Northern District of California Allows Conspiracy Claims to Proceed Against Major Credit Card Companies

Practical Law Legal Update w-003-7867 (Approx. 4 pages)

Northern District of California Allows Conspiracy Claims to Proceed Against Major Credit Card Companies

by Practical Law Antitrust

Background

In B&R, the plaintiffs alleged that the defendants, which include credit-card networks, issuing banks, and a standard-setting joint venture, conspired to impose a price term, in the form of shifting the liability for fraudulent transactions from credit card issuers to merchants if the merchant failed to adopt chip technology by October 1, 2015.

Before October 1, 2015, credit card issuers absorbed liability for fraudulent transactions. As of October 1, 2015, however, if a customer tried to pay with a chip card and the merchant instead used the magnetic strip, the merchant became liable for any fraud.

The shift in liability can only be avoided by merchants that:

Install terminals to read chip cards.
Obtain certification to use the terminals.

The plaintiffs allege that the credit-card networks, Visa, MasterCard, American Express and Discover, control the certification process and determine when or even if merchants will be certified. As a result, many merchants, especially smaller merchants, have installed the terminals but are still waiting for their systems to be certified.

Plaintiffs allege that the defendants engaged in a price-fixing conspiracy by agreeing to:

Adopt the same policy to shift liability for fraudulent charges from card-issuing banks to merchants.
Make the shift effective on the same day for all four networks.

Plaintiffs claim that the opportunity to conspire arose out of the network defendants’ participation in:

EMVCo, a company jointly owned by the network defendants that manages the standards for processing and maintaining chip transactions.
The Smart Card Alliance, an industry association where the network defendants hold a number of leadership positions.
EMV Migration Forum, an organization created by the Smart Card Alliance; of which all network defendants are members.

Additionally, plaintiffs allege that the defendants, facing the elimination of anti-steering rules, agreed to implement the liability policy on the same day in order to eliminate the merchant incentive to steer customers to one card over the other to avoid potential fraud liability.

The Network Defendants

The court found that the plaintiffs pled sufficient facts, through direct and circumstantial evidence, to plausibly allege that the network defendants Visa, MasterCard, American Express, and Discover:

Engaged in an impermissible conspiracy.
Acted in collusion, and not merely in parallel.

The court found that statements by executives constituted direct evidence of a conspiracy, including:

Charlie Sharf, CEO of Visa, stating that the liability policy occurred as a result of getting everyone in a room to work together.
Krista Tedder, a Vice President at MasterCard, stating with certainty that no card brands were going to delay implementing the liability policy.

In addition, the court found that the following plus factors were, when considered cumulatively, sufficient to support the plausibility of a conspiracy by these defendants:

The liability policy was implemented on a single day in the US, whereas in other parts of the world the rollout was staggered, there were other adjustments offered by the networks, and the networks did not all act in unison (the court did not apply this factor to Discover).
The defendants implemented the liability policy on the same day, avoiding the risk that merchants would steer customers to cards that had not implemented the shift.
There was a complete absence of competitive behavior.
The defendants had an opportunity to collude through EMVCo and the Smart Card Alliance.

The court found that the above factors applied to each of the four network defendants, except that Discover had not previously applied the liability policy internationally. The court found, however, that the remaining factors were sufficient to support the claims against Discover.

Finally, the court noted that the four defendants had a particular interest in adopting the liability shift on the same day, as the merchants faced a lawsuit that may have prohibited them from enforcing anti-steering provisions that may have allowed merchants to urge customers to use cards that did not have the same liability policy (United States v. American Express Co., No. 15-1672 (2d Cir. Sept. 26, 2016)) (see Legal Update, Second Circuit: AmEx Anti-Steering Provisions Not Anticompetitive).

The Other Defendants

The Issuing-Bank Defendants

The court dismissed claims against the seven issuing-bank defendants, noting that it would consider a motion to amend at a later date if additional facts were uncovered during discovery to support the claims against them. The court warned the banks to preserve related documents.

To support their claims against the issuing banks, the plaintiffs argued that:

Despite IPOs of both Visa and MasterCard, the issuing banks continued to control the companies.
The network defendants and issuing-bank defendants agreed to a quid pro quo arrangement with respect to the liability policy and the adoption of the chip cards.

As to the control theory, the court found that the plaintiffs’ allegations were vague and conclusory, holding that:

Plaintiffs failed to allege sufficient facts to describe the type of control the member banks continued to hold in the card companies.
The ownership rights changed in 2006, well before the adoption of the liability policy.

The quid pro quo argument also failed because:

The allegation assumed that the issuing-bank defendants had control over the adoption of the chip cards.
The complaint lacked details about whether the issuing-bank defendants were in a position to control the adoption of the chip cards.

The complaint failed to show that the issuing-bank defendants controlled the network defendants and so the court found the plus factors also largely inapplicable to these defendants.

EMVCo.

The court found that there were no specific allegations in the complaint describing actions in furtherance of a conspiracy taken by EMVCo., a standard-setting joint venture between the network defendants relating to the chip technology, and dismissed the claims against EMVCo. The court issued the same warning as to the issuing banks that if additional facts are uncovered during discovery that support plaintiffs’ claims, a motion to amend may be allowed.

For more information on the Sherman Act, see Practice Note, Establishing an Agreement under Section 1 of the Sherman Act.

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