Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (15 page)

After we filed our class motion supported by Professor Carlton’s short expert report, the defendants opposed the motion and also
moved to disqualify Carlton under the
Daubert
junk science doctrine. Visa and MasterCard jointly filed a 91-page report, allegedly authored by Dean Schmalensee, to support their position. We had charged that Visa and MasterCard didn’t really compete and should be viewed as a two-headed monopolist. However, they claimed to be fierce competitors. What did they do to demonstrate this fierce rivalry? They jointly filed Schmalensee’s expert report, replete with statements like “virtually all of the statements I make for Visa are true for MasterCard as well.”

From the earliest moments of his deposition, Dick Schmalensee, in the manner of that other Dick, made certain things perfectly clear. He was very tired, busy, and preoccupied with the
Microsoft
case, which would resume trial in only a few weeks. He testified that he had spent no more than thirty hours working on the
Merchants’
case, including work on the liability part of the case prior to our filing the class motion. This meant he had spent considerably less than thirty hours on “his” 91-page expert report with its 189 footnotes.

It is hard for me to conceive of an economist writing a scholarly report of this length and density in thirty hours let alone less than that, and Schmalensee, to his credit, quickly admitted that he hadn’t written it. Colleagues at NERA had written the report, and he had signed it. He also admitted that he hadn’t interviewed a single Visa or MasterCard executive.

I asked him to explain what was meant when his report said that “virtually all of the statements I make for Visa, are true for MasterCard as well.” Schmalensee was surprised that the report covered MasterCard as well as Visa and admitted that “I worked on it without any notion of what MasterCard might or might not do.” Dean Schmalensee even admitted that he didn’t know that he was acting as MasterCard’s expert until I pointed this out to him during the deposition.

This was just preliminary fun. The admissions that Schmalensee made about the substance of the report were even more injurious
to the defendants’ position. I asked Schmalensee about his report’s attack on the economic model used by our economist, Dennis Carlton, who was the Dean’s co-consultant on the federal merger guidelines. He answered that “I simply haven’t done enough study to have a firm view on what would have happened.” I asked him about the report’s conclusion that lower signature debit prices would have resulted in less debit transaction acceptance by merchants, contrary to the logical assumption that lower prices lead to greater usage. He replied that “I’m not making a strong argument here, except to just say if all those things happen as I have argued, you could easily have reduced acceptance.”

Dean Schmalensee’s report said that it was a “fact” that lower- priced debit transactions untied from credit card transactions would have resulted in higher credit card prices. When asked what evidence supported this “fact,” Schmalensee admitted that “fact is probably not the best choice of words.” When I pressed Schmalensee about his statement that if credit and debit were untied, credit card prices would have been higher, he admitted, “While I think it is likely that credit card interchange fees would have risen, I haven’t pushed it far enough to have an opinion.” An “opinion” is what an expert testifies about, in contrast to a lay witness, who testifies about facts.

From there, it was all downhill. The defendants and the Schmalensee report said Professor Carlton should be disqualified because he had failed to account for all the additional sales that stores got when they accepted Visa/MasterCard debit transactions, citing a 5 percent “incremental” sales figure. At the deposition, Schmalensee admitted that the 5 percent figure was just made up and that he knew of nothing to support the defendants’ assertion that debit cards, as contrasted with credit cards, create additional (incremental) sales. Schmalensee testified:

I don’t recall having seen anything from Visa that bears on that question. Certainly, I don’t believe there is anything cited in here. I don’t recall having seen anything else from Visa that bears on that question. No.

Schmalensee testified that he hadn’t asked Visa about this key assertion in his report because “[f]or purposes of this analysis, it didn’t seem particularly important.”

Professor Carlton’s report compared the United States to Canada, where effectively there was no tying arrangement between Visa/MasterCard credit and signature debit. In Canada, merchants paid no interchange fee for debit transactions, and the per capita use of debit was more than double that in the United States. Although Visa/MasterCard argued that the Canadian comparison was irrelevant, Schmalensee testified that “what went on in Canada might be a very interesting case study. I haven’t done it.”

