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Kessler Financial Services / What We Do

Over 10 million transactions per year

NOVA Information Services

KFS has formed a strategic alliance with NOVA Corporation, an integrated provider of transaction processing services for small-to-medium-sized merchants. KFS builds bridges for NOVA, identifying banks who are interested in partnering with them to process merchant transactions.

In 2001, we expect to generate approximately $2 billion in new volume for NOVA on an annual basis, generated by over 50 different banks.

When I spoke with Mr. Mark Williams of Kessler Financial Services said that he would have someone from the MBNA bank call me as that was out of his realm. No one ever called back and when I called Mr. Mark Williams of Kessler Financial Services, he replied, "that there was nothing he could do".

Although, Mr. Mark Williams of Kessler Financial Services implied in his first letter that he finalized deals with companies and not-profit organizations, Mr. Mark Williams of Kessler Financial Services gathered information from me, and then said there was nothing he could do. 

On June 28, 2002, also during the same time, Visa and MasterCard were in Antitrust proceedings before the United States Government for the protection of the American public. 

In the UNITED STATES OF AMERICA, Plaintiff-Appellee, v. VISA U.S.A., INC., MASTERCARD INTERNATIONAL, INC., and VISA INTERNATIONAL, INC., Defendants-Appellants and ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK (No. 02-6074(L) Consolidated with Nos. 02-6076, 02-6078).

In a Conclusion dated June 28, 2002, in THE UNITED STATES v. VISA U.S.A., INC., MASTERCARD INTERNATIONAL, INC., and VISA INTERNATIONAL, INC., stated that The judgment of the district court should be affirmed.  (Excerpts below, Citations omitted).

I. VISA AND MASTERCARD, BOTH JOINTLY AND SEPARATELY, HAVE MARKET POWER IN THE NETWORK SERVICES MARKET - In determining that the exclusionary rules' "anticompetitive effects outweigh [their] procompetitive effects," and hence violate Section 1 of the Sherman Act, the district court applied a "full-fledged rule of reason analysis," considering "all of the circumstances of [the] case." . In this analysis, courts first consider a defendant's market power. The district court found that the defendants, jointly and separately, possessed market power in a relevant market consisting of general purpose card network services.

The definition of the relevant market is a factual inquiry reversible only for clear error. ("market definition is a deeply fact-intensive inquiry").

The district court properly defined markets "composed of products that have reasonable interchangeability for the purposes for which they are produced--price, use, and qualities considered." It found two relevant product markets: "the general purpose card network services market and the general purpose card market." The record fully supports the district court's findings, which were based on the testimony of the economic experts for the government and for the defendants, current and former officers of the associations, and industry participants, as well as on defendants' own documents.

"General purpose cards" are credit and charge cards "accepted at numerous, unrelated merchants." General purpose cards are issued to U.S. consumers by Visa's and MasterCard's thousands of member banks, and by American Express, Discover, and Citibank (as sole issuer of Diners Club cards), and are accepted by millions of merchants as payment for goods and services.

"General purpose card networks provide the infrastructure and mechanisms through which general purpose card transactions are conducted, including the authorization, settlement, and clearance of transactions. Merchant acceptance of a card brand is also defined and controlled at the system level and the merchant discount rate is established, directly or indirectly, by the networks. These basic or core functions are indispensably done at the network level." Networks play "a major role in determining the overall quality of the brand, encompassing system-level investments in brand advertising, the creation of new products and features and cost-saving increases in the efficiency of the electronic backbone of the networks." Visa and MasterCard provide network services, and American Express and Discover are the only other significant competitors providing network services for general purpose cards.

The relationship between issuing banks and their networks is not that of distributor and manufacturer. "A card issuer, instead, 'actually determines the main characteristics of the card which it puts on the market.'" Nor do the networks merely sell services the banks use to produce general purpose cards, because the networks are mainly responsible for creating and promoting the brands and new products. Rather, the banks and networks combine to produce general purpose cards jointly. The exclusionary rules deny American Express and Discover access to the "special skills, expertise and relationships with consumers," banks bring to this enterprise.

In determining the relevant markets, the district court employed the hypothetical monopolist, price-sensitivity test endorsed by this Court and others. The "inquiry is whether a 'hypothetical cartel' would be 'substantially constrain[ed]' from increasing prices by the ability of customers to switch to other producers." The district court correctly articulated this legal standard, and expressly adopted the analysis of plaintiff's expert economist utilizing this standard. Professor Katz's analysis indicated that a hypothetical monopolist over general purpose cards would find a 5% price increase profitable unless that price increase would reduce general purpose card charge volume by more than 16%. Although a price increase for general purpose cards likely would cause some substitution to other forms of payment, the court found it "highly unlikely that there would be enough cardholder switching away from credit and charge cards to make any such price increase unprofitable for a hypothetical monopolist of general purpose card products."

MasterCard argues that the district court's focus on switching in response to price changes is inappropriate because there is no meaningful price for general purpose cards. But, for the large portion of consumers carrying a credit balance, the price of using general purpose cards is relatively straightforward: it is the interest they are charged, which the government's expert calculated to average 1.23% of the purchase price of goods.

MasterCard also argues the district court was wrong to focus on switching in response to price changes because innovation, rather than changes in price, has historically caused increased usage of general purpose cards relative to other forms of payment. Consumers have increased their usage of general purpose cards over time in response to changes in factors other than price. It does not follow, however, that other forms of payment that consumers would formerly have used are in the relevant market for general purpose cards. ("substitutability over time" is not relevant for market definition) Consumers have increased their usage of personal computers over time in response to both price and non-price factors, but that does not mean that pencils and paper and other substitute technologies are in the relevant market for PCs.

MasterCard further suggests that "[b]ecause this case is about innovation," this Court should abandon the hypothetical monopolist price-sensitivity test found in its precedents in favor of a test asking whether a hypothetical monopolist would continue to innovate. But even MasterCard's own expert employed a price-sensitivity test and MasterCard offers no case support for its suggestion that the sole test in this case should be whether a hypothetical monopolist would continue to innovate. There was no reason for the court to adopt market definition methods designed for the sort of "innovation market" to which MasterCard refers, because the government did not allege such a market. Innovation is an issue in this case but, contrary to MasterCard's assertion, many of the anticompetitive effects alleged by the government and found by the court did not relate to innovation.

Despite its objections to price sensitivity analyses, MasterCard argues that the survey-based price sensitivity analysis performed by its expert (Prof. Pindyck) provides a basis to reject the district court's findings. The district court found, however--based on the testimony of the government's and Visa's experts--that "it is essentially impossible to make a definitive calculation of consumer price sensitivity or elasticity of demand via survey." Moreover, to the extent one can draw any conclusion from MasterCard's survey, it is that credit and charge cards constitute a relevant market. Professor Pindyck's analysis considered a 2% change in the overall cost of a purchase made using a card, which MasterCard asserts is in the range of actual rebate offers. That means, however, that MasterCard is positing an effective price increase of far more than 100% of the cost to the consumer of using the card. That price increase is vastly higher than any a court ever has used to define a relevant market. Yet even with such a huge price increase, MasterCard represents that only 50% of consumers would switch, which indicates that a hypothetical monopolist would find it profitable to raise prices substantially, and therefore, that general purpose cards constitute the relevant market.

Appellants contend that the district court erred in excluding cash, checks, and debit cards from the relevant market of general purpose cards. The district court, however, properly excluded those items from the market and rejected defendants' proffered "all-payments" market. In light of the court's abundant citations for its multiple findings on market definition, appellants do not come close to meeting their burden of demonstrating clear error.

To be sure, cash and checks often are functional substitutes for general purpose cards. But functional interchangeability is not enough; the test for market definition is whether users find products to be "reasonably interchangeable." (generic anchors not in same product market as Danforth-brand anchors, even though they are "functionally interchangeable" and often "virtually identical").

The district court properly found that consumers, merchants, and defendants themselves do not consider cash and checks to be reasonably interchangeable with general purpose cards. Consumers cannot use cash to make purchases over the Internet or by phone, and "generally do not want to carry large sums of cash to make large purchases." In addition, holders of general purpose cards without monthly balances benefit by deferring payment for a short time, and those that carry outstanding balances "benefit from the . . . card's credit function, which allows for the choice to purchase now and pay later." Checks have much lower merchant acceptance than either cash or general purpose cards, which discourages their use. Merchants' attitudes derive from and therefore reflect consumers' attitudes. Most merchants believe they would "lose significant sales" if they stopped accepting general purpose cards; thus, even merchants with thin profit margins "feel compelled to accept general purpose cards."

There is strong evidence that consumers "do not consider debit cards to be substitutes for general purpose cards." "Although debit cards are similar to credit and charge cards in that they may be used at unrelated merchants, the fact that upon use they promptly access money directly from a cardholder's checking or deposit account strongly differentiates them from credit and charge cards." Debit cards do not defer payment or provide credit. In addition, online debit cards (which require special terminals at the merchant and use of a PIN) do not have the widespread acceptance of general purpose cards. And Visa and MasterCard's own research demonstrates that consumers do not view offline debit cards as substitutes for general purpose cards, even though offline debit has widespread merchant acceptance and requires only the purchaser's signature. Consumers use offline debit cards as a substitute for cash and checks, not for credit or charge cards.

Visa and MasterCard argue that it was improper for the court to consider the exclusionary rules' effects on American Express's and Discover's debit card programs in light of the fact that debit cards were neither included in the general purpose card market nor found to be a separate relevant market. The district court's findings of anticompetitive effects concerning debit, however, relate to the effect debit card transaction volume has on competition in the general purpose card network services market due to economies of processing both types of cards over the same network and because future cards will provide access to both credit and debit accounts. The district court's appreciation of debit's contribution to effective competition in general purpose card network services does not suggest that debit is reasonably interchangeable with credit and thus in the relevant market for general purpose cards.

