Delving into "one of the darkest corners of antitrust law," the federal District Court for the Northern District of California recently determined what standard – the per se rule or the rule of reason – should apply to judge the setting of prices by members of a joint venture.  In re ATM Fee Antitrust Litigation, N.D. Cal., No. 04-02676 CRB, 3/24/08.  The court concluded that in this instance, the rule of reason was the appropriate standard for two reasons: (1) the price setting was a "core activity" of the joint venture; and (2) the price setting was "reasonably ancillary to the legitimate cooperative aspects of a joint venture that requires competitor restraints if the venture’s product is to be available at all."

Procedural History and Facts

The Star ATM network is an entity that administers the agreement between the banks that issue ATM cards and the owners of ATM machines not owned by the banks but located, for example, in retail stores, entertainment centers and parking garages.  Transactions with these ATM machines are called "foreign" ATM transactions.  Foreign ATM transactions involve multiple fees.  The customer generally pays two fees, one to the ATM owner for use of the owner’s machine, and the second to the bank at which he or she has an account.  The bank also pays two fees, one called a "switch fee," paid directly to the ATM network.  The second is called an "interchange fee" and is paid directly to the owner of the foreign ATM.  Plaintiffs originally alleged that the manner in which the interchange fee was set violated the antitrust laws, as the Star network’s Board of Directors was allegedly controlled by competing banks who collectively fixed the price that they and other members of the Star network would pay foreign ATM owners.

Defendants brought and lost a motion to dismiss.  The court found Defendants could not defend against allegations of "naked price fixing" without invoking evidence beyond the scope of the complaint.  Shortly after this ruling, Defendants filed a motion for partial summary judgment on the ground that as of February 2001, the Star network was no longer owned by a number of banks, but instead was operated by Concord as a proprietary network.  The Court issued a Memorandum and Order, terminating Concord’s motion and directing the parties instead to address the "fundamental question of whether a per se analysis applies in this case."

The Defendants next moved for partial summary judgment, submitting evidence that the interchange fee is designed to compensate the ATM owner for making its ATMs available to the issuer’s customers and to provide an incentive for the deployer of the ATM to incur the costs and risks of deployment.  Defendant’s witness, MIT Economics Professor Richard Schmalensee, testified that the ability of the ATM network to set interchange fees is "central to the functioning of the network" because an ATM owner would be unwilling to dispense cash to a customer without an assurance of reimbursement.  It would be too cumbersome, he stated, for card issuers and ATM owners to bilaterally negotiate an approximate interchange fee.  Approximately 14.6 million separate bilateral agreement would be needed to ensure an agreement between Star’s 5,400 members and it simply would not work.  Dr. Schmalensee further testified that the interchange fees were procompetitive because they created an incentive for the deployment of ATMs and enabled Star network ATMs to compete with other ATM networks.

Plaintiffs’ expert testified that the need for interchange fees no longer exists because ATM owners may impose surcharge fees directly on consumers and that there is a lack of evidence establishing that interchange fees increase output.


The court explained that before it could decide the motion for partial summary judgment, it must determine what standard of analysis to apply.  The court first noted several well-settled rules of antitrust doctrine.  Most antitrust claims, the court stated, are analyzed under the rule of reason, according to which the finder of fact must decide whether the questioned conduct imposes an unreasonable restraint on competition, taking into account factors such as specific information about the relevant business, the restraint’s history, nature and effect, and whether the businesses have market power.  Some restraints, however, are so plainly anticompetitive, have such predictable and pernicious anticompetitive effects, and have such limited potential for procompetitive benefit, that they are deemed unlawful per se.  Horizontal price-fixing agreements among competitors are generally subject to per se condemnation.  The exception is with joint ventures.  It is not appropriate, the court observed, to assume that a restraint imposed by members of a joint venture is per se unreasonable merely because the same conduct by competitors would be judged under the per se rubric.

The court explained further.  Citing "the seminal hornbook on antitrust law," Areeda & Hovenkamp, the Court observed that a "joint venture is a form of organization in which two or more firms agree to cooperate in producing some input that they would otherwise have produced individually, acquired on the market, or perhaps done without."  With cooperation "the lynchpin of the value added by a joint venture," "it is unsurprising that courts would modify traditional antitrust rules in the context of joint ventures."  The court then identified four principles gathered from the Supreme Court’s jurisprudence on this subject:

