National Bancard Corp. (NaBanco) v. VISA U.S.A., Inc.
| Decision Date | 10 January 1986 |
| Docket Number | No. 84-5818,84-5818 |
| Parties | , 1986-1 Trade Cases 66,912 NATIONAL BANCARD CORPORATION (NaBANCO), a Florida Corporation, Plaintiff-Appellant, v. VISA U.S.A., INC., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
James M. Landis, Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A., Sylvia H. Walbolt, Tampa, Fla., for plaintiff-appellant.
Paul C. Huck, Fleming and Huck, P.A., Miami, Fla., M. Laurence Popofsky, Heller, Ehrman, White & McAuliffe, Stephen V. Bomse, Meryl Macklin, San Francisco, Cal., for defendant-appellee.
Appeal from the United States District Court for the Southern District of Florida.
Before JOHNSON and HENDERSON, Circuit Judges, and ALLGOOD, * District Judge.
National Bancard Corp. (NaBanco) filed this suit against VISA U.S.A. (VISA), alleging that VISA violated Section 1 of the Sherman Act, 15 U.S.C. Sec. 1, by fixing certain bank credit card interchange rates. After a bench trial that consumed approximately nine weeks, the United States District Court for the Southern District of Florida, in an exhaustive opinion, concluded that NaBanco failed in its efforts to prove a violation of the antitrust laws. See National Bancard Corp. v. VISA, U.S.A., 596 F.Supp. 1231 (S.D.Fla.1984) (hereinafter cited as NaBanco).
NaBanco appeals from this judgment, claiming that the district court erred in applying the rule of reason rather than the per se rule to the facts of the case. Alternatively, NaBanco contends that even under a rule of reason analysis VISA's conduct was violative of Section 1 of the Sherman Act.
The factual background to this case revolves around the workings of the bank credit card industry in general and VISA's operational procedures in specific. 1 Bank credit card transactions generally can involve four different entities: (1) cardholders who use the cards to purchase goods and services; (2) merchants who accept the cards in exchange for goods and services; (3) banks that issue cards to cardholders (card-issuing banks); (4) banks that contract with merchants to accept the credit cards (merchant-signing banks). In some instances only three parties are implicated because the card-issuing bank also contracts with the merchant to accept the card. 2
In a typical four-party transaction, a consumer is issued a bank credit card by a card-issuing bank, Bank X. A merchant-signing bank, Bank Y, contracts with a shopowner to join the VISA network and accept the VISA card. The cardholder then uses the card to purchase goods from the merchant, who furnishes the cardholder with the merchandise and then sends the cardholder's charge receipt (the paper) to Bank Y, the bank with which the shopowner has signed a VISA contract. Bank Y "buys" the paper from the merchant pursuant to their contract, but at less than face value. This discounted amount is known as the "merchant discount." Bank Y then must "interchange" the paper with Bank X, so that Bank X can bill the cardholder in accordance with the terms of their contract.
The difficulties in a credit card or "cashless" transaction arise because each such transaction generates a trail of paperwork. This transactional paper representing the exchange is transferred among the parties until each eventually bears the burden that it has contracted to assume. This case concerns certain fees that attach in the transfer, or interchange, of this paper between the merchant-signing bank and the card-issuing bank.
The present action arose as a result of the "Issuer's Reimbursement Fee" (IRF) that the VISA system imposes when the merchant-signing bank forwards the cardholder's paper to the card-issuing bank for collection. In the VISA system this fee, a small fixed percentage of each charge, is levied only when the interchange is conducted through VISA's computerized service known as BASE II. Significantly, the parties to the interchange are not required to use BASE II. Merchant and issuer institutions are free to negotiate a different rate and bypass the BASE II system entirely.
In today's technology, the majority of these transactions are automated, so that the banks' and merchants' computers actually credit each others' computerized accounts. The effect, however, is the same as if each party were to present the paper in person and receive cash in exchange.
For the merchant-signing bank to profit from its middleman position, the payment it receives from the card-issuing bank must be greater than the discounted amount the merchant bank originally paid the merchant. In practical terms, the IRF may not exceed the merchant discount for the merchant-signing bank to benefit from the transaction. Because each merchant-signing bank negotiates the amount of its discount with the merchant, each may ensure that it maintains such a profit margin by setting the merchant discount accordingly.
