The opinion of the court was delivered by: Barbara S. Jones United States District Judge
Amended Opinion & Order*fn1
Defendant MasterCard International Incorporated ("MasterCard") moved to enforce the Court's October 9, 2001 judgment in this case, United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322, 410 (S.D.N.Y. 2001) (the "Final Judgment") against Defendant Visa U.S.A., Inc. ("Visa") on January 10, 2005.*fn2 (See MC Mot. Enforce, Doc. No. 334.) The Court appointed Special Master Paul Shechtman to determine whether Visa's By-Law 3.14 violates the Final Judgment. (See Order of Aug. 18, 2005 ("Order of Reference").) The Special Master issued a Report in which he concluded that By-Law 3.14 violates the Final Judgment. (See Report 32-36.) Visa objected to all of the Special Master's principal findings and conclusions, and MasterCard moved to adopt them. For the reasons stated herein, the Court adopts the findings of fact and conclusions of law in the Report.
Background & Procedural History
The Court presumes familiarity with the factual background giving rise to these proceedings. (See Report 1-3.) As relevant here, Paragraph III.C of the Final Judgment provides:
Each Defendant is enjoined from enacting, maintaining, or enforcing any by-law, rule, policy, or practice that prohibits its issuers from issuing general purpose or debit cards in the United States on any other general purpose card network. 163 F. Supp. 2d at 410. After entering the Final Judgment,*fn3 the Court granted Visa's and MasterCard's motions for a stay pending appeal. See United States v. Visa U.S.A., Inc., No. 98 Civ. 7076, 2002 U.S. Dist. LEXIS 25086 (S.D.N.Y. Feb. 7, 2002).
Visa enacted By-Law 3.14 on June 20, 2003, while the appeal was pending. (MC Ex. 162.) By-Law 3.14 provides that if one of Visa's 100 largest issuers moves its debit portfolio from Visa to MasterCard, that issuer must pay Visa a fee, known as the Settlement Service Fee ("SSF").*fn4 The SSF represents that issuer's proportionate share of Visa's remaining settlement obligation arising from In Re Visa Check/MasterMoney Antitrust Litigation, 297 F. Supp. 2d 503 (E.D.N.Y. 2003) (the "Wal-Mart" litigation).*fn5 Visa's total settlement obligation from the Wal-Mart litigation was just over $2 billion,*fn6 payable in annual installments of $200 million over ten years.*fn7 (Dahir Dep. 62:16; 64:19-21; 67:3-7.)
Visa began renewing or re-signing long-term contracts with its member banks in 2003, while the appeal of the Final Judgment was pending. (See Report 33; MC Ex. 306.) MasterCard filed a motion to enjoin Visa from enforcing the SSF on September 23, 2003, which the Court denied for lack of jurisdiction due to the pending appeal. (See Order of Dec. 8, 2003 at 3 & n.2, 5 & n.3; Order to Show Cause (Sept. 23, 2003), Doc. No. 288.) By early 2004, Visa had renewed long-term contracts with most of its member banks, essentially locking up 89% of the volume of its top 100 debit issuers.*fn8 (See Report 33; MC Ex. 306.)
The Second Circuit affirmed the Final Judgment in United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003), cert denied, 543 U.S. 811 (2004). The Final Judgment became effective on October 15, 2004 (the "effective date"), after the Supreme Court denied certiorari. (See Letter from W. Stallings to Judge Jones (Oct. 21, 2004) (endorsed Oct. 27, 2004), Doc. No. 321.) On January 10, 2005, MasterCard again moved to enforce the Final Judgment against Visa, arguing that the SSF violates Paragraph III.C of the Final Judgment. (See MC Mot. Enforce.)
In an Order dated August 12, 2005, the Court interpreted Paragraph III.C of the Final Judgment as follows:
Paragraph III(c) prohibits any by-law, rule, policy or practice that imposes "loss of membership" as a penalty for issuing competing cards; that "effectively prevents" member banks from issuing cards on competing networks; or that is a "significant cause" of member banks' inability to do so profitably. (Order of Aug. 12, 2005 at 3-4.) Soon after, the Court appointed the Special Master to determine whether the SSF violates the Final Judgment.*fn9 (See Order of Reference.)
At the time of his appointment in August 2005, the Special Master had the benefit of two rounds of discovery, first in 2003 and again in 2005, as well as legal briefing related to MasterCard's January 10, 2005 Motion to Enforce. (See MC Mot. Enforce; Letter from P. Thomas to P. Shechtman (Sept. 12, 2005); Letter from P. Thomas to P. Shechtman (Sept. 20, 2005); Order of Dec. 8, 2003; Order of Aug. 12, 2005; Order of Reference.) The Special Master then held a series of conferences, oversaw another round of discovery, held a five-day evidentiary hearing that involved live testimony from eight witnesses, reviewed post-hearing briefing, and heard oral argument. (Report 3; see Letter from P. Thomas to P. Shechtman (Oct. 16, 2005); Letter from P. Thomas to P. Shechtman (Nov. 11, 2005); Hearing Tr.) The Special Master also reviewed hundreds of exhibits and deposition testimony from 15 witnesses. (Report 3.) He then circulated a draft of his Report and held a conference on July 6, 2006 to hear argument and receive comments. (See Conf. Tr.) The Special Master issued his Report on July 7, 2006.
In his Report, the Special Master concluded that the SSF effectively prevents Visa banks from switching to MasterCard in violation of the Final Judgment. (Report 33-36.) The Special Master also concluded that contempt standards do not govern this proceeding (Report 32), and that evidence from before the effective date of the Final Judgment is relevant in determining whether Visa violated the Final Judgment after that date (Report 33). On July 27, 2006 Visa objected to all of the Special Master's principal findings and conclusions, and MasterCard moved to adopt the Report on the same day. Their motions were fully submitted as of August 24, 2006. The Court notified the parties of its principal findings and conclusions, which are now reflected in this Opinion and Order, during a telephone conference on March 20, 2007, and it held oral argument with respect to the proper scope of the Court's remedy on April 23, 2007.
For the reasons stated herein, the Court adopts the Special Master's Report and concludes that the SSF violates the Final Judgment.
The Court must decide de novo all objections to findings of fact and conclusions of law made by the Special Master. Fed. R. Civ. P. 53(g)(3)-(g)(4). In acting on the Report, the Court may adopt or affirm; modify; wholly or partly reject or reverse; or resubmit to the Master with instructions. Fed. R. Civ. P. 53(g)(1).
Visa claims that MasterCard's motion sounds in contempt, and that the Special Master erred by not applying the more demanding standards applicable in contempt proceedings.*fn10 (Visa Obj. 8-12.) Specifically, Visa argues: (1) that as a procedural matter, a party may enforce a court order only through a contempt proceeding; and (2) that contempt standards should nevertheless apply here in light of the nature of MasterCard's proposed remedy. Visa is mistaken on both accounts.
A motion to enforce is an appropriate procedural vehicle for parties to seek compliance with a court order. See, e.g., Pena v. New York State Div. for Youth, 708 F.2d 877 (2d Cir. 1983) (affirming where district granted motion to enforce and did not apply contempt standards); Sanchez v. Maher, 560 F.2d 1105, 1108 (2d Cir. 1977) (same); Vassell v. Reliance Sec. Group, 328 F. Supp. 2d 454, 462 (S.D.N.Y. 2004) ("[The] motion is properly characterized as a motion to enforce the judgment previously entered."); Martens v. Smith Barney, Inc., No. 96 Civ. 3779, 2003 U.S. Dist. LEXIS 11587, at *10-12 (S.D.N.Y. July 9, 2003); see also Universal Outdoor, Inc. v. City of New Rochelle, 286 F. Supp. 2d 268, 273 (S.D.N.Y. 2003) (recognizing that parties seeking redress for violations of a court order can do so in ways other than a contempt action).*fn11
In giving effect to its prior orders, this Court has broad equitable authority to fashion an appropriate remedy, and a finding of contempt is not a prerequisite for enforcement. Berger v. Heckler, 771 F.2d 1556, 1569 (2d Cir. 1985) ("Ensuring compliance with a prior order is an equitable goal which a court is empowered to pursue even absent a finding of contempt."); Alexander v. Hill, 707 F.2d 780, 783 (4th Cir. 1983) ("[T]he lack of a finding of contempt or of bad faith should not preclude exercise of inherent equitable powers to achieve fair remedial results."); Class v. Norton, 376 F. Supp. 496, 501 (D. Conn. 1974) (noting court's "'broad discretionary power' . . . to fashion equitable remedies" to give effect to its prior orders), aff'd in relevant part and rev'd in part on other grounds, 505 F.2d 123 (2d Cir. 1974) (quoting Lemon v. Kurtzman, 411 U.S. 192, 200 (1973)); cf. United States v. New York Tel. Co., 434 U.S. 159, 172 (1977) ("This Court has repeatedly recognized the power of a federal court to issue such commands under the All Writs Act [28 U.S.C. § 1651] as may be necessary or appropriate to effectuate and prevent the frustration of orders it has previously issued . . . .").
Although contempt standards may be appropriate where sanctions are sought or imposed, see, e.g., Martens v. Thomann, 273 F.3d 159 (2d Cir. 2001); United States v. Dist. Council of New York City & Vic. of the United Bhd. of Carpenters & Joiners., No. 90 Civ. 5722, 2004 U.S. Dist. LEXIS 22308, at *16-20 (S.D.N.Y. Nov. 3, 2004); Perfect Fit Indus., Inc. v. Acme Quilting Co., No. 77 Civ. 2004, 1984 U.S. Dist. LEXIS 15405, at *30-32 (S.D.N.Y June 29, 1984), such is not the case here. As explained in Part VI, infra, the equitable remedy sought and imposed in this case is not a sanction.