  • First, when the joint venture itself is challenged, the venture must be judged under the rule of reason because joint ventures hold the promise of increasing a firm’s efficiency and enabling it to compete more effectively.  See Texaco Inc. v. Dagher, 547 U.S. 1, 6, n.1 (2006).
  • Second, when the joint venture is so economically integrated that it amounts to a single entity, it is entitled to set its own prices under the antitrust laws, so the per se rule does not apply.  In Dagher, two oil companies pooled their capital and shared the risks of loss as well as the opportunities for profit.  The competitors may have set the venture’s pricing in a literal sense, but did not in an antitrust sense.  Likewise, the court observed, the Ninth Circuit has held that where there is substantial common ownership, a fiduciary obligation to act for another entity’s economic benefit or an agreement to divide profits and losses, the venture is generally treated as a single entity.  Freeman v. San Diego Association of Realtors, 322 F.3d 1133 (9th Cir. 2003).
  • Third, even if the joint venture is not a single entity, the per se rule remains inapplicable when the core activity of the joint venture is challenged.  In Dagher, the parties consolidated their operations in the western United States and agreed to sell gasoline cooperative to downstream purchasers.  The setting of the price at which they sold gasoline was a "core activity" of the joint venture.
  • Fourth, when "horizontal agreements are necessary for the functioning of the joint venture, all horizontal agreements among members of that venture, even those as egregious as price-fixing, should be subject to rule of reason analysis."  See National Collegiate Athletic Assn. v. Board of Regents of University of Oklahoma, 468 U.S. 85, 101-103 (1984) ("NCAA").  The district court interpreted the NCAA case as holding that although the NCAA’s challenged conduct restrained competition in terms of price and output, a per se approach was not warranted in light of the NCAA‘s overall procompetitive role in enabling college football to be marketed and preserving the sport’s integrity.  "The clear implication of NCAA," the district court stated, "is that when the defendants are members of a joint venture that depends on a certain degree of cooperation if the type of competition that the venture seeks to market is to be preserved, and most of the venture’s ‘regulatory controls’ are procompetitive, any horizontal restraint imposed by the venture is subject to rule of reason analysis."

The district court found that the first and second principles did not apply in this instance.  The first principle did not apply because Plaintiffs did not challenge the creation of the Star network as anticompetitive, but rather challenged a particular activity of the venture.  The second principle neither applied because Star network’s members did not divide profits and losses derived from ATM deployments and transactions, members continued to act as actual and potential competitors in offering other financial products and services, and members did not owe each other a fiduciary obligation to act for each other’s economic benefit.

On the other hand, the court found that the third and fourth principles did apply in this instance.  The court considered the Defendants’ product to be "the acceptance of ATM cards at foreign ATMs."  The third principle applied because Plaintiffs challenged a core activity of the joint venture, the right to put a price on the good that the ATM network "produces."

As to the fourth principle, the court found that like in NCAA, the Star network is a complex network joint venture in which horizontal restraints are necessary if the product is to be marketed at all.  For the Star network to survive, it must collectively adopt and enforce uniform rules to operate.  See Regents of University of California v. American Broadcasting Companies, 747 F.2d 511, 517 (9th Cir. 1984).  Fixing the price of the interchange fee was one such rule.  Following NCAA, the appropriate standard by which to analyze the restraint would thus be the rule of reason.  However, the Court said, NCAA is not the last word on the subject.  Rather, the Court explained, the Ninth Circuit limited the reach of NCAA in Freeman.  Freeman requires defendants to prove not only that their ventures require horizontal restraints, but also that the particular restraint challenged is ancillary to the venture’s legitimate aspects.  In this instance, the fixing of the interchange fee was reasonably ancillary to the Star network’s legitimate cooperative aspects.  The price-fixing served not to generate profits for the recipient, "but to promote deployment of additional ATMs and to compensate ATM owners for allowing consumers to use their product."  "By promoting additional ATMs, the interchange fee promotes, not diminishes, competition."  The interchange fee is essentially one of several rules governing how the transaction between the cardholder, the cardholder’s bank and the ATM owner will proceed.  The court buttressed its conclusion that the rule of reason is appropriate by finding that the interchange fee was not facially anticompetitive.  It was imposed on members of the Star network, not consumers, and the network is a highly integrated, valid joint venture, even if not economically integrated.  "One would expect," the court said, that the venture "is responsible for creating significant and beneficial efficiencies that could not otherwise be accomplished."  The court thus felt it was inappropriate to subject such a venture’s conduct to a per se analysis.


Concluding therefore that the interchange fee must be analyzed under the rule of reason, the court granted Defendants’ motion for partial summary judgment.  However, the court also recognized that "despite the Supreme Court’s recent focus on the nexus between antitrust law and joint ventures in cases like Dagher, there remains ‘serious doctrinal confusion over the proper analysis of cooperative arrangements among competitors.’"  Accordingly, the court promised to certify, upon request, to the Ninth Circuit the question whether Plaintiffs’ antitrust claim should be judged under the per se or rule of reason rubric.  With Plaintiffs’ motion for certification of order for appeal granted, we can anticipate the Ninth Circuit to weigh in on the district court’s reading of NCAA and other aspects of its decision.

Authored by:

Heather M. Cooper

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