Opinion
Civil Action No. 03-CV-6150 (DGT) (RLM).
March 29, 2005
MEMORANDUM AND ORDER
Paycom Billing Services, Inc. ("Paycom" or "plaintiff"), a processing service for internet credit card transactions, filed the present lawsuit against MasterCard International, Inc. ("MasterCard" or "defendant"), a national bank card association, alleging that MasterCard conspired with its member banks to restrain trade in violation of sections one and two of the Sherman Antitrust Act ("Sherman Act"), 15 U.S.C.A. §§ 1, 2. MasterCard now moves to dismiss the complaint pursuant to Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim. For the following reasons, MasterCard's motion to dismiss is granted.
MasterCard moves, in the alternative, to compel the joinder of Paycom's acquiring back as a necessary party pursuant to Fed.R.Civ.P. 12(b)(7). Although the motion is of questionable merit, it need not be considered as it is rendered moot by the dismissal of the complaint.
Background
Plaintiff is a Delaware corporation with its principal place of business in Marina del Rey, California. See Complaint and Jury Demand ("Compl.") ¶ 37. Plaintiff contracts with internet businesses to make sales on their behalf and accepts MasterCard, Visa and other forms of electronic payment for those sales. Id. ¶ 40. Most of plaintiff's clients provide online digital "adult" content. Id. ¶ 42.Defendant is a Delaware corporation with its principal place of business in Purchase, New York. Id. ¶ 38. Defendant is a national bank card association structured as an open joint venture with 25,000 member banks. Id. A member bank may issue MasterCard-branded payment cards ("issuing bank"). A member bank may also process transactions received from merchants that accept MasterCard-branded payment cards, a procedure known in the industry as "acquiring" ("acquiring bank"). Id. ¶ 48-53.
There are a number of different types of cards that may bear MasterCard's brand: credit cards, T E cards and debit cards. See id. ¶¶ 48-53. "Credit cards permit consumers to borrow money from the issuing bank and repay and revolve the loan over time." Id. ¶ 48. "T E cards permit a consumer to borrow the money for a retail purchase from issuing banks and to repay the loan without incurring interest charges during a grace period." Id. ¶ 49. "Debit cards permit consumers to pay for purchases with funds from their asset accounts." Id. ¶ 51.
Because the processing of transactions using any of these three types of cards is identical, distinguishing between them is unnecessary for purposes of this opinion. Therefore, credit, T E and debit cards will all be referred to as "payment cards."
A traditional MasterCard payment card transaction involves four parties: a cardholder, a merchant, an acquiring bank and an issuing bank. Id. ¶ 21. A cardholder makes a purchase by physically presenting his/her payment card to a merchant and signing a receipt. Id. At the end of the day, the merchant sends all of its payment card transactions to its acquiring bank.Id. ¶ 24. The acquiring bank credits the merchant's account the amount of the transactions, less certain fees that generally constitute up to two to four percent of the total transaction amount. Id. ¶ 21. The acquiring bank sorts the transactions and presents them to the various issuing banks. Id. ¶¶ 21, 24. Each issuing bank examines the cardholders' accounts and, if it approves the transactions, credits the acquiring bank's account the amount of the transactions, discounted by fees that constitute one to two percent of the purchase prices. Id.
Transactions involving plaintiff work slightly differently. Because plaintiff's clients lack the technical expertise and resources to process credit card transactions, they contract with plaintiff, who accepts sales on the client's behalf and processes payment card transactions. Id. ¶ 41. Instead of the traditional four parties involved, therefore, there are five: the cardholder, merchant/plaintiff's client, plaintiff, acquiring bank and issuing bank. First, a cardholder visits one of plaintiff's client's websites and, upon deciding that it would like to purchase access to that website, is re-directed to plaintiff's website, where the cardholder provides payment card information and receives a user name and password to access plaintiff's client's website. Id. ¶¶ 40, 42. Plaintiff then credits the merchant's account, less plaintiff's contracted-for fees. Id. ¶ 40. Plaintiff then sends the information to its acquiring bank, which credits plaintiff's accounts, less the acquiring bank's fees. Id. The acquiring bank then sends the information to the issuing bank, which examines the transaction and, if approved, credits the acquiring bank's account, less its fees. Id.
