Opinion

United States v. Visa U.S.A. Inc.

163 F. Supp. 2d 322
2001 U.S. Dist. LEXIS 16156
2001 WL 1190590

Court: District Court, S.D. New York
Filed: Oct 9, 2001
Status: Published
Author: Jones
On the bench: Jones
Cited by: 29 cases
Authority: More cited than 86.4%

Modified by United States v. Visa U.S.A. Inc., 183 F. Supp. 2d 613 (2001)

stating that the “longer the lags before new entry, the less likely it is that potential entrants would be able to enter the market in a timely, likely, and sufficient scale to deter or counteract any anticompetitive restraints”

How later courts described this case

stating that the “longer the lags before new entry, the less likely it is that potential entrants would be able to enter the market in a timely, likely, and sufficient scale to deter or counteract any anticompetitive restraints”
noting merchants “cannot refuse to accept Visa and MasterCard even in the face of significant price increases because the cards are such preferred payment methods that customers would choose not to shop at merchants who do not accept them”
applying Merger Guidelines to find that a five percent price increase by a hypothetical monopolist of “general purpose” credit cards would be profitable and that such cards therefore constitute a relevant product market
noting Visa and MasterCard’s ability to “charge differing interchange fees based, in part, on the degree to which a given merchant category needs to accept general purpose cards,” in other words, cardholders’ credit-insistence, “illustrates their market power”

Written by the judges who cited it.

The opinion

Decision

JONES, District Judge.

INTRODUCTION

This civil action was brought by the Antitrust Division of the Department of Justice, Washington, D.C., against the defendants, VISA U.S.A. INC., (“Visa U.S.A.”), VISA INTERNATIONAL CORP., (“Visa International”) (collectively “Visa”) and MASTERCARD INTERNATIONAL INCORPORATED, (“MasterCard”). It involves the U.S. credit and charge card industry, which has only four significant network services competitors: American Express, a publicly owned corporation; Discover, a corporation owned by Morgan Stanley Dean Witter; and the defendants Visa and MasterCard, which are joint ventures, each owned by associations of thousands of banks.

The Government claims, in two counts, that each of the defendants is in violation of Section 1 of the Sherman Antitrust Act, which provides that “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States ... is declared to be illegal.” 15 U.S.C. § 1 . Count One centers around the governance rules of Visa and MasterCard, which permit members of each association to sit on the Board of Directors of either Visa or MasterCard, although they may not sit on both. Count Two targets the associations’ exclusionary rules, under which members of each association are able to issue credit or charge cards of the other association, but may not offer American Express or Discover cards. Because the Sherman Act outlaws only those agreements that unreasonably restrain trade and because the agreements alleged in this case are not the type of agreements that are unreasonable

per se,

for each count the plaintiff must demonstrate that the restraint has substantial adverse effects on competition. For the reasons to follow, the court finds that the Government has failed to prove that the governance structures of the Visa and MasterCard associations have resulted in a significant adverse effect on competition or consumer welfare. However, the proof clearly shows that the exclusionary rules and practices of the defendants have resulted in such adverse effect and should be abolished.

Turning to Count One, plaintiff focuses on what it calls the “governance duality” of

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the associations. Plaintiffs expert defines governance duality as a governance scheme which permits banks to have “formal decision-making authority in one system while issuing a significant percentage of its credit and charge cards on a rival system.” Plaintiffs theory is that because of the overlapping financial interests of the banks they represent, the dual Directors on each of the associations’ boards have a reduced incentive to invest in or implement competitive initiatives that would affect their other card product, and as a result the Visa and MasterCard associations have failed to compete with each other by constraining innovation and investments in new and improved products. To support this theory, the Government claims that the associations’ failure to compete is exemplified by delayed or blunted innovation in four areas: (1) chip-based “smart” cards; (2) an encryption standard for Internet transactions; (3) advertising, and (4) premium cards. It also cites a number of statements made over the years by Visa and MasterCard executives which generally criticize “duality” as an impediment to aggressive competition between the associations. The Government claims that these statements are further proof that dual-issuing association board members engaged in anticompetitive behavior.

Based upon what it hoped to prove, the Government proposed the imposition of a court-mandated governance structure for Visa and MasterCard for a period of ten years. This structure would require that any issuer who served either on the Board of Directors or any governing committee of either association agree prospectively to issue credit, charge and debit cards exclusively on that association’s network. It would also require that by 2003, 80% or more of the issuer’s total dollar volume in credit and charge transactions be transacted on that association’s network in the U.S. and worldwide.

After a review of the evidence, the court concludes that with the exception of the associations’ failure to name each other in their advertising — a dated example that no longer reflects the aggressive advertising competition that has existed for some years between the defendants — the Government’s examples fail to prove that dual governance has significantly diminished competition and innovation in the credit and charge card industry. Defendants’ statements about “duality” do not persuade the court to the contrary. Most of them relate to dual issuance rather than to dual governance or board conduct; those that do refer to governance are dated and far too general to be of any probative value. In addition, the Visa and MasterCard boards have an impressive record of supporting “share-shifting” initiatives specifically designed to gain market share for their association at the expense of the other association, as well as American Express and Discover. The Government’s failure to establish causation between dual governance and any significant blunting of brand promotion or network and product innovations is fatal to this claim.

Moreover, if innovation competition between Visa and MasterCard has been jeopardized in the past, it is at least as likely that dual issuance and the influence of the major dual issuers has been to blame as has dual governance. If this is so, the only remedy may well be the separation of the major banks as owner/issuers into one association or the other. This is precisely the direction the industry has taken. During the last three years, most of the top banks and monoline

issuers have already chosen to enter into “dedication” agree

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ments with either Visa or MasterCard which provide that the issuer must solicit 100% of its new cards in the association with which it has contracted. Although entering into one of these contracts is not a prerequisite for board membership, not surprisingly, the current “dedication” levels (“portfolio skews”)

of the members of the associations’ Boards of Directors now reflect the market reality that dual governance is virtually at an end.

Of course, whether or not dual issuance has been or will be the source of anticom-petitive conduct is not the issue. In this case the Government set out to prove that dual governance has been — if not

the

cause — a cause of an actual adverse effect on competition in the market. This it has not done. Even if market forces had not already all but ended dual governance, since the Government has failed to prove that adverse effect, no remedy altering the governance structures of Visa and MasterCard is justified.

In the second count, the Government alleges that Visa and MasterCard have thwarted competition from American Express and Discover through exclusivity rules forbidding members of the associations from issuing credit cards on competing networks. Since the penalty for issuing American Express or Discover cards is forfeiture of the association member’s right to issue Visa or MasterCard cards, the Government claims that these “rules raise the cost to a member bank of issuing American Express or Discover credit cards to prohibitively high levels and make it practically impossible for American Express and Discover to convince banks ... to issue cards on their networks.” (CmpltA 136.) And, indeed, since American Express’ decision in 1996 to open its network and seek bank issuers, no bank has concluded a deal with American Express at the expense of losing its Visa and MasterCard portfolios. The Government also claims that American Express and Discover, as the smaller networks, need Visa and MasterCard members to issue their cards in order to increase their share of the card-issuing market to better compete with the associations in the network services market. The Government argues that as a result of the exclusionary rules, American consumers have been denied the benefits of credit and charge cards with new and varied features.

The proof demonstrates that Visa U.S.A.’s By-law 2.10(e) and MasterCard’s Competitive Programs Policy (“CPP”) do weaken competition and harm consumers by: (1) limiting output of American Express and Discover cards in the United States; (2) restricting the competitive strength of American Express and Discover by restraining their merchant acceptance levels and their ability to develop and distribute new features such as smart cards; (3) effectively foreclosing American Express or Discover from competing to issue off-line debit cards, which soon will be linked to credit card functions on a single smart card, and (4) depriving consumers of the ability to obtain credit cards that combine the unique features of their preferred bank with any of 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,

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none of them will gain the competitive advantage of doing so.

The defendants argue strenuously that no consumer harm results from the exclusionary rules because the member banks of the associations compete fiercely as card issuers with each other and with American Express and Discover to offer lower interest rates and all manner of incentive programs and services to card consumers. This issuer-level competition, however, 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.

The defendants also argue that these exclusionary rules actually enhance competition between the four systems because they keep the systems separate. They argue that if “duality”, however defined, actually does cause reduced incentives to compete at the network level, triality or quadrality will only make things worse. However, the fact is that the major issuers have for some time now been wooed aggressively for their business by Visa and MasterCard, and as the defendants themselves have argued, the result has been procompetitive. There is no reason to believe that permitting American Express and Discover also to solicit the major issuers will be anticompetitive. It will simply mean that four networks instead of two will be able to compete to sell network services to America’s banking institutions. Of course, at present the dedication agreements concluded between Visa and MasterCard and their major issuers have locked up most of the credit and charge card market, leaving only a few major issuers uncommitted and currently free to partner with American Express or Discover. The current competitive landscape thus requires that in addition to abolishing the associations’ exclusionary rules, the court declare the dedication agreements voidable by the individual banks in order to permit them to negotiate issuing arrangements with American Express and Discover, if they so choose.

Since this court has found no liability under Count One, the associations are free to respond to concerns about multiple-issuing governors with potentially conflicting financial interests as they see fit. They may retain or appoint board members whether or not the member’s bank has agreed to solicit prospectively only that association’s cards. They are also free to set, adjust, or abandon altogether requirements that board members reach certain percentages of volume on that association’s system. This situation favors multiple issuance and leaves the monitoring of governors’ competitive incentives in the hands of the associations’ owners and the market. 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 and or MasterCard portfolios.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This case was tried to the court sitting without a jury for thirty-four trial days between June 12, 2000, and August 22, 2000. In addition to considering the oral and written testimony of a number of current and former executives of the Visa and MasterCard associations and their member banks, as well as American Express

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and Discover, the court also heard expert testimony. The Government presented the testimony of Michael Katz, Professor of Economics and Business Administration at the University of California at Berkeley. Richard Schmalensee, Dean and Professor of Economics and Management at the Sloan School of Management at the Massachusetts Institute of Technology and Richard Rapp, an economist affiliated with National Economic Research Associates, Inc., testified on behalf of Visa U.S.A. and Visa International. Ronald Gilson, Professor of Law and Business at both Stanford University and Columbia University testified on behalf of Visa International. Robert Pindyck, Professor of Applied Economics at the Sloan School testified on behalf of MasterCard. The court has considered over six thousand pages of trial testimony, volumes of deposition testimony, approximately six thousand admitted exhibits and

amicus curiae

briefs from American Express and Discover — among others. The court has made determinations as to the relevance and materiality of the evidence and assessed the credibility of the testimony of the witnesses. Upon the record before the court at the close of the admission of evidence, pursuant to Fed.R.Civ.P. 52(a), the court finds the following facts to have been proved by a preponderance of the evidence, and sets forth its conclusions of law.

I. OVERVIEW OF THE PAYMENT CARD INDUSTRY

This case involves the four major systems, or networks, that provide authorization and settlement services for U.S. credit and charge card transactions: Visa, MasterCard, American Express and Discover. Visa and MasterCard members issue credit, charge and debit cards with the Visa and MasterCard brands. American Express and Discover issue credit and charge cards with their brand names but do not issue debit cards.

(See

Ex. D-4118.) A charge card requires the cardholder to pay his or her full balance upon receipt of a billing statement from the issuer of the card.

(See

Krumme (JCB

) Dep. at 147-148.) A credit card permits cardholders to pay only a portion of the balance due on the account after receipt of a billing statement.

(See id.

at 148 .) Although debit cards are similar to credit and charge cards in that they may be used at unrelated merchants, the fact that upon use they promptly access money directly from a cardholder’s checking or deposit account strongly differentiates them from credit and charge cards.

(See

Tr. 151 (Kesler, Banco Popular); Krumme (JCB) Dep. at 148.)

As explained more fully below, the two relevant product markets are (1) the market • for credit and charge cards issued under these brand names, and (2) the market for the network services that support the use of credit and charge cards. Because the cards at issue in this case are accepted at numerous, unrelated merchants, they are known as general purpose cards. There is no dispute that proprietary cards such as those issued by department stores like Sears or Macy’s and accepted only at those locations are not in the relevant market.

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MasterCard and Visa are structured as open, joint venture associations with members (primarily banks) that issue payment cards, acquire

merchants who accept payment cards, or both.

(See

Tr. 4450-51 (Dahir, Visa U.S.A.).) They do not have stock, or shareholders; just members and membership interests.

(See id.

at 4451 .) MasterCard is open to any eligible financial institution.

(See id.

at 5613-14 (Selan-der, MasterCard).) Similarly, any financial institution that is eligible for Federal Deposit Insurance Corporation deposit insurance can join Visa.

(See id.

at 4452-53 (Dahir, Visa U.S.A.).) Visa members have the right to issue Visa cards and to acquire Visa transactions from merchants that accept Visa cards. In exchange, they must follow Visa’s by-laws and operating regulations.

(See id.

at 4451-53 (Dahir, Visa U.S.A.); Ex. D-1586 at § 2.03-2.04 (Visa U.S.A. By-laws).) The same is true of MasterCard.

(See

Ex. D-3228 at § 5 (MasterCard By-laws).) MasterCard has approximately 20,000 global members.

(See

Tr. 5571-72 (Selander, MasterCard).) Visa U.S.A. has approximately 14,000 members in the United States, including approximately 6,000 Visa card issuers.

(See id.

at 4453 (Dahir).) The remaining 8,000 members are acquiring banks.

MasterCard and Visa are operated as not-for-profit associations and are supported primarily by service and transaction fees paid by their members.

(See id.

at 4454-55, 4457-4458 (Dahir).) They set their fees to “cover the costs involved in providing the basic infrastructure to the members,” but do not charge license fees or royalties. While the associations make a “profit” from these fees, they do not try to maximize retained earnings. The profit they earn is used to maintain a capital surplus account to pay merchants in the event of a member bank failure.

(See id.

at 4455-57, 4459 (Dahir);

see also

M. Katz Dir. Test. ¶¶ 116-122.)

Despite these difficulties, the court is persuaded by Prof. Katz’ analysis and finds that it is highly unlikely that there would be enough cardholder switching away from credit and charge cards to make any such price increase unprofitable for a hypothetical monopolist of general purpose card products. This conclusion is buttressed by the fact that (1) few, if any, cardholders actually can or do observe price increases, including interchange rate increases and increases in service fees charged by issuing banks; and (2) the burden of such increases is at least partly passed on by merchants and so is shared by consumers who use other means of payment.