Finally, because we had the Schmalensee report filed in the
Microsoft
case, we pointed out to Judge Gleeson that Schmalensee’s position on tying arrangements in that case was contrary to the position that Visa/MasterCard were taking in the
Merchants’
case. In
Microsoft,
Dean Schmalensee said that forcing personal computer manufacturers who used the Windows operating system to install Microsoft’s Internet Explorer web browser was not a tying arrangement because Microsoft did not charge anything extra for the browser.

In the
Merchants’
case, Heller Ehrman asserted that a tying arrangement could harm competition only if the second “tied” product were provided without extra charge. Heller Ehrman was contradicting Dean Schmalensee—its own expert—in a position he had taken during the exact same time period in
Microsoft,
the most publicized antitrust case in history. Heller Ehrman also seemed to be attempting to harmonize
the positions it was asserting for yet another client, the 3M Corporation, in yet another case,
LePage v. 3M.

Over the years, I have taken or defended the depositions of many of the leading industrial organization economists in antitrust cases. Admissions like those made during Dean Schmalensee’s deposition are rare. Just one can seriously erode the credibility and usefulness of an expert for that case. Dean Schmalensee made more than a dozen such admissions at his two-day deposition. While he was doing this and answering my long and complex questions about hypothetical situations, his lawyer from Heller Ehrman sat virtually silent. His first objection to a question came on page 176 of the deposition transcript, during the second day. It seemed to me that the Heller Ehrman lawyer was implicitly saying, “I am not afraid of anything you ask him.” Schmalensee was therefore left to defend himself. I believe that because he was already fully booked on
Microsoft,
Schmalensee was pressured to act as Visa/MasterCard’s expert on the class motion. To his credit, Dean Schmalensee would not dissemble while under oath. He admitted to the minimal amount of work he had done and constantly refused to endorse a position in “his” report that he couldn’t agree with or hadn’t studied.

As we left Dean Schmalensee’s deposition, we were confident that the effort to disqualify Professor Carlton and defeat our class motion would fail. Judge Gleeson’s subsequent decision confirmed our beliefs. His decision referred to many of Schmalensee’s admissions, highlighting his confession that he hadn’t actually formed an “opinion” on the defendants’ primary basis for seeking to disqualify Professor Carlton. Judge Gleeson also pointed out that if he were to accept Visa/MasterCard’s argument about why Carlton should be disqualified, he would disqualify Schmalansee. But, of course, Judge Gleeson didn’t have to disqualify Schmalensee. Dean Schmalensee was relieved of his duties in the
Merchants’
case after his
deposition. He had already filed a preliminary report on the merits of the case, but Visa’s final expert report on that subject was eventually authored by his replacement, Dr. Ben Klein.

The Schmalensee report and deposition showed me that the defendants were not merely vulnerable, but beginning to crumble. This impression deepened after another incident in the Carlton/ Schmalensee expert witness duel. This incident began while I was defending Professor Carlton’s deposition in Chicago and involved the seemingly minor issue of whether Heller Ehrman would depose Carlton for one or two days. Magistrate Judge Mann had already rejected our proposal to limit the number of depositions but did adopt a two-day limit for each deposition, instead of our one-day proposal. Both sides assumed that this two-day limit would not apply to experts. However, leaving nothing to chance, when it came time to depose Dr. Carlton about his class motion report, the parties asked the magistrate judge to rule on whether this two-day limit applied to experts. On May 25, 1999, during the first hour of Carlton’s deposition in Chicago, we were interrupted and handed a copy of Mann’s decision limiting the time Carlton could be deposed to two days.

I called for a break in Carlton’s deposition, which I was defending. Carlton was being deposed by Steve Bomse, a famous and distinguished antitrust lawyer at Heller Ehrman. I asked Bomse whether he would question Carlton for one day and reserve the second day for later, or immediately use both days. When Bomse said he would use both days right then, I warned him that Carlton would submit a second supplementary report supporting the class motion. I suggested to Bomse that he might want to depose Carlton for one day on the first report and reserve the second day for Carlton’s supplementary report. He rejected this suggestion and resumed the deposition, which continued for two full days.