From time to time, cardholders claim that purchases made on their MasterCard accounts are fraudulent. When this happens, the issuing bank will refund a cardholder's money and then issue a "chargeback" to the acquiring banks for the given transaction, a process whereby the issuing bank debits the amount of the transaction, less fees, from the acquiring bank's account. Id. ¶ 77. The acquiring bank will then debit the same amount, less fees, from the merchant's account. Id. Under MasterCard's policies, if, and only if, the merchant produces a signed sales receipt, the acquiring bank will re-present the transaction to the issuing bank, which will ordinarily approve the transaction.Id. The merchant's account will then be credited the amount of the original transaction. Id. If no signed receipt is available, as is the case with all internet transactions, the merchant must bear the entire cost of the alleged fraud under MasterCard's policies. Id. ¶ 80.
Plaintiff claims that this refund policy, called the "chargeback system," violate sections one, two or both of the Sherman Act. Plaintiff challenges three additional MasterCard policies on the same grounds. These policies, discussed infra are: (1) MasterCard's Competitive Programs Policy, (2) MasterCard's Cross-Border Acquiring Rules and (3) MasterCard's Internet Merchant Qualification Mandates. These policies and their effects on the relevant markets are discussed in turn below.
Discussion (1) Relevant markets
Plaintiff claims that there are six relevant markets in this case and that the geographic dimension of all the markets is the United States. The broadest market is the "`general purpose card network services'" market. Compl. ¶ 50 (quoting U.S. v. Visa/MasterCard, 163 F. Supp. 2d 322, 338 (S.D.N.Y. 2001)). The next three markets are the "general purpose credit card services to merchants," the "general purpose credit and T E card services to merchants" and the "general purpose debit card services to merchants". Id. ¶¶ 48-51. For these purposes, defendant does not challenge plaintiff's market definitions, and precedent supports their adequacy at this stage of the proceedings. See generally, U.S. v. Visa U.S.A., Inc., 344 F.3d 229, 238-240 (2d Cir. 2003); In re Visa Check/Mastermoney Antitrust Litig., No. 96-CV-5238 (JG), 2003 WL 1712568 at *3 (E.D.N.Y. 2003).
In addition, plaintiff claims two distinct "payment card processing services" markets. Compl. ¶¶ 52, 53. The first is broader and includes the processing of all payment card transactions, regardless of whether performed over the internet or through a "brick and mortar" merchant. The second is a submarket of the first and includes only those transactions made over the internet. Defendant also does not challenge the definition of these two markets for purposes of this motion.
A "brick and mortar" merchant sells goods and/or services in person, not over the internet. Compl. ¶ 25.
(2) MasterCard's Chargeback System
Plaintiff alleges that MasterCard's "chargeback system" is a violation of section one of the Sherman Act. Under defendant's "chargeback system," internet merchants cannot dispute a claim of fraud and may be fined by MasterCard if MasterCard determines that there have been an excessive number of claims of fraudulent transactions on the merchant's website. See Compl. ¶¶ 79, 84. As stated above, when a claim of fraud is made, a merchant will be charged the transaction price unless it can present a signed receipt. Internet merchants cannot provide signed receipts and thus always bear the costs of actual fraud and claimed fraud under defendant's system. Id. ¶ 79. Although other payment card brands allow an internet merchant to disprove fraud through other means, defendant has chosen not to do so. Id. ¶¶ 73, 106. Hence, plaintiff has borne the significant cost of creating its own anti-fraud measures. Id. ¶¶ 113-119.
Visa instituted a policy, "Verified by Visa," whereby cardholders choose personal identification numbers that the cardholder gives to an internet merchant when he makes an online purchase. Compl. ¶ 106. Plaintiff does not detail Discover's anti-fraud measures, but claims that its chargeback system is less onerous overall than MasterCard's. Id. ¶ 74.
Plaintiff claims that defendant's "chargeback system" is a violation of antitrust laws because it constitutes an agreement among defendant's member banks not to compete regarding risk allocation for internet transactions. In addition, plaintiff alleges that the fines and penalties imposed by defendant's "chargeback" policy constitute price-fixing by defendant's member banks.
