United States v. Visa U.S.A., Inc.
344 F.3d 229 (2003)
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Rule of Law:
An exclusionary rule adopted by a joint venture of competitors that possesses market power, which prevents its members from dealing with competing networks, is an unreasonable restraint of trade under Section 1 of the Sherman Act if its anticompetitive effects are not outweighed by a procompetitive justification.
Facts:
- Visa U.S.A. and MasterCard are organized as open joint ventures, owned by thousands of member banks who issue their cards.
- American Express (Amex) and Discover are vertically integrated companies that historically issued their own cards directly to consumers.
- Visa U.S.A. and MasterCard each adopted an 'exclusionary rule' (Visa by-law 2.10(e) and MasterCard's Competitive Programs Policy) prohibiting their member banks from issuing Amex or Discover cards.
- As a result of these rules, any U.S. bank choosing to issue Amex or Discover cards would be forced to terminate its entire Visa and MasterCard card-issuing business.
- Since at least 1995, Amex has attempted to persuade U.S. banks to issue its cards, but it has been completely unsuccessful because no bank has been willing to abandon its Visa and MasterCard business.
- In foreign countries where no such exclusionary rules apply, banks that are members of Visa and MasterCard networks also successfully partner with Amex to issue Amex-branded cards.
Procedural Posture:
- The U.S. Department of Justice (DOJ) filed a civil antitrust lawsuit against MasterCard International, Inc., Visa U.S.A., Inc., and Visa International, Inc. in the U.S. District Court for the Southern District of New York.
- The complaint alleged that the defendants' 'dual governance' structure and their 'exclusionary rules' both violated Section 1 of the Sherman Act.
- After a 34-day non-jury trial, the district court ruled in favor of the defendants on the dual governance claim but found that the exclusionary rules violated the Sherman Act.
- The district court issued a judgment and a permanent injunction ordering the defendants to revoke the exclusionary rules.
- The defendants, MasterCard, Visa U.S.A., and Visa International, appealed the district court's judgment regarding the exclusionary rules to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does an exclusionary rule, adopted by a joint venture of competing banks that collectively possess market power, which prohibits its member banks from issuing cards of rival networks, constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act?
Opinions:
Majority - Leval, Circuit Judge
Yes, the exclusionary rules constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act. The court applied the rule of reason analysis to determine the legality of the restraint. The relevant market was defined as the market for general purpose card network services, in which Visa and MasterCard collectively hold significant market power, as evidenced by their large market share and ability to exclude competitors. The court found substantial adverse effects on competition because the exclusionary rules have completely foreclosed Amex and Discover from the issuer bank segment of the network services market, thereby stunting price competition, output, and product innovation. The defendants' procompetitive justification—that the rules are necessary to promote 'cohesion' within their networks—was rejected as unpersuasive, particularly because member banks are allowed to issue both Visa and MasterCard cards without any apparent loss of cohesion, and because cohesion has not been an issue in foreign markets lacking such rules. The court characterized the rules not as a presumptively legal exclusive distributorship, but as a horizontal restraint among thousands of competitor banks, which is a classic anticompetitive arrangement.
Analysis:
This decision clarifies the application of the rule of reason to horizontal restraints within a joint venture or network industry. It establishes that exclusionary rules which foreclose competitors from a critical segment of a market can be deemed an unreasonable restraint of trade, even if the excluded firms can still reach consumers through other channels. The court's focus on the harm to competition in the 'network services' market, rather than just the end-consumer market, shows that anticompetitive effects at an intermediate level of the supply chain are sufficient to trigger a Sherman Act violation. The ruling significantly curbed the ability of dominant joint ventures like Visa and MasterCard to use their network rules to limit competition from rivals with different business models, thereby opening the door for increased innovation and partnership opportunities in the payment card industry.
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