(See

M. Katz Dir. Test. ¶ 131.)

Professor Katz’ market definition is further supported by evidence of consumer preferences. In many circumstances, consumers strongly prefer to use credit and charge cards rather than cash or checks, because they generally do not want to carry large sums of cash to make large purchases, and checks generally have much lower merchant acceptance than either cash or general purpose cards.

(See

Schmidt (Visa U.S.A.) Dep. at 70; Tr. 5971-72 (Schmalensee); M. Katz Dir. Test. ¶¶ 113-14.) Also, consumers benefit from the general purpose card’s credit function, which allows for the choice to purchase now and pay later.

(See

Schmalensee Dep. at 381-82; Schmidt Dep. at 69-72) Indeed, defendants’ member issuers do not view cash or checks as “competitive” with general purpose cards. (Armentrout (Crestar) Dep. at 100.)

Because proprietary cards, such as a Sear’s or Macy’s card, are accepted only at a single merchant consumers do not believe that proprietary cards are substitutes for general purpose cards and therefore they should not be included in the relevant market.

9See

Krumme (JOB) Dep. atl53-54; M. Katz Dir. Test. ¶ 102; Schmalensee Dep. at 131, 244.) Consumers also do not consider debit cards to be substitutes for general purpose cards.

Due to their rela

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tive lack of merchant acceptance, their largely regional scope, and their lack of a credit function, on-line debit cards, which require a pin number, are not adequate substitutes for general purpose cards.

Similarly Visa and MasterCard research demonstrates that consumers do not consider off-line debit cards to be an adequate substitute for general purpose cards, even though they have attained widespread merchant acceptance.

Knowledgeable industry executives agree with these conclusions.

(See

Tr. 742, 746^47, 965 (McCurdy, American Express); Tr. 2996-97 (Nelms, Discover); Krumme (JCB) Dep. at 156.)

Since the merchants’ demand for general purpose cards is derived from consumers’ demand to use these cards, their attitudes also reflect consumer attitudes. Some merchants, including large, prominent, national retail chain stores, such as Target and Saks Fifth Avenue, believe that if they were to stop accepting Visa and MasterCard general purpose cards they would lose significant sales. Consequently, these merchants believe they must accept Visa and MasterCard, even in the face of very large price increases.

(See

Scully (Target Stores) Dep. at 65-67; Rodgers (Saks) Dep. at 49-50, 58-59.) Even merchants that have profit margins as low as three percent, such as Publix Supermarkets, feel compelled to accept general purpose cards.

(See

Tr. 378, 399-400 (Woods, Publix).)

In setting interchange rates paid by merchants to issuers (through the merchants’ acquiring banks), both Visa and MasterCard consider, and have considered, primarily each other’s interchange rates, and secondarily the merchant discount rates charged by Discover and American Express.

(See

Heuer (MasterCard) Dep. at 55-57; Fairbank (Capital One) Dep. at 50-52; Boardman (Visa Int’l) Dep. at 158-59; Ex. P-0717 at VU0282142; Ex. P-0514 at MET003814.) The costs to merchants of accepting cash, checks, debit, or proprietary cards were not a factor.

(See

Heasley (Visa U.S.A.) Dep. at 99-100.) In addition, general purpose card networks also track each other’s merchant charges.

(See

Ex. P-0827; Sheedy (Visa U.S.A.) Dep. at 47.) And when tracking “competitors,” defendants look to the major general purpose card networks, not to other payment methods.

(See, e.g.,

Ex. P-1110 at MC51959; Ex. P-1169.)

Although the defendants seek here to define the market more broadly, large numbers of defendants’ documents explicitly recognize the existence of a separate general purpose card market. For example, Visa research showed that the “source

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of volume for [the] New Premium Product” was MasterCard, Discover, and American Express. (Ex. P-0822 at VU 1371788.) There was no indication that the new premium card would displace consumer spending on cash, checks, debit cards or private label cards. In these documents, defendants calculate their “market” shares among general purpose card networks only. No percentages for cash, checks, debit or store cards are included in these calculations and pie charts.

Finally, although it is literally true that, in a general sense, cash and checks compete with general purpose cards as an option for payment by consumers and that growth in payments via cards takes share from cash and checks in some instances, cash and checks do not drive many of the means of competition in the general purpose card market. In this respect, Prof. Katz’s analogy of the general purpose card market to that for airplane travel is illustrative. Prof. Katz argues that while it is true that at the margin there is some competition for customers among planes, trains, cars and buses, the reality is that airplane travel is a distinct product in which airlines are the principal drivers of competition. Any airline that had monopoly power over airline travel could raise prices or limit output without significant concern about competition from other forms of transportation. The same holds true for competition among general purpose credit and charge cards.

(See

M. Katz Dir. Test. ¶¶ 11,127.)

Accordingly, because card consumers have very little sensitivity to price increases in the card market and because neither consumers nor the defendants view debit, cash and checks as reasonably interchangeable with credit cards, general purpose cards constitute a product market.

General Purpose Card Network Services Constitute a Relevant Product Market

More importantly, general purpose card network services also constitute a product market because merchant consumers exhibit little price sensitivity and the networks provide core services that cannot reasonably be replaced by other sources. General purpose card networks provide the infrastructure and mechanisms through which general purpose card transactions are conducted, including the authorization, settlement, and clearance of transactions.

(See

Tr. 3197 (B. Katz, Visa U.S.A./Visa Int’l); Afriek (MasterCard) Dep. at 11-12, 14-19.) Merchant acceptance of a card brand is also defined and controlled at the system level and the merchant discount rate is established, directly or indirectly, by the networks.

(See

Tr. 6134-35 (Pindyck, MasterCard); Tr. 2218-19 (Saunders, Household/Fleet); Flanagan (MasterCard) Dep. at 50-51.) These basic or core functions are indispensably done at the network level. (-See Tr. 5979-80; 5984-85 (Schmalensee).)

Professor Katz also used the Merger Guidelines price sensitivity test to confirm the existence of a network services market. He noted that because costs attributable to system services are less than two

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percent of total credit card issuing costs, a ten percent increase in system service prices would translate to less than a 0.2 percent increase in issuers’ total costs. Since issuers — the buyers of systems services — earn margins of about 26%, a 0.2 percent increase in their total costs would have a negligible effect on the profitability of issuing credit and charge cards. I adopt Prof. Katz’s opinion that there would be no loss to network transaction volume in the face of even a 10% increase in price for network services — both because banks cannot provide the core system services themselves and it is implausible that they would exit the profitable credit and charge card market in response to such a small increase in price.

Professor Katz recognized that theoretically an increase in network service prices could also lead to a reduction in network transaction volume if issuers passed the price increase to downstream consumers of credit cards, who then responded by switching to other means of payment. However, since the 0.2% price increase to issuers would result in an even smaller percentage increase in the prices charged to cardholders, cardholders would have to have an unrealistically high level of price sensitivity before the system service price increase would become unprofitable to a hypothetical network monopolist. Accordingly, the Guidelines price test confirms the existence of a credit card network services market.

Moreover, Visa and MasterCard do not dispute that they participate in the general purpose card network services market, or that in that market they compete against American Express and Discover as networks. As Visa has explained, “[Discover] and American Express perform precisely the same ‘system’ functions as Visa and MasterCard, they just happen to do it themselves. That hardly means that there is no competition at that level.” (Ex. P-1187H at 24, n.47; Defs.’ Proposed Conclusions of Law ¶ 148.) In fact, Visa identified a network market of intersystem competition as a relevant market for antitrust purposes in the

Mountain West

litigation and admitted that such competition impacts consumer welfare, stating “[l]est there be any confusion, the ultimate impact of any harm to system level competition is felt by cardholders and merchants who use or accept general purpose charge cards.”

Both former Visa CEO Bennet Katz and Visa’s primary expert, Dean Schmalensee, agree that that position remains true today.

(See

Ex. P-1245 at 48; Tr. 3190-91 (B. Katz, Visa U.S.A./Visa Int’l);

id.

at 5985-87 (Schmalensee).) MasterCard also confirmed that systems competition affects consumer welfare. Professor Pindyck, its expert economist, testified that the exit of MasterCard from the systems market would result in significant consumer harm.

(See

Tr. 6108, 6113-16, 6120 (Pindyck, MasterCard).)

The United States is the Relevant Geographic Market

The United States is the appropriate geographic scope for the general pur

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pose card product market and the general purpose card core systems services market for several reasons.

(See

Tr. 3187-88 (B. Katz, Visa U.S.A./Visa Int’l);

id.

at 1459 (Hart, Advanta/MasterCard); Ex. P-1235 at ¶ 143.) First, the exclusionary rules at issue are specific to the United States. Second, many other important decisions affecting the United States, including pricing, are made by the associations’ U.S. Region Board and committees.

(See

Williamson (Visa Int’l) Dep. at 103-04.) Third, the national card base and acceptance network are critical assets that a system must possess to compete, because consumers principally purchase from merchants in the same country. Fourth, significant competition among issuers — the buyers of system services — occurs at the national level. Lastly, there is a national media market and systems pursue national promotional strategies.

(See

M. Katz. Aff. ¶ 154.)

B. Defendants Have Market Power in the Network Market

The Government claims that defendants have market power in the market for general purpose card network services because they have the power to raise prices and lower output and/or innovation, either jointly or separately. Market power is defined as the “power to control prices or exclude competition.”

(du Pont,

351 U.S. at 391 , 76 S.Ct. 994 ,

see Kodak,

504 U.S. at 481 , 112 S.Ct. 2072 ,

id.

at 464 , 112 S.Ct. 2072 (“ability of a single seller to raise price and restrict output”)

National Collegiate Athletic Ass’n v. Board of Regents of the Univ. of Olda.,

468 U.S. 85 , 109 n. 38, 104 S.Ct. 2948 , 82 L.Ed.2d 70 (1984) (“Market power is the ability to raise prices above those that would be charged in a competitive market.”);

see also K.M.B. Warehouse Distribs. v. Walker Mfg. Co.,

61 F.3d 123 , 129 (2d Cir.1995) (“the ability to raise price significantly above the competitive level without losing all of one’s business”).)

Market power may be shown by evidence of “specific conduct indicating the defendant’s power to control prices or exclude competition.”

(K.M.B. Warehouse,

61 F.3d at 129.) In this regard, plaintiff has proven through the testimony of merchants that they cannot refuse to accept Visa and MasterCard even in the face of significant price increases because the cards are such preferred payment methods that customers would choose not to shop at merchants who do not accept them.

(See

Scully (Target stores) Dep. at 83-85; Rodgers (Saks) Dep. at 49-50, 58-59, 133; Tr. 692 (Zyda, Amazon.com);

id.

at 399-400 (Woods, Publix stores).) In addition, both Visa and MasterCard have recently raised interchange rates charged to merchants a number of times, without losing a single merchant customer as a result.

(See

Ex. P-1036 at DOJTE000242 (Visa U.S.A. interrogatory response stating that it was aware of no merchant that had discontinued accepting Visa cards since January 1998 “due, in whole or in part, to an increase in [Visa U.S.A.’s] interchange rates or an increase in a merchant discount as a result of an increase in interchange.”); Schmidt (Visa U.S.A.) Dep. at 102; Schall (Visa U.S.A.) Dep. at 86; Beindorff (Visa U.S.A.) Dep. at 90; Heuer (MasterCard) Dep. at 52, 57-60; Pascarella (Visa U.S.A.) Dep. at 286-87; Shailesh Mehta (Providian) Dep. at 78-79, 163-64.)

Defendants’ ability to price discriminate also illustrates their market power. Both Visa and MasterCard charge differing interchange fees based, in part, on the degree to which a given merchant category needs to accept general purpose cards.

(See

Ex. P-0024 at 0685656 (adopting an interchange strategy under which “[h]igher increases are recommended in [mer

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chant] segments where the strategic value of bankcards is higher.”);

see also

Schmidt (Visa U.S.A.) Dep. at 100-02, 117-20 (Visa’s interchange pricing strategy considers the price sensitivities of different merchant segments); Pascarella (Visa U.S.A.) Dep. at 282-83, 285-86.) Transactions with catalog and Internet merchants, for example, which rely almost completely on general purpose cards, have higher interchange fees than ‘brick and mortar’ merchants. Defendants rationalize this difference by pointing to increased fraud in these merchant categories, but this explanation is belied by the fact that the Internet merchant, not Visa/MasterCard or their member banks, bears virtually all the risk of loss from fraudulent transactions.

(See

Tr. 686-87, 694 (Zyda, Amazon.com).) Even today, Amazon’s fraud rate is lower than mail-order companies, yet it is charged (indirectly, through the merchant discount) the same interchange fee as these mail order companies. The reality is that Visa and MasterCard are able to charge substantially different prices for those hundreds of thousands of merchants who must take credit cards at any price because their customers insist on using those cards. As will be discussed below, there is also evidence that the exclusionary rules adopted by the associations reduce output and consumer choice by denying American Express and Discover the opportunity to issue cards through bank issuers who issue Visa and MasterCard.

Of course, even if direct evidence of the ability to raise prices and reduce output or innovation were absent, it may be presumed that a firm with a large share of a highly concentrated market with high barriers to entry possesses market power.

(See Kodak,

504 U.S. at 464 , 112 S.Ct. 2072 (Market power “ordinarily is inferred from the seller’s possession of a predominant share of the market.”));

FTC v. Staples, Inc.,

970 F.Supp. 1066, 1081-82 (D.D.C.1997) (evidence of market share and entry barriers have commonly been central to market power analysis.) At least in the absence of countervailing circumstances, market power exists when market share is sufficiently high and there are significant enough barriers to entry or expansion that the defendant can charge supracompetitive prices without loss of so many customers that the pricing becomes unprofitable.

(See, e.g., Southern Pacific Co. v. AT & T,

740 F.2d 980, 1001 (D.C.Cir.1984);

cf. Ryko Mfg. Co. v. Eden Servs.,

823 F.2d 1215 , 1232 (8th Cir.1987) (market power analysis);

Ball Memorial Hospital, Inc. v, Mutual Hospital Ins., Inc.,

784 F.2d 1325 , 1335-36 (7th Cir.1986) (same).)

In this case, even a cursory examination of the relevant characteristics of the network market reveals that whether considered jointly or separately, the defendants have, market power. Visa and MasterCard both have large market shares in a highly concentrated network market with only four significant competitors. In 1999 Visa members accounted for approximately 47% of the dollar volume of credit and charge card transactions and MasterCard members for approximately 26%. American Express accounted for approximately 20% and Discover for approximately 6%. Visa and MasterCard together control over 73 percent of the volume of transactions on general purpose cards in the United States. In terms of cards issued, they control about 85 percent of the market.

