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Lawyers for Visa and MasterCard sought to convince a federal appeals panel Thursday that a lower court ruling that found the exclusionary rules maintained by the companies violated antitrust laws was in error because the rules harmed neither consumers nor competitors. In oral arguments before the 2nd U.S. Circuit Court of Appeals, Visa and MasterCard attorneys asked the court to reverse the 2001 finding by Southern District of New York Judge Barbara S. Jones, who granted an injunction against the credit card giants sought by the U.S. Department of Justice. Jones, in a 157-page opinion, had found that Visa’s Bylaw 2.10(e) and MasterCard’s Competitive Programs Policy (CPP) must be abolished. She said the rule and the bylaw effectively prohibit the associations’ member banks from issuing American Express and Discover cards. Justice Department antitrust attorneys successfully argued before Jones that under the bylaw and the CPP, the banks were no longer engaged in a legitimate joint venture concerning distribution of their product, but instead were violating the antitrust laws to the detriment of consumers. But Kenneth A. Gallo of Clifford Chance, who represents MasterCard, told the 2nd Circuit panel that Jones had applied the wrong standard in issuing her opinion. Under the so-called “rule of reason analysis” that Gallo said should have been applied, the question is whether American Express is “stopped from getting to the consumer.” The panel, consisting of Judges Jose A. Cabranes, Pierre Leval and James L. Oakes, focused many of their questions on whether the analysis would be affected if Visa and MasterCard had started from scratch and made the exclusionary rules a cornerstone of their effort to build a viable distribution network. Judge Leval in particular wanted to know whether potential improvements in service to the consumer, even in the absence of more competitive terms, could be “cognizable.” It might be, Gallo said, but only if the proper standard was applied by the district court. But Adam D. Hirsh of the Justice Department’s Antitrust Division countered that Judge Jones had applied the appropriate standard and had made specific factual findings outlining different types of harm done to the consumer. Jones’ decision made it clear, Hirsh said, that wide-open access to the banks would lead to an increase in the “quality and variety” of general purpose cards, and that all four credit card companies would compete to deliver “faster, cheaper, better, more robust service.” Judge Leval also asked Hirsh whether “the case might come out differently if Visa and MasterCard were not organizations based on bank membership?” “Yes and no,” Hirsh said, “but you’d have to wonder how they have the market power they do.” He added, “I think the Justice Department would be quite concerned if all the banks merged.” Judge Cabranes asked Hirsh about the validity of case law cited by the defendants upholding certain exclusionary agreements. But Hirsh said that the case law approving of exclusionary agreements dealt with “vertical restraints,” which “are much less likely to have an impact on consumer welfare.” Steven V. Bomse of Heller Ehrman White & McAuliffe, who represents Visa USA, said that American Express is not barred from competing and was trying to get access to the company’s distribution network despite the fact that Amex made a conscious decision to target high-end consumers. “If anything, American Express has been remarkably successful during the time this rule has been in place,” Bomse said. And while Hirsh said the agreements denied American Express and Discover “access to the assets” of the banks, Gallo said the “rule of reason analysis” focuses, in part, on whether the alleged collusion leads to a “reduced net output in the industry.” “As long as Amex is an effective competitor” there can be no reduction of net output, he said. The arguments came one week after Visa and MasterCard agreed to settle antitrust litigation in the Eastern District just short of trial. Visa settled for $2 billion and MasterCard for $1 billion, and both associations agreed to change some of their debit card practices. The suit was brought in Brooklyn by WalMart and other major retailers who claimed the associations’ practices restricted competition and amounted to an abuse of market power. However, in the Justice Department’s suit in the Southern District, Jones in her 2001 ruling did not entirely favor the government. She found for Visa and MasterCard on one count, ruling that despite the exclusionary rules, the two associations still competed aggressively with each other. She also declined to order changes in the associations’ governing structure. Thursday, in the appeal of Jones’ ruling before the 2nd Circuit, Eugene F. Bannigan of Morgan, Lewis & Bockius, who represented Visa International, contested whether Jones’ ruling against Visa and MasterCard had actually covered his client, the parent of Visa USA. Bannigan said that in 1996, a board resolution on exclusionary rules passed by Visa International dealt only with regions outside the United States. And if Judge Jones actually did make a finding of liability against Visa International, Bannigan said, he was asking the 2nd Circuit, for practical reasons, to vacate that finding as it applies to the injunction. “The problem with any injunction is it tends to attract opportunistic attention from plaintiffs’ lawyers,” Bannigan said. The 2nd Circuit panel made no immediate ruling in the appeal.

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