On October 27, 2006, the Second Circuit issued its opinion in Paycom Billing Services, Inc. v. MasterCard Int’l, Inc., 2006-2 Trade Cas. (CCH) ¶ 75,470, 2006 U.S. App. LEXIS 26820 (2d Cir. October 27, 2006), affirming the dismissal of Paycom’s complaint against MasterCard by Judge Trager in the Eastern District of New York. See 2005-1 Trade Cas. (CCH) ¶ 74,751, 2005 U.S. Dist. LEXIS 4920 (E.D.N.Y. 2005). Paycom, a processing service for primarily adult internet credit card services, had purported to allege violations of Sections 1 and 2 of the Sherman Act with respect to MasterCard’s (1) chargeback system; (2) former Competitive Programs Policy ("CPP"); and (3) Cross-Border Acquiring Rules ("CBA Rules"). Paycom abandoned its Section 2 claims on appeal.

MasterCard is one of four major payment-card-network-service providers in the United States, operating a global card-payment-network that provides the infrastructure and network services for the authorization, clearance, and settlement of transactions effected with MasterCard-branded payment-cards. 2006 U.S. App. LEXIS 26820, at *3. As set forth in the Second Circuit’s opinion, MasterCard is a "consortium of competitors owned and effectively operated by some 20,000 banks, which compete with one another in the issuance of payment cards and the acquiring of merchants’ transactions." Id., at *4 (internal citation and quotations omitted).  These members agree to abide by certain regulations and bylaws promulgated by the association. Id.

Paycom is a merchant that sells access to password-protected websites owned by independent entities that do not charge their consumers directly.  A consumer wanting to purchase the services offered by such a website — in Paycom’s case, largely, but not exclusively, sexual or adult content — is redirected to Paycom’s website, where he or she purchases the desired services from Paycom.  Paycom accepts MasterCard-, Visa-, and Discover-branded payment cards, as well as automated clearing house transactions. Id., at *8.

Paycom’s Chargeback System Challenge

Paycom’s challenge to MasterCard’s chargeback system was rooted in its exclusive processing of "card-not-present" ("CNP") transactions, as opposed to "card present" ("CP") — i.e., face-to-face transactions. As described in the Second Circuit’s opinion, when a cardholder disputes a transaction, the process is reversed by means of a "chargeback," whereby the issuing bank requires the acquiring bank to return the funds, and the acquiring bank then usually deducts these funds from the merchant’s account. See id., at *6. However, if the merchant proves the validity of the transaction by producing a signed sales receipt, the funds are generally restored to the merchant’s account. As set forth in the opinion, in this respect, MasterCard essentially "guarantees payment to CP merchants that retain signed sales receipts reflecting the physical use of the card." Id. According to Paycom, this forces CNP merchants like Paycom to assume the risk of fraud because CNP merchants are not afforded the same payment guarantee as CP merchants that can produce signed sales receipts. Id., at *10.

Paycom alleged that MasterCard’s chargeback system violated the Sherman Act in two respects.  First, it claimed that the refusal to grant CNP merchants an alleged payment guarantee similar to that accorded CP merchants was the result of an unlawful conspiracy not to compete with respect to the costs or risks of CNP fraud and chargebacks.  Second, it alleged that the systematic imposition of "chargeback fines and penalties" was the result of an agreement among MasterCard members to fix the price that merchants like Paycom pay for this fraud. See id., at *20-21.

The Second Circuit affirmed the District’s Court’s dismissal of these claims for lack of antitrust standing. See id., at *20-22. The Court noted that chargebacks, as well as the alleged "fines and penalties" for excessive chargeback activity, are assessed against acquiring banks, not merchants, and it is the acquiring bank’s decision whether or not to pass along such charges. Id., at *20-21. The Court analogized Paycom’s position to that of the indirect purchaser plaintiffs in Illinois Brick Co. v. Illinois, 431 U.S. 720, 742-47 (1977), who were found not to have antitrust standing. Thus, the Court concluded, "even if one hundred percent of the chargebacks, fines, and penalties were passed-on, Paycom, as an indirect payor of the chargebacks and chargeback fines and penalties, would still lack antitrust standing." Id., at *21-22.

The Court also concluded that even if Paycom’s claims were construed as focusing on the conduct of the acquiring banks as horizontal competitors, such claims still would fail for lack of an allegation of concerted action. See id., at *22-24. While noting that "an agreement among [acquiring] banks to pass all costs of fraud back to CNP merchants would be a per se violation of Section 1," the Court held that the facts alleged in Paycom’s complaint showed "only largely parallel behavior in response to the relatively higher costs of CNP transactions." Id., at *23-24. The Court held that there was no allegation that acquiring banks had jointly agreed to pass along the costs of fraud to CNP merchants. Lastly, the Court found that "[n]othing in Paycom’s complaint sufficiently allege[d] that MasterCard rules or an agreement among acquiring banks have prevented Paycom from negotiating with acquiring banks to create an individualized solution to Paycom’s costs of fraud." Id., at *24-25.

The Competitive Programs Policy Claim

The Second Circuit also affirmed dismissal of Paycom’s challenge to MasterCard’s former Competitive Programs Policy, which was previously held to violate Section 1 of the Sherman Act under a rule of reason analysis. See United States v. Visa U.S.A., Inc., 344 F.3d 229, 234 (2d Cir. 2003). Paycom claimed that, absent the CPP, American Express and Discover would have had access to MasterCard banks and thereby would have expanded the scope of their network services by increasing transaction/issuance volume. According to Paycom, this increased competition from Discover and American Express in turn would have caused MasterCard to adopt policies more favorable to Paycom. 2006 U.S. App. LEXIS 26820, at *25-26.

Although the Second Circuit found that Paycom was a consumer of payment card network services, it nonetheless held that Paycom was not an "efficient enforcer" of federal antitrust law, and thus lacked standing to seek damages allegedly resulting from the former CPP. Id., at *26. The Court found that Paycom failed to satisfy any of the "efficient enforcer" factors set forth in Volvo N. Am. Corp. v. Men’s Int’l Prof’l Tennis Council, 857 F.2d 55, 66 (2d Cir. 1988).

First, the Second Circuit found Paycom’s alleged injuries were indirect and derivative of the direct harms allegedly suffered by competing payment-card network service providers, like Discover and American Express. 2006 U.S. App. LEXIS 26820, at *26-27. Second, the Court determined that the extent of Paycom’s losses caused by the CPP were "highly speculative." Id., at *27-28. Third, the Court held that Paycom was "not an entity whose self-interest would most motivate it to vindicate the public interest in antitrust enforcement." Id., at *28 (internal citation and quotation omitted). Finally, the Court held that "[i]t would be virtually impossible" to apportion damages between those allegedly directly injured (Discover and American Express), and the millions of merchants that conducted MasterCard transactions during the operation of the CPP and that might have been indirectly injured; "the probability of duplicative recoveries would be very large." Id., at *29.

Paycom’s Challenge to MasterCard’s Cross-Border Acquiring Rules

Finally, the Second Circuit affirmed the dismissal of Paycom’s challenge to MasterCard’s CBA Rules. Paycom contended that under the CBA Rules, non-U.S. banks are prohibited from acting as acquiring banks for internet merchants’ MasterCard transactions, thereby limiting the number of acquiring banks with which Paycom could contract for the provision of MasterCard network services.  Paycom alleged that the CBA Rules constituted an unlawful market allocation scheme insulating domestic banks from competition against foreign banks that might otherwise provide services to internet merchants. Id., at *13.

The Second Circuit found it unnecessary to decide whether Paycom’s claims against the CBA Rules should be analyzed under a rule of reason or per se analysis, finding instead that Paycom had failed to state antitrust injury or demonstrate antitrust standing with respect to such claims. The Court found that "none of the facts alleged even suggest that the CBA Rules have any anticompetitive effect on Paycom."  Id., at *30. The Court noted that Paycom conceded that the market for banks offering acquiring services is very large and competitive and that, in the Eastern District of New York alone, "[h]undreds of banks issue and/or acquire MasterCard credit and debit cards." Id. The Court concluded that, with so many options available, the CBA Rules "cannot impact competition in the market for acquiring services," and therefore, "there can be no antitrust injury and, consequently, no antitrust standing." Id., at *30-31.

Moreover, the Court added that Paycom had not alleged that "absent the CBA Rules, foreign banks would actually enter the market for acquiring MasterCard transactions, or even that it has attempted to contract with a foreign bank." Id., at *31.  Noting that nothing prevents a foreign bank from establishing a domestic presence, the Court found that Paycom had failed to provide any reason to believe that foreign bank acquirers would behave any differently from domestic acquiring banks.  Thus, the Court concluded that Paycom could not claim any "injury" causally connected to the CBA Rules. Id.

Authored By:

Michael W. Scarborough

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