An American Express lawsuit filed last month against Visa, MasterCard and eight U.S. bank issuers for what Amex dubbed anti-competitive practices could foster further litigation in the card industry, a Morgan Stanley analyst report said. Amex is seeking monetary damages potentially amounting to billions for lost business it attributed to Visa and MasterCard's exclusionary bylaws that prohibited bank issuers from working with closed-loop card networks.
In addition to Visa and MasterCard, American Express named J.P. Morgan Chase, Bank of America and U.S. Bancorp, among others, in the suit filed in the U.S. District Court in Manhattan.
Amex's move represents the latest blow to Visa and MasterCard, which in October failed to gain Supreme Court review of a U.S. Department of Justice case that ultimately repealed the exclusionary bylaws. Although consumer card network Discover filed a similar suit following the Supreme Court's inaction, American Express lead outside counsel David Boies, founding partner of Boies, Schiller & Flexner, said the cases differ as Amex also seeks damages from bank issuers in addition to Visa and MasterCard. American Express is not working directly with Discover in pursuing its case, but the cases should overlap in discovery and proceedings, Boies said.
Morgan Stanley specialty finance analyst Kenneth Posner, in a report titled "American Express Litigation Spells Risk for Card Industry," argued that a favorable outcome for Amex could make way for merchants peeved about card fees to target not only card networks, but also issuing banks.
"For merchants upset about interchange rates, and the class action lawyers, such a precedent would open the door to increasing the potential reward to litigation by several orders of magnitude," the report stated. Posner added that since the banks "have deep pockets," he expects "this potential pot to attract further interest from the class action bar."
Even the threat of such litigation could be enough to drive down interchange rates, Posner said. Such rates are derived from merchant fees and paid to issuers, comprising more than 90 percent of revenue for commercial card issuers and feeding directly into the size of corporate rebates
(BTN, March 15)."Our interpretation is that big merchants have used the threat of litigation to negotiate reduced interchange fees," Posner's report said. "In a recent meeting with analysts, Visa CEO Carl Pascarella mentioned that the association is looking at 'trading volume vs. interchange' for certain merchants, a strategy that is 'more sustainable than trying to keep ramping up interchange.' " Posner concluded that "merchant leverage is rising."
While Amex contends prior legal decisions portend a favorable outcome for the company's suit, MasterCard general counsel Noah Hanft said in a statement the day the suit was filed that Amex as a "private plaintiff" will "face significant obstacles that the government did not face. This will be a very different case, as American Express will need to prove that it was injured and suffered damages as a result of MasterCard's policy—claims that the reality of the marketplace demonstrate are entirely unfounded."
Visa U.S.A. senior vice president Daniel Tarman said Visa will "vigorously fight this lawsuit because American Express already got what it wanted from the court—the ability to issue its products through Visa members."
American Express said bank issuers that are negotiating deals to issue its cards have been excluded from the suit. MBNA earlier this month became the first such issuer and, although analysts question the viability and profitability of such relationships, Amex said other deals are in the pipeline.
Amex CEO Ken Chenault repeatedly has cited the viability of bringing legal action against Visa and MasterCard, but some analysts noted the irony of suing the networks that are owned by the same banks American Express is courting to issue its cards
(BTN, Oct. 6, 2003).Boies, however, claimed a relationship with Amex would be favorable and profitable for bank issuers. "If you look at some of the activities with MBNA, and perhaps other banks, you will see a viable business strategy that is beneficial not only to Amex, but to the banks themselves," Boies said. "It would be shortsighted to say, 'we're going to preclude this profitable business going forward because we'll have to pay damages for what happened in the past.' "
Yet, the Morgan Stanley report questioned potential relationships forged after litigation and also the profitability of Amex's endeavor for both issuers and Amex. "It's hard to imagine executives from rival firms bringing enthusiasm, creativity, and initiative to a partnership forced at gunpoint," the report said. "The reluctance of big U.S. banks to partner with Amex and the reluctance of Amex executives to disclose profits associated with its global network strategy raise questions in our mind about the viability of this strategy."