In similar circumstances, the court of appeals in Microsoft affirmed the district court's finding that Microsoft unlawfully maintained its PC operating systems monopoly by quashing the "middleware threat." Sustaining the claim of monopoly maintenance required neither the delineation of a middleware market nor the inclusion of middleware in the operating systems market.

Thus, "because card consumers have very little sensitivity to price increases in the card market and because neither consumers nor the defendants view debit, cash and checks as reasonably interchangeable with credit cards, general purpose cards constitute a product market."

The district court also found that general purpose card network services "constitute a product market because merchant consumers exhibit little price sensitivity and the networks provide core services that cannot reasonably be replaced by other sources." Although no appellant directly attacks this market's existence, Visa asserts the network market is "largely beside the point." But the network services market is the market in which Visa and MasterCard operate. Visa and MasterCard do not issue credit, charge, or even debit cards themselves, but set interchange rates and provide the network, backbone, brand support, standardization, and product parameters that permit banks to issue such cards. Networks and issuers are co-manufacturers of general purpose cards, and neither can succeed without the other.

Visa claims that the relevant market is the market for card issuing because that is where the exclusionary rules have their direct effects. To be sure, the restraint is on issuers, but the record fully supports the district court's conclusion that the exclusionary rules had the purpose and effect of blunting network-level competition, to the ultimate detriment of consumers. As Visa has expressly recognized in the past: "Lest there [be] any confusion, the ultimate impact of any harm to system-level competition is felt by cardholders and merchants who use or accept general purpose charge cards." Moreover, Visa's former general counsel and its primary expert both confirmed that this remains true today. Thus, network-level competition is the correct market for analysis in this case.

The district court found that Visa and MasterCard, "whether considered jointly or separately," have market power in the general purpose card network services market. The court based this finding on two independent analytical methods of determining market power: direct evidence of market power, and inference from market shares. Market power is a question of fact, reviewed for clear error. (deferring to district court's aggregation of "intertwined" entities to determine market power) Thus, appellants must demonstrate that the district court committed clear error with respect to both methods. They have not done so.

Although Visa disputes the relevance of the district court's market definition and the findings of anticompetitive effects, Visa does not challenge the finding that it possesses market power in the market for general purpose card network services. Having failed to address the issue in its opening brief, Visa waives the argument. Only MasterCard's market power requires discussion.

"Market power may be shown by evidence of 'specific conduct indicating the defendant's power to control prices or exclude competition.'" "Since the purpose of the inquiries into market definition and market power is to determine whether an arrangement has the potential for genuine adverse effects on competition, 'proof of actual detrimental effects, such as a reduction of output,' can obviate the need for an inquiry into market power, which is but a 'surrogate for detrimental effects.'" (proof that "defendant's conduct exerted an actual adverse effect on competition . . . is a strong indicator of market power"); (market power can be proven through "direct evidence of anticompetitive effects"). Indeed, several courts have relied on direct evidence of market or monopoly power.

Visa and MasterCard have joint market power, i.e., the power to achieve an anticompetitive effect through the restraint. ("market power bears a particularly strong relationship to a party's ability to injure competition"); ("market definition and market power are merely tools designed to uncover competitive harm"). The memberships of the two associations collectively have that power because they control the banking assets the district court found critical to competition. (banks "have the upper hand in the evolution of their industry"); (market power shown by control over productive assets). Network-level competition is harmed, the district court found, in part because the exclusionary rules foreclose American Express and Discover from access to bank partners--to which Visa and MasterCard have ready access. The court further found that the remaining banking assets (i.e., "[s]mall banks not in the Visa and MasterCard system") and non-bank issuers (e.g., retailers, insurers) to which American Express and Discover do have access, are not competitively significant. In other words, Visa and MasterCard exercise market power by excluding American Express and Discover. (market power "may be shown by evidence of 'specific conduct indicating the defendant's power to . . . exclude competition'").

MasterCard mistakenly contends that joint market power is relevant only if there was an agreement between the associations to adopt the exclusionary rules. But the common membership and ownership of the two associations alone means that this power to exclude was exercised by the associations jointly and by each association separately. The exclusionary rules had competitive "bite," only because (1) both associations enacted them, and (2) the number of banks not subject to those agreements was competitively insignificant.

Indeed, history clearly demonstrates MasterCard's separate market power. In 1996, when Visa Bylaw 2.10(e) was in place but MasterCard had no similar restraint, American Express openly courted MasterCard's members to explore partnerships with it. In fact, MasterCard seriously considered treating American Express's overture as an opportunity for MasterCard to shift share from Visa: Banks might be willing to leave Visa entirely for the opportunity to issue both MasterCard and American Express cards. Had MasterCard allowed this to happen, several large MasterCard members would have partnered with American Express, and this litigation might never have been necessary. Ultimately, however, the majority of banks on MasterCard's Board decided to take a hard line against American Express and Discover by enacting the CPP. Once both Visa and MasterCard's exclusionary rules were in place, the anticompetitive effects followed directly. Thus, MasterCard demonstrated that it has the "ability to injure competition."

Moreover, Visa's and MasterCard's joint and separate market power are evident from their power over merchants. Uncontroverted merchant testimony demonstrated that many merchants "cannot refuse to accept Visa and MasterCard even in the face of significant price increases because the cards are such preferred payment methods that customers would choose not to shop at merchants who do not accept them." Terrence Scully of Target, for example, testified that although Target considered discontinuing acceptance of American Express cards, it would be "foolhardy" to consider not accepting Visa or MasterCard. Similarly, Publix supermarkets' representative testified that Publix could not drop Visa or MasterCard even if interchange fees rose 50%. Thus, the record demonstrates that merchant demand for Visa and MasterCard--collectively and separately--is highly inelastic. That MasterCard can point to a particular merchant that accepts American Express but not Visa/MasterCard says only that Visa and MasterCard's market power is not absolute. At bottom, the district court resolved a disputed question of fact and its resolution is not clearly erroneous.

The district court supported its finding regarding merchant acceptance by noting that "both Visa and MasterCard have recently raised interchange rates charged to merchants a number of times, without losing a single merchant customer as a result." MasterCard argues here that this fact should carry little weight because its interchange rate is "below cost." MasterCard, however, never explained how defendants calculated "cost," how much below "cost" their interchange rates are, or how that "cost" compares to the sum of issuers' various revenue streams (including interest charges, interchange, late fees, annual fees, etc.). One should not expect the competitive interchange fee to cover the entire cost of card issuing because there are other important revenue sources. Appellants do not dispute that the average revenue from all sources exceeds the marginal cost of the typical transaction; indeed, MasterCard's own documents confirm that its issuers earn at least a 15% return on equity with some "pure transactors"--those transacting sufficient volume. Because issuers make a profit on some pure transactors--who generate revenues for the issuer only through interchange and possibly small annual fees--it must follow that interchange rates exceed marginal cost. In any event, the question of the associations' power over merchants was hotly contested below, and the district court found that fact in favor of plaintiff. That finding is not clearly erroneous.

Independent of the substantial direct evidence of market power, the district court also found Visa and MasterCard's market power could be inferred based on their high market shares in a market with high entry barriers. (market power may "consider[] the defendant's relevant market share in light of other market characteristics, including barriers to entry"); (market power "may be proved circumstantially by showing that the defendant has a dominant share in a well-defined relevant market and that there are significant barriers to entry in that market . . ."). MasterCard does not--nor could it--contest that the network services market has high entry barriers. There are only four significant providers of network services, no one has entered the market since Discover did so in 1985, and entry would require an investment of over $1 billion. Thus, the only remaining question is whether the market share is sufficiently high.

MasterCard assigns error to the district court's consideration of the associations' combined market shares--73% of transaction volume and 85% of cards issued --but the district court was justified in doing so. Visa and MasterCard are owned by thousands of common members and exempt each other from their exclusionary rules. (Saks could not discontinue accepting MasterCard even if still accepted Visa because "the consumer views them as being the same") Even Visa concedes that duality justifies a "distinction between 'them' (AmEx; Discover) and 'us' (MasterCard)."

MasterCard also contends that, as a matter of law, its share of "only 26%" precludes a finding of market power. But this Court recently reaffirmed that "a threshold showing of market share is not a prerequisite for bringing a § 1 claim." The cases MasterCard cites stand merely for the proposition that one cannot infer market power based on an entity's market share of less than 30%; none of those cases included other indications of market power, such as direct evidence, which the district court found here. (market share is irrelevant when market power proved directly). MasterCard cites no case to support its assertion that a share of less than 30% precludes a finding of market power, regardless of the circumstances. Nor does MasterCard's alleged decline in market share over time "foreclose a finding" of market power.

Finally, MasterCard questions how it can possess market power with a 26% share when American Express's market share is a "comparable 20%." But the direct comparison between MasterCard's and American Express's market shares is a red herring. The district court did not find that MasterCard possesses market power because of its 26% share; it merely rejected MasterCard's argument that such a share precludes a finding of market power based on other evidence. That conclusion was factually and legally sound. The court also found that the size of the merchant acceptance network and consumers' perceptions of it are vital, and that Visa and MasterCard recognized they had a "significant acceptance advantage over American Express in the United States, which they sought to maintain." MasterCard is accepted at roughly twice as many merchant outlets as American Express domestically, and nearly three times as many internationally. (in 1998, MasterCard had 35.8% of card accounts, compared to 5.5% for American Express).

Moreover, the 6% share difference is not trivial. In justifying its CPP, MasterCard's then-CEO testified that without it, American Express would gain share and "[e]very share point was worth real revenue to us." (1% share of general purpose card volume was $9.32 billion in 1999). And John Reed, then-CEO of Citibank, concluded that "[t]he reason that American Express does not have the reach necessary to be a broad-scaled card is they don't have enough volume on their card to convince the mom and pop stores to bother to sign up. . . . It isn't that there's anything wrong with the card or the cardholders or anything else, they just don't have enough volume." Reed determined that "an entrant would need to capture a 20 to 25 percent market share to be successful." American Express's market share is at best at the bottom end of that range, while MasterCard's share places it firmly above the top end.

