what Microsoft and Visa were developing.
Mr. Lockhart also discussed a letter he wrote to MasterCard members about what he thought Visa was doing. The letter, which has MasterCard favoring an open standard, said, "We believe Visa did not appreciate the nature of the deal it had entered into with Microsoft."
After the letter went out, banks pressured Visa to drop its plans with Microsoft and instead work with MasterCard to develop an open standard, according to the testimony.
On cross-examination by Mr. Popofsky, Mr. Lockhart said: "Banks were angry that Visa and MasterCard couldn't cooperate on standards. Some issuers said it was ridiculous that there were separate standards." In January 1996, Visa and MasterCard mended their fences to announce a joint agreement on the SET protocol.
