Interesting that MasterCard put $650,000,000 in reserves from its IPO to cover litigation expenses, yet, it was Visa who agree to settle first. From the below American Express press release, they explain that: "[a]s the sole remaining defendant, MasterCard would be liable for the full amount."
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Reprinted AmEx Release in it's entirety.
AMERICAN EXPRESS REACHES $2.25 BILLION SETTLEMENT AGREEMENT WITH VISA
NEW YORK, November 7, 2007 --
American Express said today that it has reached an agreement to drop Visa as a defendant in a lawsuit alleging that MasterCard, Visa and their member banks had illegally blocked American Express from the bank-issued card business in the United States.
Under terms of the settlement agreement, Visa will pay a maximum amount of $2.25 billion to American Express. Individual banks named in the lawsuit will also be dropped as defendants. These include: J.P. Morgan Chase, Capital One, U.S. Bancorp, Wells Fargo and Providian. The agreement is subject to the approval of Visa’s member banks.
MasterCard remains the sole defendant in the American Express case. The lawsuit, which was filed in Federal court (November 2004) by American Express, seeks monetary damages for the lost business opportunity that resulted from the illegal conspiracy to boycott American Express. American Express is expected to seek damages in the billions of dollars. As the sole remaining defendant, MasterCard would be liable for the full amount.
“The size of this settlement, along with earlier court rulings, underscores the seriousness of the damage done by the illegal boycott,” said Kenneth I. Chenault, chairman and chief executive. “We plan to move forward with the litigation to hold MasterCard accountable for the illegal actions that blocked banks from working with us for many years and to seek full compensation for the value that would have been generated for our shareholders.”
Under terms of the agreement reached with Visa, Inc., Visa USA, and Visa International, American Express will receive an aggregate maximum payment of $2.25 billion. An initial
payment of $1.13 billion will likely be recognized by American Express in income during the fourth quarter 2007. The remainder, payable in installments of up to $70 million per quarter over the next four years, is subject to achieving certain quarterly performance criteria within the U.S. network services business of American Express.
“Given the strong growth momentum we have built within that business, we are highly optimistic in our ability to meet those performance requirements,” said Mr. Chenault.
In light of the settlement, American Express said that it is likely to incur a number of significant additional fourth quarter expenses, including:
Incremental investments in marketing, promotion, rewards, cardmember services and other business building initiatives designed to capitalize on competitive opportunities in the payments industry at a time when some competitors are pulling back.
Additional funding for the American Express Foundation, which will support the company’s ongoing philanthropic activities.
Litigation expenses related to the lawsuit against Visa and MasterCard.
Given the continued evolution of its rewards programs, the Company also said that it is currently evaluating enhancements to its method of estimating its liability for Membership Rewards®, including the consideration of an actuarial based approach for estimating the ultimate redemption rate. These enhancements could result in a significant one time addition to reserves upon implementation.
“Rewards and customer loyalty programs have been a key element of our success, and we expect them to continue to be a centerpiece of our strategy going forward,” said Mr. Chenault. “The overall economics of a rewards-based strategy are very favorable: higher spending, stronger loyalty and superior credit metrics. Our expectation is that more Cardmembers will enroll in rewards programs and generate a growing share of their overall spending with American Express. Our higher enrollments and improvements to the program in recent years are causing us to continually evaluate and enhance the method to estimate the ultimate usage of points earned by our Cardmembers.”
The aggregate cost associated with this potential addition to the Company’s Membership Rewards liability and the other items mentioned above could represent a significant portion of the payment expected to be realized this quarter.
The Company said that any decisions about whether to reinvest future payments into business building activities will be made on a quarter by quarter basis over the next four years. “This settlement compensates us in part for past damages in a way that allows us to invest in our future,” said Mr. Chenault. “We intend to be consistent with our approach of the last several years, capitalizing on marketing and promotional opportunities and enhancing our network when we see chance to gain a competitive advantage. We have been generating very attractive returns on our investment spending of the past few years and believe that the pipeline of market opportunities will continue to be strong in the years ahead.
American Express Reaches $2.25 Billion Settlement Agreement With Visa
“At a time when weakness in parts the economy is affecting many financial services companies, the settlement will give us greater flexibility and confidence to meet our financial goals while continuing to fund business building initiatives and support future acquisitions.”
