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A federal judge’s decision that Visa USA Inc. and MasterCard International Inc. broke a federal antitrust law may do more than just give banks the option of offering rival credit cards. Antitrust lawyers said U.S. District Judge Barbara A. Jones made several novel interpretations of product markets and market power that could make it easier for regulators to challenge mergers. Though none of her legal conclusions radically depart from current practice, some lawyers said her twist on the law could foreshadow trouble for deals in network industries such as telecommunications, cable and computer software. “For the next America Online Inc.-Time Warner Inc. merger, this gives you a template on how to challenge it,” said David Balto, a partner in the Washington, D.C., office of the White & Case law firm. The Visa-MasterCard antitrust case stems from rules adopted in the 1990s by the associations that essentially bar banks that issue Visa and MasterCard from issuing rival cards sponsored by such companies as American Express Corp. and Discover Financial Services Inc. The card associations, which the issuing banks own, feared they would lose too much transaction processing volume if member banks issued other cards. The government challenged this exclusionary rule — and another rule that permitted banks that sit on the board of Visa to issue MasterCards and vice-versa — during a 34-day trial in the summer of 2000. The Department of Justice argued that the exclusionary rule hurt competition for network services such as interchange fees, which is the amount a business pays the processor for accepting the credit card. It also alleged the board rule was illegal because it reduced the incentive for either association to innovate. Jones rejected the later argument Oct. 9, concluding the card association board rule did not harm competition. But the Justice Department prevailed on its exclusionary rule claim. Jones said the policy of barring member banks from issuing rival cards has artificially inflated interchange rates charged to merchants. To find for the government, the court first had to define the relevant market. Historically, the courts have ruled that cash, checks and credit cards are all part of a broader payment-methods market. The government, however, contended there was a separate market for credit cards because some retailers, such as Web or mail-order companies, could not conduct business as easily with cash or checks. The judge accepted that argument, and several lawyers said the ruling made sense. The merger guidelines specify that a relevant market is one where a player can make a price increase stick. In this case, Jones concluded that Visa and MasterCard have forced merchants to pay higher interchange fees without losing charge-card volume. But Balto argues the ruling is distinctive. It marks not only the first time a court has posited a credit card-only market but also shows that the merger guidelines can be used to define a relevant market in a network industry. “This decision gives a road map for separately defining the relevant market,” Balto said. Tom Brock, a partner at Proskauer Rose in Washington, said the Federal Trade Commission also could find the decision useful for challenging hospital mergers. The agency has lost the past five hospital merger challenges primarily because it has been unable to persuade the court that the efficiencies gained from combining operations outweigh the competitive harms. Brock said this gives the FTC some precedent to define two markets in hospital mergers. One would be a traditional retail market; the other would be a network market for services contracted to managed-care plans. In that network market, the FTC might find it easier to show that reducing the number of hospitals would reduce competition for managed care contracts, he said. “You could have a market within the network and a market for the underlying service,” Brock said. Jones’ ruling breaks additional ground on the notion of market power, which a company must have in order to violate the antitrust laws. Robert Doyle Jr., a partner at Powell, Goldstein, Frazer & Murphy in Washington, said the judge concluded that Visa and MasterCard have market power because they can charge higher interchange fees for Internet retailers that rely almost exclusively on credit-card payments than for bricks-and-mortar retailers that can steer consumers to using cash or checks. “She is saying that the ability to pick out certain customers that I can charge different prices to is market power,” Doyle said. According to Doyle, that could help antitrust regulators in mergers because they could assess companies’ ability to discriminate on pricing. With such evidence, they could challenge the deal, he said. One recent deal where this issue comes into play, Doyle said, is in the June purchase of Internet job-hunting company Hotjobs.com Ltd. by TMP Worldwide Inc., the parent of rival Web site Monster.com. If Monster.com can charge higher prices for job ads targeted at a broad range of people than for ads narrowly targeted, at a specific geographic area, then it might have market power, Doyle said. “That seems to be unique to this decision,” he added. Balto said such network effects also are possible in telecommunications mergers, such as the aborted WorldCom Group-Sprint FON Group merger, where regulators could look if a telecommunication company could raise Internet backbone rates without losing customers. If so, then the deal would be anticompetitive even if prices charged to consumers were unaffected, he said. “This gives [regulators] a case to cite that if you find evidence of the ability to raise prices without losing customers, then you have market power,” Balto said. Copyright (c)2001 TDD, LLC. All rights reserved.

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