By Mara DerHovanesian American Express (AXP) wasted no time in capitalizing on a recent government case that successfully found card-association giants Visa USA and MasterCard International guilty of antitrust violations. On Nov. 15, AmEx slapped not only both of the associations with a suit for damages, but also named eight of the nation's biggest banks that count themselves among the association's members.
The travel and entertainment outfit has also hired legal star power -- David Boies, the lawyer who represented the Justice Dept. in its antitrust case against Microsoft (MSFT) as well as Vice President Al Gore in the legal battle over the 2000 presidential election -- to do its bidding as outside legal counsel.
"PAST ILLEGAL CONDUCT". The AmEx lawsuit, filed in the U.S. District Court in Manhattan, was widely expected after Oct. 4 when the Supreme Court upheld a lower court decision on the long-standing DOJ case.
The suit seeks unspecified monetary damages for business lost as a result of the associations' bylaws, which prohibited all U.S. banks to issue American Express cards for eight years. The ultimate amount for redress will be "big" and "in the billions," said Boies, founding partner of Boies, Schiller & Flexner in Washington, D.C.
While he expressed hope for a settlement, Boies said AmEx was prepared to take the case to trial. "The right way to have decided this case is for Visa and MasterCard to remedy their past illegal conduct, [to sit] down and work out...a fair resolution to the damages," Boies said in a press conference. Now, "we'll have to have a court decide that issue."
STRATEGY'S IRONY. Said Kenneth I. Chenault, American Express' Chairman and CEO, in a statement: "The card associations functioned as a cartel. Banks who had expressed an interest in working with us were stopped before they could start. We intend to hold the associations and their member banks accountable for their illegal actions and seek compensation for the value that would have been generated for our shareholders." The company noted that consumers would not benefit from any settlement paid by Visa or MasterCard, but rather that it was an obligation to shareholders to recover damages.
Although only a handful of banks were named in the suit, as many as 20,000 engaged in "conspiratorial conduct," over the past decade or so, said Boies. Named in the suit are J.P. Morgan Chase (JPM), Bank of America (BAC), Capital One (COF), US Bancorp (USB), Household Bank, Wells Fargo (WFC), Providian National Bank, and USAA Federal Savings Bank -- among the largest issuers of U.S. credit cards. Several of the banks contacted for this story said they had not yet seen the suit and could not comment.
Critics are quick to point to what they see as an irony in the legal strategy. By suing the associations' members, American Express could alienate the bank partners it hopes to do new business with, now that the prohibitive regulations have been lifted. American Express' answer: "This is an action that's designed to resolve damages for past conduct," says Boies. "I think it would be short sighted [for a bank] to preclude a profitable business because [they] have to pay damages for what has happened in the past."
CITI: NOT KEEN? Conspicuously absent from the suit were two of the largest U.S. credit-card issuers: Citigroup (C) (84.6 million U.S. cards) and MBNA (KRB) (54.3 million cards). The latter had already struck a deal with American Express in January to issue cards, which they did for the first time in November, putting some 300,000 new pieces of plastic on the market. The message: "Do a deal with us, and we won't sue you," says one bank spokesman.
Indeed, American Express said it will not seek damages from MBNA and has agreed to reimburse MBNA for certain costs that may be imposed by MasterCard or Visa as a result of this suit. Some speculate that because Citigroup wasn't named in the suit, it's soon to follow MBNA's lead.
In February, however, Citi Chief Operating Officer Robert B. Willumstad told investors at a conference that he's trying to build a Citi-branded credit-card portfolio and that he wasn't all that keen on an AmEx-type deal. Citigroup declined to comment for this story.
"MISGUIDED". American Express, which markets its products to an affluent class of credit- and charge-card users, lags behind rivals in both transaction volume and number of cards it has on the market. Visa card holders charged $989.3 billion last year, which accounts for more than half of the U.S. market charge volume, according to Cardweb.com. MasterCard, which controls about a third of the market, accounted for $602.3 billion in transactions in 2003, while American Express' $234.1 billion equals about 12% of the market.
Both MasterCard and Visa announced their intentions to fight the suit vigorously. MasterCard's General Counsel Noah J. Hanft said in a statement that the suit was "misguided" and "will face significant obstacles."
Hanft added that the suit against the banks and the associations will be a very different case from the government's antitrust suit, as American Express will need to prove that it was injured and suffered damages as a result of MasterCard's policy. "American Express can no longer hide in the shadow of the government," says Hanft. Visa spokesman Daniel Tarman said "it's time for American Express to stop looking to the courts to solve its problems and compete in the marketplace instead."
VARYING BATTLE PLANS. The new American Express suit is similar to one filed on Oct. 4 by Discover Financial Services, a unit of Morgan Stanley (MWO) that also seeks damages from Visa and MasterCard as compensation for harm caused by anticompetitive business practices. Discover Chairman and CEO David W. Nelms said at the time that the two associations "abused their market power to the detriment of consumers and competition, and that their exclusionary rules limited Discover's share of the general purpose credit-card market and also barred Discover from entering the debit-card market."
Nelms is fighting back in more ways than one. Discover had its own Nov. 15 announcement: For $311 million, it plans to buy PULSE EFT Association and gain access to its 4,100 member banks and credit unions. An expanded Discover Network will give its 50 million card members more access to ATMs and grow the debit business.
Says TowerGroup's vice-president for research, Theodore Iacobuzio, a credit-card specialist: This "challenges both established players and other would-be newcomers to forge their own strategy in a payments scene that's changing day by day." Looks like there's more than one way to fight in the ongoing credit-card wars. Der Hovanesian is finance and banking editor for BusinessWeek in New York