Perhaps one of the most significant changes in the past year is the conversion of MasterCard into a for-profit company and the prospective conversion of Visa. Since Visa and MasterCard have been two of the most successful nonprofit association-based joint ventures, people have questioned, is this some seismic shift? And what is the long-term effect of this organizational change?
  The associations have provided several reasons for their late-life conversions. A primary purpose appears to be an attempt to reduce antitrust risk. The option to convert to an independent company has been available for many years, yet the associations exercised that option only after merchants challenged their setting of interchange fees.
  The conversion is based on the hard lessons learned by Visa and MasterCard in the Justice Department case that challenged rules that prevented banks from issuing American Express or Discover cards.
  MasterCard and Visa defended by claiming that their conduct should be considered to be that of independent companies. After all, the associations argued, if Coke or Pepsi had a rule that limited distributors to a single brand, that would pass antitrust muster.
  But the courts uniformly rejected Visa and MasterCard's argument, explaining that as joint ventures of competitors, they were birds of another feather.
  The antitrust laws scrutinize the conduct of joint ventures of competitors much more carefully than they do that of individual corporations.
  So now rather than being non-profit and governed by a group of bank owners, Visa and MasterCard have taken the road to reform, opening up their ownership and governance in the free market. Will bringing in new owners and becoming for-profit make a difference? Will the change make a difference under the antitrust laws?
  Although Visa and MasterCard may hope that this change will give them a free pass from the antitrust courts, these hopes may fall short. Courts carefully go beyond simple labels and structure to identify the true competitive significance of structure and conduct.
  For example, a class of consumers sued the Star ATM network, charging that the setting of interchange fees violates antitrust laws. Star argued that since it no longer was a joint venture after Concord EFS Inc. acquired the network in early 2001 (First Data Corp. bought Concord EFS Inc. in early 2004), the network was free from antitrust liability once that transformation occurred.
  The court recently rejected that argument, holding that it was Star's obligation to demonstrate that such price-setting was justified. The fact that Star's conduct did not change after the conversion did not help their cause.
  Even a for-profit firm is not free from antitrust scrutiny. In the Justice Department's case the courts held that both Visa and MasterCard individually have market power because of their ability to increase interchange fees.
  Firms with market power face special antitrust scrutiny regardless of the owner.
  And longstanding antitrust decisions have held that transforming a joint venture into a single firm may violate the antitrust laws if the new firm has the ability to substantially lessen competition. The merchants have made this allegation in their class-action suit.
  If Visa and MasterCard continue to foster anticompetitive conduct, such as by increasing interchange fees or reinstating the rules condemned in the Justice Department case, the courts will carefully examine whether they are acting as individual firms or as an effort to facilitate a conspiracy.
  If, on the other hand, they begin competing aggressively and become more responsive to the interests of merchants and consumers, then perhaps these conversions will make a difference.
  Only time will tell.
  David Balto is an antitrust lawyer in Washington, D.C., and is the former policy director of the Federal Trade Commission. He can be reached at dbalto
  (c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.

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