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REYN'S PASTA BELLA, LLC v. VISA U.S.A.

April 21, 2003

REYN'S PASTA BELLA, LLC, JEFFREY LEDON DEWEESE, M.D., BARRY LEONAD, DBA CRITTER FRITTERS, HAT-IN-THE-RING, INC. DBA EDDIE RICKENBACKER'S, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
VISA U.S.A., INC., MASTERCARD INTERNATIONAL, INC., BANK OF AMERICA, N.A., A SUBSIDIARY OF BANK OF AMERICA CORPORATION, WELLS FARGO BANK, N.A. A SUBSIDIARY OF WELLS FARGO & COMPANY, U.S. BANK, N.A., A SUBSIDIARY OF U.S. BANCORP, DEFENDANTS.



The opinion of the court was delivered by: Jeffrey S. White, United States District Judge

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS AND STRIKING ALLEGATIONS FROM THE FIRST AMENDED COMPLAINT
INTRODUCTION

Plaintiffs are various merchant, retail and service businesses who bring this action against Defendants, credit card companies Mastercard International, Inc. ("Mastercard") and Visa U.S.A., Inc. ("Visa") and credit card issuing banks. Plaintiffs challenge the internal fee system of Mastercard and Visa as price fixing in violation of section 1 of the Sherman Antitrust Act ("Sherman Act"), 15 U.S.C. § 1, et seq. Plaintiffs also claim the structure of Mastercard and Visa as a joint venture of member banks violates various provisions of the Clayton Act, 15 U.S.C. § 12 et seq., prohibiting ownership of businesses by banks. 12 U.S.C. § 24, 24a; 15 U.S.C. § 18. Defendants move pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss each of plaintiffs' claims. Having carefully reviewed the parties' papers and considered their arguments and the relevant legal authority, and good cause appearing, the court hereby GRANTS IN PART and DENIES IN PART Defendants' Motion to Dismiss. The Court further orders that certain allegations be stricken from the Plaintiffs' First Amended Complaint.

STATEMENT OF FACTS

Visa and Mastercard are each joint ventures by banks, including Defendant banks. Through their member banks, Visa and Mastercard issue various forms of payment cards. In re Visa/Mastermoney Antitrust Lititgation, 280 F.3d 124, 130 (2d Cir. 2001). Member banks can issue Visa or Mastercard payment cards to consumers and set interest rates, fees, and other terms for cardholders. Id. Member banks also individually contract with retailers on behalf of Visa or Mastercard to purchase payment card transactions. Id. Member banks may function as either "issuing" banks or "acquiring" banks, or both. There has also been no allegation that a bank which is a member of the Visa network cannot also be a member of Mastercard, or a member of another payment card venture that has different interchange rules entirely.

When a customer pays with a payment card, the "acquiring" bank purchases the payment card receipt (or electronic equivalent) from the retailer for the amount of payment less a "merchant discount" fee. Through the Visa or Mastercard system, the acquiring bank then receives reimbursement from the cardholder's "issuing" bank for the purchase price less an "interchange fee" a preset fee agreed to by all issuing and acquiring banks on the Visa or Mastercard network. The issuing bank then profits by the amount of the interchange fee, while the acquiring bank profits by the amount of the merchant discount less the interchange fee.*fn1 In a credit card system, the issuing bank rather than the merchant bears the risk of nonpayment by the cardholder. National Bancard Corporation (Nabanco) v. Visa U.S.A., Inc., 779 F.2d 592, 595 (11th Cir. 1986).

While Defendants set different interchange fees for different classes of retail business, the interchange fees do not vary between member banks. Member banks do not individually negotiate varying interchange fee rates between themselves. All member banks have agreed to uniform interchange fees throughout the payment system.

Plaintiffs claim that this agreement on uniform interchange fees amounts to horizontal price fixing in violation of the Sherman Act. Plaintiffs allege that the merchant discounts that acquiring banks assess merchants for each transaction are "based largely on" the interchange fees. (First Amended Complaint, hereinafter "FAC" at ¶ 20(b)). By agreeing to fix the interchange fee, Plaintiffs maintain, Defendants have limited competition in the merchant discount market because no acquiring bank can charge a merchant discount below the interchange fee. Plaintiffs further allege that Visa, Mastercard, and Defendant banks have "boycotted banks and third parties that have competed by lowering the deposit fee." (FAC at ¶ 25.) Plaintiffs also attack the ownership of Visa and Mastercard by their member banks, an arrangement which they allege enables Defendants' price fixing practices. as violating both the Clayton Act, 15 U.S.C. § 12 et seq., and the Bank Service Company Act, 12 U.S.C. § 1861 et seq. Plaintiffs seek treble damages from losses due to the allegedly artificially high merchant discount.

ANALYSIS

A. Legal Standard.

A motion to dismiss for failure to state a claim will be denied unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). All allegations of material fact are taken as time and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mutual Ins. Co. 80 F.3d 336, 337-38 (9th Cir. 1996). Dismissal is proper only where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The court is not, however, bound to accept as true conclusory allegations of law or legal conclusions couched as a factual allegations. Papasan v. Allain, 478 U.S. 265, 286 (1986); Arpin v. Santa Clara Transp. Agency, 261 F.3d 912, 923 (9th Cir. 2001) (internal quotation omitted).

In deciding such a motion, the court may also consider facts that are properly the subject of judicial notice. MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986); see also Emrich v. Touche Ross & Co., 846 F.2d 1190, 1198 (9th Cir. 1988) (holding that a district court may take notice of the "proceedings and determinations" of prior related litigation without treating the Rule 12(b)(6) motion as one for summary judgment).

Defendants move to dismiss each of Plaintiffs claims. The Court addresses each claim in turn.

B. Plaintiffs Have Stated a Claim for Relief under the Sherman Act.

Section 1 of the Sherman Act makes unlawful "[e]very contract, combination. . . . or conspiracy, in restraint of trade or commerce among the States." 15 U.S.C. § 1. To state a claim under section 1 of the Sherman Act, Plaintiffs must allege (1) that Defendants entered into a contract, combination, or conspiracy; (2) that this agreement unreasonably restrained trade under either a per se rule of illegality or a rule of reason analysis; and (3) that the restraint affected interstate commerce. Tanaka v. University of Southern California, 252 F.3d 1059, 1062 (9th Cir. 2001) (internal quotations omitted); Bhan v. NME Hospitals, Inc., 929 F.2d 1404, 1410 (9th Cir.), cert. den., 502 U.S. 994 (1991).

In examining the reasonableness of a restraint on trade, most claims of antitrust violation are analyzed under a `rule of reason.' State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). A restraint violates the rule of reason if the harm to competition outweighs its procompetitive effects. Tanaka, 252 F.3d at 1062; California Dental Ass'n v. Federal Trade Comm'n, 224 F.3d 942, 947 (9th Cir. 2000), citing Amer. Ad Mgt. v. GTE Corp., 92 F.3d 781, 789 (9th Cir. 1996). To state a claim, Plaintiff must allege an "actual[] . . . injury to competition, beyond the impact on ...


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