With the closely watched Wal-Mart Stores Inc. suit against Visa U.S.A. and MasterCard International finally cleared for trial, the antitrust community is weighing in on what appears to be the retailers' first advantage.
A summary judgment decision handed down Wednesday may have seemed like a bad April Fools' Day joke to Visa and MasterCard, which lost all of their motions while the retailers won most of theirs. Among other things, Judge John Gleeson of the U.S. District Court for the Eastern District of New York found that Visa has market power, that debit and credit cards are separate products (a crucial point for the merchants' claim that the associations illegally tie their acceptance), and that MasterCard must share a trial with Visa.
While proponents of the associations played down the significance of the merchants' partial victory, some observers said MasterCard's and, even more so, Visa's now-grim prospects before a jury could force them into a settlement. But with so much at stake - not just tens of billions of dollars of damages, but also the potential end to the associations' Honor All Cards rules - sources speculated that Visa and MasterCard have little room to negotiate.
Meanwhile, banks - and the Wall Street analysts who cover them - seem torn between fear and curiosity. Though a Wal-Mart loss would be a huge blow to their longstanding and lucrative joint ventures, it could also mean an opportunity to work with retailers directly, resulting in new and more powerful types of cobranded cards, for example.
"If the retailers win, they will have a lot more leverage in structuring access to their selling floors," said Michael Malloy, a professor at the University of the Pacific, McGeorge School of Law in Sacramento. "They are not going to be worried about offending Visa" and they will not have to put up with high interchange fees, he said.
Pretrial nods to the plaintiffs in this type of antitrust case are almost unheard-of, lawyers said. But they also pointed to Judge Gleeson's prudence in distilling the case to its knottiest issues, which should make it easier for jurors when their initiation into the arcane world of electronic payments begins on April 28.
"This is extremely rare. In antitrust you almost always assume a summary judgment victory is for the defense," said Mark Ostrau, chair of the antitrust group at Fenwick & West LLP in Washington. "Granting summary judgment to a plaintiff is sending a very strong message that the judge thinks the defendants have some real problems."
For the merchants' counsel, Constantine & Partners PC in New York, "not having to argue the market power and distinct product elements cuts down a lot of the things that bore a jury to death," Mr. Ostrau said. (Judge Gleeson found last week that Visa does have market power, though the jury will still have to decide whether or not MasterCard does.) The retailers, he said, "can focus very much on the conduct, which is the part that sells best to jurors."
Duncan MacDonald, a former group general counsel for the card division of Citicorp, a Citigroup Inc. predecessor, said Judge Gleeson's summary judgment decision has probably created serious concern in the associations' camps and among their bank members, who until now have been willfully indifferent to this case.
Given the associations' now bleak chances at trial, a settlement may be looking less preposterous, he said. But a settlement could pull Visa and MasterCard into undesirable territory: Among the terms the merchants could seek are the right to decline debit cards, a substantial reduction in interchange rates, and a big cash payout. For Visa and MasterCard, "It's as though they have boxed themselves into every worst-case scenario they could imagine," Mr. MacDonald said.
If the retailers win their case, Mr. MacDonald said, there would be nothing to stop them from bringing separate suits against the individual bank members. From there, the joint ventures that are the bank-owned card associations would be "at risk of being dismembered," he said.
Asked last week about the probability of a settlement, the merchants' counsel Lloyd Constantine said, "In summary judgment, the judge found that no rational jury could conclude otherwise" on those issues he decided for the retailers. "You asked about a settlement. That speaks to the rationality of the defendants."
Banks are also casting an opportunistic eye on the outcome of the appeal in the Justice Department's separate antitrust suit against Visa and MasterCard, in which Judge Barbara S. Jones of the U.S. District for the Eastern District of New York outlawed the associations' exclusionary rules barring member banks from issuing rival cards. That appeal will be heard before the U.S. Court of Appeals for the Second Circuit on May 8 - in all likelihood, right in the middle of the Wal-Mart trial.
Sources say the now very real possibility of issuing American Express Co. cards may be loosening banks' allegiance to the associations. And if the Wal-Mart suit is lost, they say, banks will have more incentive to cut deals with alternative networks, for example, the entity the imminent merger of First Data Corp. and Concord EFS will produce.
"Look at the banks' history with each of the players," an analyst said. "Only a few have been happy with Visa. The entry of new players would be welcome."
Regarding a settlement possibility in the Wal-Mart suit, Bruce Sokler, the vice president of the Washington office of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo PC, said he did not think the summary judgment decision has changed the associations' perspectives. "It's hard to believe the big individual retailers who are the named plaintiffs in the case could agree on anything on their side of the table that is going to be acceptable to Visa and MasterCard," he said.