The cases relied upon by Visa are to no avail. In Thomann, for example, the motion to enforce included sanctions against class counsel. See 273 F.3d at 164. Here, by contrast, the Motion to Enforce is advanced against a party and does not include sanctions. On remand, the district court distinguished Thomann on precisely these grounds from cases which did not apply contempt standards. See Martens, 2003 U.S. Dist. LEXIS 11587, at *10-12 (S.D.N.Y. July 9, 2003).
EEOC v. New York Times Co., 196 F.3d 72, 80-81 (2d Cir. 1999) also does not weigh in favor of applying contempt standards here. In New York Times, the Second Circuit was faced with two issues: first, whether certain conduct violated a consent decree; and, second, whether certain other conduct violated a subsequent order that the district court had entered to effect compliance with the consent decree. The Court applied contempt standards only in its review of the latter. In bifurcating the contempt analysis, New York Times highlights that while contempt standards are appropriate in some cases --such as where a party violates a subsequent enforcement order --contempt standards are not necessarily applicable where, as here, conduct violates an underlying prior order. See id.; see also Berger, 771 F.2d at 1569 n.19 (refusing to apply contempt standards and citing the district court's "basic authority to compel compliance with its orders").
Because contempt standards do not govern the instant proceedings, MasterCard must demonstrate only by a preponderance of the evidence that Visa's SSF violates the Final Judgment. For the reasons stated herein, MasterCard has met its burden.*fn12
III. The Special Master's Ultimate Conclusion that the SSF Violates the Final Judgment
Visa's primary objection is that the weight of the evidence does not support the Special Master's factual findings and ultimate conclusion that the SSF violates the Final Judgment. (Visa Obj. 23-25, 39-45.) The Court disagrees. The Special Master considered evidence from seventeen banks, four that switched from Visa to MasterCard and thirteen that remained with Visa. He heard live testimony from executives at MasterCard, Visa, and six issuing banks.*fn13 He also reviewed 15 depositions and hundreds of exhibits. (Report 3.) As the Special Master properly found, the record easily shows by a preponderance of the evidence that the SSF effectively prevents Visa member banks from switching to MasterCard in violation of Paragraph III.C of the Final Judgment. (See Order of Aug. 12, 2005 at 3-4; United States v. Visa U.S.A. Inc., 163 F. Supp. 2d at 410.)
Visa and bank executives considered the SSF a cost of conversion that MasterCard would have to reimburse. Visa and MasterCard use so-called "hard dollar" financial incentives --e.g., signing bonuses, marketing support, and compensation for costs of conversion such as issuing new plastic cards -- to persuade issuing banks to switch from one network to the other.*fn14
(Tr. 162; Tr. 785-86; Report 10-11; 35.) The SSF for most banks is quite sizable in relation to the total incentive package offered by MasterCard. (See Report 11 & n.16 (chart).)
The evidence shows that the SSF de-valued MasterCard's incentive package on essentially a dollar-for-dollar basis. (MC Ex. 194 at 096080; see MC Ex. 18 at 0193, 0211 ("MasterCard's substantial recent offer is not enough to outweigh Visa's exit penalty and the above incentives.").) This follows intuitively -- if MasterCard offered a Visa member bank an incentive package to convert to MasterCard, but the bank first had to pay Visa an SSF in order to receive the incentive package, the bank would reduce the dollar value of the incentive package by the dollar value of the SSF in making its brand-switching decision. (See, e.g., MC Ex. 170 (illustrating that Visa expected the SSF to force MasterCard to increase the size of its incentive package by the amount of the SSF); MC Ex. 167 (same); see also Report 10-11, 15, 35-36.)
The Court agrees with the Special Master that, because banks make the brand-switching decision "at the margin," the SSF is large enough in relation to MasterCard's incentive package to effectively prevent a bank from switching. (Report 35.) The weight of the evidence, which includes the testimony of Visa executives as well as Visa's own internal conversion analyses, confirms this conclusion.*fn15
a. Testimony of Visa Executives and Internal Visa Documents
Visa's former Executive Vice President of Finance and current CFO, Neil Williams, testified that Visa "never included the collection of any [SSF] money in any of our . . . projections [because] we weren't expecting to collect the money." (Williams Dep. 140-41.) Visa's former Chairman of the Board, Patrick Phillips, testified that the SSF would have the same effect as assessing the settlement obligation against a member bank in one lump payment. (Tr. 999). This "would [have been], ...