518 F.3d 1042 (9th Cir. 2008), 05-16549, Kendall v. Visa U.S.A., Inc.

Docket Nº:05-16549.
Citation:518 F.3d 1042
Party Name:Sheri L. KENDALL, doing business as Bala Hair Salon, James Maser, and Maiz Holding Co., Plaintiffs-Appellants, v. VISA U.S.A., INC., Mastercard International, Inc., Bank of America, N.A., Wells Fargo Bank, N.A., and U.S. Bank, N.A., Defendants-Appellees.
Case Date:March 07, 2008
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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518 F.3d 1042 (9th Cir. 2008)

Sheri L. KENDALL, doing business as Bala Hair Salon, James Maser, and Maiz Holding Co., Plaintiffs-Appellants,


VISA U.S.A., INC., Mastercard International, Inc., Bank of America, N.A., Wells Fargo Bank, N.A., and U.S. Bank, N.A., Defendants-Appellees.

No. 05-16549.

United States Court of Appeals, Ninth Circuit.

March 7, 2008

Argued and Submitted June 11, 2007.

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[Copyrighted Material Omitted]

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Richard J. Archer, Archer & Hanson, Occidental, California and James A. Kopcke, Golden Kopcke, San Francisco, CA, for the appellants.

Marie L. Fiala, Heller Ehrman, San Francisco, CA; Robert Vizas, Arnold & Porter, LLP, San Francisco, CA; Jay N. Fastow, Debra J. Pearlstein, Gianluca Morello, Weil, Gotshal & Manges, LLP, New York, NY; Keila D. Ravelo, Wesley R. Powell, Hunton & Williams, New York, NY; Eileen Ridley, Foley & Lardner, LLP, San Francisco, CA; Maurice J. McSweeney, Michael Luedner, Foley & Lardner, Milwaukee, WI; Daniel M. Wall, Joshua N. Holian, Latham & Watkins, San Francisco, CA; and Sonya D. Winner, Tara M. Steeley, Covington & Burling, San Francisco, CA.

Appeal from the United States District Court for the Northern District of California; Jeffrey S. White, District Judge, Presiding. D.C. No. CV-04-04276-JSW.

Before: HAWKINS, A. WALLACE TASHIMA, and CARLOS T. BEA, Circuit Judges.


BEA, Circuit Judge

This case concerns the pleading requirements to state a claim for antitrust violations under Section 1 of the Sherman Act following the Supreme Court's recent pronouncement in Bell Atlantic Corp. v. Twombly, ---U.S. ----, 127 S.Ct. 1955, 1964-66, 167 L.Ed.2d 929 (2007).

Appellants are a group of businesses who offer their customers the convenience of paying with a credit card, at a cost to

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the business. Appellees are composed of two groups: (1) MasterCard and Visa (referred to as "Consortiums") and (2) Bank of America, N.A.; Wells Fargo Bank, N.A.; and U.S. Bank, N.A. (referred to as "Banks"). 1

Appellants sued appellees under Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 16 of the Clayton Act, 15 U.S.C. § 26, for antitrust violations, alleging appellees conspired with each other to set the fees charged to merchants, such as appellants, for payment of credit card sales. The district court dismissed appellants' First Amended Complaint without leave to amend for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). We hold that Appellants' First Amended Complaint failed to plead evidentiary facts sufficient to establish a conspiracy, and we affirm.

I. A Typical Credit Card Transaction

To understand this case, it is helpful to begin with an example of a credit card transaction: 2 A customer purchases dinner for $100 from a merchant using his Visa credit card. The merchant accepts the credit card from the customer, then electronically presents the card's data to the merchant's bank (the "acquiring bank"), or sometimes to a third party processing firm, for verification and processing. The acquiring bank presents the data to Visa, which in turn contacts the bank that issued the credit card to the customer (the "issuing bank") to check the customer's bank account or credit line. The issuing bank then tells Visa to authorize or decline the transaction, and Visa relays this message to the acquiring bank, which notifies the merchant. Thanks to modern computers, this all typically happens while the customer finishes his coffee.

If the transaction was authorized, the merchant eventually delivers the credit card slip to the acquiring bank and asks the sum be credited to the merchant's bank account. If this had been a personal check from the customer, the acquiring bank might put a hold on the check until the customer's bank had paid it. The acquiring bank might also charge a fee for this service. Because this is a Visa receipt, and Visa's credit is good, the acquiring bank credits the merchant's account before the customer pays his Visa bill at the end of the month.

