Lloyd Constantine on the Underside of Antitrust
23 Corporate Crime Reporter 48, December 14, 2009
He was an assistant Attorney General. In New York State. He was head of the Antitrust Division.
And Lloyd Constantine for months had been investigating what he believed to be an illegal merger of the debit card networks of Visa and MasterCard. It was July 1989. And it was time to act.
Constantine – acting on behalf of a number of state AGs – sent to both Visa and MasterCard a letter of intent to sue. He had gathered at his Manhattan apartment assistant AGs from 14 states to discuss the impending lawsuits against the two credit card giants.
After dinner, Constantine gets a call from a colleague – Tim Cone. Cone had been out to dinner at a Rusty Staub’s new restaurant on Fifth Avenue. Tim, his fiancé Diana and his father Terry Cone, a senior partner at Cleary Gottlieb, overheard three men discussing the meeting they were going to have with Constantine the next day.
The men said that an investigator would be hired to uncover something about Constantine that he wouldn’t want revealed. And they would threaten to expose him unless he laid off MasterCard.
“From Tim’s description, I was reasonably sure that one of the three men was Bob Norton, MasterCard’s General Counsel, and that another was Stanley Robinson, a senior antitrust partner at the Kaye Scholer law firm,” Constantine relates in the opening to his new book – Priceless: The Case that Brought Down the Visa/MasterCard Bank Cartel (Kaplan, 2009).
The next day, Constantine confronted Norton and Robinson.
Norton was identified as the lawyer who had said he would have Constantine investigated and threatened.
Constantine asked the lawyers if they had dined at Rusty Staub’s the previous night.
“Yes,” Norton said.
Constantine asked if Norton were going to hire an investigator to try to uncover illegal or embarrassing activities.
“Norton unraveled,” Constantine says.
“Oh my God, Oh my God,” Norton blurted out. “I know you’re not supposed to talk in bathrooms. I know you’re not supposed to talk in elevators. I said it. But I didn’t mean it. It was a joke. You’ve got to believe me, it was a joke! No matter what we found out about you, we wouldn’t use it. If you used drugs, we wouldn’t use it. If we found out about some weird sexual behavior, we wouldn’t use it. No matter what, we wouldn’t use it. Lloyd, you’ve gotta believe me!”
Norton continued to rattle on until Robinson cut him off.
“Bob, shut up,” Robinson said to him.
“You have to believe me, Lloyd, that I didn’t think Bob was serious,” Robinson said.
Constantine asked Robinson what he had done to make sure that Bob wasn’t serious.
Robinson didn’t answer.
“Then I had a choice about what to do about this,” Constantine told Corporate Crime Reporter last week. “Do I file a complaint with the disciplinary committee? Do I bring a lawsuit? And I thought at the time – if I do that, if I get really involved in going after them for this incident, it’s going to make it difficult for me to do what I really wanted to do – and that was to go after Visa and MasterCard for antitrust violations.”
“So, I made a decision at the time – I don’t know whether it was right or wrong – but I made a decision at the time to not file the disciplinary action charge against them or bring a lawsuit.”
“We did sue Visa and MasterCard. We broke up their merger. Using that experience, I really started a whole new area of antitrust law. I considered this to be one of the two most successful cartels in the world – the other one being OPEC."
After successfully settling the case, Constantine left the New York Attorney General’s office and signed on with McDermott Will & Emery in 1991 to do plaintiff’s side antitrust work.
That McDermott stint didn’t go well.
“On the first day I got to McDermott, American Express called me and said they wanted me to represent them in a potential lawsuit against Visa,” Constantine says.
“And I said – yes. Your complaint is valid. But McDermott would not let me do that because they said they represented a number of banks who were members of Visa. And therefore it would present an issue conflict and therefore they couldn’t do it.”
Then the firm told him he couldn’t represent Visa. Or Dean Witter – the then owner of Discover.
“Within a few weeks – I can’t represent Visa, I can’t represent American Express. I can’t represent Dean Witter. And pretty much this new area of the law, which I felt I had created, I had no possible work in because my firm wouldn’t let me represent anybody,” Constantine said.
In April 1994, Constantine left McDermott and started his own antitrust boutique – Constantine and Partners – now Constantine Cannon.
“Based upon a lot of work I had done involving Visa and MasterCard – mostly when I was in the Attorney General’s office – I was approached by The Limited,” Constantine says.
“It’s a big clothing conglomerate. They own The Limited, Victoria’s Secret, Abercrombie & Fitch. They said they were being forced to take Visa and MasterCard debit cards because they voluntarily accepted Visa and MasterCard credit cards. The Limited said they were being forced to take the debit cards at the same price as the credit cards. And actually, they didn’t know they were taking them, because the identity of the cards, the physical design of the cards made it impossible to know that they were taking them at the store.”
