Merchants Hit MasterCard IPO on Anticompetitive Grounds

A law firm co-leading the merchant class-action interchange lawsuit against Visa USA, MasterCard Inc. and a number of their large members yesterday filed a supplemental complaint in federal court asserting that MasterCard's imminent initial public offering of stock is an attempt to shield itself from antitrust liability for past interchange practices. But if or how the revised complaint will affect the planned IPO that could come as soon as Thursday and raise up to $2.8 billion is unclear. A spokesperson for Purchase, N.Y.-based MasterCard would not comment on the development. K. Craig Wildfang, the partner with Minneapolis-based Robins, Kaplan, Miller & Ciresi L.L.P. who signed the supplemental complaint, would not comment today. H referred Digital Transactions News to an accompanying letter he filed with presiding Judge John Gleeson of U.S. District Court in Brooklyn, N.Y. According to the letter, the IPO is an attempt by MasterCard and its member banks to insulate themselves from liability under the antitrust laws “whose effect may be substantially to lessen competition.” The supplemental complaint does not directly ask Gleeson to block the IPO, but it does ask the court to restrain the defendants from its alleged anticompetitive effects. The IPO is part of an ongoing restructuring effort by MasterCard, a payment card association founded and still owned by banks, to reduce the role of role of financial institutions in its governance as the payments market rapidly changes, bring in outside directors, and raise money for legal expenses. MasterCard intends to use about $2.2 billion of the IPO's proceeds to buy out the voting rights of current financial-institution owners. About $650 million would be available for legal expenses. In the letter, the plaintiffs specifically challenge the IPO on three major grounds: that it lessens competition in violation of the Clayton Act; that the agreements between MasterCard and its members that spawned the IPO restrain competition under the Sherman Act; and that the agreements are a “fraudulent conveyance” in that they “contemplate the elimination?for no consideration?of the ability of MasterCard to assess its member banks to satisfy the debts and liabilities of MasterCard.” The current class action is a consolidation of about 50 merchant lawsuits challenging bank card interchange, the revenue Visa/MasterCard issuers receive on each card transaction from merchant acquirers. The card associations set interchange rates, and merchant acquirers simply pass the expense on to their merchant clients. Gleeson presided over the first major merchant court challenge to interchange, which involved signature-based debit cards. In 2003, MasterCard settled for $1 billion and Visa for $2 billion.