Antitrust Law Daily Wrap Up, ANTITRUST NEWS: CVS Pharmacy Alleges Visa, MasterCard Conspiracies to Set Supracompetitive Credit Card Fees for Merchants, (May 29, 2013)

By Tobias J. Gillett, J.D., LL.M.

CVS Pharmacy, Inc. has filed a complaint in the federal district court in Brooklyn asserting that Visa and MasterCard have conspired with their member banks to set and maintain supracompetitive interchange fees for their credit cards (CVS Pharmacy, Inc. v. Visa, Inc., May 24, 2013).

CVS operates a chain of retail stores and a pharmaceutical benefits manager that accept Visa and MasterCard credit cards. According to CVS’s complaint, Visa and MasterCard colluded with their respective member banks to “(1) fix, set and enforce interchange fees associated with general and premium credit cards paid by retail merchants,” and “(2) eliminate Plaintiff’s ability to negotiate lower interchange fees through a set of restraints incorporated in Visa’s and MasterCard’s association rules.”

CVS alleges that Visa and MasterCard are national bank-card associations that have established various “merchant restraints” that permit them to maintain supracompetitive interchange fees, or fees that retail merchants pay to issuing banks when the banks’ cards are used as payment. These restraints include the “no surcharges rule,” under which merchants cannot impose a surcharge on any credit card transaction; the “no discount rule,” under which merchants cannot offer a discount for using a payment card issued by a particular issuing bank, or for using a competitor’s payment card; the “honor-all-cards rule,” under which a merchant must accept all of Visa’s or MasterCard’s products if the merchant accepts any of them; the “all-outlets rule,” under which a merchant that accepts Visa or MasterCard at one outlet must accept them at all outlets; the “no-bypass rule,” which prohibits retail merchants and member banks from bypassing the Visa or MasterCard systems for clearing, authorizing, or settling card transactions even if the issuing and acquiring banks are the same; and the “no-multi-issuer rule,” which prohibits a bank that processes any other card association transaction from also processing other card network’s transactions.

Collectively, these rules enable Visa and MasterCard to maintain their supracompetitive interchange fees by preventing merchants from steering consumers to lower cost payment products through discounts and surcharges, according to CVS. Merchants are also prevented from refusing to accept high-cost premium cards that offer rewards to consumers but impose higher interchange fees on merchants, or from placing competitive pressure on MasterCard and Visa to offer lower-cost products.

The higher interchange fees allegedly lead to higher prices for consumers, particularly lower-income consumers that do not use credit cards, and particularly not premium cards. The inability to offer discounts or impose surcharges also prevents offers of lower prices by existing competitors or new entrants from being translated into lower prices for consumers, thus eliminating competition between credit cards. The restraints, such as the “honor-all-cards rule,” also inhibit competition between member banks within the Visa and MasterCard associations for the ability to provide card services to merchants. In addition, the rewards offered by premium credit cards have resulted in an “economically perverse relationship” where the high interchange fees are used to pay for the rewards, which increases demand for the higher-priced cards.

CVS also alleges that merchants cannot substitute other methods of payment for the Visa and MasterCard products due to the high degree of consumer preference for the cards, and due to the high barriers to entry to the market, which has not had a new entrant since 1985. According to CVS, the lack of competition has resulted in interchange fees charged by Visa and MasterCard that have ballooned out of proportion to the marginal costs of the services rendered.

CVS contends that “[i]t would be contrary to the independent self-interest of each of MasterCard’s bank members to prevent merchants from discounting credit cards which it issues, surcharging credit cards issued by its competitors, or refusing to accept its competitors’ credit cards,” but it would be in their collective interest to have Visa and MasterCard set interchange fees at supracompetitive levels and then preserve those levels by enforcing the merchant restraints. Therefore, the member banks conspired with MasterCard and Visa to set the fees and impose the rules on merchants.

CVS asserts claims against Visa and MasterCard for conspiracy in restraint of competition, monopolization, and attempted monopolization. CVS seeks a declaration that Visa and MasterCard violated the federal antitrust laws, permanent injunctive relief, treble damages, costs of suit, and any other relief to which it may be entitled.

The case is No. 1:13-cv-03059-NGG-VVP.

Attorneys: Jay W. Eisenhofer (Grant & Eisenhofer P.A.) for CVS Pharmacy, Inc.

Companies: CVS Pharmacy, Inc.; Visa, Inc.; Visa U.S.A., Inc.; Visa International Service Association; Mastercard Incorporated; Mastercard International Incorporated

News: Antitrust