467 F.3d 283 (2nd Cir. 2006), 05-1845, Paycom Billing Services, Inc. v. Mastercard Intern., Inc.

Docket Nº:05-1845-CV.
Citation:467 F.3d 283
Party Name:PAYCOM BILLING SERVICES, INC., Plaintiff-Appellant, v. MASTERCARD INTERNATIONAL, INC., Defendant-Appellee.
Case Date:October 27, 2006
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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467 F.3d 283 (2nd Cir. 2006)




No. 05-1845-CV.

United States Court of Appeals, Second Circuit.

Oct. 27, 2006

Argued: Nov. 22, 2005.

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Jeffrey I. Shinder (Gordon Schnell, Reiko Cyr, Jean Kim on the brief) Constantine Cannon, P.C., New York, NY, for Plaintiff-Appellant.

Jay N. Fastow (Bruce A. Colbath on the brief) Weil, Gotshal & Manges LLP, New York, NY, for Defendant-Appellee.

Before JACOBS, Chief Judge, WINTER, and WALKER, Circuit Judges.

WINTER, Circuit Judge.

Paycom Billing Services, Inc. ("Paycom") appeals from the dismissal of its complaint by Judge Trager in the United States District Court for the Eastern District of New York. The complaint alleges that three different policies adopted and practiced by MasterCard International, Inc. ("MasterCard") violate Section 1 of the Sherman Act, 15 U.S.C. § 1. 1 These policies are MasterCard's imposition of penalties for charges denied by customers of, and failure to guarantee payment to, merchants who accept credit card charges without obtaining a signed receipt, its limitations on member banks' associating with competing credit cards, and rules limiting the participation of foreign banks in MasterCard's payment-card business. We conclude that Paycom lacks antitrust standing and has not sufficiently alleged concerted action. We therefore affirm.


Because this is an appeal from a dismissal of a complaint under Fed.R.Civ.P. 12(b)(6), we view the allegations of the complaint in the light most favorable to appellant. Leeds v. Meltz, 85 F.3d 51, 52 (2d Cir.1996).

a) MasterCard

MasterCard is one of four major payment-card-network-service providers in the United States. 2 United States v. Visa U.S.A., Inc., 344 F.3d 229, 234 (2d Cir.2003) [hereinafter " Visa II "]. It operates 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. Id. at 235.

Organizationally, MasterCard is a membership association operated as an open

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joint venture, comprised of and owned by more than 20,000 member banks 3 who engage in the payment-card business for profit. See id.; Visa I, 163 F.Supp.2d at 332. MasterCard is funded primarily by service and transaction fees paid by its members, and the "organization['s] capital surpluses are held basically as security accounts, to pay merchants in the event a member bank defaults on a payment obligation." Visa II, 344 F.3d at 235. 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 242. The consortium's members agree to abide by certain regulations and bylaws promulgated by the association. Id. at 235.

MasterCard members fall into one, or both, of two categories: (i) issuing banks, which disseminate MasterCard-branded payment-cards to individual cardholders and serve as the intermediary between the network and the cardholder; and (ii) acquiring banks, which contract with merchants to purchase transactions effected with MasterCard-branded payment-cards and serve as the intermediary between the network and the merchants accepting MasterCard payments. Id.

b) Card-Present and Card-Not-Present Transactions

For purposes of this proceeding, there are two distinct methods by which cardholders use their cards to purchase goods or services.

The first method is a face-to-face transaction in which a consumer physically presents a MasterCard-branded card to pay for goods or services from a "brick and mortar" merchant. We will call these "card-present" ("CP") transactions.

