Debit Card Case Goes to Trial Today
Consumers who purchase items with debit cards may not give much thought to whether they sign a receipt or punch a personal identification number on a keypad, but to lawyers set to debate the issue today, the distinction is crucial.
The routine debit transaction is the subject of a trial seven years in the making, pitting Wal-Mart Stores Inc. and millions of other retailers against Foster City, Calif.-based Visa USA and New York-based MasterCard International, with the merchants asking for damages in the tens of billions of dollars.
The outcome of the case could have a striking effect not only on the companies involved, but on other businesses vying for a piece of the growing debit card market and on consumers who have become accustomed to debiting such expenses as clothing and groceries.
“This case isn’t merely about money, it’s about the future of the Visa and MasterCard debit business,” said Washington-based antitrust lawyer Bruce Sokler of Mintz Levin Cohn Ferris Glovsky and Popeo P.C.
The class-action suit, filed in 1996, claims Visa and MasterCard rules that require merchants to accept their signature-verified debit cards impose costs that get passed on to consumers.
It also says Visa and MasterCard have used their market power to stifle competition from smaller rivals, such as Concord EFS Inc., that have cheaper and more secure systems that are PIN-based.
If retailers win, Visa and MasterCard say, it would mean less choice to cardholders because the suit challenges Visa and MasterCard’s rule that a merchant that accepts any of each company’s cards must accept all of that company’s cards. The card companies say a victory by merchants would allow retailers to arbitrarily pick which Visas and MasterCards they want to accept.
“Our rule is pro-competitive. It protects consumers and gives them more choice,” said MasterCard spokeswoman Sharon Gamsin. “We believe when the jury gets to hear all the evidence they will agree.”
U.S. District Judge John Gleeson of the Eastern District of New York in Brooklyn this month dealt a blow to Visa and MasterCard when he denied their motion to throw out the case and also ruled in favor of the retailers on several major issues.
Since that ruling, First Data Corp., which owns money transfer company Western Union, said it would acquire Concord EFS for nearly $7 billion. Visa said that it would cite the proposed merger during the trial.
If the deal goes through it would unite First Data’s majority interest in the NYCE automated teller machine network with Concord’s rival STAR, MAC and Cash Station networks, giving the combined company more than two-thirds of the PIN-based transaction market.
“The First Data and Concord merger is very strong evidence of how competitive the debit marketplace is,” said Daniel Tarman, a vice president at Visa.
But Lloyd Constantine, a lawyer for retailers, said that, if anything, the proposed deal proves the opposite -- that companies are forced to combine because they are unable to compete alone against Visa and MasterCard.
Constantine has placed the potential damages somewhere in excess of $39 billion, a sum legal experts say is unlikely to be awarded. Any damages also could involve ordering Visa and MasterCard to reform their practices.
Visa and MasterCard are not profit-making companies in the typical sense, but associations of banks. Some analysts question whether the banks themselves would be forced to share costs in the event of a costly damage verdict.
Visa spokesman Tarman said the association has a sizable cash reserve and credit lines on hand, but any verdict beyond that amount would have to be considered by its board of directors. Gamsin of MasterCard said the board would determine how to deal with any outcome.
Tarman said that although he believes Visa will win the trial, even if it loses, an appeals process could drag on until 2007.