Visa and MasterCard contend that the exclusionary rules should be characterized as exclusive distribution restraints imposed by a single entity on its dealers. The district court rejected their characterization, however, and its rejection is a finding of fact, reviewed only for clear error. ("Characterization is a creative rather than exact endeavor. Appellate review is accordingly deferential"); (the "nature of an entity and its ability to combine or conspire in violation of § 1 is a fact question"). The exclusionary rules are agreements among competing banks to eliminate an important form of competition among themselves and against the networks they control. The joint venture context does not alter the nature of the restraint; hence, the vertical distribution cases, to which Visa and MasterCard direct the Court's attention, have no relevance to this case.

A joint venture controlled by competing firms may, of course, take actions as a single entity that do not restrict competition among its members. For example, a joint venture might offer a product in a market in which its owners could not separately compete or it might purchase supplies for its headquarters. But whether particular conduct is concerted action is a question of fact, and there can be little doubt that the exclusionary rules at issue here are horizontal restraints.

As the district court found, Visa's Bylaw 2.10(e) and MasterCard's CPP are "restrictions of, by and for the member banks." The member banks compete as issuers of general purpose credit cards. They do not merely distribute cards, but co-manufacture them, determining many of the "features and services" of the cards they issue, including the nature of any rewards or rebates.

Bylaw 2.10(e) and the CPP were adopted specifically for two reasons. The first purpose was to restrict competition among the member banks as to the kinds of cards they issue, thereby ensuring that no member/issuer gains a "competitive advantage" over other members by offering consumers cards with features available from American Express or Discover. In enacting a bylaw that "prevents member institutions from competing against each other" on some basis, the "member institutions have created a horizontal restraint--an agreement among competitors on the way in which they will compete with one another." (league acting in horizontal capacity when board acts to control competition among members); (horizontal restraint because "all of these legally separate corporations agreed to a policy that restricted competition").

The second reason for the exclusionary rules was to weaken the only two networks not owned by the member banks. These banks also are involved at the network level, as owners of the Visa and MasterCard associations. Member banks fund competitive initiatives and sit on the boards and committees that make strategic business decisions. And, as owners of the associations, the member banks reap the rewards from the suppression of network-level competition caused by the rules.

Visa and MasterCard do not seriously dispute that Bylaw 2.10(e) and the CPP restrict competition among issuing banks. Indeed, Visa concedes that "[i]t is unquestionably true, that--absent the joint venture--the antitrust laws would not allow a group of banks to agree that they will not also issue American Express or Discover cards." Rather, Visa and MasterCard assert that the exclusionary rules are "ancillary" to legitimate joint ventures and that, therefore, the rules should not be treated as horizontal restraints. Visa and MasterCard reason that joint ventures formed by competitors should not be placed at a disadvantage vis-à-vis their unitary rivals, and so the exclusionary rules should be judged by the same standards that would be applied to an agreement between a single manufacturer and its distributors. They contend that the exclusionary rules should be subject to at most a lenient rule of reason inquiry, in which vertical exclusive dealing arrangements may be found to be anticompetitive only if they entirely foreclose a rival's opportunity to distribute cards. This chain of reasoning is fundamentally flawed.

No one disputes that Visa and MasterCard are "legitimate joint ventures," and the district court expressly recognized that "such ventures may employ reasonable restraints to make the joint venture more efficient." This principle, articulated in Addyston Pipe and its progeny, reflects recognition that agreements among competitors that might be anticompetitive in another context may be procompetitive if they make a joint venture much more effective in achieving its procompetitive purposes. For example, although an express agreement between two competitors to reduce their output ordinarily would be condemned as per se unlawful, such an agreement may be necessary or appropriate in the context of a sports league so that each team plays the same number of games in a season. (output-restricting call rule procompetitive in joint venture context). Such "ancillary" restraints are properly evaluated under the rule of reason in a manner that fully accounts for their procompetitive effects, even if similar conduct unrelated to a joint venture would be unlawful per se. (per se rule applies when "practice facially appears to be one that would always or almost always tend to restrict competition and decrease output").

However, the ancillary restraints doctrine does not support Visa and MasterCard's argument that the exclusionary rules in this case should be treated as if they were the product of a vertical agreement between a single entity at the network level and its independent issuers rather than a horizontal agreement among those issuers. The fundamental problem with their argument is that they failed to establish that the exclusionary rules are ancillary. As we discuss in Part IV below, the district court carefully considered the proffered procompetitive rationales for the restraints and rejected them, not because it failed to understand their legal significance, but because it found that the record did not support them. Appellants' efforts to substitute their own characterizations of the purpose and effect of the exclusionary rules for the district court's fact findings should be soundly rejected. (rejecting proffered justification because "factual predicates are lacking").

Moreover, even if Visa and MasterCard had established that the exclusionary rules were ancillary restraints because they were reasonably related to the viability of the joint ventures and thereby promoted competition, it would not follow that the district court should ignore the horizontal nature of the restraints in evaluating their overall effects on competition under the rule of reason. ("[t]he evaluation of ancillary restraints under the Rule of Reason does not imply that ancillary agreements are not real horizontal restraints"). Horizontal agreements, restricting competition among direct competitors, raise competitive concerns that single-firm conduct does not. ("[t]here is a vast difference, however, between actions legal when taken by a single firm and those permitted for two or more companies acting in concert"). As Chief Judge Boudin of the First Circuit explained, in deciding whether a rule restricting salary competition among a sports league's member teams was the conduct of a single entity or a horizontal agreement:

From the standpoint of antitrust policy, this prospect of horizontal coordination among the operator/investors through a common entity is a distinct concern. Whatever efficiencies may be thought likely where a single entrepreneur makes decisions for a corporate entity (or set of connected entities), the presumption is relaxed--and may in some contexts be reversed--where separate entrepreneurial interests can collaborate . . . .

The district court's analysis afforded Visa and MasterCard the full benefit of their status as joint ventures. The government did not argue that the exclusionary rules constituted per se violations of the antitrust laws, and the district court applied the rule of reason, which "seeks to 'determine whether the restraints in the agreement are reasonable in light of their actual effects on the market and their procompetitive justifications.'" The district court's conclusion that the rules unreasonably restrain competition reflects the failure of Visa and MasterCard to prove their claims of procompetitive justification, and not any legal error.

Appellants urge this Court to treat the exclusionary rules as vertical exclusive distribution restraints. But the antitrust laws "have long drawn a sharp distinction between contractual restrictions that occur up and down a distribution chain--so-called vertical restraints--and restrictions that come about as a result of agreements among competitors, or horizontal restraints." Appellants' novel rationale for not drawing this distinction here is entirely unpersuasive.

Although characterization of a restraint as horizontal often proves decisive, because it leads to application of the per se rule, the court below analyzed the exclusionary rules under the rule of reason. And the rule of reason calls for an examination of all circumstances surrounding a restraint--whether "horizontal" or "vertical"--to assess the restraint's anticompetitive effects. Here, that analysis shows that the exclusionary rules unreasonably restrain trade, notwithstanding appellants' contention that American Express and Discover can use existing distribution channels (e.g., direct mail, telemarketing) to reach every consumer with card offerings and, therefore, are not foreclosed.

Appellants direct this Court to "exclusive dealing" cases. Those cases, however, are inapposite because the district court found that the exclusionary rules were enacted and maintained by the member banks as horizontal rivals. (per se condemnation of a manufacturer-imposed restraint on its distributors in response to an agreement among the distributors).

The law does not support appellants' suggestion that the exclusionary rules should be treated as exclusive dealing despite their clear horizontal character. (rejecting vertical analysis when store orchestrated a "horizontal agreement" among its key suppliers to boycott store's competitors; agreement caused substantial anticompetitive effects); (utilizing "exclusive dealing" vertical analysis only after finding no evidence of horizontal agreement). The banks are not mere distributors agreeing with a manufacturer to be an exclusive agent for distributing a commodity product; rather, they "are a unique distribution source" based on their individual experience and expertise as well as their access to demand deposit accounts, which is crucial for offering network products with debit functionality. (banks are "not merely distributors of commodity products such as 'spices or ice cream'").

The exclusionary rules embody agreements among competing bank issuers of general purpose cards to refrain from issuing cards on any network not controlled by them. The issuing banks participating in these agreements account for 85% of all general purpose card issuance, and the small banks not already members of Visa/MasterCard, and therefore not party to the agreements lack their "card-issuing infrastructure" and expertise. On their face, these agreements restrict competition in the issuing and network services markets.

The district court found that the challenged rules "effectively prevent[] Visa and MasterCard member banks from issuing American Express and Discover cards, reducing overall card output and available card features." Individual issuers yield their freedom to decide whether to offer their customers cards with features available on the American Express and Discover networks in exchange for the assurance that they will not face competition from other issuing banks offering those features. As the Supreme Court has emphasized, "[a] refusal to compete with respect to the package of services offered to customers, no less than a refusal to compete with respect to the price term of an agreement, impairs the ability of the market to advance social welfare . . . ." "Absent some countervailing procompetitive virtue . . . such an agreement limiting consumer choice by impeding the 'ordinary give and take of the market place, cannot be sustained under the Rule of Reason." ("[e]nsuring that individual members of a joint venture are free to increase output has been viewed as central in evaluating the competitive character of joint ventures").

Moreover, "and more importantly for this case, the rules restrain competition in the network market because they prevent American Express and Discover from offering network services to the consumers of those services, the members of the Visa and MasterCard associations." The issuing banks, which control networks with market power, have agreed to deny rival networks "'relationships the competitors need in the competitive struggle.'" Unless procompetitive justifications are established for such an agreement, "the likelihood of anticompetitive effects is clear." The agreements deny American Express and Discover the opportunity to combine their network services and card products with the unique assets and marketing skills possessed by Visa and MasterCard member banks, and thereby reduces the ability and incentives of American Express and Discover to invest in improved network services and card features. As a result, American Express and Discover are significantly less effective competitors in the general purpose card network services market, and the competitive pressure on Visa and MasterCard is reduced. Absent the exclusionary rules, "American Express and Discover would seek to work with a variety of bank issuers . . . ." Indeed, the purpose of the rules was "to restrict competition among competitor networks and banks."

