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DOJ rests in Visa, MC case
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July 13, 2000: 7:28 p.m. ET
Visa, MasterCard now to present defense side in federal antitrust case
By Staff Writer John Chartier
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NEW YORK (CNNfn) - The Department of Justice on Thursday rested its case against credit card networks Visa and MasterCard, which it accused of operating a "duopoly" by shutting rival card issuers out of its member banks.
The antitrust trial will now take a two-week hiatus as U.S. District Judge Barbara Jones reviews the plaintiff's portion of the case and considers Visa and MasterCard motions claiming the government lacks evidence.
On July 31, the defense side of the case is scheduled to commence with the judge hearing the card networks' first witness, the Justice Department said. Visa and MasterCard expect to finish presenting their case in about a month, said MasterCard officials.
A Justice Department spokeswoman declined comment on the case Thursday.
In the trial, which began last month in United States District Court Southern District of New York, the Justice Department has been trying to show that Visa and MasterCard slapped a lock on nearly 80 percent of the U.S. credit card market through measures designed to shut out American Express and Discover.
 "After years of investigation, followed by testimony from witness after witness, the only thing the government has proven over the past month is what we knew all along -- the current structure of the payment card industry has given rise to intense competition and extraordinary innovation, with the consumer as the ultimate beneficiary of unprecedented choice," Noah Hanft, deputy general counsel for MasterCard said Thursday.
The Justice Department filed the suit against Visa and MasterCard in late 1998 based on alleged antitrust violations. The suit challenges an exclusivity rule adopted by both the credit card associations in which banks that issue their cards are prohibited from issuing a competitor's card, such as American Express or Discover. Doing so means being dropped from the Visa and MasterCard networks.
A second aspect of the suit contends that Visa and MasterCard are operating what is known as a "duality," in which the approximately 7,000 banks that operate both associations in the United States engage in collusion.
Duality permits each card association to install board members who hold a significant interest in the other's card. That means a Visa board member may have a significant MasterCard portfolio and vice versa.
The government claims that duality has kept Visa and MasterCard from vigorously competing against one another and hampered the introduction of innovative new products, such as the so-called "smart cards"; credit cards embedded with computer chips that encrypt the holder's financial information.
However, MasterCard lawyers point to the network's 1994 investment of $130 million in Mondex, a company that develops the "smart card" technology in order, they claim, to compete with Visa.
Visa, in turn, had entered an agreement to develop smart card technology with Sun Microsystems (SUNW: Research, Estimates), MasterCard lawyers said.
The Justice Department wants each network's board members to have a majority interest in their own card and for banks to be free to issue competitors' cards.
MasterCard and Visa have repeatedly insisted that their practices do not hurt consumers or competition and that American Express pushed the Justice Department into the suit.
In testimony since the trial began a month ago, the two networks produced American Express documents outlining a plan for what they term "trench warfare," against competitors and noted that the company hired former Supreme Court nominee Robert Bork as a lobbyist to push for the antitrust suit.
 American Express denies the claims and said Visa and MasterCard have repeatedly tried to divert attention from the issues by lashing out at them.
"I think that Visa and MasterCard, they're the ones that are on trial," American Express Spokeswoman Susan Korchak told CNNfn.com Thursday. "Certainly we did see wrongdoing. I think what Visa and MasterCard are trying to do is divert attention from a very serious matter."
Several senior executives from the card networks and American Express took the stand during the government's presentation, including Harvey Golub, chairman and chief executive officer of American Express who has announced plans to retire.
Under questioning by Department of Justice lawyers last week, Golub testified that American Express invited banks to issue its cards, but nearly all refused because of Visa and MasterCard's exclusivity rule.
Golub also denied that an agreement with British bank NatWest to offer a United Airlines corporate credit card was done specifically to outmaneuver MasterCard.
"We wanted to hopefully get more volume, but if it had a negative effect on MasterCard or Visa, I certainly wouldn't have objected to that," Golub said. "I would have been very enthusiastic about it."
Together, Visa, which is based in Foster City, Calif., and MasterCard, based in Purchase, N.Y., issue about 75 percent of the 500 million credit cards in circulation in the United States.
As of the first-quarter 2000, Visa U.S.A. had issued more than 250 million cards and posted annual purchase volume of $439.04 billion. MasterCard has 391.7 million card members worldwide with annual purchase volume of $242.5 billion, according to nilsonreport.com.
 Lawyers for the Justice Department, led by Melvin Schwarz, argued that the close-knit relationship between the two associations has hurt consumers by hampering innovation in the industry. The most prominent example of that harm has been the delayed introduction of so-called "smart cards" to the public, he said. Had there been more competition between MasterCard and Visa, smart cards would have made their debut 15 years ago, Schwarz asserted.
In the mid-1980s, both MasterCard and Visa invested millions in developing technology for smart cards, credit cards embedded with a silicon chip that, in addition to use as a regular credit card, can store its owner's medical history, bank records and other vital information.
However, the Justice Department argues that MasterCard, which was much closer to releasing its version of the smart card than Visa, agreed not to issue its cards until Visa caught up.
Not so, say Visa and MasterCard. Their lawyers have argued that it would have cost too much to produce the cards and that consumers didn't go for them in pilot tests.
Subsequently, American Express rolled out its own version of the smart card, called "Blue," last year. Golub said American Express has issued between 1.5 million and 2 million Blue cards and that they have been wildly successful. He said the chips in the cards are loaded with an operating platform that, when swiped through an electronic reader, positively identifies its owner for added security. 
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