After a brief recess, the government's antitrust lawsuit against VISA and MasterCard will resume this month. The Department of Justice completed the presentation of its complaint during July. Now VISA and MasterCard get their turn at the stand. It is expected the trial will run into September. In a nutshell, the U.S. Government alleges that VISA and MasterCard have conspired to limit competition by restricting member banks from doing  business with competitors, namely American Express and Discover. The DOJ lawsuit also alleges that  VISA and MasterCard are controlled by the same group of large banks and therefore do not really compete with each other. VISA and MasterCard hold that their business structures have not dampened competition or innovation and that if the government prevails in the courtroom it will only benefit American Express, leading to higher prices for consumers.

Here are some trial highlights thus far:

*The Government's key witness was among the first to take the stand to testify that VISA and MasterCard jointly agreed to slow down the introduction of smart cards in the USA.  John Elliott, formerly of MasterCard and a consultant for American Express, testified that MasterCard was ready to rollout out smart cards but VISA was not, and therefore the technology was put on hold. However under cross examination, Mr. Elliott revealed he received half-million dollars as a consultant for American Express. He also admitted on the stand to having an additional eight to ten meetings, not including phone calls, with the DOJ as part of his work under his American Express consulting arrangement. VISA attacked Mr. Elliott insisting he purely represents American Express' interests. VISA says American Express continues to pay his legal expenses including his lawyer appearing in court with him this week. VISA said while the smart card is a good idea in theory, the business case for the product in the U.S. does not exist.

*A senior American Express executive, Steve McCurdy, identified some of the bank credit card issuers who expressed an interest in issuing American Express cards. Among the three dozen prospects American Express attracted: MBNA, First USA, KeyCorp and Advanta.  To date, AmEx has formed more than 60 card issuing partnerships internationally, but has found no takers within the US.

*Former CEO of MasterCard and Advanta, Pete Hart, testified about his frustration with VISA and MasterCard in regard to Advanta's former Rewards Accelerator program which linked Advanta's credit cards to the American Express 'Membership Rewards' program.  *According to top secret documents admitted into evidence, American Express assembled a report two years ago to show the impact if VISA and MasterCard's policies were modified to permit members to issue competitors' cards. AmEx projected it would have realistically signed up nearly nine million cardholders through two dozen bank partners over a three year period. However the AmEx estimates ranged from 6 million cards and 15 partners to 21 million cards through 50 partners over the same period of time. Another top secret AmEx document was admitted into evidence entitled "Trench Warfare: A Battle Plan vs Citibank, First USA and VISA".

*Former CEO of MasterCard, Eugene Lockhart, testified that he debated the issue of members issuing American Express cards within MasterCard and was confused by VISA's radical position. Lockhart also testified  that board members from Metris, GE Capital, Advanta, and AT&T Universal opposed an anti-American Express rule. He also testified that he was suspicious of VISA's SET initiative with Microsoft.

*Fleet Credit Card Services CEO Joseph Saunders, testified that he distributed written minutes from MasterCard board meetings to colleagues who sat on VISA's board and that he attended high-level VISA meetings while serving as director of MasterCard International.

*American Express President/COO Kenneth Chenault acknowledged that his company made a number of strategic errors over the past 20 years but has been hamstrung by VISA and Master Card rules. Chenault confirmed that AmEx made a mistake in passing up co-branding opportunities with American Airlines and AT&T. He testified, however, that his company would like to enter the debit card market and needs bank relationships to do so. He also gave the AmEx side of a failed merger with Citibank. Looking ahead, Chenault indicated AmEx would like to undercut VISA and MasterCard merchant fees for debit cards. He also detailed discussions AmEx held with MBNA, Bank One and Capital One. Chenault further addressed his opinion of an 18-page Bain & Co. report, commissioned by AmEx, that suggested AmEx use the government to attack the underpinnings of VISA’s business structure. He characterized the report as"'ludicrous" and "naive".

*Adam Rothschild, VP of Strategic Planning and Business Development for TRS at American Express, testified that his company had considered introducing a U.S. offline debit product in 1996 but concluded that it would be too expensive. He said the transactions would have had to run through the automated clearing house at a cost of 3.7 cents each.

*American Express' chairman Harvey Golub testified that AmEx is interested in working with any bank that has the skill and market base that's relevant to AmEx goals. Golub also spent time on the stand defending his company's higher merchant fees, arguing that such fees are not universally higher than VISA or MasterCards. He also testified about the potential merger with Citibank indicating that one of the reasons the deal came apart was because Citibank wanted to acquire AmEx rather than merge.

*Discover's president, David Nelms, testified that consumers and merchants could benefit if banks could issue cards on the Discover network, thereby taking advantage of Discover's lower merchant fee structure. However Nelms also suggested that the government's proposed remedy to the alleged anti-trust practices of VISA and MasterCard could negatively impact Discover.  Nelms said that allowing banks to issue cards on the American Express network and the Discover network would put Discover at a competitive disadvantage due to its smaller market share. Nelms also confirmed that Discover and Citibank met twice last year to discuss the possibility of jointly buying MasterCard. 

*Bennett Katz, former general counsel of VISA International for 29 years, testified that board members of VISA and MasterCard have leaked confidential information to the other association, and that there have been situations in which conflicts of interest have arisen.

*The sole expert witness for the government and the government's final witness testified that VISA and MasterCard's exclusionary rules and dual governance has negatively affected the market. However, the expert, Professor Michael Katz of the University of California at Berkeley,  was unable, in cross-examination, to cite any specific examples of consumer harm or delayed innovation in the card industry resulting from card association policies.

In an interesting twist, a number of so-called nonprofit, nonpartisan groups joined in the defense of VISA and MasterCard by issuing news releases during the government's presentation of its case. However one group stood out as a pure propaganda tool. Washington, DC-based Americans for Consumer Education and Competition not only issued news releases but also ran full page ads in major publications such as the Wall Street Journal to blast American Express. It turns out that the ACEC group was formed a month before the trial and was funded entirely by VISA. Former U.S. Rep. Susan Molinari is the group's spokesperson. ACEC's news release warned consumers that "if American Express prevails" in the courtroom then "we could all be spending more for credit card transactions". The group says its ads were designed to explain the "facts of this case to consumers and public opinion leaders". The group's purported mission is "fostering consumer education and financial literacy while promoting competition in the marketplace". The group's first press release quotes Molinari as saying "this trial . . . is about bailing out a competitor".

The Virginia-based 300,000-member National Taxpayers Union also issued a press release calling for federal officials to stop "mauling the marketplace" by ending involvement in the ongoing feud among credit card companies. The NTU says "The government's case against VISA and MasterCard has the same troubling signs for taxpayers as the ill-founded foray against Microsoft." NTU also maintains that American Express worked closely with federal prosecutors in bringing this case in order to avoid expensive private litigation.

Also joining in the defense of VISA and MasterCard is the Washington, DC-based Small Business Survival Committee. The SBSC issued a press release criticizing the government's case as another attempt to impose government regulation on a competitive industry. The group says:  "The case against Visa and MasterCard, like other recent antitrust actions, has nothing to do with helping consumers, and has everything to do with helping big companies like American Express achieve in the courtroom what they could not do in the marketplace. If American Express and their allies at the Department of Justice are successful in this case, it will be a disaster to small business owners. Increased government regulation in the credit card industry will undoubtedly mean higher costs for small businesses using credit cards. If companies like American Express are successful in these types of antitrust cases, no small business in America is safe." SBSC has about 50,000 members.

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