Before IPO, Visa Reaches a $2.25 Billion AmEx Antitrust Settlement

In an attempt to clear away legal issues before its planned initial public stock offering next year, Visa Inc. today said it would pay rival American Express Co. more than $2 billion to settle an antitrust lawsuit AmEx brought seeking compensation for lost business during the years a Visa rule kept its member banks from issuing AmEx-branded cards. The proposed settlement, first reported this morning by the CNBC cable-television station, would be funded by Visa members, not Visa Inc., Visa said in a late-afternoon press release. The members' liability is spelled out in Visa's so-called “retrospective responsibility plan” involving agreements with U.S financial institutions that address who bears financial obligations arising from certain litigation against Visa USA and Visa International, including the AmEx suit. Visa USA members must approve the settlement. Visa said that in settling the case, it was “not conceding any liability in the dispute,” according to the release. “Visa is doing what is in the best interests of its membership and the new organization,” Visa Inc. chairman and chief executive Joseph W. Saunders said in the release. “Our retrospective-responsibility plan and these settlement agreements reduce risk and uncertainty for our members and Visa. I believe this is a positive resolution for Visa and its financial institutions.” AmEx's suit arose out of the U.S. Department of Justice's groundbreaking antitrust lawsuit in 1998 that challenged Visa's and MasterCard's bans on their members issuing cards on rival networks such as AmEx and Discover Financial Services LLC. The DoJ also challenged Visa and MasterCard's governance structures, claiming they thwarted competition. A federal trial judge in New York rejected the governance claim in 2001 but agreed with the DoJ on the exclusionary rules. An appellate court upheld that opinion and the Supreme Court in 2004 declined to take the case. The DoJ suit not only forced Via and MasterCard to repeal the exclusionary bans, but it also opened the door for AmEx and Discover to sue for lost business from potential bank partners?which they did (Digital Transactions News, Oct. 4, 2004). The AmEx suit, which also named eight big banks, didn't specify damages, but a Visa filing with the Securities and Exchange Commission earlier this year said AmEx was seeking treble damages. In its own release, AmEx said the payout could go as high as $2.25 billion. “The size of this settlement, along with earlier court rulings, underscores the seriousness of the damage done by the illegal boycott,” said Kenneth I. Chenault, AmEx chairman and chief executive, in the release. “We plan to move forward with the litigation to hold MasterCard accountable for the illegal actions that blocked banks from working with us for many years and to seek full compensation for the value that would have been generated for our shareholders.” American Express earlier dropped its action against three financial institutions that became AmEx issuers?Bank of America Corp., Household International Inc. (now owned by HSBC Holdings PLC), and USAA Federal Savings Bank. As part of the Visa settlement, AmEx would drop actions against the five remaining issuers: JPMorgan Chase & Co., Capital One Financial Corp., Washington Mutual Inc. (now the owner of the originally named Providian Financial Corp.), US Bancorp, and Wells Fargo & Co. Under the proposed agreement, AmEx would receive $945 million from Visa and an additional payment from the bank defendants no later than March 31, according to the Visa release. Beginning then, Visa also would pay AmEx up to $70 million a quarter for 16 quarters, for a maximum of $1.12 billion. AmEx says the size of the quarterly payments would depend on its U.S. network-services unit meeting certain performance goals. AmEx said it expects to record an initial $1.13 billion payment as revenue this quarter, implying that the bank defendants' share is $185 million. Visa said its nominal payout is $2.065 billion with an accounting reserve of $1.9 billion and a net present value to Visa of $1.8 billion. A Discover spokesperson would not comment on pending litigation. A spokesperson for MasterCard says by email, “We are confident of our position in the lawsuit, and believe we have strong defenses. However, our CEO and CFO have said publicly that we would consider a settlement only if it is commercially reasonable, and in the best interest of the company, our shareholders and our customers.” AmEx's release issued a warning to MasterCard. “American Express is expected to seek damages in the billions of dollars,” it says. “As the sole remaining defendant, MasterCard would be liable for the full amount.” Consultant and former MasterCard executive Steve Mott, head of Stamford, Conn.-based BetterBuyDesign, hailed Visa's settlement as a sign that the clubby bank card world of old?MasterCard went public in 2006 and Visa's IPO is pending?is passing away. “It's a good thing for the industry to get this era behind us as we move toward real competition,” he says. “Today's payments world wouldn't tolerate that kind of behavior, so clearing the decks from a checkered past like that is nothing but good news for potential investors in Visa stock.” More than a dozen banks now issue Discover-branded credit, debit, or prepaid cards. AmEx's stable of partners also includes Citigroup Inc. AmEx said it would incur upfront expenses related to the initial payment, including additional spending on marketing and cardholder rewards, more funding for its charitable foundation, and legal costs.