(See

Ex. D-4118.)

Furthermore, there are significant barriers to entry into the general purpose card network services market. Visa’s CEO described starting a new network as a “monumental” task involving expenditures and investment of over $1 billion.

(See

Tr. 5224 (Pascarella, Visa U.S.A.);

see

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also

Dahir (Visa U.S.A.) Dep. at 200-01 (building a global brand and acceptance network would cost between $2 and $5 billion).) In addition to the high costs of establishing a network and developing a brand name a new entrant must also solve the so-called “chicken-and-egg” problem of developing a merchant acceptance network without an initial network of cardholders who, in turn, are needed to induce merchants to accept the system’s cards in the first place.

The difficulties associated with entering the network market are exemplified by the fact that no company has entered since Discover did so in 1985. Both AT & T and Citibank conducted entry analyses, but decided it would be unprofitable.

(See

M. Katz Dir. Test. ¶ 181.) John Reed, then co-CEO of Citibank, concluded that an entrant would need to capture a 20 to 25 percent market share to be successful.

(See

Reed Dep. at 38-41.) Although the defendants argue that non-traditional .companies, such as AT & T, America Online, Microsoft and others, including companies offering Internet-based alternative currencies, should be seen as potential entrants, the evidence shows otherwise. Visa and MasterCard do not regard these firms as competitors. Rather they are viewed by the associations as potential allies and partners, posing no significant threat to defendants’ market share in general purpose card transactions.

(See

Fehringer (Visa Int’l) Dep. at 28-29; Ailworth (Visa U.S.A.) Dep. at 90-93,105-06.)

The higher the barriers to entry, and the longer the lags before new entry, the less likely it is that potential entrants would be able to enter the market in a timely, likely, and sufficient scale to deter or counteract any anticompetitive restraints.

(See Dep’t of Justice and Fed’l Trade Commn. Merger Guidelines,

§ 3.0.) Where barriers to entry are high, such as here, “a monopolist would find it easier to raise prices because it would be unlikely that a competitor would, or could, enter the market.”

(Bon-Ton Stores, Inc. v. May Dept. Stores,

881 F.Supp. 860, 876 (W.D.N.Y.1994);

see also Kelco Disposal Inc. v. Browning-Ferris Indus. of Vermont, Inc.,

845 F.2d 404 , 408 (2d Cir.1988) (high barriers to entry shown by fact that only two companies entered market in eleven year period and significant costs to enter impeded new entrants);

Fineman v. Armstrong World Indus.,

980 F.2d 171, 201-03 (3d Cir.1992).)

Finally, Dean Schmalensee’s own description of the network market characteristics aptly makes the point that “[t]here are, at most, five viable system competitors within the general purpose charge card market and entry of a new system is quite difficult.” (Tr. 5987-88;

see also

Ex. P-1040 at DOJTE000289.)

Because Visa and MasterCard have large shares in a highly concentrated market with significant barriers to entry, both defendants have market power in the general purpose card network services market, whether measured jointly or separately; furthermore plaintiff has demonstrated that both Visa and MasterCard have raised prices and restricted output without losing merchant customers.

C. The Rule of Reason and Unreasonable Restraints of Trade

A showing of market power in the relevant market does not alone establish a Sherman Act violation; rather a showing of market power must be associated with some form of abusive conduct. In this case the abusive conduct alleged is the impeding of the competitive process by the associations’ dual governance structure and their exclusionary rules. According to the plaintiff, dual governance affects the incentives of directors whose banks have a

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substantial interest in the other association, thereby causing less than vigorous competition between the two largest general purpose card networks in a highly concentrated market with only a handful of participants. Plaintiff also alleges that defendants’ exclusionary rules restrain the competitive abilities of the networks that their members do not own, which not only limits their competitiveness but also allows the associations and their members to temper the competitive vitality of network and issuer-level competition. Plaintiff alleges that as a result of these restraints on the competitive process, consumers are denied the benefits of full competition, namely innovative and varied products and services as well as a marketplace responsive to consumer preferences.

Although the Sherman Act, by its terms, prohibits every agreement “in restraint of trade,” it is clear “that Congress intended to outlaw only unreasonable restraints.”

(State Oil Co. v. Khan,

522 U.S. 3, 10 , 118 S.Ct. 275 , 139 L.Ed.2d 199 (1997).) Certain agreements, like price-fixing or market-division agreements, are condemned as unreasonable

per se. (See id.,

at 10, 118 S.Ct. 275 ;

Palmer v. BRG of Georgia, Inc.,

498 U.S. 46 , 111 S.Ct. 401 , 112 L.Ed.2d 349 (1990);

United States v. Topco Associates, Inc.,

405 U.S. 596 , 92 S.Ct. 1126 , 31 L.Ed.2d 515 (1972);

United States v. Socony-Vacuum Oil Co.,

310 U.S. 150 , 60 S.Ct. 811 , 84 L.Ed. 1129 (1940).) Other agreements are analyzed under the rule of reason. Plaintiff and defendants agree that analysis of the defendants’ agreements as to dual governance and their exclusionary rules involves application of the rule of reason. That rule seeks to “determine whether the restraints in the agreement are reasonable in light of their actual effects on the market and their procompetitive justifications.”

(Clorox Co. v. Sterling Winthrop, Inc.,

117 F.3d 50, 56 (2d Cir.1997).) Any agreement is unlawful (under the rule of reason) if its restrictive effect on competition is not reasonably necessary to achieving a “legitimate procompetitive objective,

i.e.,

an interest in serving consumers through lowering costs, improving products, etc.”

(National Soc’y of Prof'l Eng’rs v. United States,

435 U.S. 679, 691 , 98 S.Ct. 1355 , 55 L.Ed.2d 637 (1978).)

The most full-fledged rule of reason analysis requires that “the factfinder weigh [ ] all of the circumstances of a case

...(Continental T.V., Inc. v. GTE Sylvania, Inc.,

433 U.S. 36, 49 , 97 S.Ct. 2549 , 53 L.Ed.2d 568 (1977);

see also

Tr. 3645-46 (M.Katz).)

Initially the card associations were non-dual; their members issued only their own association’s card. In 1971, Visa (then known as NBI) adopted By-law 2.16, which prohibited Visa members from issuing MasterCard cards or participating in the MasterCard system.

(See

Ex. P-0954 at 4; Tr. 3329 (B. Katz, Visa U.S.A./Visa Int’l).) However, under the By-law agent banks — smaller banks that did not issue Visa cards and instead formed agreements to have larger banks issue cards to the agent banks’ customers — were permitted to be dual.

(See

Tr. 3329-30 (B.Katz).) One of Visa’s members, Arkansas-based Worthen Bank and Trust Company, objected to competing against an agent bank that was able to sign merchants for both Visa and MasterCard. Worthen sued Visa, alleging that the exclusivity provision

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violated the antitrust laws.

(See

Ex. P-0954 at 4; Tr. 3330-31 (B.Katz).)

The Eighth Circuit reversed a lower court ruling in favor of Worthen, holding that the by-law should have been analyzed under the rule of reason, and remanded the case to the district court.

(See

Tr. 3131 (B. Katz, Visa U.S.A./Visa Int’l).) Visa nonetheless chose to amend By-law 2.16 to fully prohibit duality, including on the agent bank side.

(See

Tr. 3332 (B.Katz); Ex. P-0954.) Visa wrote the Department of Justice and asked the Government to endorse amended By-law 2.16 as “a reasonable method of preserving that competition against the anticompetitive effects of dual membership.” (Ex. P-0954 at 7.)

In October 1975, in a business review letter, the Department of Justice declined to approve the proposed Visa exclusivity rule, reasoning that the proposed by-law was too stringent and that certain of its restrictions on the acquiring side “might well handicap efforts to create new bank credit card systems and may also diminish competition among the banks in various markets.” (Ex. P-0955 at 2-3.) Although the Government did “not have the same criticism of the proposed rule” with regard to dual issuance, the Government emphasized that its views were based only on the state of the market at that time, reserving the right to bring an enforcement action if circumstances changed. (Ex. P-0955; Tr. 3106-07 (B.Katz).) Following the business review letter, Visa attempted to permit duality on the acquiring side only, but quickly found it impractical. It therefore dropped its exclusivity requirement completely and allowed Visa members to become dual issuers. (Tr. 3108 & 3333-35 (B.Katz).)

After Visa eliminated its exclusivity rule, dual issuance spread rapidly, particularly among larger banks. In February 1977, Visa again raised its concerns with Justice Department officials, noting the prevalence of dual issuance, the movement toward common operations and marketing and increasing concerns about confidentiality issues.

(See

Tr. 3340-42 (B.Katz); Ex. D-0161, attached letter at 2-3.) In response, the Government “expressed no adverse opinion” about “the rush toward dual issuance.” It instead indicated that “it perceived bank-to-bank competition of utmost importance” and “any risks to be taken should be to system-to-system competition.” (Ex. D-1714 at VUTE0002801; Ex. D-0161 at 2;

see also

Tr. 3344-45 (B. Katz, Visa U.S.A./Visa Int’l).) The Government informed Visa that it “[did] not intend to reverse its present policy unless it sees substantial adverse effects on competition for cardholders and merchants attributable to duality.” (Ex. D-0161 at 2.) Within a year, 20 of the 25 largest commercial banks were dual and dual issuers were responsible for almost 70 percent of Visa’s sales volume.

(See

Ex. D-1714 at VUTE0002803.)

MasterCard, unlike Visa, has always maintained that duality is procompetitive, contributing to the growth, efficiency and competitiveness of the associations. Duality afforded members of the associations flexibility that promoted efficiencies, facilitated coordination on necessary standards and created benefits for banks and consumers.

(See

Schmalensee Dir. Test, at 48-52.) As Visa grew to be the association with the larger market share, duality became particularly important for the viability of MasterCard, as the smaller and more vulnerable association, as well as for member financial institutions.

(See

Pindyck Dir. Test, at ¶¶ 11, 81-83.) Duality gave MasterCard the opportunity to obtain business from members which otherwise might only issue cards under the Visa brand.

(See id.

at ¶¶ 80-83; Tr.2072;

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2091-2092, 2095-96, (Boudreau, Chase); Fairbank (Capital One) Dep. at 63-64, 71, 191-198.)

By 1986 about two-thirds of the 100 largest bank credit card issuers had at least 25 percent of their cards on each system.

(See

Ex. D-3054.) This resulted in dual members who had strong financial interests in making sure that both card brands worked efficiently with each bank’s back office operations.

(See

Tr. 3112-15 (B. Katz, Visa U.S.A./Visa Int’l).)

As a logical outgrowth of dual issuance and ownership, the Directors of the associations’ Boards consisted primarily of representatives of member banks with substantial card portfolios of both associations. The Government claims that this dual governance structure caused anticom-petitive effects in the network services market because the overlapping financial interests of dual governors reduced their incentives to compete against their other card product and as a result they sometimes prevented management from competing with the other association card brand.

In this regard, it is worth noting that the Government alleges that dual governance is the result of separate conspiracies between each association and its members.

(See

Cmplt. ¶ 155.) The Complaint does not allege a conspiracy between the two associations. In the context of the specific claims of Count One, the Government has the burden of establishing that MasterCard and one or more of its members and, separately, Visa and one or more of its members, consciously committed to place “non-dedicated” members on its board in order to limit competition between the two associations.

(See AD/SAT v. Associated Press,

181 F.3d 216, 234 (2d Cir.1999)) (stating that “an antitrust plaintiff must present evidence tending to show that association members, in their individual capacities, consciously committed themselves to a common scheme designed to achieve an unlawful objective.”) The court finds no evidence of such conscious commitment.

B. The Government’s Examples of Consumer Harm from Reduced Competition

Plaintiff relies in part on four specific examples of allegedly anticompetitive behavior in support of its theory that dual governance has blunted innovation in the credit and charge card market. The centerpiece of its proof on innovation is the claim that if MasterCard truly competed with Visa, it would have moved forward in the 1980’s with plans to convert credit cards from the prevailing magnetic stripe technology to “smart” cards with embedded computer chips. However the record on smart cards does not support the plaintiffs theory that dual governance blunted innovation competition between MasterCard and Visa. In fact, there is no credible evidence that their individual decisions not to implement smart cards were linked in any way to governance duality. Rather, the proof at trial demonstrated that smart cards were not implemented in the 1980s because the associations believed that there was no business case for smart cards in light of the enormous investment that association members and merchants would have had to make in order to place smart card terminals at the point of sale.

Smart Cards

A smart card is a plastic card containing an embedded computer chip capable of performing calculations and storing data. The payment processing functions performed on a smart card substitute for some of the functions that can be performed on a central mainframe computer using a magnetic stripe card.

(See

Tr. 454 (Elliot, MasterCard).) When MasterCard

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began to consider converting from magnetic stripe technology to chip or integrated circuit cards in 1984, it focused on them primarily as a security measure which would reduce fraud and credit losses. As of the mid-1980s, however, substantial investments had already been made in increasing “on-line” authorizations and controlling fraud.

(See

Russell (Visa U.S.A.) Dep. at 24-28 & 32-33.) Thus, the incremental gains from chip cards as a means of controlling fraud and credit losses, and increasing authorizations, were limited. Moreover, the costs of replacing the existing magnetic stripe infrastructure would have been substantial. Merchants — whose cooperation and financial support for a migration to chip technology were crucial to its success — did not believe that the extra effort and costs of processing chip cards would be justified by any real benefit over the recently installed magnetic stripe terminals.

(See

Rapp (Visa U.S.A.) Dir. Test, at 27;

see also

Ex. P-0231 at JE000064.) Card issuers also resisted the new technology, unconvinced that a business case existed.

(See

Ex. D-0049 at BAH02160; Rapp Dir. Test, at 25-27; Tr. 5542:1-25 (Rapp).) As a result, in the 1980s Visa and MasterCard concluded, after independent and joint analyses, that the significant costs of chip technology outweighed its limited benefits in the United States.

The Government’s principal witness, John Elliott, was hired in 1984 as MasterCard’s Executive Vice President of Electronic Services. He led a project to evaluate smart cards as an anti-counterfeit device. Throughout 1985 Elliott hired several consulting firms and ran pilots of competing smart card systems.