The acquiring bank, however, will not credit the merchant's account the full $100. Instead, the acquiring bank will deduct a "merchant discount fee" of around three percent. Thus, the acquiring bank will credit the merchant's account only $97, keeping $3 as a fee. This merchant discount fee is negotiable. The acquiring bank might not charge this fee if the merchant leaves a large amount of money in its account which the bank can lend out.

The acquiring bank then delivers the credit card receipt to the issuing bank, via Visa. The issuing bank pays the acquiring bank the original amount minus a fee of around two percent, or $98, because the issuing bank knows that when it presents the $100 receipt to Visa, Visa will deduct a $2 fee as well. The difference between the credit card receipt, $100, and the amount the issuing bank pays the acquiring bank, $98, is known as the "interchange fee" or "interchange reimbursement fee." The issuing bank makes nothing in its transaction

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with Visa, but profits, in part, by being one of the owners of Visa through an association. 3

At the end of the transaction, the customer and his family are fed, for which he pays $100 to the issuing bank, plus any late fees and interest. The merchant receives $97 for the dinner, for which it charged the customer $100. The acquiring bank receives $98 from the issuing bank, credits the merchant's account $97, and keeps $1 as a merchant discount fee. The issuing bank receives $98 from Visa, but gives all $98 to the acquiring bank. The issuing bank gets only a portion of Visa's $2 profit as one of the many owners of Visa through an association but, most importantly, keeps any late fees and interest the customer must pay if the customer does not pay his account on time, in full, according to his contract with the issuing bank. Visa receives $100 from the customer, pays the issuing bank $98, and keeps $2 as an interchange fee. The difference between what the two banks keep represents the difference between the greater risk the issuing bank and Visa have that the consumer will not pay compared to the lesser risk the acquiring bank has that the issuing bank will not pay.

In this case, appellants allege the appellees' actions in setting the amount of the merchant discount fee and interchange fee constitute violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 16 of the Clayton Act, 15 U.S.C. § 26, because appellees conspired to set the amounts charged. The district court dismissed appellants' original complaint with leave to amend for, inter alia, failure to allege specific facts of such conspiracy. The district court then allowed appellants to conduct discovery so they would have the facts they needed to plead an antitrust violation in their amended complaint. Appellants deposed Steven Jonas for MasterCard and William Sheedy for Visa. They then used the facts learned in those depositions to form the allegations in their First Amended Complaint. 4 The district court then granted appellees' motions to dismiss the First Amended Complaint, without leave to amend, for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6).

II. Section 1 of the Sherman Act

We review the dismissal of a complaint under Rule 12(b)(6) de novo. Les Shockley Racing Inc. v. Nat'l Hot Rod Ass'n, 884 F.2d 504, 507 (9th Cir. 1989).

Section 1 of the Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations." 15 U.S.C. § 1. The Supreme Court recently clarified what a plaintiff must plead to state a claim under § 1:

[A] plaintiff's obligation to provide the "grounds" of his "entitle[ment] to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do, see Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986) (on a motion to dismiss, courts "are not bound to accept as true a legal conclusion

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couched as a factual allegation"). Factual allegations must be enough to raise a right to relief above the speculative level.... In applying these general standards to a § 1 claim, we hold that stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of illegal agreement.... [A]n allegation of parallel conduct and a bare assertion of conspiracy will not suffice.

Bell Atlantic Corp. v. Twombly, --- U.S. ----, 127 S.Ct. 1955, 1964-66, 167 L.Ed.2d 929 (2007).5 This is because discovery in antitrust cases frequently causes substantial expenditures and gives the plaintiff the opportunity to extort large settlements even where he does not have much of a case. Id. at 1966-67.

"[T]erms like 'conspiracy,' or even 'agreement,' are border-line: they might well be sufficient in conjunction with a more specific allegation--for example, identifying a written agreement or even a basis for inferring a tacit agreement, . . . but a court is not required to accept such terms as a sufficient basis for a complaint." Id. at 1966 (quoting DM Research, Inc. v. College of Am. Pathologists, 170 F.3d 53, 56 (1st Cir. 1999)). The Court also suggested that to allege an agreement between antitrust co-conspirators, the complaint must allege facts such as a "specific time, place, or person involved in the alleged conspiracies" to give a defendant seeking to respond to allegations of a conspiracy an idea of where to begin. Id. at 1970 n.10. A bare allegation of a...

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