Visa International and MasterCard International face unprecedented legal challenges this year in the form of two major antitrust lawsuits slated to go to trial within six months of each other.
Behind-the-scenes wrangling during the discovery periods of both cases has given glimpses of the defense strategies the credit card powerhouses are developing. The maneuvering also indicates that Visa may be turning to an old friend to supply the intellectual cornerstone of its defense.
Richard L. Schmalensee, dean of the Sloan School of Management at the Massachusetts Institute of Technology, is perhaps best known as an expert witness in the Microsoft trial. His ties to the credit card industry, and Visa in particular, go back nearly a decade.
These roots, legal experts say, could be both an advantage and a detriment if he becomes Visa's expert witness at trial.
The lawsuits, one filed more than a year ago by the Department of Justice and the other filed three years ago by the biggest retailers - known as the Wal-Mart case - have trial dates of June 5 and November 27 respectively. There are many overlapping issues in the cases - so many, in fact, that that the Department of Justice was granted permission by the judge in the retailer case to intervene. This means that the lawyers for the government and the retailers may share documents.
In an interview, Mr. Schmalensee said he is involved in both cases on behalf of Visa. People close to the legal proceedings said Mr. Schmalensee appears on Visa's witness lists in both lawsuits and that he is likely to be its expert witness. Mr. Schmalensee declined to confirm that he is named as a witness. He said only that " there is no commitment to call everyone on the witness list."
In an odd twist, the case would also provide Mr. Schmalensee a chance to square off against a recent adversary. Franklin M. Fisher, the economic expert for the government in the Microsoft case and an M.I.T colleague of Mr. Schmalensee, is also the retailers' economic expert.
If Mr. Schmalensee is called to the stand, it would not be his first testimony on behalf of Visa. He first worked for the San Francisco-based association in 1991, when Sears Roebuck & Co., the Discover card's owner at the time, filed an antitrust lawsuit after Visa refused to let Sears issue a Visa card. Mr. Schmalensee testified with limited success as Visa's expert witness in defending a rule preventing competitors Discover and American Express from issuing Visa cards. A jury in 1992 sided with Discover. Visa appealed, and in 1994 a judge overturned the decision.
The focus of the Department of Justice's lawsuit, among other things, is another rule that prohibits Visa's and MasterCard's member banks from issuing the card brands of competitors.
Mr. Schmalensee said the credit card industry is uniquely misunderstood, and that that misunderstanding has caused the industry's legal woes. A new book Mr. Schmalensee wrote with David Evans, a senior vice president of National Economics Research Associates Inc., "Paying with Plastic" (M.I.T Press), is meant to address misperceptions, Mr. Schmalensee said.
"It is an attempt to unpack a rather unusual competitive landscape," he said. "The courts need to recognize that these joint ventures [Visa's and MasterCard's] have done a lot for the American consumer and economy."
Mr. Schmalensee said he approached Visa about writing the book and Visa provided the funding for it as well as much of the data. The book was distributed to journalists by a public relations firm hired by Visa.
The professor described "Paying with Plastic" as an "academic analysis" and disputed that the book, published in December, "was an exercise in paid-for advocacy." Mr. Schmalensee said, "I've been an academic for 30 years. The notion that I would sell my reputation for the little bit of money I got for this not a chance."
Academic and legal experts say academic work funded by for-profit organizations raise questions about integrity.
George Hay, a professor of law and economics at Cornell Law School who was chief economist for the antitrust division of the Department of Justice from 1973 to 1979, said, "It is very uncommon to have an academic work funded or sponsored by industry."
The book will no doubt be dissected by the Department of Justice and the attorneys representing the retailers, especially if Mr. Schmalensee is named as Visa's expert witness.
Expert reports, which generally indicate whom a company is hiring for a trial, are to be filed by April 4 in the retailer case.
Mr. Hay, who has been an expert witness numerous times, said expert witnesses' testimony often is contradicted by statements they have made elsewhere. In the Microsoft case, for example, Mr. Schmalensee was attacked by the government for statements he made in previous articles that appeared to contradict his arguments supporting the software giant.
Lloyd Constantine, of the New York-based law firm Constantine & Partners representing the retailers, said, "The more you testify for the same company, the more potential inconsistencies there are."
Mr. Constantine is representing some of the largest retailers, including Wal-Mart Stores Inc., Sears Roebuck & Co., Limited Inc., and Safeway Stores. The retailers allege that MasterCard and Visa coerce merchants into accepting debit cards at roughly the same prices charged for credit cards. Claiming that debit transactions are less risky and should be cheaper, the merchants want to eliminate Visa's and MasterCard's "honor all cards" rule.
Mr. Constantine said Mr. Schmalensee's close ties to Visa are not as relevant as his past testimonies for the company. That history "leaves fertile ground to impugn him," Mr. Constantine said.
Expert witnesses can also be attacked for lacking a strong grasp of the facts, Mr. Hay said. On this front, Mr. Schmalensee's association with Visa is clearly an asset.
"The role of the expert is very important, because he is the one who is allowed under the law to give the jury an opinion as to how to tie all the facts together," Mr. Hay said.
The danger in a jury trial - and the retailer case will most likely be heard by a jury - is that a witness can be portrayed as a "house economist" for the defendant, an issue that arose in Mr. Schmalensee's testimony in the Microsoft trial. The Department of Justice made much of the fact that Mr. Schmalensee was paid $800 per hour by Microsoft, a ploy meant to shock the jury and raise questions about Mr. Schmalensee's independence.
Such tactics are less effective when a judge presides over a case, Mr. Hay said. Judges are rarely shocked by the sums expert witnesses earn. The department of Justice lawsuit against Visa and MasterCard is likely to come before a judge, as are most brought by the government, said legal experts.
Lawyers have already had an early crack at Mr. Schmalensee.
Mr. Schmalensee was Visa's and MasterCard's economic expert in their motion to oppose class certification of the retailers' lawsuit. On Wednesday, John Gleeson, the judge presiding over the retailer case, ruled that the retailer case should be certified as a class action. (See related article, page 9.)
In a transcript of the Feb. 4 court proceedings, when each side presented their oral arguments regarding the class action motion, it was disclosed that Mr. Schmalensee was unaware that he was representing MasterCard on the class-action issue. "He didn't know that MasterCard was his client," Mr. Constantine said during the hearing.
The estimated $8.1 billion in preliminary damages Mr. Constantine's clients are seeking - a figure widely reported several weeks ago - could actually be as high as $63 billion, according to court documents.
The $63 billion estimate is a projection - before trebling - of what Visa and MasterCard can expect to pay in the next 10 years if they do not lift their "honor all cards" rule. The $8.1 billion estimate covers Oct. 2, 1992 through Dec. 31, 2000, also before trebling.
While the numbers are immense, this case and government's may never generate the kind of publicity the Microsoft trial did.
"I think this case will turn out to be a whole lot less sensational," Mr. Schmalensee said. "The theatrical elements like the e-mails and the Gates deposition are missing here."
