Visa says it was acting in members' best interests by agreeing to a settlement of up to $2.25 billion to end American Express Co.'s lawsuit seeking damages stemming from Visa and MasterCard rules that banned members from issuing AmEx and Discover cards. But other experts contend Visa recognized the difficulty of defending a practice the courts deemed illegal.
"This settlement sends a signal of a recognition by Visa and its member banks of the weakness of their legal position in this case," contends K. Craig Wildfang, a partner with Minneapolis-based Robins, Kaplan, Miller & Ciresi LLP and lead counsel for merchants in a consolidated interchange price-fixing lawsuit against Visa and MasterCard Worldwide.
Regardless of Visa's true intentions, observers believe the card association's decision to settle could force MasterCard to settle as well. Moreover, it may also prompt both Visa and MasterCard to settle a similar dispute Discover Financial Services filed against them.
Indeed, once a big defendant in a case like this settles, "there is enormous pressure on other defendants to settle before the stakes go higher," says Mark Ostrau, an antitrust legal expert and a partner with Fenwick & West, a Mountain View, Calif.-based law firm. "Visa and AmEx arrived at a number that could set the bar for a reasonable settlement with other defendants."
AmEx's settlement with Visa comes nearly three years after the U.S. Supreme Court let stand lower court rulings that Visa and MasterCard violated antitrust laws through "exclusionary" rules that prevented their member banks from issuing rivals' credit cards.
Shortly afterward, AmEx filed suit to seek compensation for damages, naming MasterCard, Visa and some of their largest member banks as defendants. AmEx says it will drop from the lawsuit defendants JPMorgan Chase & Co., Capital One Financial Corp., U.S. Bancorp, Wells Fargo & Co. and Providian Financial, which now is owned by Washington Mutual, if Visa USA's member banks approve the settlement.
At C&P deadline, MasterCard appeared willing to discuss a "reasonable" settlement, but it must be in the best interests of the shareholders, says a spokesperson.
Discover would not comment on its lawsuit, but analysts speculate that settlements also may be on the horizon in the Discover case.
"It wouldn't surprise me if MasterCard is next in settling with AmEx," Wildfang says. "And because Discover has essentially the same legal claim against Visa as AmEx did, a similar rationale might lead to a Visa settlement with Discover as well."
Anurag Rana, an analyst with New York-based KeyBanc Capital Markets, says Visa's settlement "puts a dollar amount on the process, which provides some insight into how much MasterCard might pay to put this behind them." He predicts that a MasterCard settlement amount with AmEx would be between $1 billion and $1.5 billion.
In Visa's settlement, AmEx would get $1.13 billion this quarter and $70 million each quarter until the total is paid, contingent upon AmEx hitting certain performance targets. Visa says its member banks would fund the settlement, though it also says a portion of the $10 billion it expects to raise through an IPO will be used to "settle judgments."
"Visa is doing what is in the best interests of its membership and the new organization," Visa Inc. CEO and Chairman Joseph W. Saunders said in a statement.
AmEx says a significant portion of the initial settlement payments will go to pay legal expenses. An undisclosed portion will be used to fund marketing and brand-advertising initiatives this quarter, Dan Henry, AmEx's executive vice president and chief financial officer, told analysts during a conference call.
(c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
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