(See

Tr. 441-042, 529, 454-457, 459-60 (Elliott).) Despite a number of promotional activities engaged in by Elliott and then-CEO Russell Hogg in the fall of 1985 through the spring of 1986, the record is clear that MasterCard had not yet reached any conclusions regarding the financial business case for smart cards.

(See

Ex. P-1195; Tr. 471-72; 514-519 (Elliott).)

MasterCard commissioned a study by consultants Edgar, Dunn & Conover (“Edgar, Dunn”), regarding the economic feasibility of implementing smart cards in the U.S. or worldwide. The Edgar, Dunn study was completed in 1987 and concluded that a smart card implementation would have cost MasterCard members $1.3 billion.

(See

Ex. D-0345 at JE000163; Tr. 533, 563-564; 578 (Elliott).) If MasterCard were to implement the smart card project alone on an international basis, the costs savings would not have justified the investment — MasterCard would have lost $200-220 million.

(See

Ex. D-0345 at JE 000169; Tr. 518-519 (Elliott).) Edgar, Dunn further projected that if MasterCard were to implement the smart card project alone on a U.S.-only basis, for a cost to members of a billion dollars, there would have been only a modest profit generated.

(See

Ex. D-0345 at JE000169; Ex. P-0231 at JE000114; Tr. 577-78 (Elliott, MasterCard).) On the other hand, the study projected the returns to a joint MasterCard/Visa implementation to be significantly higher and profitable.

(See

Ex. D-0345 at JE000169; Ex. P-0231 at JE000114; Tr. 538 (Elliott).)

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In January 1987, John Elliott presented a proposal to the MasterCard Executive Committee, relying in part on the Edgar, Dunn study, that recommended that MasterCard proceed jointly with Visa on smart cards.

(See

Ex. P-0231 at JE000117; Tr. 483 (Elliott).) Based on Elliott’s January 1987 presentation, the MasterCard executive Committee directed then-CEO Russell Hogg to contact Visa’s CEO Charles Russell to consider the possibility of proceeding jointly with smart cards.

(See

Tr. 501 (Elliott).) However, at trial Elliott testified that he believed that MasterCard should have implemented smart cards alone and that the decision not to do so was related to dual governance. I find this testimony to be wholly unreliable, as Mr. Elliot exhibited an obvious bias against MasterCard and a complete lack of objectivity on the subject of smart cards throughout his testimony.

(See

Tr. 487-95.) Mr. Elliott has enjoyed a lucrative employment relationship with American Express both before and during the investigation stage of this action. Elliot’s consulting agreement with American Express provided that between March of 1998 and March of 1999, he would be paid $42,000 per month without regard to whether he was actually called on to provide services. During that period, Elliot participated in one meeting and two phone calls with the Department of Justice. He was paid a total of $504,000 under the agreement.

(See

Tr. 519-523.)

Moreover, I credit the testimony of Pete Hart and Ed Hogan, corroborated by the slide presentation Elliott himself made to the Executive Committee when he worked at MasterCard, that MasterCard management believed (and proposed to the Executive Committee) that based on economies of scale and the large investment required, smart card implementation should go forward, if at all, in conjunction with Visa and possibly others.

(See

Tr. 1398 (Hart, Advanta/MasterCard); Hogan (MasterCard) Dep. at 223-24; Ex. P-0231 at JE000117-118.)

Independent of MasterCard, Visa International had already concluded in a 1985 study that there was no business justification for Visa International to mandate a global migration to chip technology. The study showed high costs of operating a chip card system and small gains from reducing losses due to lost, stolen and counterfeit cards.

(See

Ex. D-0223 at BAH1290

1350;

see also

Tr. at 4691-4694 (Boston, Visa Int’l); Russell (Visa U.S.A.) Dep. at 179-82.) In January 1987, Visa U.S.A.’s Board also considered the merits of MasterCard’s publicly stated plan and concluded that a conversion to smart cards was not justified at that time.

(See

P-0599 at VISA00796; Tr. 3213 (B. Katz, Visa U.S.A./Visa Int’l).)

In 1987, the CEOs of Visa and MasterCard met and decided to hire an indepen

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dent consultant to analyze the economic feasibility of implementing smart cards.

(See

Tr. 501-503 (Elliott).) Booz, Allen and Hamilton concluded that there was no business case for MasterCard and Visa proceeding jointly or alone on smart cards; that even a joint implementation would have been unprofitable, and recommended that the associations not pursue smart cards.

(See

Tr. at 582-83 (Elliott); Ex. D-0346 at 0346009.)

Plaintiffs expert concedes that there is no direct evidence linking “dual governance” to MasterCard’s decision not to implement smart cards in the 1980s.

(See

Tr. 3981-82 (M.Katz).) Indeed, Professor Katz does not assert that it was inappropriate for MasterCard and Visa to pursue smart cards jointly. Rather, he concedes that “[d]ue to economies of scale, the business case for chip cards was in some ways stronger if more systems made use of the chip technology and the terminals that would be located on merchants’ premises. Thus, even if MasterCard and Visa were true arm’s-length competitors, MasterCard could have had an interest in Visa proceeding with chip card introduction.” (M. Katz Dir. Test. ¶ 232.)

In 1994, at the request of its European members, MasterCard once again reviewed the potential for smart cards.

(See

Hogan (MasterCard) Dep. at 229-230; Tr.1894 (Lockhart, MasterCard); Ex. P-1116; Ex. P-0356.) Edgar, Dunn prepared an analysis finding possible cost savings to MasterCard members that could result from the implementation of smart cards.

(See

Ex. P-1116.) Despite senior management’s belief that the Edgar, Dunn study was based on faulty assumptions, the Board resolved unanimously to fund the building of a smart card infrastructure, including setting industry-wide standards and developing specifications for various technical aspects of a smart card-based payment transaction.

(See

Tr. 1844-45

1905-06 (Lockhart, MasterCard); Hogan (MasterCard) Dep. at 230-31; Ex. P-0356.)

Even by March 20, 1996, MasterCard management reported to the Board that there still was not a viable business case for smart card deployment in the United States.

(See

Ex. D-2784 at 2784009.) Management did believe, however, that in some regions of the world, MasterCard could have a business case to introduce smart cards.

(See

Tr.1907-08 (Lockhart).) Thus, MasterCard began exploring the possibility of investing in Mondex International, a smart card technology company. The MasterCard International Board voted unanimously to acquire a 51 percent interest in Mondex in November 1996.

(See

Ex. D-4199.)

Like MasterCard, Visa U.S.A. has the technology for chip cards, but it has “not been able to find a cogent business case or business model to develop the chip [card].” (Pascarella (Visa U.S.A.) Dep. at 272;

see also

Beindorff (Visa U.S.A.) Dep. at 114-15, 170-72 & 192-93.) With the exception of John Elliott, every witness to testify on the subject of smart cards has stated that he is unaware of any viable business case for the widespread deployment of smart cards in the United States.

(See e.g.,

Tr. 2227-28 (Saunders, Household/Fleet), Tr. 2383 & 2539; (Chenault, American Express); Tr.1907 (Lockhart, MasterCard); Tr. 1346 (Hart, Advanta/MasterCard); Wankmueller (MasterCard) Dep. at 20-21;

see also

Tr. 2855-56 (Golub, American Express); Tr. 3064-65 (Nelms, Discover); Krumme (JCB) Dep. at 27-29.) More than a decade after Elliot advocated the use of smart cards, neither Visa nor MasterCard has been able to demonstrate a viable business case for the wide-scale implementation of smart cards in the United States. This is so even though advances in

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technology and standard-setting have eliminated or reduced certain of the obstacles to the early development of smart cards. Impediments remain, most notably cost and cost-bearing issues relating to wide-scale point-of-sale reterminalization.

(See

Tr. 5355-56 (Williamson, Visa Int’l).)

Only recently have. American Express and certain individual bank card issuers begun to launch chip card programs in the United States. Those programs are limited to use on the Internet, not at the point of sale, so as to avoid the costs of merchant reterminalization.

(See

Tr. 4751-52, (Knox, Visa U.S.A.);

In Camera

Tr. 2252-55 (Saunders, Household/Fleet).) They require bringing the technology directly to the consumer in the form of a card reader to be used with the consumer’s computer for card use on the Internet.

(See

Tr. 2752-53 (Golub, American Express); Tr. 3994-95 (M.Katz).)

Despite the overwhelming evidence that legitimate business considerations drove the associations’ decision-making on smart cards, Professor Katz opined that there are “several facts that suggest the process and outcome were distorted by dual governance.” (M. Katz Dir. Test. ¶ 232.) First, Prof. Katz points to the fact that in quantitative studies prepared by MasterCard and its consultants, MasterCard did not count any potential improved competitive position relative to Visa as an advantage.

(Id.)

However, it would be illogical for MasterCard to attribute any share-shifting benefit to pursuing a smart card initiative on its own. MasterCard had just concluded that even if all MasterCard and Visa issuers invested in smart card terminals its issuers would lose money.

Second, Prof. Katz pointed to the fact that MasterCard did not partner with American Express to combine scale and strengthen the business case for chip cards after Visa decided not to move ahead.

(Id.

at 233) Given the results of the Booz, Allen study that it would have been unprofitable to the membership for MasterCard and Visa to jointly pursue smart cards, Professor Katz fails to explain why it could possibly have been profitable to the membership for MasterCard and American Express to pursue the implementation of smart cards.

Finally, plaintiffs expert points to Elliott’s assertion “that banks in countries that did not have dual governance favored the introduction of chip cards as a means of gaining competitive advantage relative to Visa and its issuers, while U.S. members did not.” (Tr. 3675-77 (M.Katz);

see

M. Katz Dir. Test. ¶ 233.) There is no evidence, however, that non-U.S. banks favored chip cards because they were from countries without dual governance. And Elliott himself conceded that international members wanted MasterCard to proceed with smart cards because “international members had, in many countries, received Government mandates that indicated an endorsement of chip card technology.... [and] they had, in several countries, had their competing banks already involved in the issuance of a smart card.” (Tr. 628-29 (Elliott).) Furthermore, Professor Katz acknowledged that “chip cards have come out in places that have been characterized and I believe do have higher telecommunications costs.” (Tr. 3678-79 (M.Katz).)

Plaintiffs theory of competitive distortion also is inconsistent with the unanimous vote by MasterCard’s Global Board to permit MasterCard to acquire a controlling interest in Mondex International for a commitment of over $150 million.

(See

Ex. D-2796 at 2796048-2796019.) The trial record demonstrates that MasterCard felt competitively disadvantaged with its internal chip development, and acquired a controlling interest in Mondex so that it could

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compete against Visa and others.

(See

Tr.1916-17 (Lockhart, MasterCard).) The MasterCard Global Board understood that one of the reasons for MasterCard’s desire to acquire a controlling interest in Mondex was to attack or compete with Visa.

(See

Tr.1903 (Lockhart).) At no point in time did any member of the MasterCard Board attempt to stop the Mondex acquisition to avoid harm to its Visa portfolio.

(See

Tr. at 1913 (Lockhart).)

Plaintiffs theory also fails to account for the fact that Visa and MasterCard currently have competing approaches to smart card technology. Visa’s Open Platform program is based on Sun Microsys-tems’ Java technology.

(See

Tr. at 3922 (M.Katz).) Visa invited other companies to participate in its Open Platform; Microsoft and British Telecom are members of the efforts. Recently American Express has switched to the Open Platform.

(See

Schapp (Visa Int’l) Litigation Dep. at 24-25.) MasterCard declined Visa’s invitation to join; MasterCard continues to invest in and rely upon the Mondex technology for its smart card plans. Shortly after acquiring Mondex MasterCard created an industry Consortium to which it dedicated the Multos operating system for future development.

(See

Tr.1917 (Lockhart); Jacobs (MasterCard) Dep. at 127-28.) American Express joined initially (but as noted above has now switched to Open Platform) and Discover continues to cooperate with MasterCard and others in the MAOSCO Consortium. Visa is not a member of this Consortium.

(See

Jacobs (MasterCard) Dep. at 129, 182-83; Mannion (Discover) Dep. at 180; Gauthier (Visa U.S.A.) Dep. at 109-11.)

Plaintiff has also failed to demonstrate that MasterCard’s decision not to pursue smart card implementation alone generated any adverse consumer welfare effects. Professor Katz conceded that he reached no conclusion as to whether there was in fact a business case for smart cards in the 1980s or whether smart cards would have succeeded in the marketplace to the benefit of consumers.

(See

Tr. 3667 (M.Katz).) He testified merely as to his belief that the decision-making process had been affected in some way.

(See id.

at 3666-67 (M.Katz).) He further admitted that the assertion, made at the Press Conference announcing this lawsuit, that smart cards have been delayed by a decade because of dual governance “is an oversimplification.” (Tr. 3666 (M.Katz).) Finally, to the extent that chip cards would have reduced credit and fraud losses generally, John Elliott conceded modifications to magnetic stripe technology and other advances, have greatly reduced credit and fraud losses as a percentage of transaction volume.

(See

Tr. 549, 598 (Elliott, MasterCard).)

In support of its assertion that but for dual governance the world would be more competitive with respect to smart cards, plaintiff points only to the fact that consumers had to rely on American Express to innovate through its Blue Card. First, Blue does not have point of sale functionality, making the cost-benefit analysis of Blue quite different from the business case of smart cards functional at the point of sale.

(See

Tr. 793-95, (McCurdy, American Express); Tr. 2752-53 (Golub, American Express).) Second, MasterCard and Visa, independently, have made possible the technologies used in Blue. As noted, American Express initially relied on the Multos operating system which was developed by Mondex International in cooperation with, and supported financially by, MasterCard. Now American Express uses Visa’s Open Platform.

(See

Tr. 4807-OS (Knox, Visa U.S.A.); Tr. 1039-40 (McCurdy, American Express).)

Plaintiff simply has not met its burden of proving that the associations’ respective

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decisions not to implement smart cards in the United States were linked in any way to anticompetitive behavior in general or to dual governance in particular.

Secure Electronic Transactions Over The Internet

In April 1995, Visa entered into an agreement with Microsoft to develop a global standard called Secure Transaction Technology (“STT”) to secure e-commerce payments.

{See

Ex. D-0052.) Current and former Visa officials assert that the specifications were intended to be open and publicly available, although Visa hoped to achieve a competitive advantage with STT by being the first to market.

{See

Tr. 3445-46 (B. Katz, Visa U.S.A./International); Tr. 4630 (Herz, Visa Int’l); Herz Dep. at 162) Visa International and Microsoft also agreed that Microsoft would develop proprietary software products compliant with the specifications and receive a per transaction fee.

