Retailers Sue Visa, MasterCard

In addition to damages, the retailers will seek an injunction to prevent Visa and MasterCard from using their power in credit cards to enter new markets. This could have a significant impact on the evolving market for electronic payments, which are critical to the growth of online commerce and are increasingly supplanting cash in everyday retail sales. Wal-Mart has been joined in the lawsuit by Sears, Roebuck amp; Co, Safeway Stores Inc, Limited Inc, Circuit City Stores Inc and other US retailers.

US District Judge John Gleeson has issued a series of rulings in recent weeks accelerating the three-year-old suit and sharply raising the stakes for the nation8217;s banks, which control the credit-card associations. He rejected efforts by Visa and MasterCard to delay the case, set a trial date of November 27 and approved a government request to intervene.

The Justice Department8217;s intervention, while limited to reviewing evidence with Wal-Mart8217;s lawyers, is significant because the government last year opened its own investigation of the debit card market. The Wal-Mart lawsuit also is separate from a Justice Department suit filed a year ago in federal court in New York alleging anti-trust violations by Visa and MasterCard in their credit card operations.

The Wal-Mart suit echoes some of the issues in the Microsoft Corp. anti-trust case. It alleges that card issuers used a monopoly in one market to enter another by tying their new debit cards to credit cards and forcing merchants to accept them 8212; and higher fees 8212; in order to continue accepting credit cards. Visa and MasterCard then charged retailers quot;interchange,quot; or processing, fees as much as four or five times higher than what traditional bank debit cards charge.

In court papers, Visa and MasterCard deny the allegations and defend their business practices. The retailers8217; key demand, that they not be forced to accept the debit cards, quot;would seriously undermine the entire premise on which the Visa system is built,quot; Visa said. quot;We will vigorously defend this action and believe we will prevail.quot;

A Visa spokesman said the quot;honor all cardsquot; rule challenged in the lawsuit quot;will be found both lawful and pro-competitive.quot; A MasterCard spokesman called the suit quot;totally without merit.quot; The damage estimates remain under seal in the case and weren8217;t supposed to be disclosed until August, when summary-judgment motions are to be argued. But one of the defendants8217; lawyers, in a December 20 letter to the court seeking a delay in the case, disclosed the plaintiffs8217; claim. The amount represents alleged overcharges from 1992 to the present. The letter said the injunction sought by the retailers quot;obliterates the business model that defendants have built over several decades.quot;

As commerce shifts from cash and checks to electronic payments, interchange fees charged by Visa and MasterCard jumped about 50 to 2.2 billion last year on 165 billion in transactions. The Visa and MasterCard debit cards are different from traditional bank debit cards, or quot;ATMquot; cards, which charge a fee averaging about eight cents a transaction and are processed online immediately. Visa and MasterCard debit cards are processed quot;off-line,quot; which takes longer and is somewhat more susceptible to fraud than ATM cards. They also add a fee of about 50 cents for a typical sale, or more than 1 per transaction, the retailers say.

The case will feature the same economists who squared off in the Microsoft trial. Frank Fisher, who testified for the government in the Microsoft case and against it in the International Business Machines Corp. case 20 years ago-will testify for the retailers. He will face his former student, Richard Schmalensee, now dean of the Sloan School of the Massachusetts Institute of Technology, who testified for Microsoft.

In addition to eliminating the honor-all-cards rule, the suit seeks to end interlocking directorates between banks that run ATM debit networks while also sitting on the board of Visa or MasterCard. These conflicts tend to prevent ATM networks from competing aggressively, said Lloyd Constantine, lead counsel for the retailers.