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Exclusionary rules and practices maintained by Visa and MasterCard must come to an end, but the two associations do not have to change their governing structures, a judge for the Southern District of New York ruled Tuesday. In a long-awaited decision, U.S. District Judge Barbara S. Jones found that rules preventing member banks of the Visa and MasterCard associations from issuing American Express or Discover cards have resulted in a significant “adverse effect” on competition or consumer welfare. The judge ordered the rules abolished. At the same time, however, Jones rejected the arguments of lawyers with the Antitrust Division of the U.S. Department of Justice, who claimed that the governing structure of the two associations hurt competition or injured the consumer. The rulings came in a 156-page opinion issued more than a year after a trial in which the government, with American Express and Discover as eager bystanders, sought to portray the Visa and MasterCard associations as anticompetitive cabals responsible for restricting innovation and limiting consumer choice. In one of two claims brought under the Sherman Antitrust Act in United States v. Visa U.S.A., 98 Civ. 7076, the government had charged that Visa and MasterCard had a stranglehold on the general-purpose credit card industry because of so-called “dual governance.” Under the rules of the associations, member banks cannot serve on the board of directors of both associations. However, the government charged, the largest banks, including such giants as Chase Manhattan, were still allowed under association rules to have a seat on the board of directors of one association while maintaining seats on key committees of the other association. The result, the government said, is that Visa and MasterCard, and their associations’ 8,500 member banks, dominated 86 percent of the market for general purpose credit cards. The associations, they argued, have been able to stymie innovations ranging from a method of ensuring secure transactions over the Internet to the development of so-called “smart cards.” But Tuesday, Judge Jones said that “with the exception of the associations’ failure to name each other in their advertising,” what she called “a dated example” that no longer reflects the “aggressive advertising competition” in recent years, “the Government’s examples fail to prove that dual governance has significantly diminished competition and innovation in the credit and charge card industry.” But the government had more success in its second count; it persuaded Judge Jones to find that the exclusionary rules maintained by the associations violated the Sherman Act. Visa U.S.A. Bylaw 2.10(e) and MasterCard’s Competitive Programs Policy (CPP) both had the effect, she said, of limiting output of American Express and Discover cards in the United States, restricted the competitive strength of the two cards by “restraining their merchant acceptance levels and their ability to develop and distribute new features such as smart cards,” and “effectively” foreclosed American Express and Discover from “competing to issue off-line debit cards, which soon will be linked to credit card functions on a single smart card.” Moreover, she said, Bylaw 210(e) and the CPP “weaken and harm consumers” by depriving them of the “ability to obtain credit cards that combine the unique features of their preferred bank with any of the four network brands, each of which has different qualities, characteristics, features and reputations.” “At the same time, the direct purchasers of network services (the issuers) restrict competition among themselves by ensuring that so long as all of them cannot issue American Express or Discover cards, none of them will gain the competitive advantage of doing so,” she said. Visa and MasterCard had argued that no harm was done by the exclusionary policies because member banks still competed with each other and with American Express and Discover by offering lower interest rates and incentive programs and services for card consumers. Judge Jones disagreed. COMPETITIVE LANDSCAPE Issuer-level competition, she said, “does not take the place of competition at the network level, and while there is no claim in this case that member banks of Visa and MasterCard have conspired intra-association or inter-association to raise prices to consumers directly, their exclusionary rules have significantly reduced product output and consumer choice in the issuing market and have reduced price competition in the network services market.” In addition to ordering the repeal of Bylaw 210(e) and the CPP, Jones enjoined both associations from adopting any rule or policy that “prohibits issuers from issuing general purpose or debit cards in the United States or any other general purpose network.” She said that while the “agreements themselves are not anti-competitive,” the foreclosure of American Express and Discover “from competing to enter into the agreements has greatly and impermissibly altered the competitive landscape of the network and card markets.” Explaining the overall impact of her decision, Jones said that, even though the governing structure of the associations will remain unchanged by her ruling, ending exclusionary practices will open up competition. “Under the remedy ordered by the court, banks that reach issuing arrangements with American Express, Discover or any other association may not be treated as well by Visa or MasterCard, but they will not be forced to give up their Visa or MasterCard portfolios,” she said. Special Counsel for Civil Enforcement Melvin A. Schwarz, now of Dechert, was lead counsel for the Justice Department. Representing MasterCard International Inc. were Kevin J. Arquit, James C. Egan Jr., Kenneth Gallo and Aimee H. Goldstein, of Clifford Chance Rogers & Wells. Noah Hanft is general counsel for MasterCard. Brent Rushforth and M. Lawrence Popofsky of Heller Ehrman White & McAuliffe were lead counsel for Visa U.S.A.

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