Some downplayed the judge's preliminary findings, saying many of the motions he granted were not contested by Visa and MasterCard and that the retailers still have to prove their most difficult points at trial. "You can't in any way view this as a victory for Visa and MasterCard, but there's not much new in this decision. The judge is basically repeating what he concluded in class certification," said George Priest, a law professor at Yale University and a former consultant to Visa.
One key decision deferred by Judge Gleeson is whether or not he will apply a per se or rule-of-reason standard to the case. The judge denied the retailers' per se motion on summary judgment but made it clear that it might still apply to trial.
Under a per se standard, the merchants might not have to prove foreclosure of competition in the debit card market, and Visa, by way of summary judgment, would already have been found in violation. Though Judge Gleeson turned down MasterCard's request for a separate trial from Visa, he granted that its case may require the more onerous rule-of-reason standard because of the outstanding question of whether MasterCard has market power. Two weeks earlier MasterCard made a motion for severance, saying that "substantial prejudice" could arise from evidence against Visa.
Mr. Sokler said a trial will likely see more divergence between Visa's and MasterCard's defense strategies. But most sources agreed that jurors would find it difficult to keep the two parties distinct in their minds.
"Unless the jury is made up of your readers," Mr. Ostrau told American Banker, "these things are not going to be obvious to them."
Judge Gleeson "wants to see all the evidence come out at trial," said Paul Rothstein, a law professor at Georgetown University who has sided with the associations in the media. "All this means is that he's going to wait and see."
The distinct product finding "is a mild setback" to the associations, he said. "Just because debit and credit are separate products doesn't make the [Honor All Cards] policy illegal," he said. "You have to show coercion of some kind being exercised, which is very hard to prove."
In his summary judgment order, Judge Gleeson wrote, "A trial will be held on, among other issues, those that lie at the heart of the merchants Section One [illegal tying] claims: whether Visa and MasterCard's Honor All Cards rules harmed competition in the debit card services market, and whether the defendants acted together to produce that result."
Mr. Malloy of the McGeorge School cautioned against overplaying the retailers' advantage. Their win of six motions against the associations' zero in summary judgment "looks like a scorecard, but in a practical sense it's not," he said.
"Effectively, the retailers have won the coin toss, but the questions remains: Are Visa's and MasterCard's policies in fact anticompetitive? Are they really tying?"
Sources said Judge Gleeson's clearing away of all but the most controversial points in the case also signals his distaste for a long trial. In a separate order issued Wednesday, he set time limits for each side. The retailers will have 150 hours to present their case; Visa and MasterCard have a combined 170 hours to present theirs. (If Visa and MasterCard cannot agree on how to divide their time, the judge said he would do it for them.)
"He doesn't want another DOJ," said one source, referring to that summer-long trial three years ago. Mr. Sokler of Mintz, Levin said Judge Gleeson in his summary judgment decision was careful not to rely on Judge Jones' ruling. "So no matter what happens to that appeal, his decision stands on its own - probably a good thing from the plaintiffs' point of view."
Nonetheless, he said, Judge Jones' decision probably informed Judge Gleeson's findings. "It has to make it easier for him to reach conclusions similar to those Judge Jones has already reached."
An appeals loss in the Justice Department would dismantle the exclusionary rules but would not result in monetary damages. Banks that ended their exclusive contracts with Visa and MasterCard could even be forced to pay back some of the price breaks they received from the associations.
But in the Wal-Mart suit, analysts have speculated that a dogfight among the bank members would ensue if they were hit up for damages by the associations. Monoline companies, which do not issue debit cards, would decidedly not want to contribute to the cost of this lawsuit, they said.
In an interview two weeks ago, Visa's general counsel, Paul Allen, said that his personal opinion would be that "all members should share in the burden" if there were an assessment. Such a decision would ultimately be made by Visa's board of directors, he said, but Honor All Cards, which guarantees acceptance of all card products bearing the Visa logo, clearly benefits all members, whether or not they issue debit cards.
The repercussions of dismantling Honor All Cards would reach beyond debit into the entire franchise, he said. "You can't afford to create a new brand every time you want to introduce a new card." Without a unitary acceptance system, niche cards and services - such as the Visa payroll card unveiled last year - would be halted, he said.
Mr. Allen said that a Visa bankruptcy "is not a realistic option … and not something that would merit even casual discussion" among members.
In the unlikely event that it lost the Wal-Mart suit and had to pay damages exceeding its cash assets, Visa would probably raise interchange rates, Mr. Allen said.