{See

Ex. D-0052; M. Katz Dir. Test. ¶ 235.)

In the summer of 1995, Visa International publicly announced its commitment to the development of an open payment security standard and through at least August 1995, Visa and MasterCard engaged in meetings and discussion to work toward a common standard.

{See

Tr. 4625, 4632 (Herz, Visa Int’l).) MasterCard CEO Eugene Lockhart wrote to Visa in August 1995 asking for their cooperation on a common protocol for Internet Security. When MasterCard refused to endorse the STT standard and ceased negotiations in September 1995, Visa International and Microsoft announced their standard at a press conference and published the STT protocol on the Internet.

{See

Tr. 4632-33 (Herz).)

According to Lockhart, MasterCard was concerned that the protocol that Visa and Microsoft were working on was not truly open because the specification did not disclose the application program interfaces to the Windows operating system, and favored a Microsoft application. In his view, STT would not have been an open, published standard because others could not read it and then write compatible application programs.

(See

Tr.1926 (Lockhart, MasterCard);

see also

Ex. P-0405 at MCJ 2774923-24.)

After the publication of STT, MasterCard, member banks, software vendors and technology companies including IBM and Netscape, who shared MasterCard’s concerns that the Visa/Microsoft standard might not be open, non-proprietary and interoperable, began working toward a security standard of their own.

{See

Wank-meuller (MasterCard) Dep. at 46-47.) Within several weeks of the Visa Microsoft publication of STT, MasterCard published its Secure Electronic Payment Protocol (“SEPP”) on the Internet.

{See

Tr. 3258 (B.Katz, Visa U.S.A./Visa Int’l); Tr. 4638 (Herz, Visa Int’l).)

In light of the now separate efforts of MasterCard and Visa, member banks and technology companies became concerned about the prospect of having two

de facto

standards in the marketplace; they wanted instead a common technical standard for interchange, settlement, authorization and secured transmission of transactions over the Internet.

{See

Tr.1939-40 (Lock-hart, MasterCard);

see also

Ex. D-3170.) Dual issuers perceived two different technologies as costly and inefficient.

{See

Tr. 3521-23 (B.Katz, Visa); Dimsey (MasterCard/MBNA) Dep. at 401; Tr. 4638-41 (Herz).) Two different payment systems would require dual issuer banks to implement two standards to accept transactions. Merchants would have to have two different technologies at the market place, and consumers’ software would have to accommodate both standards. In sum, multiple

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standards would have caused duplicate costs for all parties.

(See

Tr. 4639-42; and 4686-90 (Herz).)

Pressure from all of these players in the industry pushed Visa and MasterCard to resume working together to create a joint specification based on the STT and SEPP specifications that ultimately became known as Secure Electronic Transaction (“SET”) technology.

(See

Lewis (Visa Int’l) Dep. at 116-17; Hogan (MasterCard) Dep. at 149-62.) SET took the best of each specification “[s]o the result was that SET was significantly better from a technical design perspective than either of the predecessors had been.” (Lewis Dep. at 117.)

Shortly after the release of SET in February 1996, Visa, MasterCard and other participants in the SET consortium solicited comments on the standard. American Express noted a specific requirement necessary to support the unique way in which American Express authorized transactions. Recognizing that a global standard needed to support business requirements of all payment brands around the world, the consortium changed the specification to include the American Express requirement.

(See

Tr. 4649-50 (Herz, Visa Int’l).) In December 1997 the first commercial production transaction involving the SET technology occurred; at around the same time the consortium formed a joint venture called SETCo to continue the development of the standard.

(See

Tr. 4646 — 47 (Herz); Tr.1940 (Lockhart, MasterCard).) American Express initially declined to join, but currently sits on the SETCo technical advisory board, permitting it to participate in directing the future of the standard.

(See

Lewis (Visa Int’l) Dep. at 151-52.) American Express has adopted the SET standard, meaning that merchants and cardholders can use SET with American Express transactions.

(See

Wank-mueller (MasterCard) Dep. at 264-66.) Discover also declined to join as an equity holder.

(See id.

at 266.)

The plaintiff points to this chronology and to the statements of Visa executives Bennet Katz, Carl Pascarella and others to support its claim that Visa’s agreement to cooperate with MasterCard both delayed the implementation of an internet security standard and was caused by dual governance. Plaintiff and its expert, however, have established no causal link between dual governance and any delay in implementing an Internet security standard.

As an initial matter, MasterCard never voted on Internet security standards at either the Board level or in any decision-making committee. Nor is there any evidence that “non-dedicated” directors of either MasterCard or Visa pushed the associations to cooperate in order to prevent either from gaining a competitive advantage over the other. Although plaintiff does correctly point out that two Visa directors at a Board meeting in October 1995 expressed a “need for a single standard,” the minutes of the meeting reveal nothing to support plaintiffs claims that those directors were motivated by concerns about harm to their MasterCard portfolios if Visa were to independently market its Internet security technology.

(See

Ex. P-0770.)

The court finds that to the extent that dual-issuing member banks wanted MasterCard and Visa to work together in this area, the dynamic was driven by the nature of dual membership and dual issuance, not dual governance. There is no evidence that dedicated Visa issuers were more in favor of Visa pursuing a separate secured electronic transaction standard than non-dedicated issuers.

(See

Tr. 3699 (M.Katz).) The record reflects only that all banks had an interest in a single standard and in investing in a single infra

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structure to support that standard, regardless of how heavily weighted their portfolios were toward one association or the other.

(See

Tr. 4640 (Herz, Visa Int’l).)

The court also finds that the statements of Carl Pascarella (that he was forced to “come back” and work with MasterCard rather than pursuing a competitive advantage for Visa); of Bennet Katz before the FTC (MasterCard is trying to delay the process because it is behind Visa) and of Visa International in its submission to the European authorities (Visa and MasterCard’s

members

put pressure on them to work together to develop a common technical standard) further reflect the operation of dual issuance and dual membership, rather than any anticompetitive conduct by dual board members.

(See

M. Katz Dir. Test, at ¶ 236; Pascarella (Visa U.S.A.) CID Dep. at 169; Dep. at 106-113; P-0901; Ex. P-0727 at VU 396161). Dual issuers understandably prefer a single set of back room procedures for all brands that they issue because multiple standards are inefficient and costly.

(See

Tr. 4674 (Hertz, Visa Int’l).) Indeed, Professor Katz conceded that the “banks would like some processes to be standardized ... [and] the desire for there to be some standardization is dual issuance.” (Tr. at 3696:10-21 (M.Katz).) He further admitted that the entire industry — merchants, cardholders, software vendors and banks— saw value in having a single standard for an Internet security protocol.

(See

Tr. at 3696-97 (M.Katz).)

Plaintiff also has failed to introduce any evidence of consumer harm arising from the associations’ pursuit of a joint security standard. In its Complaint, plaintiff alleges that the introduction of an Internet security standard was delayed as a result of MasterCard and Visa’s joint activity.

(See

Cmplt. ¶ 94). The entire period of alleged delay, however, is about four months. Microsoft and Visa announced the availability of STT in late September 1995.

(See

Herz (Visa Int’l) Dep. at 15.) The joint Visa MasterCard specification, SET, was available by February 1996.

(See

Lewis (Visa Int’l) Dep. at 117.)

It is impossible to predict whether STT could have been brought to market any more quickly than SET; after its September announcement it still had to go through industry comment, revision, testing, commercial roll-out and adoption.

(See

Tr. 4648 (Herz).) Furthermore, it is unlikely that STT would have succeeded in becoming adopted in the marketplace, in light of the fact that SET, which comprises the best features of STT, has not. It is undisputed that SET has been a commercial failure and has not been implemented on a wide-scale basis.

(See

Tr. 3255 (B. Katz, Visa U.S.A./Int’l); Tr. 4002 (M.Katz); Beindorff (Visa U.S.A.) Dep. at 186-87.) One of the main reasons for the lack of penetration of SET is the success of the alternative SSL technology available to consumers from Netscape.

(See

Tr. 3698-99 (M.Katz).) Consumers and merchants are able to implement SSL at no cost and without any involvement by issuers, acquirers or the associations.

(See

Tr. 4001-03 (M.Katz).) Neither banks nor merchants have been persuaded that the investment in SET is justified by savings in fraud reduction or increases in incremental sales as a result of increased consumer confidence in the Internet market.

(See id.

at 4654;

see also

Beindorff (Visa U.S.A.) Dep. at 186-87 (there is no business case for SET as a security mechanism on the Internet; most merchants use and are satisfied with SSL).) Currently consumer demand for Internet security has been satisfied by this and other alternative competing products.

(See

Pindyck Dir. Test, at ¶ 116.)

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Even if plaintiff is correct in asserting that cooperation and standardization in this area caused the security standard to come to market later than it would have, the introduction of two conflicting standards could have negatively impacted consumer welfare to a greater degree than any delay resulting from cooperation between MasterCard and Visa. As plaintiffs expert concedes, it is desirable to have some cooperation in setting the standards for the development of security technology for e-commerce.

(See

Tr. 3693 (M.Katz).) Plaintiff has not shown that these procom-petitive effects were outweighed by the alleged four month delay in bringing the product to market. These facts support Professor Pindyck’s opinion that there simply is no evidence of consumer harm arising from the preference of the associations to develop a joint security standard.

(See

Pindyck Dir. Test, at ¶ 116.)

Comparative Advertising

Plaintiff asserts that the dual governance structure of the associations historically has diminished comparative advertising. The court finds that Visa and MasterCard have generally refrained from naming each other in their ads and that on one occasion (the “Sisters” ad campaign) MasterCard did not name Visa in its advertising at the insistence of its U.S. Region Business Committee. The record also demonstrates, however, that throughout the years the associations had legitimate business reasons not to engage in comparative advertising and that currently and for some time advertising between the two associations has been highly competitive. Moreover, the court finds that no significant consumer harm arose from the 1992 “Sisters” ad decision.

The statements of former executives of Visa and MasterCard, Bennet Katz and Pete Hart, do establish that historically the associations have not attacked each other in their advertising in part because of “duality” or the “common interests of the associations.” (Tr. 3192 (B. Katz, Visa U.S.A./Visa Int’l);

see

Ex. P-1042 at DOJTE000361; Tr. 1321 (Hart, Advan-ta/Mastercard).) Indeed, this was the policy of each association.

(See

P-0005 at 0014848; P-1212 at MCJ 2827244.) The testimony of Charles Russell, a former Visa CEO, corroborates this.

(See

Russell (Visa U.S.A.) Dep. at 116-17.)

The lack of comparison was also due in part, however, to the beliefs of management at MasterCard and Visa, as well as at American Express and Discover, that comparative advertising is not a superior method for brand promotion. Gene Lock-hart testified that as CEO of MasterCard during 1995 and 1996, he chose not to name Visa in MasterCard ads because “I don’t think you should spend your advertising money advertising somebody else’s brand.” (Tr.2028 (Lockhart, MasterCard);

see also

Rapp. Dep. 379-81.) In this case, MasterCard’s current chief advertising executive, Larry Flanagan, credibly testified that consumers do not gain more information from an advertisement using the language “no card is more accepted-not Visa, not American Express” as opposed to “no card is more accepted on the planet.”

{See

Tr. 5783-84.) In his opinion there may be more negatives than positives associated with comparative advertising, chief among them being the potential to confuse consumers.

{See id.

at 5778-79.)

Since 1997 Mastercard has engaged in the well-known and very successful “Priceless” ad campaign. For the previous several years MasterCard International had been losing share to Visa; one objective of the Priceless campaign was to reverse this share decline.

(See

Tr. 5792; Ex. D-3557; Tr. 5771-73; 5786-87; Heuer (MasterCard) Dep. at 200.) Plaintiff’s expert agreed that one of the effects of the Priceless campaign is to take market share from Visa.

{See

Tr. 3653-54 (M.Katz).) He also acknowledged that MasterCard’s current

non-dedicated

Board approved the Priceless campaign.

(See

Tr. 3654 (M.Katz).) This example of the MasterCard Board authorizing MasterCard to attempt to shift share away from Visa runs squarely counter to the Government’s dual governance theory.

Likewise, since at least the mid-1980’s Visa has used its highly successful “It’s Everywhere You Want To Be” ad campaign. I credit the testimony of a number of Visa executives and member bank representatives that the purpose of the campaign was to distinguish Visa from MasterCard by linking the Visa brand to the more upscale brand image of American Express.

(See

Tr. 4355-56 (Beindorff, Visa U.S.A.); Russell (Visa U.S.A.) Dep. at 115-16; Soderstrom (Visa Int’l) Dep. at 26; Schapp (Visa Int’l) Dep. at 66; Saeger (Visa U.S.A.) Dep. at 98-99.) This ad “attempted to ... leave MasterCard where it was and leapfrog (Visa’s) image over American Express ... And the resultant shift in market share between Visa and MasterCard has to attest to that fact.” (Tr. 2243 (Saunders, Household/Fleet).) For many years Visa has also regularly compared its services and products to MasterCard’s in promotional materials and advertisements directed to member banks and argued that Visa was the superior association.

{See

Tr. 4983-85; 4994 (Schall, Visa U.S.A.); Ex. D-1887; Ex. D-1892; Ex. D-1894.)

Accordingly, although plaintiff did establish that in the past dual governance has led to decreased advertising competition between the associations, it failed to estab

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lish that any consumer harm resulted. Furthermore, plaintiff failed to demonstrate that at present advertising competition between the associations is anything but vigorous.

Premium Cards

In 1996, Visa had conducted consumer research and determined that there could be an opportunity for Visa to develop a premium product, tentatively called “Visa Platinum,” to compete in the above-gold segment of the market.

(See

Tr. 4335-86 (Beindorff, Visa U.S.A.);

see also

Stock (Visa U.S.A.) Dep. at 88:18-92:19 (market research indicated opportunity at higher end of credit card market).)

As part of the development of the premium card, Visa U.S.A. marketing staff met with representatives of major member banks to solicit their input.

(See

Tr. 4337 (Beindorff).) Michael Beindorff, then the Executive Vice President of Marketing and Product Management for Visa U.S.A., also conducted an ad hoc meeting of key members of the Visa U.S.A. Marketing Advisors Committee. At this meeting, Visa management made a presentation on a proposed Visa Platinum card product.

(See

Tr. 4337-39 (Beindorff).) The advis-ors recommended against moving forward with the premium card at that time and suggested that Visa provide platform specifications for a less costly Platinum card product which had already been developed and introduced into the market by several issuers.