As the district court emphasized, the restraints' effect on competition is the touchstone for legality under the rule of reason. Vigorous competition does not violate the law merely because it disadvantages less-efficient rivals. But agreements that deny consumers the benefits of vigorous competition do violate the law by denying other firms the opportunity to compete. Thus, when the two dominant incumbents significantly disadvantage their only two significant rivals (actual or potential), a rule of reason analysis involves consideration of the challenged conduct's effects on the opportunities available to competitors. The nexus here is plain. The district court found that by disadvantaging American Express and Discover, the exclusionary rules forestalled competition that could "enhance price competition and benefit consumers" in the issuing market and "increase the available supply and variety of network services," resulting in "more card products for bank issuers and thus more options for consumers."

Although it could have chosen to rely on the inherently anticompetitive nature of the exclusionary rules, in light of Visa and MasterCard's failure to demonstrate procompetitive justifications for them, the court's findings were instead based on its meticulous review of the extensive record. The court set forth in detail the clear evidence of specific anticompetitive effects at both the network and issuer level, to the ultimate detriment of consumers.

Different issuers have different strengths in providing "special skills, expertise and relationships with consumers that collectively strengthen the general purpose card networks." Because banks possess customer relationships, "the most valuable assets available," they "have the upper hand in the evolution of their industry." The collective refusal of the Visa and MasterCard member banks to issue cards on networks not controlled by banks denies those networks access to this expertise and these assets.

Of course, independent issuers such as American Express and Discover can reach consumers without contracting with Visa and MasterCard member banks. They can use the mail or telephone, or buy a bank and have it issue cards. But these arguments miss the point, which is the significance of access to multiple and diverse bank issuers--the access that bank members of Visa and MasterCard have agreed collectively to reserve to bank-controlled networks and deny to rival networks. American Express and Discover may be "successful issuers," but "they cannot alone duplicate the strength and breadth of issuance and acceptance achieved by the defendants through issuance by thousands of different entities."

Visa's and MasterCard's CEOs concede that access to multiple, diverse issuers is necessary for a general purpose card network to offer network-level services effectively. s the district court explained, banks can translate their specialized marketing skills into specialized and targeted products. One bank may have particular database marketing skills, another may be a master of cross-selling, or be expert in marketing to Hispanics, while another may reach rural consumers effectively and efficiently, etc. No single issuer possesses all of these attributes, but with many and diverse issuers, the Visa and MasterCard networks do, and from that they draw enormous strength. These diverse capabilities are especially important as the effectiveness of direct-mail solicitation has waned. And the possibility of contracting with issuers not affiliated with Visa or MasterCard is not an adequate solution, for such alternative issuers "lack the expertise, experience, personnel, and reach to be effective marketers of cards."

The district court's finding that the collective denial of access to multiple bank issuers had significant anticompetitive effects is supported by detailed examples of the importance of that access. As the court found, "[m]ultiple bank issuance of general purpose cards strengthens general purpose credit and charge card networks in three fundamental areas: increased card issuance, increased merchant acceptance, and increased scale."

Because different banks have different skills in targeting and marketing unique card products to discrete consumer segments, acquiring "additional issuers leads to increased card issuance." The district court found that partnering with banks would increase both American Express's and Discover's card output and total card output, As Visa's expert economist testified, increased output is clearly procompetitive, and even share shifting from Visa or MasterCard to products consumers prefer likely enhances consumer welfare.

There is a chicken-and-egg relationship between card issuance and merchant acceptance of those cards. Merchants do not accept a network's cards unless they are confident that sufficient numbers of customers will want to use that card, and consumers do not want a network's card unless they are confident that merchants will accept it. Thus, "[m]erchant acceptance, and the consumer perception of merchant acceptance, is vital to a network . . . . Card features are irrelevant if consumers cannot use the card. As a result, increased merchant acceptance--and increased perception of merchant acceptance--can lead to an increase in card issuance and transaction volume."

The associations recognize that American Express is at a competitive disadvantage because its merchant coverage lags behind that of Visa/MasterCard. Indeed, because one purpose of the exclusionary rules was to preserve the associations' merchant advantage, it is hardly surprising that the discrepancy remains. Although American Express's coverage measured by "cardholder spend" (the percentage of total card expenditures for which a current American Express cardholder could use an American Express card) is currently 96%, its coverage is much lower if measured in terms of the numbers of merchants that accept American Express, or in terms of consumer perceptions, (1999 perception of American Express acceptance levels still at 1996 levels, showing 95% spend coverage but only 78% perception coverage). To attract additional cardholders, American Express will have to break into "new industries" and focus on signing smaller locations after already reducing its merchant discount, further reductions will not significantly improve the situation. Moreover, as the court found, smaller merchants will not accept American Express even at interchange rates below Visa/MasterCard until these merchants see more people carrying the card.

Discover also faces a significant merchant acceptance gap. Despite having the lowest merchant discount rate of the four major networks, Discover is accepted at only 90% of the merchants that accept Visa or MasterCard in the United States. MasterCard describes this gap as "near merchant parity" but its own bank dedication agreements belie this characterization. See (granting Chase a right to terminate its dedication agreement if MasterCard's global merchant acceptance trails Visa's by more than 7.5%). Moreover, consumers perceive Discover's acceptance to be even lower. To increase merchant acceptance, it "needs more card issuance and transaction volume, which can only realistically be obtained via third-party issuers, to become a more relevant network." (increased cardholder base makes it easier to increase merchant acceptance).

"Multiple issuers provide networks with the scale, and, in turn, the relevance that they require to be strong competitors. . . . As Charles Russell, former CEO of both Visa U.S.A. and Visa International, explained, scale drives the card network business and lowers network costs, thereby increasing the networks' ability to offer services at lower, competitive prices." Visa and MasterCard owner/issuers' collective refusal to deal with American Express and Discover limits those networks' ability to increase their scale.

Appellants contend that American Express and Discover are already "at efficient scale." But growing those networks nevertheless would reduce their costs and strengthen them as competitors, just as Visa and MasterCard are constantly trying to increase scale further so as to lower network costs.

Checking accounts ("demand deposit accounts" or "DDAs") are one of the reasons that access to multiple bank issuers is critical to effective competition in network services. Roughly 90% of U.S. families "have at least one checking account," and "consumers view the DDA as their primary financial relationship." "Visa and MasterCard member banks are the custodians of the vast majority of these accounts." The district court found that "b]nk access to DDA accounts is of competitive significance for two distinct reasons: (1) a network that is able to utilize debit accounts has a link to the next generation of payment devices for which the debit account will be the 'core' payment service; and (2) a network with the ability to provide debit products (particularly off-line debit) gains economies of scale by running additional products over the same network facilities."

A bank with DDAs can offer its customers a link to those accounts by issuing them debit cards. Visa and MasterCard "have stressed the importance of the DDA as the primary relationship that a bank has with the consumer," and "view debit cards as the 'portal' to chip-based 'relationship' cards." ("the road to chip is debit as debit is the core link with the consumer") ("[t]his migration will be led through debit") (MasterCard global strategy since the mid-1990s has presumed that chip-based debit cards would be the "primary access tool" for cardholders) .

"Through a single multi-function chip card, defendants intend that issuers will be able to provide their customers the ability to access credit and debit accounts, as well as offering other features such as 'sophisticated loyalty schemes.'" (citing testimony and documents). Visa claims the court found that there is no "business case" for smart cards, but that finding related only to the associations' business decision in the 1980s. And appellants' contention that relationship cards do not yet exist simply points to the need for competition. Consumers demand smart and relationship cards, and Visa and MasterCard continue to include such cards in their plans. Because these next-generation cards depend on DDAs, banks are in the "best position" to offer the products to consumers. "By forbidding their member banks from issuing competitors' general purpose cards, defendants' exclusionary rules thus foreclose the competitive threat that American Express and Discover otherwise might pose to that relationship card strategy." (American Express's partnerships with banks would represent "a clear threat to Visa's Relationship Card strategy").

American Express and Discover's preclusion from the market for multi-function cards further restricts their ability to achieve scale economies. Offline debit transactions run over the same network as credit and charge transactions, "the addition of debit volume improves network economies of scale and increases network relevance. In addition, debit functionality makes a network more attractive for consumers and banks desiring a range of products over a single brand or card." Because of the expected growth in relationship chip cards, which can combine credit, debit, and a variety of other products as the issuer and network see fit, the "inability to provide debit functionality on a cost-effective basis further limits the effectiveness of American Express and Discover as suppliers of credit and charge card network services."

Appellants assert that, even if relationship cards represent the future of general purpose cards, the exclusionary rules do not limit their potential. They contend that American Express is not currently precluded from offering multi-function cards and that its failure to offer them stems from its disinterest. This argument lacks merit. Indeed, appellants ignore the fact that American Express already offers cards through banks outside the United States (where the exclusionary rules do not apply) that combine a credit and debit function.

MasterCard simply distorts the record in asserting that American Express has disclaimed interest in issuing a card combining credit and debit functionality. In the testimony upon which MasterCard relies, Rothschild was commenting on the makeshift "debit on charge" product--using the ACH network for debit authorization and settlement--that American Express considered because it could not contract with banks to issue cards. This strategy is not viable in part because ACH is an "inferior system." (authorization through ACH has unacceptable processing delays and provides consumers with "only limited transaction information"). Accordingly, American Express "wouldn't even be considering a product like debit on charge" if the exclusionary rules were lifted because they would then be able to form relationships with banks and offer comparable debit products to Visa's and MasterCard's. (Discover determined that offline debit not viable without access to banks' DDA accounts).

The district court found that enhanced network-level competition would benefit not just American Express and Discover, but also merchants and--most importantly--consumers.