Eighteen months later, in Heller Ehrman’s brief to the U.S. Court of Appeals for the Second Circuit seeking to overturn Judge Gleeson’s certification of the class, there was a footnote arguing how unfair it was that they had been unable to depose Professor Carlton after his second report. It was asserted that this had deprived the defendants of the opportunity to subject Carlton’s additional findings to cross-examination under oath. I assumed that Heller Ehrman associates had written the brief without knowing what had happened, and that Bomse had not spotted the false assertion when he reviewed the brief. So I called Bomse and left him a voice mail message about the misrepresentation and gave him the opportunity to file a corrected version of the brief. Bomse responded with a voice mail message of his own, which I had transcribed. He said:

. . . I am not gonna hide behind the notion that I didn’t know about what was in the brief, and I certainly am not going to suggest to you that I have forgotten agreements that in fact were made and you have recited with precision. Having said that, I will stand entirely by the footnote.

Bomse justified his position by complaining about how much of Dr. Carlton’s analysis was contained in the second report. He did this despite admitting that I had given him the opportunity to depose Carlton after we filed the second report, and also admitting that he had declined the offer. Steve Bomse is a famous antitrust lawyer, a straight shooter, and a man I like and look up to. To me, his refusal to change that footnote was a sign that as the stakes mounted, Heller Ehrman was beginning to panic. As the reader will soon see, this particular sign of panic intensified and dramatically played out in open court months later.

On February 22, 2000, eighteen days after oral argument of the class action motion, in the United States District Court in Brooklyn, Judge Gleeson granted class certification in a 45-page opinion. If the class action doctrine, codified in Rule 23 of the Federal Rules of Civil Procedure, had been applied by the blindfolded goddess in the way we are taught by our eleventh grade social studies teachers that justice is meted out, Judge Gleeson’s opinion need not have been 45 pages. The decision could have been 4.5 pages or just these 45 words, which Judge Gleeson wrote and, 20 months later, the U.S. Court of Appeals repeated:

This is precisely the type of situation for which the class action device is suited . . . without class certification, there are likely to be numerous motions to intervene and millions of small merchants will lose any practical means of obtaining damages for defendants’ allegedly illegal conduct.

That was the simple truth. The case was enormously complicated and difficult, but the class issue should have been a no-brainer. The above judicial statement recognized this, in the midst of a long and unnecessarily complicated analysis. Millions of stores were in the class. These stores were all challenging the exact same Visa/MasterCard conduct and identical tying arrangements. The tying arrangements were part of the contracts used by every one of the thousands of Visa/MasterCard banks. It was not merely “impracticable,” as Rule 23 requires, but impossible for the vast majority of the five million stores to bring separate lawsuits against Visa/MasterCard. Had even 1 percent done so, this would have choked the federal courts with 50,000 lawsuits.

Recognizing the simplicity of the class determination, while giving this massive case its due, Gleeson wrote forty-three pages of well-reasoned opinion. However, on page 44, Judge Gleeson apparently lost his nerve.
He said that the class certification raised “substantial and novel questions” and asked the Second Circuit to review his decision, under a new provision of Rule 23 of the Federal Rules of Civil Procedure. This new rule permitted a circuit court to hear an immediate appeal of a class-certification decision. Begging a higher court to give a losing party the opportunity to attack one’s ruling is a rare and odd step for a confident jurist.

There are several possible explanations for why Judge Gleeson did this. He may really have believed that our case raised novel issues. If so, he was wrong. Anyone can characterize the issues in a case so as to distinguish them from every previous case. However, in our case these distinctions made no difference that was meaningful to the law. When Case B involves the identical legal principle previously established in Case A, the party seeking to avoid the precedent established in Case A may argue that Case A involved conduct on Tuesday, whereas the conduct in Case B occurred on Wednesday. A judge should quickly reject that argument. Judge Gleeson rejected, but then characterized as “novel,” distinctions as irrelevant as Tuesday versus Wednesday.