In response, MasterCard argues that plaintiff does not have standing to assert that the "chargeback system" violates the Sherman Act because it has not suffered an "antitrust injury." In order to properly plead an "antitrust injury," a "plaintiff must allege threatened loss or damage `of the type the antitrust laws were designed to prevent and that flows from that which makes the defendants' acts unlawful.'" Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 113 (1986) (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)). Therefore, in order to determine whether a plaintiff's claimed injury flows from an unlawful act, it must first be determined whether the act was an antitrust violation.
Because MasterCard is organized as a joint venture, its policies must be analyzed under the rule of reason. See Copperweld Corp. v. Indep. Tube Co., 467 U.S. 752, 768 (1984) ("[C]ombinations, such as . . . joint ventures . . . are judged under a rule of reason.") Under the rule of reason, an agreement, such as the one alleged here, is only an antitrust violation if it "will have an actual adverse effect on competition in the relevant market." Elec. Communications Corp. v. Toshiba Am. Consumer Prods., 129 F.3d 240, 244 (2d Cir. 1997).
Where a dispute involves a single product by a manufacturer or service provider, courts have generally found that where inter-brand competition exists, an agreement to limitintra-brand competition does not harm competition. See e.g., Elec. Communications Corp., 129 F.3d at 244; K.M.B. Warehouse Distrib., Inc. v. Walker Mfg. Co., 61 F.3d 123, 127 (2d Cir. 1995); Oreck Corp. v. Whirlpool Corp., 579 F.2d, 126, 131 (2d Cir. 1978). Although these cases generally involve agreements between manufacturers and distributors to limit competition by eliminating one brand of the same manufacturer's product, the circumstances here are analogous. MasterCard's policies only restrict competition within its own brand. Moreover, this restriction may inhibit MasterCard's ability to compete in the market for internet merchant services. Since there are other payment card brands readily available in the market that provide more favorable terms to plaintiff, such as Visa and Discover, internet merchants like plaintiff may choose to cease accepting MasterCard-branded payment cards or, at the very least, inform their customers that they prefer other brands because the "chargeback system" is burdensome.
Plaintiff thus has not shown how MasterCard's policies harm competition in any of the relevant markets. Instead, plaintiff has merely shown that MasterCard's "chargeback system" harms plaintiff because it increases its costs. Accordingly, plaintiff has failed to indicate how the "chargeback system" is an unlawful agreement in violation of section one of the Sherman Act. Plaintiff therefore does not have standing because it cannot show that it suffered an "antitrust injury" since its injury did not flow from any antitrust violation.
Although the plaintiff in its complaint and during oral argument cited the Second Circuit's decision in U.S. v. Visa U.S.A., that case is of limited relevance here as plaintiff has not pled that Visa in any way conspired with MasterCard in instituting the contested policies. In particular, plaintiff's claim that the MasterCard banks are engaged in a conspiracy not to compete regarding risk allocation or price-fixing for internet transactions appears on its face to lack merit. These same banks are handling Visa payment card transactions with less stringent chargeback policies. This would appear to undermine this alleged "conspiracy."
(3) Competitive Programs Policy
Plaintiff claims that defendant's "Competitive Programs Policy" ("CPP") violates sections one and two of the Sherman Act. The CPP prohibits MasterCard member banks from issuing any competing cards except Visa. Compl. ¶ 69. Visa has a reciprocal policy.Id. In an action brought by the United States Department of Justice, these policies were determined to violate section one of the Sherman Act. Visa U.S.A., 344 F.3d at 243.In Visa U.S.A., the Second Circuit found that the CPP's exclusion of American Express and Discover from a segment of the market constituted an antitrust violation. Id. at 241. Specifically, the CPP prevented American Express and Discover from contracting with banks to issue American Express-branded and Discover-branded credit, debit and charge cards, resulting in fewer American Express and Discover cards available to the public and fewer transactions involving these cards. Id.
Plaintiff claims that the CPP harmed it because Discover could not gain sufficient power in the general purpose or credit and T E markets to challenge MasterCard and its onerous "chargeback system." A plain reading of its pleading, however, shows that Paycom's claimed injuries are merely derivative of the injury to Discover. "The existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement diminishes the justification for allowing a more remote party" to enforce a claim. Assoc. Gen. Contractors of C.A, Inc. v. C.A. State Council of Carpenters, 459 U.S. 519, 542 (1983). In fact, plaintiffs more suitable than Paycom have already brought a successful challenge to the CPP in this circuit. See Visa U.S.A., 344 F.3d 229. Plaintiff is a remote party and allowing it to recover under this theory could result in punishing MasterCard multiple times for the same offense. Thus, plaintiff does not have standing on this theory.
