Some of the most complex and contentious aspects of contemporary antitrust litigation involve threshold determinations about what kind of market participants are entitled to bring antitrust cases. These controversies are typically played out in the context of two related, but distinct concepts. The first is standing to sue, and the second is whether the type of injury allegedly suffered by the plaintiff is of the sort which the antitrust laws were intended to remedy, typically referred to as "antitrust injury." In a recent unreported decision the Northern District of California wrote at length about both of these topics in the complex context of a challenge to basic aspects of the VISA interbank credit card system brought by First Data Incorporated, a small processor of credit card transactions seeking to both process VISA credit card transactions and offer credit card interchange services. VISA USA v. First Data Corporation, et al., No. C02-01786 (May 12, 2006, N.D.Cal.). Readers should note that the decision discussed below is only one of the latest in a series of private and government cases reflecting a variety of different challenges under state and federal antitrust law to the VISA bank credit card network.
The First Data decision in the Northern District of California arose out of VISA’s attempts to extinguish First Data’s Section 2 claims of monopolization and attempted monopolization. VISA asserted in a summary judgment motion that First Data lacked standing, had not suffered cognizable antitrust injury, and had not suffered economic injury in the same relevant product market which was the subject of the attempted monopolization claim. The Court denied both motions, scheduling the matter for trial, and in so doing, provided an interesting discussion reflecting a relatively expansive view of both antitrust standing and the permissible scope of antitrust injury.
First Data claimed that VISA had monopolized the market for the VISA credit card network processing services, and attempted to monopolize the general purpose credit card network processing services market by willfully maintaining monopoly power through: (1) demanding compliance by First Data with unreasonable conditions before approving First Data’s proprietary software for processing VISA transactions; (2) subsequently banning implementation of First Data’s proprietary software for processing VISA transactions directly between member banks by prohibiting all such "private arrangements;" and (3) blocking competition on interchange fees and merchant discounts through an "Honor All Cards" rule, and associated rules against discounts and so-called "intra-processing" directly between competing banks which bypassed the VISA transactions processing network.
Essentially, the gravamen of First Data’s alleged economic injury was that VISA’s ban on discounts and promotions, coupled with the requirement for honoring all credit cards and prohibiting intra-processing of transactions, stifled price competition both by horizontal competitors to VISA providing processing services, like First Data, and by member banks and merchants in the VISA network which would permit discounts on interchange fees to "acquirers" of transactions for processing, like First Data, which would ultimately lead to lower retail prices. VISA’s "Honor All Cards" rule requires any merchant which accepts any VISA branded payment card to accept all VISA branded payment cards. The Honor All Cards rule also allegedly precluded merchants from offering point of sale discounts or preferences to some VISA issuers’ cards over other VISA issuers’ cards, required banks participating in the VISA network to charge uniform interchange fees for all VISA transactions, and prohibited participating banks from offering any discounts on VISA transactions.
First Data’s theory of injury was that this combination of rules essentially maintained a supra competitive interchange structure by preventing issuing banks from competing for merchant business. The absence of such competition results in supra competitive interchange fees that First Data is required to pay in its attempt to offer competing VISA credit card processing services. First Data also contended that VISA’s rules effectively restrained all VISA banks from entering into bilateral agreements which might otherwise undercut the default interchange rate set by VISA’s governing board.
VISA moved for summary judgment and sought to establish as a matter of law that First Data lacked antitrust standing. The District Court began by noting that the Supreme Court, in Associated General Contractors of California v. California State Counsel of Carpenters, 459 US 519, 529 (1983) ("AGC") assumed that there had to be some appropriate limits on the scope of private damage actions under Section 4 of the Clayton Act because a literal reading of the statute would have been broad enough to encompass every harm that can be attributed directly or indirectly to the consequences of an antitrust violation, no matter how broad. The District Court then noted that the prevailing standard for determining antitrust standing in the Ninth Circuit after AGC requires examining "(1) the nature of the plaintiff’s alleged injury; that is whether it was of the type the antitrust laws were intended to forestall; (2) the directness of the injury; (3) the speculative measure of the harm; (4) the risk of duplicative recovery; and (5) the complexity of apportioning damages," citing KnevelBaard Dairies v. Kraft Foods, 232 F.3d 979, 987 (9th Cir. 2000).
In fact, the District Court noted that the Ninth Circuit’s formulation explicitly combines the concept of standing with the notion of "antitrust injury," by making the presence of "antitrust injury" the first factor in determining whether antitrust standing exists. The first factor in the Ninth Circuit’s analysis, the requirement that the injury complained of be of "the type the antitrust laws were intended to forestall" then in turn required reference to the Supreme Court’s seminal decision on antitrust injury, Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 US 477, 489 (1977) which requires "unlawful conduct, causing injury to the plaintiff, that flows from the aspect of the conduct which makes the conduct unlawful, and is of the type the antitrust laws were intended to prevent."