On the other hand, the card-issuing bank is responsible for collecting all sums due and payable by its cardholders. All risk of loss resulting from nonpayment, default or any other reason falls solely on the issuer bank. Additionally, until recently, card-issuing banks did not charge an annual user fee to each cardholder for fear of losing patrons to competing bank cards that made no such charge. The card-issuing banks also traditionally have provided a so-called "convenience period" for their customers. This period, usually comprising several weeks, allows cardholders to avoid any interest payments if their account is paid in full before the next billing cycle--in effect an interest-free loan.
The IRF ostensibly is designed to shift to the merchant-signing bank some of the costs--from risk of loss, lack of user fee, and convenience period expense--that fall solely on the card-issuing banks. NaBanco contends that this practice constitutes horizontal price fixing and is therefore a per se violation of Section 1 of the Sherman Act. NaBanco further asserts that even if the rule of reason is invoked, VISA's IRF is unreasonably anticompetitive. VISA, however, maintains that the BASE II IRF helps create a product that could not exist otherwise and therefore is neither subject to traditional per se attack nor in contravention of the Sherman Act when subjected to rule of reason evaluation.
The purpose of the IRF, and the basis of NaBanco's attack on it, are intertwined in the development of BankAmericard, VISA, and NaBanco. 3 The Bank of America (BA) originally marketed the three-party BankAmericard on a statewide basis in California. In 1966 BA decided to expand its system nationwide by licensing local banks to use the BankAmericard name, thereby making BankAmericard a four-party transaction. As part of the new national system, a variable interchange fee system was created. Each merchant-signing bank was required to inform the card-issuing bank of either the actual or average merchant discount it charged. The fee was based on this information.
After the original BankAmericard network expanded, the variable interchange fee system did not work effectively. A for-profit nonstock-membership corporation, NBI, was therefore formed in 1970. NBI's board of directors adopted a new uniform fee system, the IRF, in late 1971. NBI became VISA in 1977.
VISA, which included over 13,000 members in 1983, has two types of membership. "Proprietary" members both issue cards and sign merchants. In 1983 they made up approximately 14% of all VISA members. "Agent" members choose only to sign merchants to participate in the VISA system. The sole significant difference between proprietary and agent members is that only proprietary members may vote, or serve on, VISA's board of directors. Thus, agent members have no input in determining VISA policies, including the existence and amount of the IRF. It is important to note that VISA members voluntarily choose the type of membership they desire and may elect to issue cards and thereby gain a voice in the VISA decisionmaking process. The various members also compete vigorously against one another to issue cards and sign merchants.
NaBanco does not belong to the VISA system. It serves as a processing agent for VISA members and receives all or part of the merchant discount of the VISA member to whom it provides a processing service. For purposes of this decision, however NaBanco stands in the exact position of an agent member. 4
NaBanco's basic complaint is that the IRF reduces or eliminates its ability to compete with proprietary VISA members that both issue cards and sign merchants. Because "on-us" transactions (in which the card-issuing and merchant-signing bank is the same) involve no interchange, and therefore are not subject to the IRF, proprietary members conducting "on-us" transactions can reduce the merchant discount they charge. NaBanco alleges that it is unable to compete because it must keep its merchant discount higher than the IRF to ensure a profit. Merchants therefore do not choose to contract with NaBanco because they receive a better merchant discount from proprietary VISA members. See NaBanco, 596 F.Supp. at 1240.
Because both "on-us" and IRF transactions involve many of the same costs, NaBanco claims that by reducing the merchant discount in "on-us" transactions, proprietary VISA members demonstrate that the IRF is not cost related. According to this argument, the IRF is either unnecessary or intentionally set at a level to discourage purely merchant-signing competitors. When NaBanco seeks to sign and service merchants, it competes with merchant-signing banks that also issue VISA cards. NaBanco alleges that banks that also issue cards have set the IRF to keep purely merchant-signing banks from being able to compete. Therefore, in NaBanco's view these proprietary members are equivalent to a group of competitors who have agreed to sell goods to each other (or, in this case, to themselves) at a lower rate than that offered to NaBanco. NaBanco urges that,...
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