Further, the amount of plaintiff's damages is highly speculative. Assoc. Gen. Contractors, 459 U.S. at 542 (finding no standing where damages were highly speculative because plaintiff was indirectly effected by alleged antitrust violation). Plaintiff claims that the CPP has allowed MasterCard to maintain its allegedly onerous and anti-competitive "chargeback system." However, in order to determine plaintiff's damages, a court would first have to determine how many additional Discover transactions would have occurred if the CPP did not exist. This would amount to pure speculation. Next, albeit probably less speculative, a court would have to determine how many of those additional transactions would be the subject of fraud claims. In any case, any damages would be indirect and any endeavor in making the initial calculation would be entirely fanciful.
Plaintiff also asserts, with reference to its section two attempt-to-monopolize claim, that it has suffered damages because the CPP has prevented it and other companies from entering into the general purpose payment card market. However, "[w]here . . . the claim asserted is that the defendant unlawfully prevented the plaintiff from engaging in a business, particularized allegations of preparedness are essential." D.L. Auld Co. v. Park Electrochemical Corp., 651 F. Supp. 528, 587 (E.D.N.Y. 1986) (quoting Indium Corp. of A. v. Semi-Alloys, Inc., 591 F. Supp. 608, 613 (N.D.N.Y. 1984)). Plaintiff makes no such allegations in its complaint. It makes no claim that it sought to or was ever prepared to enter the general purpose payment card market.
For the reasons stated above, plaintiff lacks standing to challenge the CPP under the Sherman Act.
(4) MasterCard's cross-border acquiring rules
Plaintiff argues that MasterCard's cross-border acquiring rules violate section one of the Sherman Act. Under defendant's cross-border acquiring rules, non-United States member banks may not act as acquiring banks for MasterCard transactions. Compl. ¶ 124. Plaintiff claims that this policy limits competition among acquiring banks and therefore is an antitrust violation.Like MasterCard's "chargeback system," the cross-border acquiring rules are subject to rule of reason analysis. Similar to the "chargeback system," the cross-border acquiring rules simply reduce competition within the MasterCard brand. What Visa, American Express and Discover do is not disclosed and no claim of conspiracy among these corporations is alleged. Therefore this policy also does not harm competition.
Moreover, were this action brought by foreign banks, the antitrust injury of this rule would appear clear, whereas, here, limiting the number of acquiring banks competing for American internet merchants' business may actually benefit, rather than harm, plaintiff's business. Since plaintiff's clients can contract either with plaintiff or directly with an acquiring bank for payment processing services, the fewer acquiring banks, the less competition for plaintiff's clients. In light of the benefit conferred on plaintiff by the cross-border acquiring rules, plaintiff cannot assert an antitrust injury. Matsuhita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 583 (1986) (finding as a matter of law that plaintiffs could not recover damages where plaintiffs stood to gain from defendants' alleged antitrust conspiracy).
Consequently, plaintiff has neither pled that the cross-border acquiring rules violate section one of the Sherman Act, nor demonstrated standing to assert an antitrust claim because, with regard to MasterCard's cross-border acquiring rules, it has not suffered an antitrust injury.
(5) MasterCard's Internet Merchant Qualification Mandates
Plaintiff claims that MasterCard's Internet Merchant Qualification Mandates ("IMQMs") also violate sections one and two of the Sherman Act. Under IMQMs, plaintiff would have to alter its business model in order to continue accepting MasterCard transactions. Businesses like plaintiff's are relatively new, and payment card corporations, like Visa, Discover and MasterCard, at first had difficulty categorizing transactions with them. Compl. ¶ 127. Initially, MasterCard treated plaintiff like it did any other internet merchant in its system, such as amazon.com or bloomingdales.com. Id. ¶ 129. Plaintiff's acquiring bank processed plaintiff's transactions in the same manner as other internet merchants, and MasterCard did not impose any additional rules on plaintiff regarding fraud protection measures or the way in which plaintiff dealt with its clients or consumers. Id.
