This industry should be aware of two developments of late. First, the decision striking down the rule forbidding banks from issuing American Express or Discover cards stands to have a significant, long-term impact on the credit card industry. Second, the recent settlement between the Federal Trade Commission and Playgirl.com and others should stand as an alert.
On the credit card front, this column has reported on what has seemed to become the endless trial of the government's antitrust attack on VISA and MasterCard (AVN Online, Aug. 2000). The court heard more than two months of testimony during the summer of 2000, reviewing the resulting transcript comprising over 6,000 pages - including testimony of an array of economic experts with impressive credentials - along with volumes of depositions, roughly 6,000 exhibits, and an avalanche of briefs, not only from the parties, but also from interested parties appearing amicus curiae (which technically means "friend of the court" but, as a practical matter, means a party whose ox stands to be gored depending upon the outcome of the case). Almost 14 months after the close of testimony, from Courtroom 905 in Foley Square in Manhattan, came the opinion of Hon. Barbara S. Jones, Judge of the United States District Court for the Southern District of New York, driving a dagger into the heart of VISA and MasterCard and loosening their stranglehold on the credit card industry, United States v. VISA USA, Inc., et al., ___ F.Supp.2d ___, 2001 WL 1190590, No. 98 Civ. 70076(BSJ) (S.D.N.Y., October 9, 2001). For many in this industry who have been the victim of disrespectful treatment from VISA and/or MasterCard, there may be some champagne corks popping.
As reported earlier, the antitrust law prohibits agreements that unreasonably restrain trade (FAQs, AVN Online, Aug. 2000). Some agreements, such as price fixing, are unreasonable per se. The remainder, including the ones involved with VISA and MasterCard, are illegal only when they have a substantial adverse effect on competition.
In evaluating anti-competitive activities involving VISA and MasterCard, the analysis begins with the important fact that there are only four significant players in the credit card market - VISA, MasterCard, American Express, and Discover. Although there are others, such as Carte Blanche, and cards issued by gasoline companies and department stores, their effect on the credit-card market is of little or no consequence. And while Discover and American Express compete ruthlessly and independently in the market, VISA and MasterCard hold hands, as explained in a four-part series in this column a couple of years back (AVN Online, Feb.-May, 2000).
The Antitrust Division of the Department of Justice brought an action against VISA and MasterCard, advancing two claims. First, the government objected to the fact that VISA and MasterCard - each owned by associations of thousands of banks - had in place a system that allowed a given bank, for example, to have a seat on the Board of Directors of MasterCard, while issuing mostly VISA cards. That, the Government unsuccessfully claimed, stood to unreasonably thwart competition, as evidenced by the associations' failure to compete, for example, "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." The court rejected that claim.
The government's second and profoundly more important claim, however, carried the day. There, the government challenged "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" as causing an unreasonable restraint of trade by keeping American Express and Discover out of the banking loop. Significantly, in 1996, American Express - which before then had maintained exclusivity in issuing its own cards - opened its network to allow banks to issue American Express Cards. Yet, despite American Express' long history, world-wide advertising campaign, and resulting notoriety, no bank cashed in on the opportunity to issue American Express cards for fear of losing portfolios of "the bank cards," VISA and MasterCard.
The court found that the policies of VISA and MasterCard indeed weakened competition and harmed consumers in several ways:
"The proof demonstrates that [VISA and MasterCard]... 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, none of them will gain the competitive advantage of doing so."
So, if you thought that VISA and MasterCard were bullying the market around, you were not alone. VISA and MasterCard had their affairs arranged so that their member banks were automatically booted out of their lucrative system if they started issuing American Express or Discover cards. It should be no surprise to learn that these anti-competitive rules emerged just as American Express began dealing with international banks and sought to deal with American banks.
Based upon its findings, the court enjoined VISA and MasterCard from enforcing their "exclusionary rules," the ones that automatically kick banks out of the VISA/MasterCard network for issuing American Express, Discover, or other competing cards. The door is thereby open for banks to issue other cards without losing their profitable VISA and MasterCard portfolios.
The prospect of VISA and MasterCard losing their choke hold on banks stands to have an impact comparable to the deregulation of the airline industry and the breakup of Ma Bell. At a time when the Internet has transformed the charge card from a luxury to a necessity, expect dramatic changes, including the emergence of other major players.
On the Federal Trade Commission front, it recently announced a settlement with Crescent Publishing Group Inc. - owners of Playgirl.com, HighSociety.com, and scores of other adult entertainment Websites - for doing what the author of this column has been reminding anyone who would listen is illegal: charging money for something that is advertised as "free." The FTC, you will recall, is a federal agency charged, among other things, with stopping unfair trade practices (Legal FAQs, AVN Online, Oct. 1999 and Sept. 2001).
According to the FTC, these sites went off the deep end:
"According to the complaint, the defendants operated scores of adult entertainment Web sites, deceptively promoting them as 'free.' The 'Free Tour Web Sites' claimed that consumers' credit card numbers were required solely to prove that the consumers were of legal age to view the adult material, and that the credit cards would not be billed. Consumers complained, however, that their cards were billed despite the representations, and other consumers were billed even though they did not visit the defendants' Web sites. Thousands of consumers were charged recurring monthly membership fees ranging from $20 to $90, the complaint alleged. Consumers who tried to dispute the charges were met with a variety of barriers designed by the defendants to thwart their efforts. According to the complaint, the defendants used billing names different than the names of the Web sites, so consumers often had no idea who was billing them or why. Moreover, consumers often had difficulty contacting the defendants to get refunds from the information provided to them on their billing statement."
The settlement includes a permanent injunction against any further acts of this type of chicanery and a requirement that the defendants cough up $30 million to reimburse defrauded consumers. To the extent that the victims cannot be reimbursed, the federal government and the State of New York split the excess.
Arguably, this does not go far enough. If these sites did all that the government alleged, they were simply stealing millions of dollars from innocent consumers. Mail fraud, wire fraud, and RICO come to mind. Webmasters who engage in this type of conduct cause a black eye on the entire industry. They are largely responsible for the inability of Webmasters to secure merchant processing and prevent honest ones from making a living.
Clyde DeWitt is a partner in the Los Angeles office of the law firm of Weston, Garrou & DeWitt. He can be reached through AVN Online's offices, at his office at 12121 Wilshire Boulevard, Suite 900 Los Angeles, CA 90025, or by email at [email protected]. Readers are considered a valuable source of court decisions, legal gossip, and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases, and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.
