Magazine article American Banker

Banks Must Act to Prevent Disaster in Wal-Mart Case

Magazine article American Banker

Banks Must Act to Prevent Disaster in Wal-Mart Case

Article excerpt

The judge deciding the retailers' class action against Visa and MasterCard moved it a step closer to a calamity for the card industry Tuesday. Because his decision threw out so many of the card associations' defenses, the trial, which will begin in about three weeks, will now end far sooner than anyone expected. It is hard to imagine that the associations can now win. But if they lose, they won't be alone - joining them will be the banks and virtually all of the merchants in the class. Only the lawyers will win.

The court's decision to certify a nationwide class of merchants is perhaps the worst of its kind ever. In addition to drastically lowering the standard for allowing a class action, it ushered in something we will surely come to regret -- whole industries using our court system to try to destroy one another, regardless of the consequences to themselves and the economy.

That so many merchants would let Wal-Mart Stores Inc. be their Pied Piper in such an endeavor is beyond comprehension. Did they join the fray really believing that Wal-Mart was looking out for their interests? Or that the many law firms for the class could be trusted not to exploit the case to promote their own interests? How many of them are aware that several of those law firms are leaders in the class action bar?

Make no mistake about it, the Wal-Mart lawyers will turn every precedent they achieve in the case into another weapon to harass the business community. Most certainly, they'll use their class-certification decision politically to try to stop Congress from enacting reform legislation. They will argue, with credibility, that if an easily begotten class was OK for all the retailers in the United States, consumer actions should be given the same right.

The card associations seem to have played a similar Pied Piper role with their member banks. Years ago they predicted an easy victory over the Department of Justice and said they'd use it to undo Wal-Mart's threat. They guessed badly. What they got was a decision that branded them as antitrust violators, invited a multitude of new suits, and vastly strengthened Wal-Mart's case.

Ironically, the Department of Justice decision has produced a kind of split-personality disorder in the industry. While most members want it overturned to help against Wal-Mart, many would be perfectly happy to exploit it to do business with American Express and Morgan Stanley & Co.'s Discover. Whatever they want, it seems unlikely that the Second Circuit will reverse the decision.

Perhaps we would not have this predicament had the banks been more involved, but for the longest time they have behaved as though the Department of Justice and Wal-Mart cases had been brought against completely unrelated parties. They apparently determined that a safe legal strategy was to be impassive, hoping it would save them from collateral damage. In light of the fact that they own and control the associations, write their rules, and set the systems' interchange fees that they collect for themselves, this strategy never made sense to me.

If a decision for Wal-Mart and the rest of the class pushes the associations into bankruptcy, the plaintiffs will sue the banks to collect the remainder of their judgment. To help make their case, they'll put doomed executives from Visa and MasterCard on the stand to testify that the banks deserve to be held liable. To bring home the point, they'll introduce into evidence reams of association briefs that over the years have repeatedly said in so many words that Visa and MasterCard are virtually one and the same with their owners.

A way to look at the card industry's impassiveness is to compare how it normally responds to other serious legal threats. Take the privacy debate. Its risks to the industry are very real, but in comparison to the antitrust cases they are modest. Nonetheless, in the past five years the industry has spent at least $100 million on various efforts to control the privacy debate -- on public relations, scholarly studies, position papers, think tank analysis, law firms, coalition building, lobbying, litigation, conferences, and preventive actions. …

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