After the consumer produces the card, a series of electronic messages and transactions follows. The merchant sends the relevant information to its acquiring bank, which packages and processes that information and transmits it to the MasterCard network. The network sends this information to the cardholder's issuing bank, which approves or disallows the transaction based on the current validity of the card and the cardholder's available credit. This authorization or disallowance is sent via electronic message to the acquiring bank, which then sends it to the merchant. The purchase is then consummated or rejected. If consummated, the cardholder signs a receipt. The issuing bank bills the cardholder for the purchase amount and transmits the purchase price to the acquiring bank, deducting an "interchange fee," the fee the issuer charges to process the transaction. Id. The acquirer places these funds in the merchant's account after subtracting the fee for providing its services and executing the transaction, the "merchant discount." Id.

When a cardholder disputes a charge on his payment-card, the process is reversed by means of a "chargeback": 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. To reverse a chargeback, a merchant must verify the validity of the transaction by producing the sales receipt signed by the cardholder at the point of sale. Upon providing such verification, the

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chargeback is re-presented for clearance through the network and the funds are restored to the merchant's account. Essentially, therefore, MasterCard guarantees payment to CP merchants that retain signed sales receipts reflecting the physical use of the card.

"Card-not-present" ("CNP") transactions differ in that the merchant never sees the card or cardholder but acquires the card number and/or other verifying information generally by phone or online. The ensuing sequence of electronic messages and authorization or disallowance are the same as CP transactions. CNP transactions disputed by cardholders are handled quite differently, however. A chargeback begins with the issuing bank receiving the funds back from the acquiring bank that in turn usually seeks the funds from the merchant, who has paid an unrefunded merchant's discount. Unlike the CP merchant, the CNP merchant must bear the loss--purchase price plus merchant's discount--because there is no signed receipt.

CNP transactions of course have a higher risk of fraud than CP transactions. It may be safer for thieves to use stolen cards by phone or online, and the occurrence of cardholders' falsely denying purchases is much higher than in the case of CP transactions.

Moreover, if a merchant client of an acquiring bank has excessive chargeback activity causing its "Chargeback Ratio" 4 to exceed a certain "Chargeback Threshold" defined by MasterCard, the acquiring bank is subject to fines and penalties.

c) Paycom

Paycom is a merchant that sells access to password-protected websites ("customer websites") owned by independent entities that do not charge their consumers directly. A consumer wanting to purchase the services offered by a customer website--in Paycom's case, largely, but not exclusively, sexual or adult content websites that charge subscription fees to view materials on the website--is redirected from the customer website to Paycom's website. Once on Paycom's website, the consumer purchases the desired services from Paycom, e.g., monthly memberships, account IDs, and passwords that allow content to be viewed on the customer website. For payment, Paycom accepts MasterCard, Visa, and Discover payment cards, as well as automated clearing house transactions.

In serving as "payment processor" or "agent" for its customer website operators, Paycom is a merchant purchaser of MasterCard network services that has contracted with a MasterCard member acquiring bank directly. Under its merchant account with an acquiring bank, Paycom submits consumers' MasterCard transactions for authorization and payment. After receiving authorization and payment from the acquiring bank, Paycom credits the accounts of its customer websites in the amount of the transaction minus those fees Paycom charges for arranging the transaction. All purchases through Paycom are CNP transactions.

d) The Complaint

On December 5, 2003, Paycom filed the present action in the Eastern District of New York challenging, inter alia, three MasterCard policies and practices: the chargeback system, the Competitive Programs Policy ("CPP"), and the "Cross-

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Border Acquiring Rules" ("CBA Rules"). 5 Paycom alleged that each of these violated Section 1 of the Sherman Act. We describe these seriatim.

1. The Chargeback System

MasterCard's chargeback system is described in the complaint as follows. When a cardholder disputes a charge, the MasterCard issuing bank "typically" issues a chargeback to the acquiring bank. If the merchant fails to present a signed sales receipt, the acquiring bank "often" debits the entire amount from the merchant's account. 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. CNP merchants are injured in this regard because they pay merchant fees for transactions for which they receive no benefit, as the transaction credit is removed from their account when a chargeback is issued.

Moreover, Paycom contends that MasterCard has imposed an arbitrary and onerous chargeback fine and penalty program that...

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