“Whether or not they did know that, they were being forced to take them anyway. They were being forced to pay the same price for them. They objected to that for a variety of reasons, but mostly because the debit card transaction is a substitute for a cash or check transaction. There is no extension of credit. There is very little risk for the bank and for Visa and MasterCard. But the retailers were being forced to take them at the same very high price that Visa and MasterCard were charging for their credit card transactions.”
Constantine tried to get the federal antitrust authorities involved – to no avail.
He approached Robert Pitofsky – then chair of the Federal Trade Commission (FTC).
“I had known him for 15 years,” Constantine. “He was the guy I thought was the best qualified lawyer for his position as an antitrust enforcement official in a generation. He and I shared a lot of viewpoints about activism and antitrust law.”
“I met with him. And I met with the FTC’s Bill Baer. They were very polite and very dismissive. On the one hand, they said – you don’t need us. You are representing two huge companies, including Wal-Mart. I said – this affects every merchant in the United States and every consumer in the Untied States. It is quintessentially the kind of case that the federal government ought to handle.”
“They listened politely, but they were dismissive.”
“They also said – we don’t think you have a case. We don’t think what you say Visa and MasterCard are doing constitutes an antitrust violation. They didn’t think it constitutes an illegal tying arrangement. They didn’t think they had tied debit to credit.”
“And I said – yes they have.”
“Their answer to me disclosed a basic legal flaw in their analysis. Not only was this an illegal tying arrangement, but it was an incredibly predatory tie. The kind of tie that the Justice Department utilized later on in their big case against Microsoft. It was the exact same type of tie.”
“Indeed, the economist that we utilized to break up this tie between debit and credit between Visa and MasterCard – Franklin Fischer – two years later agreed to be the economist for the Justice Department in its case against Microsoft.”
“He utilized the exact same analytical framework, which he first developed with us for our case.”
“In any event, Pitofsky was polite but dismissive. And he said – sorry, we’re not going to join in.”
“Seven years later, after we won the case, Pitofsky went out of his way to call me, compliment me, and remember what he had done. And he was very gracious about it. It showed me that he was a good guy and he hadn’t forgotten.”
The case went on for seven years of active litigation.
“It involved 400 depositions, 350 motions, hundreds of thousands of pages of trial exhibits,” Constantine says. “On the day the trial began, there were 713 witnesses ready to testify at trial. And on that morning that the trial began – April 28, 2003 – MasterCard capitulated. Within 50 hours, Visa also capitulated. They agreed to pay my clients a $3.4 billion cash payment. And they agreed to stop doing what they had been doing – forcing merchants to accept their debit card at the same price.”
Then there was the question of his fee.
Twelve years of work – five preparing the lawsuit, and seven litigating.
“We went to the judge – John Gleeson – and said – we don’t want to ask for any specific amount of money,” Constantine said. “We want to set forth for you the facts, the pre-existing legal precedent and how courts have awarded fees in these cases.”
“And the court said – no, I won’t do that. You have to ask for a specific amount.”
“So, we did the research. There had been 13 previous cases in which a mega-antitrust settlement – over $100 million – had been arrived at.”
“The previous highest settlement had been a bit above $1 billion. That was In Re Nasdaq Antitrust Litigation.”
“So, there was really no precedent. We were three times higher than the previous high. We were higher than the previous eight highest put together.”
“The research said that the average fee awarded in the mega-settlements was 24.6 percent.”
“Then there were these other factors – the difficulty of the case, the length of the case, the public benefit. In every category, our case had been superior.”
“We recovered more money, we worked harder and longer, the risk was higher, the case was more difficult.”
“We got expert opinions from John Coffee, Arthur Miller, Harry First – they all said that a comparison to any other case was ludicrous.”
“Given the fact that the average fee in these other cases was 24.6 percent, we asked for 18 percent – $600 million – taking into consideration just how much money was involved.”
“And still, the court said – the request was ludicrous, insulting. He insulted us and awarded us a fee of $225 million. Which as far as I was concerned was fine. We initially asked him – just give us whatever the hell you want.”
“But he had refused to do that. He made us ask him for a specific amount. So, we asked what we considered to be well within the precedent. And actually somewhat lower than the precedent should have suggested. And he used it as a vehicle to insult us. I wrote about that. And I criticized the judge for doing it. It was a classic case of the judge grandstanding.”
[For a complete transcript of the Interview with Lloyd Constantine, see 23 Corporate Crime Reporter 48(8), print edition only.]