In 2002, MasterCard re-interpreted its policies and ceased to classify plaintiff as a regular merchant and instead chose to treat plaintiff as an "aggregator," an existing classification in MasterCard's system. Id. MasterCard defines an aggregator as a business that collects other merchants' transactions and deposits them into a single account. Id. Plaintiff does not offer any explanation in its complaint why the aggregator classification confers any economic benefit on MasterCard. Since MasterCard policies prohibit transactions with aggregators, plaintiff was threatened with the possibility of either changing its business model to avoid the aggregator classification or ceasing to accept MasterCard-branded payment cards. Id. Plaintiff claims that MasterCard's sole reason for changing the classification was to force plaintiff "to deliver its merchant customers to a MasterCard acquiring bank." Id.
MasterCard's memorandum of law does not offer an explanation as to why it chose to reclassify the plaintiff as an aggregator. However, it may be to protect MasterCard cardholders from fraudulent charges as transactions originating from adult content websites which, like plaintiff's client's, have a high rate of fraud. See Memorandum of Law in Support of Defendant MasterCard International Incorporated's Motion to Dismiss the Complaint Under Fed.R.Civ.P. 12(b)(6) at 2 (citing Taxpayer Beware: Schemes, Scams and Cons: Hearing before the Committee on Finance, United States Senate, 107th Cong. 31-33, app. at 109, 112 (2001)).
Plaintiff alleges that MasterCard has chosen an unnecessary and anti-competitive way of dealing with plaintiff and other internet payment processing service corporations. The aggregator classification has left plaintiff with two options if it wishes to continue to accept MasterCard payments, either of which would substantially change its business model. Id. ¶ 129-130. Under the first option, plaintiff may become a "Merchant Service Provider," whereby it ceases to accept transactions and instead introduces merchants to acquiring banks. Id. ¶ 129. The alternative is that plaintiff must comply with the following MasterCard policies: (1) prohibit its customers from displaying prices on their websites and (2) allow consumers to use a "shopping cart," whereby they may purchase goods and services from multiple Paycom clients in a single transaction. Id. ¶ 131.
This policy is the exact opposite of Visa's policy for merchants like Paycom. Visa prohibits Paycom from displaying prices on its website and requires that Paycom's customers display prices on their websites. Comp. ¶ 131.
Plaintiff alleges that the IMQMs are merely a disguised attempt to force plaintiff, and merchants like it, out of business. However, plaintiff has not properly plead that it has suffered an "antitrust injury." Cargill, 479 U.S. at 113 ("[P]laintiff must allege threatened loss or damage `of the type the antitrust laws were designed to prevent and the flows from that which makes the defendants' acts unlawful.") (quoting Brunswick, 429 U.S. at 489). The antitrust laws were enacted for the "protection of competition, not competitors." George Haug Co. v. Rolls Royce Motor Cars, In., 148 F.3d 136, 139 (2d Cir. 1998) (quoting Brunswick, 429 U.S. at 488)). "Injury to an individual competitor, even if that competitor is effectively excluded from the market as the result of a contract, combination, or conspiracy, is not sufficient injury to state a claim under the Sherman Act." See Beyer Farms, Inc. v. Elmhurst Dairy, Inc., 142 F. Supp. 2d 296, 304 (E.D.N.Y. 2001) (citing Eastway Const. Corp. v. N.Y., 762 F.2d 243, 250 (2d Cir. 1985)).
Assuming, arguendo, that plaintiff is a competitor of MasterCard acquiring banks, plaintiff has not plead any harm to the broader payment processing services market. Plaintiff has only pled that its business is harmed by the IMQMs. Plaintiff concedes that if it no longer accepted MasterCard transactions, its customers could simply switch to one of plaintiff's competitor websites that do accept MasterCard. Compl. ¶ 60. Second, plaintiff, and other merchants like it, can still accept other payment cards and, therefore, compete for payment processing services, although in a more limited manner. Thus, plaintiff has not pled any harm to competition but has instead merely pled harm to its business; this is insufficient to confer antitrust standing. Brunswick, 429 U.S. at 488 (holding that plaintiff did not have antitrust standing because defendant's actions merely harmed plaintiff's business and not competition in the relevant market).
Conclusion
For the foregoing reasons, defendant's motion is granted and plaintiff's complaint is dismissed in its entirety. The Clerk of the Court is directed to close this case.
SO ORDERED: