The Credit Card Cases

Important issues relating to one of the longest-running controversies in U.S. antitrust law may be resolved in a series of cases now proceeding at various levels of the federal courts. These cases all involve antitrust challenges to rules of the Visa and MasterCard credit card networks, which, it is alleged, restrain competition in markets related to credit and debit cards. The rules at issue have a long and storied history, but likely developments in these cases during the next few months may take many large U.S. banks from the status of interested bystanders to frantic defendants. Banks that are members of Visa and MasterCard would be well-advised to consider taking steps to limit their potential exposure to persons injured by the challenged antitrust violations.

Issues relating to the competitive effects of membership rules of credit card networks date back more than 30 years. In the early 1970s, a bank in Little Rock, Ark., sued for the right to issue both Visa cards and MasterCard cards. See, Worthen Bank & Trust Co. v. National Bankamericard Inc., 345 F. Supp. 1309 (E.D. Ark. 1972), rev'd, 485 F.2d 119 (8th Cir. 1973), cert. denied, 415 U.S. 918 (1974). As a result of that suit, attorneys for what is now known as Visa sought the views of the antitrust division of the U.S. Department of Justice on the proposed adoption of a bylaw which would require banks to belong to only one bank credit card network. In a 1975 letter, the Justice Department refused to approve the proposed bylaw. Thus began almost three decades of investigations, scholarly examination and litigation, which is only now close to fruition.

The development of the credit card industry was significantly affected by the 1975 DOJ business review letter. When Visa was unable to require banks to choose between Visa and MasterCard, most banks chose to be members of both and to issue both Visa and MasterCard cards. What came to be known as "duality" later gave rise to antitrust concerns at the DOJ. During the 1980s and early 1990s, the phenomenon of duality and credit card competition continued to interest the DOJ and others. Articles in scholarly journals and the trade press argued that the DOJ should sue to eliminate duality, i.e., to force banks to choose between Visa and MasterCard. Particularly beginning in 1991 when Discover sued Visa (see SCFC ILC Inc., d/b/a Mountainwest Financial v. Visa U.S.A. Inc., 36 F. 3d 958 (10th Cir. 1994), cert. denied sub nom. MountainWest Fin. Corp. v. Visa U.S.A. Inc., 515 U.S. 1152 (1995)) and Visa adopted a bylaw 2.10(e) prohibiting member banks from affiliating with other networks (except MasterCard), some industry observers felt that the combination of duality with exclusionary bylaws like 2.10(e) was the worst of all possible worlds: The result was both the diminution of innovation competition between Visa and MasterCard caused by duality, and the anti-competitive effects on network competition from Discover, American Express and other potential new entrants.

In 1998, following MasterCard's adoption of a rule mirroring Visa's bylaw 2.10(e), the DOJ finally sued both Visa and MasterCard over what it called "governance duality"— the fact that Visa and MasterCard were effectively governed by the same large banks. The DOJ also challenged the exclusionary rules of Visa and MasterCard, which prevented American Express and Discover (and any future entrants) from offering network services to bank issuers. In October 2001, the federal district court in New York concluded that the DOJ had failed to establish that governance duality was a violation of § 1 of the Sherman Act, but had proven that the exclusionary rules of Visa and MasterCard violated that section by unreasonably restraining competition in the market for general-purpose credit cards in the United States. U.S. v. Visa U.S.A. Inc., 163 F. Supp. 2d 322 (S.D.N.Y. 2001). The court ordered Visa and MasterCard to abolish these rules, but later stayed its ruling pending appeal.

Less than a week after this decision, the certification of a class of merchants that had sued Visa and MasterCard challenging certain of their rules was affirmed on appeal. In re Visa Check/Master Mondy Antitrust Litigation, 280 F.3d 124 (2d Cir. 2001), cert. Denied, 122 S. Ct. 2382 (2002). The merchants challenged as an illegal tying arrangement Visa and MasterCard rules requiring merchants to "honor all cards" branded Visa or MasterCard. The merchants objected to having to accept "off-line" Visa and MasterCard debit cards, at "supracompetitive" prices. Visa and MasterCard have exhausted their appeals, and the case will go to trial in April 2003.

In a third case, Visa and MasterCard face another class action, brought by merchants seeking to recover damages resulting from the antitrust violation found by the district court in U.S. v. Visa U.S.A. Inc. Unless that decision is reversed on appeal, the doctrine of collateral estoppel will likely preclude Visa and MasterCard from relitigating the finding of a violation of § 1 of the Sherman Act.

These cases pose risks of substantial damages exposure, not only for Visa and MasterCard but also for their member banks. In the Visa Check/Master Money litigation, Visa and MasterCard's principal argument in support of Supreme Court review was that their damage exposure is approximately $100 billion. Even a fraction of this amount far exceeds the likely assets of Visa and MasterCard put together. As a result, the class plaintiffs and their lawyers may turn to member banks to recover those amounts. As noted above, both Visa and MasterCard are membership associations, thus potentially exposing their members to the liabilities of the associations under partnership theories. Even a bankruptcy filing by Visa and MasterCard may not shield their bank members from liability. Even if the plaintiffs do not ultimately prevail on such theories, they could pursue direct antitrust claims against the directors of the associations, who authorized the challenged rules. Under federal antitrust law, each co-conspirator would be jointly and severally liable for the full amount of the plaintiffs' damages, with no right of contribution from the other co-conspirators. See Texas Indus. Inc. v. Radcliff Materials Inc., 451 U.S. 630 (1981). Even the largest banks would have to seriously contemplate how to avoid or minimize such enormous potential exposures. In addition, banks whose competitive opportunities have been foreclosed by these restrictive rules might also have antitrust claims of their own against Visa and MasterCard for profits they may have lost from being unable to affiliate with other networks. For banks interested in minimizing their exposure, a good first step would be to disavow the allegedly illegal agreements. Under federal law, a co-conspirator's liability continues until the co-conspirator takes affirmative steps to withdraw from the conspiracy, and withdrawal requires an affirmative act to defeat or disavow the purpose of the conspiracy; a mere cessation of activity is insufficient. Hyde v. U.S., 225 U.S. 347, 368-69 (1912); U.S. v. Lewis, 759 F.2d 1316, 1343 (8th Cir.), cert. denied, 474 U.S. 994 (1995).

So, for example, at a minimum, a bank might make a public statement that it does not consider itself bound by the challenged Visa and MasterCard rules, and considers itself free to take actions inconsistent with the rules. This seems a prudent step, particularly with respect to the Visa and MasterCard rules already held illegal in U.S. v. Visa U.S.A Inc. Although it is possible that the decision could be reversed on appeal, such a result seems unlikely. Banks might also consider filing a declaratory judgment action against Visa and MasterCard, seeking a determination of their rights and obligations under the association rules in light of the antitrust claims. This might be appropriate for the most risk-averse banks, which seek to limit their antitrust liability while also minimizing the risk of adverse actions taken against them by Visa and/or MasterCard for violating the rules.

Finally, banks may want to use their collective influence over the management of Visa and MasterCard to try to repeal the exclusionary and anti-competitive rules. At least with respect to the rules successfully challenged by the DOJ, the evidence of their anti-competitive effects seems pretty clear, having been established in a trial before a federal judge, and the necessity for them is far from obvious. The United States is the only region in the world in which Visa and MasterCard enforce such rules. In Europe, Latin America, Asia and even in Puerto Rico, banks are free to affiliate with American Express, Discover or other card networks. Such affiliations have occurred, apparently to the benefit of consumers, and without harm to Visa and MasterCard. The U.S. antitrust laws are founded upon the proven concept that consumers benefit when markets are unrestrained by artificial limitations on the ability of sellers to compete freely with one another. In the last decade or so, more and more countries around the world have concluded that they should emulate this free-and open-competition policy and have adopted antitrust laws and regulations designed to prohibit unreasonable restraints on trade. Since the United States is the acknowledged world leader in antitrust policy and enforcement, it could be viewed as ironic that these rules of the major credit card networks have survived here as long as they have. The member banks of Visa and MasterCard have the power to eliminate these rules, or at least to minimize their potential antitrust exposure from the effects of these rules. Either option would seem prudent under the circumstances.