Issuing banks view Visa and MasterCard as both suppliers of services and as partners. Consumers benefit when multiple networks compete for banks' business because such competition stimulates the networks to offer more competitive products and services. But for the agreement among member banks not to partner with American Express or Discover, consumers could expect lower prices and better service.

Appellants question whether decreased network prices or improved network services would ultimately benefit consumers, but there is no basis for special tolerance of conduct restraining competition in upstream or input markets. "In the long run consumers will benefit when upstream as well as downstream markets are made more competitive. The overall impact of noncompetitive upstream prices is that downstream firms will have higher costs, and even in competition they will charge higher prices." (discussing upstream mergers); ("the antitrust laws assume that a retailer faced with an increase in the cost of one of its inventory items 'will try so far as competition allows to pass that cost on to its customers in the form of a higher price for its product'").

Moreover, because "cardholders believe there are differences among credit card brands, many issuers want to be able to deliver them a brand choice . . . to satisfy consumer demand." Issuers "recognize that the combination of banks' knowledge and features with network features and brand preference yields customer value." Indeed, in 1993 Visa sought to garner more business from its dual members by differentiating its services from MasterCard's and telling members that banks "will be able to combine their own marketing strategies with the capabilities of their chosen system to create both more real and more easily perceived differences in the marketplace." This is so because banks are "not merely distributors of commodity products such as 'spices or ice cream.' A card issuer, rather, 'actually determines the main characteristics of the card which it puts on the market (in competition with the other issuers)'" Thus, it is true but irrelevant that American Express or Discover can mail a card application to anyone in the United States. American Express and Discover as networks have different strengths and weaknesses than Visa or MasterCard, and banks could mix and match their own strengths and capabilities with American Express's or Discover's and create new cards for consumers.

The district court illustrated this fundamental point with a specific example: "Blue from American Express" (Blue). Blue, introduced in 1999, has both a traditional magnetic stripe and an integrated circuit that could provide multi-applications. "While this limited function is currently 'marginal,' Blue offers a platform and an operating system that allows applications to be developed and downloaded to the chip for widespread use by millions of consumers." The chicken-and-egg problem appears again, however, as "software developers have no incentive to write applications for a piece of hardware that does not have wide distribution."

"Absent the exclusionary rules, American Express would make the smart card feature available to banks that issue on the American Express network," the district court found, and banks are in fact interested in working with American Express "to issue the card and provide innovative features." Moreover, multiple bank issuance "would greatly enhance both the functionality and scale of the Blue card. . . . Multiple issuers would offer a variety of features designed to appeal to different consumers, maximizing the benefit of a multi-application card." "The mass deployment of bank issuing resources would improve the scale economies of smart card issuance. . . . Should the 'Blue' smart cards continue to proliferate, particularly via multiple bank issuers, consumers will benefit because increased functionality will result from increased scale." These scale effects, in turn, potentially would feed network effects on the demand side, further expanding the networks.

Visa argues that there is no need for bank issuance of Blue because bank issuance of Visa's smart cards, which use the same technology, can solve the chicken-and-egg and scale problems equally well. But it is for the market, and not private agreements among competing issuers, to determine the pace, extent, and qualities of smart card development. (defendant "not entitled to pre-empt the working of the market by deciding for itself that its consumers do not need that which they demand"); ("all elements of a bargain . . . are favorably affected by the free opportunity to select among alternative offers"). There are opportunities for all four networks to work with banks to increase the smart card choices for consumers, thereby greatly enhancing the competitive vitality of the program. American Express likely would develop different applications than Visa or MasterCard; banks working with American Express could well issue smart cards with different features than banks working with Visa. Consumers would benefit from the ability to choose among alternatives. "In short, the evidence is clear that multiple issuer networks provide the best competitive means for consumers to obtain the long-recognized benefits of smart cards."

The district court found that merchants also would benefit from increased network-level competition. Merchants have an interest in having interchange pricing set competitively, and "enhanced competition from American Express and Discover would likely cause defendants to be more responsive to the interests of merchants." Appellants speculate about what will happen to interchange rates--and the attendant consequences--if their members issue American Express cards. But network providers consider a variety of factors when setting interchange rates, as do merchants in deciding which cards to accept. Visa's expert acknowledged the difficulty in analyzing the effects on consumer welfare of changes in interchange rates. The court reasonably concluded that "merchants--and ultimately consumers--have an interest in the vigor of competition to ensure that interchange pricing points are established competitively." American Express has lowered its discount rate to open up new merchant categories in the past, and it may elect to do so in the future. In any event, there is no reason to permit a private agreement among issuers to deny merchants and others the prospect of vigorous competition among providers of network services. (Sherman Act "rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress").

A more competitive network market not only would bring better products and services from American Express and Discover, but, as the district court found, "would also cause Visa and MasterCard to respond to the greater network competition by offering new and better products and services of their own, thereby benefiting consumers." In fact, the record repeatedly demonstrates that even the possibility of competition by American Express or Discover has spurred competitive responses from Visa and MasterCard.

American Express's initial overture to banks in 1996 caused MasterCard to "'speed up'" its development of a premium card product, and "to consider partnering with a travel agency to compete with American Express." Similarly, a Visa International Competitive Assessment cautions that Visa must "proactively strengthen" its product offerings with member banks in response to actual and potential American Express partnerships with member banks, and that "Visa needs to monitor the situation and counter with competitive products that meet banks needs."

Similarly, American Express's arrangements with foreign banks (unaffected by the exclusionary rules) caused Visa and MasterCard to "react[] competitively." For example, after declining to adopt a 2.10(e)-equivalent, the Visa European Region Board "directed that Visa compete aggressively by making sure that members could offer a 'full range of competing products.'" Visa management "responded with a number of significant initiatives offered to member banks specifically to reduce their incentive to partner with American Express. . . . These included, among others, permission for multi-national corporate cards, increasing network support for the Visa premium product, and improving service to merchants." The district court found that MasterCard also "responded to American Express on the international level."

Visa has also responded competitively when rival networks sought to increase merchant acceptance. For example, Visa was so concerned about the potential volume loss at Wal-Mart when that merchant began accepting the Discover card that Visa offered promotional support to Wal-Mart for the first time.

As the district court found, competition forces all four network competitors--not just the two heretofore excluded--to produce better products at lower prices. Visa and MasterCard sought to reduce that competitive pressure through the exclusionary rules; their repeal will enhance competition.

The exclusionary rules limit American Express and Discover to competing for the banks' business on an all-or-nothing basis, requiring a bank to renounce the possibility of offering its customers cards on the two dominant Visa and MasterCard networks (as well as their associated debit and ATM networks) as the price of doing business with American Express or Discover. (due to exclusionary rules, American Express and Discover face much higher costs than do the associations to obtain banks' business). Appellants do not deny that these rules have prevented American Express from entering into agreements with banks. Nor could they. (American Express would have entered into issuing agreements with certain banks but for the exclusionary rules).

Visa and MasterCard both assert, however, that banks would be uninterested in issuing Discover cards because Discover's interchange rate is too low, and that Discover would actually be hurt by the court's remedy. But the district court found that the exclusionary rules--not Discover's interchange--deterred First USA from entering into an issuing arrangement with Discover. And if appellants truly believed "that the ban would not significantly foreclose [Discover] . . . they would hardly have gone to the trouble of adopting it."

In any event, appellants' insistence that Discover would be harmed by the remedy ignores Discover's view that it "fully supports" Sections III(A), (B), and (C) of the Final Judgment, including repeal of the exclusionary rules. See Discover's Amicus Comments On Proposed Final Judgment 2 (Oct. 17, 2001). Although Discover sought additional language in the decree concerning anti-discrimination provisions, the district court found that the Final Judgment already provided the protection Discover sought. Discover's strategy is to be the low-cost competitor, offering banks other features, services, and qualities that would lead to beneficial relationships, notwithstanding its low interchange rate. The market, and not an agreement among competing issuers, should determine whether that strategy succeeds.

Once the government established that the challenged rules had substantial anticompetitive effects, the burden shifted to Visa and MasterCard to come forward with evidence demonstrating procompetitive justifications. Visa and MasterCard's proffered justifications were that the exclusionary rules are ancillary to the joint ventures because they foster "loyalty" and "cohesion" among the members. The district court expressly acknowledged that joint ventures "may employ reasonable restraints to make the joint venture more efficient." It carefully considered Visa and MasterCard's claims that Bylaw 2.10(e) and the CPP are such ancillary restraints, concluding that "defendants have offered no persuasive procompetitive justification," That conclusion is entirely consistent with the record evidence, which belied defendants' claimed justifications.

Whether a restraint is ancillary is a question of fact. (applying clearly erroneous standard to ancillarity determination). To demonstrate ancillarity, appellants were required to offer more than merely plausible theories of how the exclusionary rules could be reasonably necessary to the procompetitive benefits of the joint ventures--they were also required to prove that their theories were validated by the facts in this case. ("the record must support a finding that the restraint in fact is necessary to enhance competition and does indeed have a pro-competitive effect"); (rejecting proffered justification because "factual predicates are lacking").

A restraint is not automatically deemed ancillary simply because it is "related" to a joint venture. Such a lax standard "could protect cartels from the heightened scrutiny attending naked restraints through the simple device of attaching the cartel agreement to some other, independently lawful transaction." Rather, to be ancillary, a restraint must be reasonably designed to further the procompetitive aspects of the joint venture. (rule of reason "permits 'ancillary restraints' necessary to a legitimate transaction"); (look at the "reasonableness" of the restraint's "relationship to the purposes of the venture"); (an ancillary restraint is an "essential or at least important part of some arrangement that has potentially redeeming virtues"); ("An ancillary restraint is one that is reasonably related to a joint venture or transaction that, at least on initial examination, promises to increase output, reduce costs, improve product quality, or otherwise benefit consumers"). Accordingly, courts have often struck down agreements (including bylaws) even though related to legitimate, procompetitive joint ventures.