(See

Tr. 1139 (Tylenda, Fleet); Ex. P-0211.)

The plaintiff argues that Visa did not move forward with the product because its Visa Marketing committee members were concerned about its effect on their MasterCard portfolios. Based upon the testimony of Beindorff and James Tylenda, who represented Fleet at the meetings, as well as the contemporaneous documents, the court finds that Visa was unable to get approval from its members for legitimate business reasons rather than because of concern for their MasterCard portfolios.

Although there were projections that the new card would take business from existing MasterCard portfolios, a far greater percentage (49 percent) of business was projected to come from existing Visa portfolios. According to Tylenda, he and other Visa advisors considered this cannibalization rate for Visa cards to be, by itself, sufficient to pose a question about the advisability of a premium product.

(See

Tr. 1197 (Tylenda).) Tylenda also testified that the concerns raised by the committee members related primarily to the economics of providing the proposed services on the card — that is whether it would be profitable for issuers given the projected cost of the product. Some of the proposed services, such as a concierge service, would have been very expensive to provide and the recommendation expressed by the ad-visors to Visa staff not to go forward with the product design was based upon their belief that the product could not be marketed cost effectively.

(See

Tr. 1197-99 (Tylenda, Fleet).)

Beindorff corroborated Tylenda, testifying that the reaction of the committee members to the product was mixed, with some advisors expressing concerns about whether there was a positive business case for introducing a premium card product and others objecting to the association introducing a Platinum product when banks (or at least large banks) could develop a premium card product independently.

(See

Tr. 4337 (Beindorff, Visa U.S.A.).) Beindorff testified that the biggest concern for some of the larger issuers was the fact that “they were working on their own products ... and they preferred to have a head start in the marketplace relative to their other Visa competitors than to allow

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Visa to develop a product that anybody would be able to issue.” (Tr. 4339-40, 4342;

see also

Ex. D-0140 at VU1017714R.) As early as 1996, certain banks were developing and issuing their own premium cards to consumers.

(See

Tr. 4341-43 (Beindorff);

see also

Ex. P-0822 at VU1371785; Ex. D-2573 at 2573015 (MasterCard “[g]ave MBNA approval to issue a Platinum Card”).) A number of the advisors who opposed the Visa-sponsored premium product had developed a premium card at their own respective banks.

(See

Stock (Visa U.S.A.) Dep. at 92-96.)

Visa nonetheless continued to pursue development of a premium card product.

(See

Tr. 4343^4 (Beindorff, Visa U.S.A.).) However, Visa management felt that it could no longer refer to its proposed premium product as “Visa Platinum” because of the banks which had already used Platinum for their cards.

(See id.

at 4344-45 (Beindorff).) While Visa established minimum parameters for cards to be issued as Visa Platinum cards, it turned its efforts to developing a premium product which would be superior to the platinum product.

(See id.

at 4343-44 (Beindorff);

see also

Ex. P-822 at VU1371789-90.)

After MasterCard introduced the premium product World Card in 1997, Visa developed a proposal for the Visa Signature card. In January 1998, Mr. Beindorff presented this proposal to the Product Development and Marketing Committee of the Visa U.S.A. Board of Directors. The Signature card was expected to take share from other brands in the marketplace, including MasterCard.

(See

Tr. 4345-46 (Beindorff, Visa U.S.A.).) In fact, Mr. Beindorffs presentation projected that, if introduced, the Visa Signature card would take seven percentage points from American Express and six percentage points from MasterCard.

(See id.

at 4346-48 (Beindorff)); Ex. D-2027 at VIF0686527.) Although the committee knew that the new product would take share from MasterCard, it endorsed the Visa Signature card proposal.

(See

Tr. 4345-46, 4350 (Bein-dorff).) In fact, the potential to shift share from MasterCard was one of the reasons the proposal was endorsed by the committee.

(See id.

at 4351 (Beindorff).) The Board of Directors subsequently approved the Visa Signature card in January 1998 with full knowledge that it was expected to take share away from MasterCard.

(See id.

at 4352 (Beindorff).);

see also

Ex. D-151 at VU0009119.)

The court finds that the plaintiff has failed to prove that there was (1) any delay in Visa U.S.A. introducing its premium card product because of “dual governance,” that is, due to efforts by non-dedicated board banks; or (2) that any harm to competition or consumers resulted.

C. Governance Duality and Alleged Admissions by Visa and MasterCard Executives

Plaintiffs other direct proof in support of its theory that dual governance is anti-competitive consists of statements made about “duality” by MasterCard and Visa executives during the 1980’s and into 1993. The court has reviewed the testimony and documentary record and finds that the Visa and MasterCard executives who have expressed concerns about duality generally have used the term to refer to their concerns about dual issuance rather than dual governance. The court thus grants little weight to these references in assessing the competitive harm directly attributable to “governance duality.”

(See

Tr. 3110-11, 3113, 3132-33, 3138, 3142-43, 3191-92 (B. Katz, Visa U.S.A./Visa Int’l); Tr. 1304-05, 1308-09, 1441-42 (Hart, Advanta/Master-Card); Russell (Visa U.S.A.)

Mountain-

*361

West

Tr. 1397;

MountainWest

Dep. at 70-71.

see also

Ex. P-0196 at 20101403; Ex. P-0007 at 0024160; Ex. P-0642; Ex. P-0984P1022 at 20101200 (all of which refer to “issuance duality”).) From Katz’ perspective, “if you want to solve the problem, you would roll back duality, but ... at this stage of the game I am not so sure the cure wouldn’t be worse than the crime.” (Tr. 3408.)

Similarly, Charles Russell’s concerns are driven by members belonging to both associations and issuing both cards, as opposed to governance duality. Russell scoffed at a hypothetical structure for Visa where governors would be owners and other issuers would be licensees with no governing rights.

(See

Russell (Visa U.S.A.) Litigation Dep. at 107-09 (‘You’re dancing around an issue ... I’m still issuing both products. I might not have it at the board level, but I’ve got it at the other level. But I can still play one association off against the other. This isn’t competition. It’s a joke ... If you want to do something with straightening out and getting competition at the association level or the banks’ level back into this, what you do is you separate. You don’t dance around it. And you’re dancing around it ... [y]ou roll back duality”).) Mr. Russell made it quite clear that rolling back what he called “duality” meant telling banks they had to issue solely Visa or MasterCard and in either event, not permitting dual issuance with American Express, Discover or any other network.

Bennet Katz also testified that he was not aware of any instance during his tenure on the Visa International Board, which began in 1992, where a board member— “dedicated” or not — sought to prevent Visa from supporting an initiative because of the potential negative impact on Master

*362

Card.

(See

Tr. 3394-95 (B. Katz, Visa U.S.A./Visa Int’l).) He did testify that prior to 1992, while he sat on the Visa U.S.A. board, there were occasions when Visa U.S.A. was asked by members to coordinate certain initiatives with MasterCard. These projects, however, were fully disclosed to the Justice Department. For example, in the 1980s MasterCard and Visa were cooperating on a joint debit product, Entrée, as well as on warning bulletins and chargebacks.

(See

Ex. D-4181 (1986 letter from MasterCard General Counsel to Antitrust Division discusses with Division representatives regarding a “joint/common operating rules effort,” attaching “a summary of the proposed Joint Debit Card program” and indicating date and time of future meeting between the associations and Division representatives to discuss proposed Joint Debit Card program).)

In particular, the efforts by members to drive Visa and MasterCard cooperation on warning bulletins, charge-back rules and software changes were all operational in nature and promoted efficiencies in the network systems by reducing duplication and cost.

(See

Tr. 3356-60; 3413-17).) It is uncontested that dual issuance creates incentives to standardize the back room operations at the issuing institution, and these efforts are consistent with those incentives.

(See id.

at 3638 (M.Katz).) It is also true that cooperation in these areas might have been procompet-itive because of the cost savings; cooperating on innovation, unlike agreements to raise prices or reduce output, is much harder to categorize as anticompetitive, primarily because such cooperation may reduce prices to the consumer.

Plaintiff also points to a 1992 letter from the General Counsel of MasterCard to the Department of Justice as an admission that governance duality restrains competition.

(See

Cmplt. ¶ 62; M. Katz Dir. Test. ¶ 208.) In fact, the letter makes specific reference to common membership, not the Government’s concept of governance duality. The letter was written in an unsuccessful attempt to convince the Department of Justice to allow MasterCard to place representatives on its board from banks which also had representatives on Visa’s board. MasterCard argued that bank consolidations had limited the number of large traditional banks available to serve on the MasterCard board. The Complaint quotes the letter: “MasterCard and Visa simply do not ‘compete’ in any conventional business sense.”

This sentence must, however, be read in full context:

MasterCard and Visa do not “compete” in any conventional business sense. It is, in fact, their members, and not MasterCard and Visa, which issue the cards and sign up merchants. It is true MasterCard and Visa “compete” to maintain the value of their respective trademarks, and the goodwill associated with them. And they compete for the hearts and minds of members but it is those members which compete with each other in the marketplace and price the services to merchants and cardholders.

(Ex. P-0303 at MC 0029832.)

It is evident that MasterCard was asserting that, although the two associations compete, the most important competition for consumers — interest rates, fees, etc.— occurs at the issuer level where neither association operates.

Plaintiff places perhaps the most weight on a MasterCard memorandum dated Sep

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tember 1992 from Peter Dimsey, U.S. Region President of MasterCard, to the MasterCard International U.S. Region Board of Directors in which he responds to a report distributed to the Visa U.S.A. Board by Visa’s management.

(See

Ex. P-0318.) In fact plaintiffs counsel stated that “it’s one of the more extraordinary documents I’ve ever seen in a case because it capsulizes the whole case.” (Tr. 4187.) In particular, plaintiff has relied on a line in the memorandum which states that “the interests of the MasterCard and Visa Boards are fundamentally identical” to support its position regarding the anticom-petitive effect of dual governance. When viewed in its entirety and in context, however, the memorandum reflects just the opposite — the heated competition between the two associations.

A review of the entire document reflects that Mr. Dimsey was responding to Visa’s assertion that the actions of MasterCard’s Board were threatening the profitability of MasterCard’s traditional bank members and failing to represent the interests of those traditional members because of the influence of non-traditional (monoline) banks sitting on MasterCard’s U.S. Board.

(See

Ex. P-0318 at MC0144100, MC0144105, MC0144107.) Thus, Mr. Dim-sey was simply responding to this charge by stating that MasterCard’s Board, like Visa’s Board (or the Board of any association or corporation), was acting in the best interests of its members or shareholders.

(See

Tr. 1329 (Hart, Advanta/Master-Card).) In MasterCard’s case, the Board was acting in the best interests of both its traditional bank and non-traditional financial institution members. (Dimsey (MasterCard/MBNA) CID Dep. at 209-12.)

Importantly, the memorandum goes on to describe just how MasterCard’s Board was acting in the best interests of its members — by innovating and competing with Visa. Indeed, on cross-examination, Professor Katz acknowledged that the memorandum reflects a number of areas of competition between MasterCard and Visa.

(See

Tr. 3962-66 (M.Katz).) Perhaps most significantly, the memorandum reflects that MasterCard’s Board was engaging in competition by promoting a differentiated MasterCard brand and encouraging share-shifting from Visa to MasterCard — the type of activity that plaintiff contends does not occur because of dual governance.

The court finds that in their totality these so-called “admissions” are evidence that historically “duality” has led to some blunting of competitive incentives. It is equally clear however that the speakers were referring to dual issuance, ownership or membership, rather than to dual governance. These statements are not admissions that anticompetitive decisions have been made by “non-dedicated” Board members and do not support a theory that a Board of governors comprised solely of governors with portfolio skews of 80% or above will result in a more competitive structure. Plaintiffs arguments regarding these statements are also undermined by the record of competition between the associations demonstrated by the defendants. Lastly, whatever they may say about dual governance, the cited statements have little relevance in today’s market.

D. Plaintiffs “Dual Governance” Theory Is Totally Inconsistent With The Record of Vigorous Competition Between MasterCard And Visa

Innovations

Professor Katz’ theory is that non-dedicated association governors, those representing member banks issuing more than 20 percent of their card portfolio in the other association, will have a reduced incentive to support innovation competition

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which shifts share between the associations. The record is replete, however, with examples of competitive initiatives by both associations, taken during periods of time when their boards were not comprised of dedicated governors, aimed at exactly that — shifting share from one association to the other.

Both associations moved from inefficient, labor-intensive, paper-based systems to sophisticated electronic systems and have continued to upgrade their systems and to provide fraud and loss controls and in doing so have taken different paths in competition with each other.

(See

Tr. 4483-84 (Dahir, Visa U.S.A.) (direct correlation between Visa’s mission to increase member profitability and its innovations); Tr. 4852-53 (L. Elliott, Visa Int’l) (systems innovations intended to lower member costs and to get a competitive advantage over MasterCard).)

Specifically, Visa has made continuous improvements to its VisaNet system since it was implemented in the 1970’s.

(See id.

at 4849-54 (L. Elliott, Visa Int’l); Ex. D-4515 (chart of significant VisaNet innovations over the last 30 years).) These innovations were instituted (1) to lower costs for members and therefore encourage them to issue Visa cards and send transactions through VisaNet on the acquiring-side, and (2) to gain a competitive advantage over other card systems, specifically over MasterCard.

(See

Tr. 4852 (L. Elliott, Visa Int’l).)

Similarly, MasterCard has made continuous efforts to improve and upgrade its systems. Since the 1980s, it has had in place a “Systems Enhancement Strategy” (formerly referred to as OMNI). This strategy currently involves rewriting almost all of the core MasterCard systems to upgrade processing and provide more flexibility to members.

(See

Africk (MasterCard) Dep. at 27-31; Tr. at 5565-66 (Selander, MasterCard).)

One major Visa systems innovation was PaymentService 2000 (PS2000), implemented in 1993 as a major upgrade to the VisaNet system.

(See

Tr. 4509 (Dahir, Visa U.S.A.); Tr. 4865 (L. Elliott, Visa Int’l).) Visa actively marketed the advantages of PS2000 to encourage members to issue Visa cards instead of MasterCard.

(See

Brooks (Visa U.S.A.) CID Dep. at 410-11; Derman (Visa U.S.A./Visa Int’l) Dep. at 75-77; Blewett (BaneOne/First U.S.A.) Dep. at 87-89 (Visa used PS2000 as a selling point to a predominantly MasterCard issuer).) In 1994, in response to Visa’s PS2000 program, MasterCard introduced its Interchange Compliance Program. This program links authorization and clearing processes but in a very different way than Visa’s program does.

(See

Africk (MasterCard) Dep. at 54-55).)

Visa also continued to innovate in fraud detection and prevention, both to reduce costs for members and to compete with MasterCard. Between 1989 and 1994 Visa implemented three anti-fraud systems: Address Verification Service; Card Verification Value and Cardholder Risk Identification Service. Each was successful in reducing fraud rates and created a competitive advantage for Visa over MasterCard.

(See

Tr. 4856-4861, 4864 (L. Elliott, Visa Int’l).)

None of these Visa fraud innovations— AVS, CW or CRIS — was developed in cooperation with MasterCard, nor were they shared with MasterCard.

(See id.

at 4857, 4859-60 (L.Elliott).)

To the con

*365

trary, Visa promoted these fraud services to members in comparisons with MasterCard and other card brands.

(See, e.g.,

Tr. 4981-84 (Sehall, Visa U.S.A.).) Throughout the 1980s, MasterCard further improved its systems by implementing Banknet, MasterCom and other means to combat fraud. It also introduced the laser hologram as an antifraud device.

(See

Tr. 526-28, 455 (J. Elliott, MasterCard); Africk (MasterCard) Dep. at 17.)

Visa also has made continuous efforts to increase merchant acceptance and to provide better products and services to cardholders.

(See

Tr. 4478-80 (Dahir, Visa U.S.A.); Tr. 4976-79 (Sehall, Visa U.S.A.);

see also

Rapp (Visa U.S.A.) Dir. Test, at 21 (listing some of the major innovations by Visa from the 1970’s to the present).) Many of these innovations by Visa were designed to differentiate Visa from MasterCard.

(See, e.g.,

Russell (Visa U.S.A.) Dep. at 41^42; Tr. 4852 (L. Elliott, Visa Int’l).)

For its part MasterCard was the first to introduce co-branded cards on a wide-scale basis. MasterCard distinguished itself by offering greater flexibility than Visa in designing co-branding programs.

(See

Ex. D-2603; Ex. D-3001.) In 1990, MasterCard unveiled a co-branding strategy that resulted in numerous partnerships and card offerings. These co-branding deals contributed to the development of comprehensive rewards programs for cardholders.

(See

Pindyck Dir. Test, at ¶ 66.) MasterCard’s co-branding programs were successful in shifting share from Visa to MasterCard.

(See

Tr. 3976-77 (M.Katz); Tr. 4515-17 (Dahir, Visa U.S.A.).)

MasterCard also introduced the pm-chasing card well before Visa. The purchasing card is designed to be used by corporations to pay for goods and services and to compete with other forms of payment, including Visa cards.

(See

Tr. 1404-05 (Hart, Advanta/MasterCard).) MasterCard was also the first to introduce a fleet card. A fleet card allows companies to manage their vehicle fleets by issuing a payment card to cover maintenance and operating costs for those fleets.

(See id.

at 1954-55 (Lockhart, MasterCard).)

MasterCard has continually attempted to improve its commercial card products, including corporate, purchasing and fleet cards, by introducing innovative card features.

(See

Tr. 5569-70 (Selander, MasterCard).) For example, in 1997 MasterCard introduced an innovative premium card product known as the World Card. It was the first card product to offer this combination of features, targeted at high-spend business travelers interested in a product with no preset spending limit.

(See

Tr. 5642-43 (Selander, MasterCard); Ex. P-1104 at MCJ0000283-284.)

A History of Share-Shifting Competition

During the 1980’s MasterCard’s share had fallen sharply.

(See

Tr. 1382-83 (Hart, Advanta/MasterCard).) In contrast to Visa, and in order to capture market share from Visa, MasterCard permitted non-bank corporations into the credit card business, including AT & T, GM and GE. Monoline banks (banks without branch systems) also entered the marketplace in the early 1990s with notable success. MasterCard welcomed these new entrants into the MasterCard association and bene-fitted as these new entrants rapidly built their card portfolios.

(See id.

at 1363-64

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(Hart).) Visa was less willing to allow new entrants to join the associations, because of questions about whether this would be fair to the existing members that built the association.

(See id.

at 4511-13 (Dahir, Visa U.S.A.).)

While Visa studied the membership issue, it declared a moratorium and allowed no new non-bank members to join. As a result, all of the new issuers joined the MasterCard association.

(See id.

at 1385-86 (Hart);

id.

at 4514 (Dahir).) MasterCard gained share from Visa as a result of its alliance with these nonbanks and mono-lines.

(See id.

at 4516-17 (Dahir);

id.

at 1386 (Hart);

see also

Ex. D-3111 at 31110022 (MasterCard’s share for general purpose credit cards increased from 30.7% in 1991 to 32.2% in 1992).) Visa’s strategy to counter this share shift by marketing itself as the association for traditional issuers was not successful because the most successful and fastest growing issuers in this time period were non-banks and mo-nolines.

(See

Tr. 4561-62 (Dahir).)

During the same time period, co-branded card products became more prevalent, heavily promoted by new issuers such as MBNA.

(See id.

at 4514 (Dahir).) Co-branding is a partnership in which the card issuer joins its brand with a third party’s brand to create an attractive value proposition for cardholders.

(See id.

at 4514-15 (Dahir).) Although the largest and best known co-branding programs are airline cards, today there are thousands of other co-branded cards available to consumers. During the early 1990s, when there was also a membership moratorium at Visa for non-banks, Visa’s co-branding rules were far more restrictive than MasterCard’s.

(See id.

at 4516-17:12 (Dahir).)

While MasterCard was gaining the majority of the new card issuance, Visa’s management was becoming increasingly concerned about Visa’s declining share. From 1991 to 1993, Victor Dahir, the Chief Financial Officer of Visa U.S.A., presented a chart showing the relative performances of Visa and MasterCard to the Board of Directors and warned of the considerable risk that, given the rapid number of new cards being issued by new entrants through MasterCard, Visa was going to lose share to MasterCard. This became reality in early 1993, when the results of the rapid growth of the General Motors program (which issue only MasterCard) caused MasterCard to gain sales volume share at Visa’s expense.

(See id.

at 4516-17 (Dahir);

id.

at 1386-87 (Hart, Advan-ta/MasterCard);

id.

at 1960-61 (Lockhart, MasterCard); Ex. D-3111 at D3111022.)

MasterCard’s success with new entrants and co-branded programs in the early 1990s led to Visa’s decision in 1993 to enter the co-branding arena and compete directly with MasterCard for these programs. In early 1993, when Visa experienced loss of share against MasterCard, the Visa U.S.A. Board of Directors was immediately concerned and instituted a number of significant changes. Most notably, in August 1993, Carl Pascarella was appointed as the new President and Chief Executive Officer. Mr. Pascarella indicated to the Board of Directors that he was only willing to assume leadership of Visa if it competed more aggressively against MasterCard.

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The Board accepted his terms.

(See

Tr. 5137 (Pascarella, Visa U.S.A.).)

At Mr. Pascarella’s first board meeting in October 1993, a resolution was passed at his urging giving Visa management the authority to approve proposed card programs, including co-branding programs.

(See id.

at 4519-20 (Dahir); Ex. P-0003 at 10; Tr. at 5141 (Pascarella).) Visa devoted tremendous marketing resources to its drive to obtain new co-branding programs.

(See

Tr. 5141-42 (Pascarella); Tr. at 1963-64 (Lockhart, MasterCard).) In February 1994, Visa U.S.A. adopted a program for co-branded cards, including cash incentives that would be provided to members to offset the cost of issuing and promoting these new cards.

Visa also offered other services to members to compete with MasterCard for co-branding programs.

Visa reversed its loss of share to MasterCard following Mr. Pascarella’s “call to arms.” In an early speech to Visa employees, Mr. Pascarella stated “The message is simple: Kill MasterCard.” (Ex. P-1228 (video clip of speech);

see also

Tr. 5138-39.) Within six months, Visa was .winning the majority of the co-branding programs and its share began to increase again.

(See

Tr. at 4520-21 (Dahir, Visa U.S.A.); Ex. P-1165, Exhibit B; Tr. 5003-04 (Schall, Visa U.S.A.).) As the competition for co-branded programs continued to increase, both associations raised the cash incentives that they offered to members.

(See

Tr. 1218 (Tylenda, Fleet);

id.

at 5004 (Schall);

id.

at 4523 (Dahir).) The use of cash incentives also spread into other areas. Specifically, issuers who were conducting large-scale, national direct mail solicitations began to demand and receive cash incentives from the associations.

(See id.

at 4521-25 (Dahir).) MasterCard member relations employees constantly worked with members to craft direct mail solicitations that would provide a greater mail share for MasterCard.

(See id.

at 1972-73 (Lockhart, MasterCard); Flood (MasterCard) Dep. at 27.) Visa U.S.A. President and CEO Carl Pascarella testified that “we were in a very, very competitive environment where share of mail is very important.” (Pascarella Dep. at 133.) As the associations battled for mail share, large issuers were negotiating for and obtaining per card payments in return for an agreement to have a large mail solicitation predominantly or exclusively devoted to one association.

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Because of the concern that issuers were playing the associations against one another and demanding ever-increasing amounts, Visa did not support the expanded use of cash incentives for mail share— unlike co-branding programs, the cards did not offer new value to cardholders or to the association. Visa also was concerned about using increasing amounts of money from the membership as a whole to support programs for a limited number of issuers. Ultimately, the effect would be to take money from other areas and reduce the amounts available to promote and support the Visa brand.

(See, e.g.,

Christof-ferson (BancOne/First U.S.A.) Dep. at 163-66; Tr. at 4525-27 (Dahir, Visa U.S.A.).)

Share-Shifting Competition Culminates in Dedication

a. Visa’s Partnership Program

Both associations ultimately took steps to move away from ad hoc incentive payments to longer term agreements that would exchange monetary and other incentives for greater brand loyalty and dedication. In February 1999, the Visa U.S.A. Board adopted the “Partnership Program.”

(See

Tr. 4537-38 (Dahir).) This program offers a uniform schedule of discounts to issuers and provides other support to members who agree to issue only Visa cards (including debit cards) and to reach 90 percent Visa credit card volume share within an agreed-to transition period.

(See

Tr. 4609, 4533-34, 4612 (Dahir); Ex. D-1594-R (“Visa Partnership Program Principles”).) Nearing the end of 2000, 439 Visa U.S.A. members, constituting over sixty percent of its transaction volume, had committed to Visa under this program.

(See

Tr. 4538 (Dahir); Tr. 5164 (Pascarella).)

While the fee discounts that Visa offers under its Partnership Program Principles are available to any member interested in dedicating itself to Visa

(see id.

at 4540 (Dahir), Visa has executed independent side agreements with several of its largest members that provide significant additional financial incentives to those members in return for their commitment to Visa.

(See id.

at 454CM1, 4610-11 (Dahir, Visa U.S.A.) Of the Visa members that have received these special deals, all but one have one or more representatives on the Visa U.S.A. Board; the lone exception is Fleet, a bank that Visa expects to add to its Board in the near future.

(See

Tr. 4611 (Dahir).)

At its February 2000 meeting, Visa U.S.A.’s Board also enacted a by-law that every Board member from an issuing bank have at least 75 percent of its total transaction volume — credit and debit — on the Visa system.

(See id.

at 5164-65 (Pascar-ella); Ex. P-1039.) Visa plans to increase the required portfolio skew over time.

(See id.

at 5166 (Pascarella); 5305 (Schmidt, Visa U.S.A.).) At present, eleven of the twelve outside directors on Visa U.S.A.’s Board of Directors are affiliated with members that have committed to partnership agreements.

(See

Ex. 4500A.) The lone holdout, Suntrust Bank, sold most of its credit card portfolio and now issues only Visa off-line debit cards.

(See

Tr. 4539 (Dahir).) The Visa U.S.A. Board banks, accordingly, have effectively relinquished their right to issue new cards except on the Visa network in exchange for the incentives of the partnership program and for the right to serve on the Visa Board, where they can have say in the association’s governance.

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MasterCard’s Member Business Agreements

MasterCard has entered into “Member Business Agreements” with four of the largest United States card issuers — Citibank, Chase, Metris and Household

(see

Hanft (MasterCard) Dep. at 60-66; Ze-beck (Metris/Fingerhut) Dep. at 201-02; Siddharth Mehta (Household) Dep. at 14-15), and with a total of 32 of MasterCard’s largest issuers.

(See

Tr. 5596-97 (Selan-der, MasterCard).) At least two of the banks represented on MasterCard’s U.S. Region Board, MBNA and Capital One, however, have not signed such agreements.

MasterCard’s member business agreements, like Visa’s partnership agreements, call for the banks to prospectively dedicate themselves to MasterCard.

(See

Ex. P-0498 at MCJ6058232 (outlining general terms of the member business agreements).) Fdr instance, Chase’s agreement with MasterCard has a five-year term and obligates Chase to reach an 80 percent portfolio skew (of its credit and charge cards) to MasterCard by July 2003.

(See

Ex. D-2555R.) In return, MasterCard has agreed to pay Chase a cash incentive and to provide Chase substantial discounts from the fees it pays to MasterCard.

While plaintiff and Professor Katz have suggested that these agreements were motivated by this litigation, both associations were exploring possible loyalty agreements long before this action commenced. The court credits the testimony of Victor Dahir that Visa had explored similar types of programs as long ago as 1988. The impetus for the 1998 partnership program was based upon a proposal from Citibank in Spring 1998 to offer greater brand dedication to Visa in exchange for lower fees.

(See

Tr. 4536-37 (Dahir); 5160-61 (Pasear-ella);

see also

Russell (Visa U.S.A.)

Moun-tainWest

Tr. 1435 (Visa considered loyalty program in early 1990’s).)

Similarly, Robert Selander, the President and CEO of MasterCard International, testified that MasterCard was trying to transform incentive programs into “broader, relationship-oriented programs” in 1996 and 1997 so that there was “a more durable, longer-term relationship.”

(See

Tr. 5574-75 (Selander, MasterCard);

see also

Hanft (MasterCard) Dep. at 59-60 (“the concept of member business agreements predates October, 1998”).) This strategy evolved into the member business agreements, which were not a response to this lawsuit, nor to any concerns about dual governance.

(See

Tr. at 5596-97 (Selan-der).) MasterCard had learned from the co-branding and mail share competition and developed the confidence to demand more commitment from its members as part of an overall improved relationship. In fact, MasterCard’s Corporate Strategy Blueprint 1998-2002 (written in 1997) calls for MasterCard to “[djeliver the ‘MasterCard experience’ via our relationship management process with major payments players globally [and] [establish a partnership contract with our customers for mutual market benefit.” (Ex. D-3902 at MCJ2180199.) Mr. Selander testified that this was the foundation for the member business agreements: “we need to have ... clear understanding from our customers of what their expectations are and to have a longer-term, structured relationship which means that as we invest in that relationship, that we will see that come back to benefit the MasterCard joint venture.” (Tr. 5585-86 (Selander).)

The competition between Visa and MasterCard has been fierce to sign members to these long-term issuing agreements. Through Visa partnership agreements and MasterCard member business agreements, the associations have tried to secure brand

*370

loyalty commitments from their members, including the limited number of very large issuers who account for large percentages of card volume.

(See id.

at 5575-76, 5585-86 (Selander).) These large issuers continue to play the associations against one another. For example, Citibank was able to obtain a certain amount of flexibility from MasterCard regarding the use of the Citibank brand on its cards.

(See id.

at 2068 (Boudreau, Chase); 2230 (Saunders, Household/Fleet); 4915-16, 4930-31 (Wells, Wachovia).) This competition, and the willingness of member banks to shift share from one association to the other, directly contradicts plaintiffs theory on dual governance.

Plaintiffs focus on dual governance has been rendered largely irrelevant by these agreements, which have led to current association Board compositions that are virtually “dedicated” under plaintiffs definition. Visa U.S.A. and International Boards are dedicated to Visa under plaintiffs definition. Below are the current portfolio skews (including those established by agreement) for both Visa U.S.A.

(See

Ex. D-4500A) and Visa International

(See

Ex. D-4688):

VISA U.S.A.’s Board of Directors

Member Bank Estimated 1999 Share Committed Credit Share By 2003

Texas Independent Bankshares 100% 90%

U.S. Bancorp 97% 90%

Bank One (2 directors) 83% 90%

Bank of America (2 directors) 79% 90%

Suntrust Bankcard 79%

First Union 77% 90%

Associates National Bank ' 68% 90%

Wachovia 63%

First National Bank of Nebraska 58% 90%

Wells Fargo & Company 46% 90%

Visa International’s Board of Directors — 1999

Member Bank Visa Share

U.S. Bancorp 93%

Bank of America 80%

Associates Corporation of North America 75%

Bank One 71%

First National Bank of Nebraska 59%

Firstar Corporation 54%

Wells Fargo & Company 53%

Banco de Crédito del Peru 100%

Canadian Imperial Bank of Commerce 100%

First Rand Bank 100%

Royal Bank of Canada 100%

Visa España 100%

Sumitomo Credit Service Co., Ltd. 96%

Deutsche bank S.p.A. 89%

UOB 85%

Bankgesellschaft Berlin AG 80%

Equitable Banking Corporation 80%

Barclaycard 77%

Banco de Brasil 77%

Natexis Banques Populaires 74%

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Foreningssparbanken 65%

Lloyds/TSB 57%

The trial record reflects that the MasterCard Global and U.S. Region Boards are comprised of a majority of members from institutions skewed towards MasterCard. Set forth below are the current portfolio skews (including those established by agreement) for both the Global and U.S. Region Boards.

Bank Issuers on the MasterCard International Global Board of Directors — 2000

Member Bank MasterCard Share of Credit and Charge Cards

Household 95% *

Metris 95% *

Citibank 85% *

Chase 80 % *

USAA Federal Savings 69.4%

MBNA 52.1%

Bank of Montreal 100%

ArgenCard 100%

Bayerische Hypo-und Vereinsbank AG 97.1%

Caisse Nationale de Credit Agricole 94.4%

Orient Corp. 55.3%

Commonwealth Bank of Australia 53.0%

(* = per agreement)

Bank Issuers on the MasterCard International U.S. Region Board of Directors — 2000

Member Bank MasterCard Share of Credit and Charge Cards

Household 95% *

Metris 95% *

GE Consumer Card Co. 87.8%

Citibank 85% *

Chase 80 % *

Peoples Bank 80% *

USAA Federal Savings 69.4%

MBNA 52.1%

Capital One 33%

Key Bank 100% (Debit Cards Only)

Union Bank 100% (Debit Cards Only)

(* = per agreement)

MasterCard has also entered into Member Business Agreements with key Board members such as Citibank, Chase and Household that provide for those banks to be at least 80 percent MasterCard issuers.

(See

Ex. P-180.)

E. The Government’s Proposed Remedy

This court already has found that dual governance does not lead to anticompeti-tive effects. Perhaps no one factor confirms this more than Plaintiffs concession that skew is not the primary influence over how Board members vote, and thus does not drive Board members to act in any particular manner. In fact, the skew of directors’ portfolios is only one of many, and not a decisive factor in board votes.

Plaintiffs own expert, Professor Katz, conceded that multiple factors besides skew affect how a board member will vote at any given time. For example, Prof. Katz admitted that although governors

*372

make the ultimate investment decisions, non-governors have influence as well on management and the board.

(See id.

at 3518-19, 3713-14 (M.Katz).) Yet his theory does not account for the fact that non-directors, who may be non-dedicated in Professor’s Katz’ “but for” world, also exert important influence over association policies. Katz further admitted that directors take the interests of large issuers into account out of a desire to be reelected, among other reasons.

(See id.

at 3716-17 (M.Katz).) Thus, skew is merely one factor that influences how a bank may vote on the board. Other factors include fiduciary duty, a desire for consensus, an individual bank’s interests, cost savings, and likely benefits.

(See

Tr. 3565-67, 3590, 3594-95, 3712-13, 3869-70, 3870-71, 3875, 3891, 3893, 3916, 4062-63 (M.Katz).)

For this reason, plaintiffs expert generally discounts the importance of actual board votes in his “but for” world, despite the fact that his dual governance theory is premised on the assumption that board decision-making has been compromised.

(See id.

at 3869-71 (M.Katz).) In fact, Katz did not reach any opinions by examining board votes.

(See id.

at 3565-67, 3869-70 (M.Katz) (must be “cautious” in looking at votes due to multiple factors influencing voters).) Specifically, Professor Katz did not study the skews of the Global or U.S. Region Board for any time period before: (1) forming an opinion in this litigation; (2) constructing his “but for” world; and (3) preparing his Expert Report and direct written testimony.

(See id.

at 3932-33 (M.Katz).) Plaintiffs expert has not traced the decision-making behavior of certain board members over time as they have transformed from non-dedicated to dedicated members or vice versa.

(See id.

at 3901 (M.Katz).)

Perhaps it is this tenuous connection between portfolio skew and Board decision-making (and therefore between skew and any alleged anticompetitive effects) that explains both the Government’s and it expert’s problems in crafting a remedy in this case. Professor Katz did not espouse a particular remedy, but rather hypothesized a “but for” world as a theoretical standard of comparison to determine what competition would be like absent dual governance.

(See

Tr. 3496-97 (M.Katz).) In his opinion, all Visa and MasterCard board members should issue between 80 and 90 percent on that association’s card system, leaving open 10 to 20 percent for issuance of other card brands. According to Katz, this would ameliorate the purported harm from dual governance while promoting the goal of multiple issuance sought to be effectuated by the abolition of By-law 2.10(e) and the CPP.

(See

Tr. at 3500-03 (M.Katz); M. Katz Dir. Test. ¶¶ 188-189

n.220.)

Yet Professor Katz could not seem to settle on a skew that would accomplish this goal. Katz testified that while a 79% skew as opposed to an 80% skew should not impact a board member’s incentives, a 75% skew would be too low to stem the purported ill effects of dual governance. However, he offered no analysis or evidence to explain the difference in competitive effects between 75 and 80%.

(See

Tr. at 3500-03 (M.Katz).) He later testified that 80% is not a threshold for dedication: “There is increasing dedication as you increase percentage and I thought something [in] the 80 to 90 percent range is likely to strike a balance. I have not set a particular threshold.”

(Id.

at 3597, 3889-90 (M.Katz).) In the end, Professor Katz testified only that dedication increases, even at levels below eighty percent, as skew levels increase.

(See id.

at 3500-03 (M.Katz).)

By contrast, the Government’s suggested remedy in this case would require 100%

*373

future issuance by Board members and mandate an 80% portfolio skew. These provisions are not found in the relief section of the Complaint, where the Government proposed simply that board members be “dedicated” to their association’s brand, without mandating percentages for

portfolio skew

future issuance.

Plaintiff’s proposed exclusive issuance remedy is also not contemplated in Professor Katz’ “but for” world, and is in tension with plaintiffs position that dual issuance is on balance procompetitive. Because of industry consolidation, as of 1999, the twenty-two banks that collectively sit on the Visa and MasterCard Boards accounted for 78% of the credit card volume on those two systems in the United States. (Nilson Report Nos. 708, 709, 712). Assuming the largest issuers choose to remain on the Boards, under the Government’s proposed remedy they may not issue American Express, Discover or MasterCard cards going forward and the opportunities for American Express or Discover are dramatically reduced.

F. The Record Evidence of Actions Taken Through Board Votes Is Inconsistent with and Contradicts Plaintiffs Theory

Professor Katz has acknowledged that actions taken by the respective Boards of Visa and MasterCard to shift share between the two associations would undermine his theory.

(See id.

at 3932 (M.Katz).) In fact the record of board votes, ignored by Katz, reveals that MasterCard’s and Visa’s boards have consistently voted to allow management to compete vigorously with the other association, even when the competition was designed to shift share between them.

For example, in 1989 the Executive Committee of the MasterCard Global Board unanimously voted to authorize the CEO of MasterCard to take any action necessary to respond to the competitive actions of Visa without having to first approach the Board. At the time, MasterCard’s Global Board — the only board in existence in 1989 — was non-dedicated under plaintiffs definition of dedication. As reflected in the minutes, the Executive Committee understood that this competitive action could harm Visa.

(See

Ex. D-4203.) Plaintiffs expert acknowledged that this authorization was aimed at competing with Visa directly and conceded that such action was inconsistent with his theory regarding dual governance.

(See

Tr. 3932 (M.Katz).)

Other examples which are plainly inconsistent with Prof. Katz’ theory include: (1) the 1996 U.S. Region Board’s unanimous vote to reinstate co-branding incentives (which upon cross-examination Prof. Katz admitted was prompted by competition with Visa

(see id.

at 3915:3-20 , M. Katz); (2) the unanimous 1996 votes of the Global and U.S. Boards to acquire a 51 percent interest and 10 percent interest in Mondex International and Mondex U.S.A., respectively; (3) the unanimous vote by the U.S. Region Board in 1995 in an EPS smart card venture, and (4) a 1993 U.S. Region Board unanimous vote authorizing the development of the MasterCard Purchasing Card product which was aimed at competing with Visa. (See Ex. D-4200; Ex. ID-4199; Ex. D-4198; Ex. D-4201; Ex. ID-4202.)

For all of these votes, MasterCard’s Board was “non-dedicated” under plaintiffs definition and yet the Board voted, in all cases unanimously, to engage in a variety of competitive initiatives against Visa. Plaintiffs expert conceded that even though he reviewed some of these votes, he did not include in his analysis either those votes that were unanimous or those that did not reflect a “heterogeneity in the

*374

voting” that bore a relationship to the skew. (Tr. 3917, 3929 (M.Katz).) As a result, the court finds that plaintiffs expert simply disregarded any votes that were inconsistent with his theory.

Plaintiffs expert ultimately did offer two votes at trial — the enactment of the CPP and the decision to stop co-branding incentive payments — as support for plaintiffs dual governance theory. MasterCard management began considering the possibility of adopting a rule or policy regarding banks partnering with American Express, as a result of the stated desire of American Express to “cherry-pick” just the key issuers or high end business of MasterCard and Visa. (Ex. D-4551 (Golub Speech).) Ultimately, the MasterCard U.S. Region Board, after considering “cherry-picking” and other concerns related to brand dedication, adopted the CPP.

(See

Tr. 18-20 (Lockhart, MasterCard); Ex. P-1204 at DOJTE 000796 (notes from June 1996 U.S. Region Board meeting re: cherry picking concern); Ex. P-0181 at CPW00189 (Pre-read for June 28, 1996 U.S. Region Board meeting detailing concern for brand dedication); Ex. P-0187 (Minutes of the June 28, 1996 Meeting of the U.S. Region Board of Directors); Ex. P-0188 (Minutes of the June 29, 1996 Meeting of the Global Board).)

Citing the testimony of Pete Hart that because Visa’s By-law 2.10(e) was in place, MasterCard had an opportunity at that time to differentiate itself from Visa by

not

following its lead and enacting the CPP,

(see

Tr. 1459-1460 (Hart, Advanta/Master-Card)), plaintiff argues that a MasterCard board whose portfolio is principally made up of MasterCard cards — who was interested in competition with Visa — would likely have opposed the CPP. In support of his hypothesis that skew impacted decision-making, Professor Katz notes that 4 out of the 6 board members with the highest MasterCard skews voted in favor of the CPP.

(See id.

at 3889 (M.Katz).) As defendants note however, a fair examination of the voting pattern demonstrates no correlation between skew and the vote on the CPP. An examination of the votes of the

eight

Board members with the highest skews — who plaintiff presumes would have similar incentives because of their skew levels — reveals that members of equal or similar skew voted differently.

(See

Ex P-

1263

— In

favor of CPP:

Saunders (Household) 80%; Wright (USAA) 72%; McGuinn (Mellon) 61%; McDonald (Signet) 60%;

Opposing CPP:

Zebeck (Fingerhut) 100%; Schauer (GE) 81%; Hunt (AT

T) 69%; Hartnack (Union Bank) 66%.)

Consistent with Professor Katz’ acknowledgment that multiple factors affect why a board member votes a particular way, including skew, fiduciary duty and the individual interests of a particular bank, the record reflects that many of these banks were in discussions with American Express at the time of this vote and that this fact, and not skew, appears to provide the common thread among the banks that opposed the CPP.

(See

Tr. 3595-96, 3893-94 (M.Katz).) In fact, each of the opposing issuers had been engaged in discussions with American Express.

(Compare

P-1263

with

Tr.1981-84 (Lock-hart, MasterCard); Hartnack (Union Bank) Dep. at 22-25; Tr. 3594-96 (M.Katz).) Professor Katz further acknowledged that Advanta — with only a 26 percent MasterCard skew — voted against the CPP, presumably because Advanta also was in discussions with American Express at the time.

(Id.)

Finally, plaintiffs expert acknowledged that MasterCard management an

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