First Data’s attempt to meet this requirement, which turned out to be successful, is a good example of how plaintiff’s attempt to recast potentially novel economic circumstances, like the operation of the VISA credit card system, into claims of well recognized types of economic injury flowing from allegedly anticompetitive conduct. First Data first pointed to the VISA rules described above, and asserted that they had the practical effect of eliminating incentives for VISA’s member banks to negotiate direct interchange agreements with specific merchants. This in turn had the effect of eliminating the possibility of competing for the ability to process VISA transactions, and also in effect forced First Data to pay higher interchange rates than it would have been charged if it had been able to negotiate its own rates with specific merchants. This then enabled First Data to cast itself both as an excluded direct competitor attempting to offer a competitive processing service, and also as a harmed "purchaser" or "acquirer" of credit card transactions, because it allegedly had to acquire the transactions it was able to obtain at rates higher than it would have obtained those transactions if it had been free to make its own deals with merchants accepting VISA credit cards. So configured, the District Court had little problem determining that, at least theoretically, First Data had suffered exactly the type of injury the antitrust laws are meant to prevent because, assuming a violation was found at trial, it had been precluded from competing in a properly defined relevant market, and had overpaid for a commodity – credit card transactions – in an adjacent product market.
Having gotten past the potentially complex conceptual inquiry relating to antitrust injury, the District Court dealt with the rest of the Associated General Contractor factors relatively quickly. It ruled that the injuries as claimed, assuming wrongdoing were found to have occurred, were neither speculative nor indirect. The Court noted that the only way to demonstrate such indirectness is typically for the defendant to proffer an intervening or independent cause of injury, and VISA had failed to do so.
The risk of duplicative recovery and complexity in apportioning damages gave the District Court more trouble. In particular, the Court noted that VISA was also currently facing multiple actions in New York federal court brought by both individual merchants and merchants seeking to represent classes of merchants accepting VISA cards for payment, challenging the setting of interchange fees directly, as well as other aspects of VISA’s "Honor All Cards" regulations. However, the Court also noted that from what it had been told by the parties about the New York litigation, it did not appear that merchants in that case were seeking to challenge either VISA’s ban on intra-processing, or the limitations on point of sale discounts for VISA transactions. As a result, First Data appears to potentially have suffered distinct injury from the merchant claimants in the New York cases, because it is First Data that pays the interchange fees and is not a VISA member. First Data is trying to acquire VISA transactions from merchants and is therefore, in the Northern District of California’s view, the most appropriate party to challenge the interchange fees set by VISA. Having dispensed of the conceptual issue concerning potential duplicative recovery, the Court dismissed the notion of problems in apportionment. In its view, since First Data’s alleged injury constituted the alleged payment of super-competitive fees, its damage determination would reflect a straightforward calculation of such fees, albeit in a hypothetical damage model presented by experts.
Perhaps the most intriguing aspect of the decision involves VISA’s efforts to curtail the scope of First Data’s potential recovery by arguing that First Data sought damages in a product market different from the one in which it pressed its monopolization claim. First Data claimed monopolization of the market for VISA credit processing and attempted monopolization of the credit card processing market. However, it is also seeking damages allegedly suffered during its acquisition of VISA credit card transactions at allegedly supra competitive interchange fee levels. VISA attempted, relying on certain Ninth Circuit cases, to argue that damages could not be recovered in a separate market for VISA transactions if First Data’s monopolization claims were based on a market to provide credit card processing services.
The argument troubled the District Court, but was ultimately rejected. The Court noted that a so-called "systems market" for credit card transactions was clearly a related and adjacent market to the market for credit card processing services. It credited First Data’s response that competitive dislocations in both markets resulted from anticompetitive behavior in the market for processing services. Given that competition had been distorted in that market, the distortions, according to First Data, had collateral effects in an adjacent market for VISA transactions which in fact injured First Data in the adjacent market as well. The Court accepted the argument for purposes of denying summary judgment, but explicitly held that First Data would have to demonstrate at trial that its harm in its role as an acquirer of VISA credit card transactions was directly precipitated by some unlawful conduct in the network processing market. The ruling is a useful reminder that in situations where complicated economic activities, typically involving the provision of services, impact related but distinct types of economic activity in upstream or downstream markets, care must be taken by both plaintiffs and defendants to relate the harms allegedly suffered to the same markets being used establish market power to support claims of underlying antitrust violation.