Visa argues that the "fragility" of the Visa and MasterCard associations makes them vulnerable to "opportunistic behavior" by "members seeking primarily to further their own individual interests." Consequently, Visa argues, Bylaw 2.10(e) is an ancillary restraint because it "prevents opportunistic behavior that is destructive of the venture's cohesion." MasterCard similarly argues that the CCP was a legitimate response to American Express's "announced desire . . . to 'cherry pick' select MasterCard issuers," which would "destabilize the association and reduce the incentives of other members to invest in the MasterCard brand" by allowing "'defecting' members nonetheless to avail themselves of the benefits" of the MasterCard network. These arguments are sound as theories but, as the district court found, the record evidence demonstrates that such theories are not factually supported. As the district court concluded: "Describing American Express' motives with the pejorative term 'cherry picking' does not change the anticompetitive purpose of the rules: to restrict competition among competitor networks and banks."

Restraints designed to encourage members to devote their efforts to promoting a joint venture's product may be ancillary. Indeed, the government's expert economist so testified. But in this case, the district court agreed with the analysis of the government's expert, M.Katz Dir. and rejected this proffered justification as unsupported by the record.

The instant case is akin to the one this Court faced in NASL. There, an NFL bylaw prohibited members from owning other professional sports teams. The NFL justified its rule as "assur[ing]" the NFL joint venture the "undivided loyalty" of its member clubs. While acknowledging the legitimacy of the proffered justification as a theoretical matter, this Court rejected it on the facts: "We do not question the importance of obtaining the loyalty of partners in promoting a common business venture, even if this may have some anticompetitive effect. But in the undisputed circumstances here the enormous financial success of the NFL league despite long-existing cross-ownership by some members of NASL teams demonstrates that there is no market necessity or threat of disloyalty by cross-owners which would justify the ban."

As the district court found, the associations' concerns about loyalty ring hollow in light of their long history of successful operation despite the divided loyalties of their members, which the associations specifically sanction. The most obvious and material illustration is that both associations--the two dominant networks--exempt each other from their exclusionary rules. This means thousands of issuers aggregating 73% of the market as measured by transaction volume (85% measured by cards issued), have their loyalties divided between Visa and MasterCard. Appellants tout their recent history of dedication programs, but neither association insists on exclusivity even under such agreements (though member banks still are not free to offer American Express or Discover on the uncommitted portion) or even requires issuers to enter into such agreements.

Moreover, both associations exempt certain proprietary networks from their exclusionary rules. Citicorp, the largest issuer of association cards, is free to own and be the sole U.S. issuer on the Diners Club network, even though "at the time By-law 2.10(e) was passed, the worldwide volume on the Diners Club and Discover networks were about equal." Similarly, both exclusionary rules exempt issuance of JCB cards, despite the fact that one association member, Household, obtained exclusive rights to issue JCB cards in the United States.

The associations argue that divided loyalties have a different effect when American Express or Discover is involved. But, as the district court found, "there is no evidence as to why it would be any more opportunistic for American Express to offer a deal to a large issuing bank than it is for MasterCard to offer a special deal to a Visa bank." Indeed, Visa hypothesizes that American Express might destabilize the Visa association by luring away its largest issuer of corporate cards, yet MasterCard's corporate card program survived when Visa "enticed Wells Fargo to sign a Partnership Agreement even though Wells was one of MasterCard's top three corporate card issuers."

Visa and MasterCard's primary rationale for treating each other differently from American Express/Discover is that the associations are both "open" joint ventures, whereas American Express and Discover will choose which banks issue their cards. Under the theory articulated by Visa's expert, Prof. Gilson, "a 'self-enforcing mechanism' limits opportunistic behavior between the associations, but not between the associations and their closed, for-profit competitors." The district court openly questioned Prof. Gilson's credibility and qualifications, but "[m]ost importantly," found that his testimony was "belied by the uncontradicted record evidence."

Professor Gilson's "self-enforcing mechanism" depends on the ability of issuers to shift resources between the associations to "share collectively in any single issuer's attempted opportunistic behavior," which they cannot do if an American Express-issuing bank acts "opportunistically" because, by hypothesis, most member banks would not have issuing agreements with American Express. The district court recognized, however, that the associations' move toward dedication agreements limits the extent to which contractually committed issuers can shift from one association to the other, and thereby undermines the supposed self-enforcing mechanism. Id. MasterCard argues that the dedication agreements represent an alternative to the self-enforcing mechanism, but, in fact, the two work at cross-purposes. To the extent most large issuers have dedicated themselves to one association, "they demonstrate that association members are willing to voluntarily sign agreements which deny them the ability to counteract the opportunistic behavior that the rules ostensibly combat."

In short, the exclusionary rules do not say "You're with us or you're against us" but rather "You're with us . . . or our largest competitor . . . or a network controlled by an important member . . . or you're against us." Visa and MasterCard may indeed prefer that member banks exhibit "loyalty" by not choosing rival network services and not competing to offer cards that consumers might find more attractive. But the record does not support their claim that permitting members to issue cards on rival networks would substantially undermine the joint ventures' ability to compete.

Visa and MasterCard contend that the exclusionary rules are reasonably necessary to maintain the associations' "cohesion" and prevent American Express or Discover from "destabilizing" the associations. Such arguments are not new. In NASL, this Court recognized that damage to or losses by even one league member could "adversely affect the stability, success and operations of other members." Nevertheless, this Court held that the NFL's justification for its bylaw failed on the facts. (rejecting similar justification for shippers' conference prohibiting its authorized travel agents from also selling tickets on non-conference ships, because factfinder "found no indication . . . that elimination of the rule would in fact jeopardize the stability of the conference"). That same focus on the lack of evidentiary support for defendants' claims led the district court to reject defendants' "cohesion" justification on this record.

Appellants argue that American Express's overture to the member banks was intended to subvert the associations and that bank issuance of American Express or Discover cards would undermine the cohesiveness of their "fragile" associations. The contemporaneous evidence, however, does not support the associations' current claim that they acted out of fear of destabilization; rather, the record reflects that the associations enacted the exclusionary rules merely to eliminate or weaken the competitive threat that American Express posed and to prevent some banks from gaining a "competitive advantage" over other banks in the association.

Moreover, the district court found abundant historical and contemporaneous evidence of the associations' disparate treatment of their own members without loss of cohesion. For example, there is no "dissension or disruption within Visa" arising from the continued presence of large, non-dedicated members, such as MBNA, despite the fact that most major issuer/members are now dedicated to one association. Nor has Citibank's continued membership in Visa caused divisiveness or loss of cohesion despite the fact that it is the largest issuer of association general purpose cards has committed to dedicating itself to MasterCard, and continues to control Diners Club.

Most importantly, the district court found "overwhelming" evidence that the associations' special deals that conferred competitive advantages on select members "did not cause disruption" within the associations. Over the years and continuing today, the associations have paid hundreds of millions of dollars in incentive payments and provided product development assistance to select members. In the early 1990s, these payments were made to induce select large member banks to favor one association in that member's mail solicitations to consumers, even though such payments "did not offer new value to cardholders or to the association." In addition, as part of some of those dedication agreements, Visa and MasterCard work closely with individual members to develop new products that will give those members a competitive advantage over sister members. As a whole, the associations have dedication agreements "with virtually all of the largest issuers, controlling more than half of all card issuance, . . . and their terms are not shared with other members of the cooperative." (board members not privy to amount of payments to individual members.

The associations also permit Household and Citicorp to issue cards that no other member can, thereby conferring a competitive advantage on these select members. Visa also has maintained two classes of members since 1992, with "charter" members retaining governance rights, and newer, "non-charter" members having no such rights and paying higher fees. Thus, the associations provide cash, discounts, special products, and other differential treatment to select members, yet justify their exclusionary rules by the supposed need to prevent American Express from engaging in the same conduct. The district court surely was justified in concluding that this "inconsistency cannot withstand scrutiny."

Nor is there any reason to believe that bank issuance of American Express or Discover cards will introduce disloyalty or loss of cohesion any more than does the current practice of dual issuance. Member banks have a "long history" of dealings with American Express in the United States (including issuance of lines of credit to American Express cardholders and selling American Express travelers checks), without loss of cohesion among members. (citing evidence) The story is even more forceful outside the associations' self-defined U.S. Regions. Banco Popular's issuance of American Express cards in Puerto Rico "has caused no disruptive effect." And many member banks issue American Express cards abroad, yet representatives from Visa USA, MasterCard, and Visa International all testified that such issuance had caused no "disruption" or loss of "cohesion." Moreover, "both Visa and MasterCard knowingly continue to have banks that issue American Express serve on their Regional, and even International, Boards." Appellants have not shown how mere bank issuance of American Express or Discover cards in the United States could diminish cohesion within the associations, if such presence on the boards by American Express-issuing members does not.

In sum, it was not enough for Visa and MasterCard to assert that the exclusionary rules encouraged "loyalty," or even to advance plausible theories as to why loyalty provisions might contribute to the "cohesion" of the joint ventures. Rather, it was their burden to come forward with evidence demonstrating that these particular rules were reasonably necessary to maintain loyalty and cohesion and thereby preserve the joint ventures' ability to compete effectively. The district court found that the evidence did not support their claimed procompetitive justifications and, given the substantial anticompetitive effects of the exclusionary rules, found those rules to violate Section 1 of the Sherman Act. The record strongly supports those findings, which should be affirmed.

"The District Court is clothed with 'large discretion' to fit the decree to the special needs of the individual case." ("the contours of an injunction are shaped by the sound discretion of the trial judge"). The "determination of the scope of the decree . . . is peculiarly the responsibility of the trial court," and so long as "the findings of violations are sustained," appellate courts "will not direct a recasting of the decree except on showing of abuse of discretion." "[O]nce the Government has successfully borne the considerable burden of establishing a violation of law, all doubts as to the remedy are to be resolved in its favor."

A trial court "has the duty to compel action" that will "cure the ill effects of the illegal conduct, and assure the public freedom from its continuance." The district court found that Visa's and MasterCard's exclusionary rules "decreased network-level competition," resulting in "fewer and less varied credit card products to the consumer." To "cure the ill effects" of these unlawful exclusionary rules, the district court properly fashioned relief with two basic components: repeal of the exclusionary rules themselves and a transition period during which members are permitted to terminate "dedication agreements" entered into by Visa and MasterCard with many of their member banks, which otherwise would lock a large majority of card issuing volume into the Visa or MasterCard networks. The court's remedy was lawful and appropriate, and MasterCard's argument that the court did not engage in sufficient process before ordering its remedy is without merit.

Given the district court's findings that the exclusionary rules violate the antitrust laws, a necessary component of relief is mandating their repeal. "Civil suits under the Sherman Act would indeed be idle gestures if the injunction did not run against the continuance or resumption of the unlawful practice". Visa argues, however, that various modifications of the exclusionary rules would be more appropriate.

First, Visa suggests that what "is needed here, . . . is greater brand separation, not less," so the "correct response" is not "that By-law 2.10(e) should be repealed," but rather that it should be "extended" to cover all competing networks, presumably including MasterCard. But the factual premise for this suggestion--that issuance of multiple cards "reduce[s] incentives to compete at the network level"--was rejected by the district court. Moreover, the court's remedy does not prohibit Visa or other networks from seeking an exclusive agreement with any issuing bank, nor does it prohibit any issuing bank from entering into such an exclusive arrangement; it simply requires defendants to compete with American Express and Discover rather than foreclose that competition by edict.

Second, Visa suggests only a limited repeal of the exclusionary rules, directed only to those specific products in which the court found American Express and Discover to be disadvantaged. But the court should not attempt to regulate what products appellants' members may offer in conjunction with rival networks. Network competition should instead be allowed to proceed unfettered by restraints.

Finally, Visa suggests that its members be permitted to work with only those networks "that are (or agree to become) open to other issuers generally." But, given that the district court found no basis for concern about the "opportunism" appellants believe to be associated with networks not open to all issuers, there is no basis for its suggested modification. Network competitors should be free to partner with those banks with the precise package of complementary assets they seek.

The decree affords Visa and MasterCard member banks a limited opportunity to terminate existing dedication agreements. The court included this provision because "such agreements between issuers and Visa and MasterCard now predominate the market," so "American Express and Discover have been effectively foreclosed from a large portion of the card issuing market." The court found that merely abolishing the exclusionary rules would not restore competition. And the court narrowly tailored the remedy by (1) limiting the rescission provision to a two-year period, (2) allowing rescission only if a bank enters into an issuing agreement with Discover or American Express, and (3) permitting Visa or MasterCard to apply for the equitable return of any funds paid to the issuer but not yet earned under the agreement, in the event of such termination. As the court found, this remedy "is the least burdensome way of achieving the appropriate result under the antitrust laws."

MasterCard argues that the dedication agreements were neither challenged nor found to be "violations of the antitrust laws." It is well established, however, that conduct remedies may go beyond enjoining the specific conduct proven to violate the antitrust laws. Courts may enjoin lawful and otherwise permissible practices when necessary to correct the anticompetitive effects of unlawful conduct. The decree should "effectively pry open to competition a market that has been closed by defendants' illegal restraints. If this decree accomplishes less than that, the Government has won a lawsuit and lost a cause."

MasterCard argues that the district court was wrong to conclude that the rescission provision was necessary, because: (1) a few large issuers had not signed dedication agreements when the trial record closed; (2) the agreements are of "limited duration"; and (3) some of the agreements allow the member-issuer to issue a limited number of cards on other networks. The district court, however, carefully considered and rejected the purely factual arguments MasterCard raises. The court found that as a result of the dedication agreements, "American Express and Discover have been effectively foreclosed from a large portion of the card issuing market, and will continue to be so foreclosed for the duration of those agreements." Before permitting rescission of the agreements, the court gave due consideration to their duration and to the fact that Visa and MasterCard had not yet "locked up" all of their issuing banks. MasterCard emphasizes that some of its dedication agreements permit member banks to issue as much as 20% of their card portfolio on other general purpose card networks. This, too, was considered by the district court. MasterCard demonstrates no abuse of discretion, and having been found to have violated the antitrust laws, is not entitled to set limits on the portion of each bank's portfolio for which rivals may compete.

MasterCard suggests the Final Judgment should be vacated, at least in part, because MasterCard was not afforded an evidentiary hearing concerning relief. A district court, however, has broad authority to determine its procedures, and a decision not to hold a separate evidentiary hearing concerning remedy is reviewed for abuse of discretion. There plainly was no such abuse here.

MasterCard's brief does not identify any remedy-related disputed facts requiring a hearing, nor did its remedy filings below. Nor did any defendant ever request an evidentiary hearing concerning the remedy, before or after they reviewed the proposed decree. They should not be heard to raise the argument for the first time on appeal.

Moreover, the defendants had ample opportunity to offer evidence related to relief. The government filed its Proposed Final Judgment and its supporting Memorandum during the trial, on August 11, 2000. Two expert witnesses for Visa USA and MasterCard's only expert witness subsequently testified concerning the proposed remedy. Thereafter, defendants collectively filed over eighty pages concerning the proposed remedy. In its initial opinion, the district court instructed the parties to submit "comments and objections regarding the Proposed Final Judgment." In response, defendants submitted nearly seventy pages of comments concerning the proposed decree. There was no abuse of discretion in failing additionally to order an unsought evidentiary hearing. (defendants not entitled to remedies hearing because they failed "to explain to the district court what new proof they would present").

Visa International's brief is principally devoted to disclaiming its liability under Section 1 of the Sherman Act. It largely ignores the district court's rulings that Visa International was properly joined as a defendant and properly included in the decree--whether or not it is liable for violating the Sherman Act--because the court could not otherwise fashion effective relief. Those rulings are determinative for purposes of the remedy the government obtained in this case and should be affirmed.

A trial court's determination under Rule 19 of the Federal Rules of Civil Procedure with respect to the joinder of persons needed for a just adjudication is reviewed for abuse of discretion. District courts are vested with large discretion in molding effective and appropriate relief in antitrust cases, and the district court's choice of remedy is reviewed for abuse of discretion.

The district court in a civil government antitrust case has broad discretion to approve joinder of a party who may not have violated the antitrust laws, and to enjoin certain conduct of that party if necessary to afford effective relief. Visa International ignores the controlling authority requiring its joinder in this case.

Rule 19(a) expressly provides for joinder of a non-party if "in the person's absence complete relief cannot be accorded among those already parties." In fact, "Rule 19(a) requires the Court to join any person who is necessary to effect 'complete relief,' where such joinder is feasible." (court "must" order joinder if "any" Rule 19 criterion is met).

Complete relief in a government antitrust case means relief that is "'effective to redress the violations.'" ("courts are . . . required [] to decree relief effective to redress the violations, whatever the adverse effect of such a decree on private interests"). As we have noted, it is well established that appropriate conduct remedies go beyond enjoining the specific conduct proven to violate the antitrust laws. And an antitrust court not only can, but "should" include non-liable third parties in any remedy orders when necessary to effectuate a decree.

The district court determined that Visa International is a necessary defendant under Rule 19, whether or not it is liable under the Sherman Act, "because it has the authority to adopt exclusionary by-laws in the United States." Thus, the district court denied Visa International's motion to dismiss it as a defendant because "Visa International has the power to impose its own version of By-law 2.10(e) unless legally prevented from doing so." The court subjected Visa International to a single provision of the decree, enjoining it and the other defendants from "enacting, maintaining or enforcing any by-law, rule, policy or practice" equivalent to Bylaw 2.10(e), to ensure "effective relief by preventing Visa International from adopting at an international level a by-law that Visa USA would be prohibited from adopting itself." (decree prohibits Visa International "from circumventing the effect of this decision by using its authority to enact practices that this court has found to be anticompetitive").

Visa International asserts that the injunction is "improper and unnecessary" because it has only "limited, conditional power over Visa USA and its bylaws." But the express terms of Visa International's bylaws justify the district court's concern. Section 15.02(a) of those bylaws gives Visa International "exclusive[]" authority over "interregional matters." Although the regulation of "intraregional matters" resides initially with Visa USA, even that authority is "subject to Visa International policies," which may be adopted by a majority of Visa International's total membership. §15.02(b). The bylaws place no limits on the types of policies that Visa International's membership might adopt. In addition, "intraregional matters which may have a significant effect on the worldwide Visa program" can be "preempted or regulated" by Visa International. Again, the bylaws do not limit the Board's power to determine which intraregional matters have such an effect. Section 15.05 further provides that the Board can consider "conflicts and/or controversies" between the policies of regional boards (such as Visa USA) and the regulations, bylaws, or policies of the International Board--including whether regional policies "are inconsistent with the rules, regulations, and/or policies, or otherwise not in the best interests of the corporation."

In disputing the district court's conclusion that it has power to preempt Visa USA's Bylaw 2.10(e), Visa International complains that the district court did not make findings as to the meaning of particular bylaw terms, as applied to issues related to 2.10(e). But Visa International's bylaws do not provide for judicial review of the Board's interpretations of its own authority. The bylaws give the Board "final" authority to determine whether a matter is "purely interregional, purely intraregional, or intraregional having a significant effect on the worldwide Visa program, and to be preempted or regulated by [Visa International]." (Board decisions are "binding") (Visa International's "federal system" vests legislative and judicial power in a single entity).

Moreover, Visa International's own conduct gave the district court further reason for concern that Visa International might exercise its authority to circumvent the decree by adopting a rule equivalent to Visa USA's Bylaw 2.10(e). As the court noted, Visa International had "provided affirmative encouragement for By-law 2.10(e) and would have passed its own international version of that rule absent intervention from foreign competition authorities." Visa International then adopted a resolution delegating authority to Visa USA, among others, in order "to ensure that the United States Region knew the International Board supported a continuation of By-law 2.10(e)." That resolution expressly reaffirmed the Board's opposition to "dual issuance of VISA and competitive cards, including American Express cards" and specifically promised that "Visa will continue to examine other alternatives to eliminate or diminish the adverse anti-competitive effects . . . which would result from Visa Members issuing and/or acquiring competitive products, including American Express products . . . .". In these circumstances, the district court was amply justified in its concern that Visa International could circumvent a decree applicable only to Visa USA by replacing Bylaw 2.10(e) with an equivalent provision.

Visa International's remaining objections to the decree are insubstantial. Visa International claims that it is "powerless to engage in the conduct proscribed by the court's injunction" because the injunction contains the factually incorrect premise that Visa International has "issuers" that issue cards in the United States. Visa International never challenged the remedy on this basis in the district court, however, and thus should be foreclosed from raising this issue for the first time on appeal. Application of this "well-established general rule," is particularly appropriate here where the district court could easily have made the minor correction required to reflect the court's obvious intent. In any event, a request for correction can be made to the district court, which retains continuing jurisdiction over the decree.

Visa International also argues that the possibility of contempt proceedings were it "to somehow frustrate the court's overall relief" is an adequate substitute for applying the decree to it. That alternative would defeat an important Rule 19 purpose: to avoid repeated and unnecessary litigation. Moreover, contempt remedies can reach only non-parties who "abet the defendant, or [are] legally identified with him." Visa International maintains that it and Visa USA "are now and always have been separate and distinct entities," and it denies that its conduct to date could be considered to aid or abet Visa USA's actions. The district court properly tailored the relief in this case to avoid the necessity of further litigation to prevent Visa International from circumventing the decree.

The district court weighed the need to include Visa International in the decree's prohibitions against the burden imposed, concluding that the provisions to which Visa International would be subject are "'minor and ancillary.'" The court carefully considered Visa International's objections on a section-by-section basis, and modified the proposed decree to limit its applicability to Visa International where appropriate. The final decree "requires no affirmative conduct on the part of Visa International, but rather merely prohibits it from circumventing the effect of this decision by using its authority to enact practices that this court has found to be anticompetitive," and that Visa International now disclaims any intent to undertake. In these circumstances, the district court acted well within its discretion.

Visa International devotes the bulk of its brief to attacking the district court's determination that Visa International "was in part responsible for the illegal rule and therefore is liable." These arguments, even if accepted, would provide no basis for modifying the decree or dismissing Visa International from the litigation. As the district court held, Visa International was appropriately joined as a defendant and included in the remedy, "regardless of whether [it] is found to be liable." Id.

Contrary to Visa International's contention, it was held liable for its own conduct, not for Visa USA's conduct under a theory of strict liability. The district court's determination that Visa International was liable as a participant in the challenged agreement among Visa USA and its issuers was based on its finding that Visa International "not only had the power to preempt Visa USA's exclusionary rule, but also provided affirmative encouragement for the illegal bylaw." The Visa International Board's resolution delegating authority "to ensure that the United States Region knew the International Board supported a continuation of By-law 2.10(e)," and promising to "continue to examine other alternatives," provided Visa USA and its issuers not only encouragement, but assurance that Visa International would not act to preempt their exclusionary practice, despite the expressed opposition of other regions and competition authorities. In these circumstances, the district court reasonably found that Visa International knowingly joined the conspiracy, and that finding is not clearly erroneous. ("If a defendant, with an understanding of the unlawful character of the conspiracy, intentionally engages, advises, or assists, for the purpose of furthering the illegal undertaking, he thereby becomes a knowing and wilful participant, a conspirator"); Restatement (Second) of Torts § 876(b) (liable for "tortious conduct of another" if one "knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself").

Visa International's reliance on Copperweld Corp v. Independence Tube Corp., 467 U.S. 752 (1984)for the proposition that, as a matter of law, it cannot be held liable for conspiring with Visa USA if it has the power to exercise control over Visa USA's adoption and adherence to an anticompetitive rule, is beside the point because the challenged conspiracy also involved Visa issuers. Corporations, their senior officers, and subordinates over whom they exercise significant control are often joined as defendants in suits under Section 1 of the Sherman Act when they conspire with outside competitors.

(Dollars in Millions)         THREE MONTHS ENDED JUNE 30,                     SIX MONTHS ENDED JUNE 30,

                              ---------------------------                  ----------------------------

                                     2002            2001      % CHANGE           2002             2001    % CHANGE

                              -----------     -----------     ---------    -----------    -------------  ----------

Local services                $     5,230     $     5,545         (5.7)%   $    10,465    $      11,165        (6.3)%

Network access services             3,418           3,399           .6           6,875            6,691         2.7

Long distance services                777             758          2.5           1,556            1,520         2.4

Other services                      1,043           1,251        (16.6)          2,046            2,497       (18.1)

                              -----------     -----------                  -----------    -------------

                              $    10,468     $    10,953         (4.4)    $    20,942    $      21,873        (4.3)

(Dollars in Millions)            THREE MONTHS ENDED JUNE 30,                 SIX MONTHS ENDED JUNE 30,

                                 ---------------------------                 --------------------------

                                         2002           2001     % CHANGE           2002           2001     % CHANGE

                                 ------------    -----------     --------    -----------    -----------     --------

Operations and support           $      5,592    $     5,904       (5.3)%    $    11,170    $    11,861        (5.8)%

Depreciation and amortization           2,393          2,344        2.1            4,758          4,627         2.8

                                 ------------    -----------                 -----------    -----------

                                 $      7,985    $     8,248       (3.2)     $    15,928    $    16,488        (3.4)

(Dollars in Millions)           THREE MONTHS ENDED JUNE 30,                  SIX MONTHS ENDED JUNE 30,

                                ---------------------------                  --------------------------

                                         2002          2001      % CHANGE            2002         2001     % CHANGE

                                 ------------   -----------    ----------     -----------   ----------    ---------

Segment Income                   $      1,232   $     1,361        (9.5)%     $     2,498   $     2,711      (7.9)%

(Dollars in Millions)           THREE MONTHS ENDED JUNE 30,                   SIX MONTHS ENDED JUNE 30,

                                ---------------------------                  --------------------------

                                         2002          2001      % CHANGE            2002          2001    % CHANGE

                                --------------   ----------    ----------    ------------   -----------   ---------

Wireless services                 $      4,738   $    4,383          8.1%    $      9,112   $     8,429        8.1%

 

(Dollars in Millions)            THREE MONTHS ENDED JUNE 30,                 SIX MONTHS ENDED JUNE 30,

                                 ---------------------------                 -------------------------

                                         2002           2001      % CHANGE          2002           2001     % CHANGE

                                  -----------    -----------    ----------   -----------    -----------   ----------

Operations and support            $     3,046    $     2,817         8.1%    $     5,865    $     5,454         7.5%

Depreciation and amortization             785            887       (11.5)          1,566          1,806       (13.3)

                                  -----------    -----------                 -----------    -----------      

                                  $     3,831    $     3,704         3.4     $     7,431    $     7,260         2.4

(Dollars in Millions)           THREE MONTHS ENDED JUNE 30,                   SIX MONTHS ENDED JUNE 30,

                                ---------------------------                  --------------------------

                                         2002         2001       % CHANGE            2002          2001      % CHANGE

                                -------------    ----------     ---------    ------------   -----------     ---------

Segment Income                    $       240    $      151         58.9%    $        437   $       249         75.5%

(Dollars in Millions)           THREE MONTHS ENDED JUNE 30,                  SIX MONTHS ENDED JUNE 30,

                                ---------------------------                  --------------------------

                                         2002          2001      % CHANGE            2002          2001      % CHANGE

                                -------------    ----------      --------    ------------   -----------      --------

Operating revenues                $       754    $      598          26.1%    $      1,505   $     1,125         33.8%

(Dollars in Millions)           THREE MONTHS ENDED JUNE 30,                   SIX MONTHS ENDED JUNE 30,

                                ---------------------------                  --------------------------

                                         2002          2001      % CHANGE            2002          2001     % CHANGE

                                -------------    ----------      --------    ------------   -----------     --------

Operations and support            $       474    $      432           9.7%   $        972   $       816         19.1%

Depreciation and amortization             137           114          20.2             273           219         24.7

                                  -----------    ----------                  ------------   -----------

                                  $       611    $      546          11.9    $      1,245   $     1,035         20.3

(Dollars in Millions)           THREE MONTHS ENDED JUNE 30,                 SIX MONTHS ENDED JUNE 30,

                                ---------------------------                 --------------------------

                                        2002           2001      % CHANGE          2002          2001      % CHANGE

                                -------------    ----------     ---------   -----------     ----------    ---------

Segment Income                    $       256    $      243          5.3%     $     467     $      453        3.1%

(Dollars in Millions)           THREE MONTHS ENDED JUNE 30,                  SIX MONTHS ENDED JUNE 30,

                                ---------------------------                  --------------------------

                                        2002           2001      % CHANGE           2002           2001    % CHANGE

                                ------------     ----------      --------    -----------    -----------    --------

Information services              $      936     $      984         (4.9)%    $    1,739    $     1,773      (1.9)%

(Dollars in Millions)            THREE MONTHS ENDED JUNE 30,                  SIX MONTHS ENDED JUNE 30,

                                 ---------------------------                 --------------------------

                                         2002           2001    % CHANGE           2002            2001     % CHANGE

                                  -----------    -----------    --------     ----------     -----------     --------

Operations and support            $       477    $       453         5.3%    $      911     $       869          4.8%

Depreciation and amortization              16             20       (20.0)            31              41        (24.4)

                                  -----------    -----------                 ----------     -----------

                                  $       493    $       473         4.2     $      942     $       910          3.5

(Dollars in Millions)            THREE MONTHS ENDED JUNE 30,                  SIX MONTHS ENDED JUNE 30,

                                 ---------------------------                 --------------------------

                                         2002           2001    % CHANGE           2002            2001     % CHANGE

                                  -----------    -----------    --------     ----------     -----------     --------

Segment Income                    $       260    $      298        (12.8)%    $      473    $       510        (7.3)%