Payment Logistics Limited v. Lighthouse Network, LLC et al, No. 3:2018cv00786 - Document 57 (S.D. Cal. 2018)
Court Description: ORDER Granting Defendants' Motion to Dismiss [ECF No. 19 ]. For the reasons stated in this order, the Court grants Defendants' motion. The Court grants PLL's request for leave to amend its initial complaint. Signed by Judge M. James Lorenz on 10/23/2018. (lrf)
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Payment Logistics Limited v. Lighthouse Network, LLC et al Doc. 57 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 Plaintiff, 12 13 v. 14 LIGHTHOUSE NETWORK, LLC; SHIFT4 CORP.; AND SHIFT4 PAYMENTS, LLC, 15 16 Case No.: 3:18-cv-00786-L-AGS PAYMENT LOGISTICS LIMITED, ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS [ECF NO. 19] Defendants. 17 18 19 Pending before the Court is Defendants Lighthouse Network, LLC, SHIFT4 20 Corporation, and SHIFT4 Payments, LLC’s (“Defendants” or “Shift4”) motion to dismiss 21 Plaintiff Payment Logistics Limited’s (“Plaintiff” or “PLL”) first amended complaint. The 22 Court decides the matter on the papers submitted and without oral argument. See Civ. L. 23 R. 7.1(d.1). For the reasons stated below, the Court GRANTS Defendants’ motion. 24 /// 25 /// 26 /// 27 /// 28 /// 1 3:18-cv-00786-L-AGS Dockets.Justia.com 1 I. BACKGROUND 2 This antitrust case arises out of a vertical merger that united all three levels of the 3 payment processing in the credit and debit card payment industry.1 The merger at issue is 4 a purchase of three point-of-sale (“POS”) companies—Restaurant Manager, Future POS, 5 and POSitouch—and one payment interface, Shift4 Corporation (the “Merger”), by a 6 merchant account service provider (“MAS”), Defendant Lighthouse Network. At each 7 level of the payment processing market, it seems, there are multiple competitors vying to 8 serve various types of merchants. Plaintiff PLL is a payment interface competitor that 9 serves mid-to-large table-service restaurants (“MLTSR”). PLL seeks to prevent the 10 Merger because it believes the Merger will substantially lessen the competition among 11 payment interfaces servicing POS companies owned by Defendant and in the broader 12 payment interface market. 13 Accordingly, PLL filed a complaint for violations of federal antitrust laws against 14 Defendants on April 24, 2018. See ECF No. 1. PLL alleges the following three claims: 15 (1) Illegal merger in violation of section seven of the Clayton Act, 15 U.S.C. § 18; (2) 16 monopolization in violation of section two of the Sherman Act, 15 U.S.C. § 2; and 17 attempted monopolization in violation of section two of the Sherman Act. See id. On June 18 15, 2018, Defendants filed a motion to dismiss PLL’s Complaint for failure to state a claim 19 and a request to take judicial notice in support of Defendants’ motion.2 ECF Nos. 19, 20. 20 PLL filed its opposition to Defendants’ motion to dismiss and request for judicial notice 21 22 23 24 25 26 27 28 1 The three levels of payment processing are as follows: (1) Point of sale (“POS”), systems where merchants enter orders and accept credit cards; (2) payment interfaces, conduits that receive and process credit card transaction data from merchants’ POS and send it payment processors; and (3) merchant account service providers (“MAS”), payment processors that receive data from payment interfaces or POS systems and send the data to banks and credit card companies. 2 Defendants filed a Request for Judicial Notice in this case. ECF No. 20. Plaintiff opposed Defendants’ request. ECF No. 31. Plaintiff objected that the contents of the request (press releases, Form 10-Ks, and webpage timelines) did not meet the requirements of Federal Rule of Evidence 201 as they neither are relied upon in the complaint nor a matter of public record. See id. The Court DENIES AS MOOT Defendants’ request as those exhibits were not used in reaching the Court’s ruling. See Medina v. City of San Diego, 2012 WL 1033019, at *6 (S.D. Cal. Mar. 26, 2012). 2 3:18-cv-00786-L-AGS 1 on August 3, 2018. ECF Nos. 30, 31. On August 17, 2018, Defendants filed replies in 2 support of the motion to dismiss and request for judicial notice. ECF Nos. 33, 34. 3 4 II. LEGAL STANDARD 5 The court must dismiss a cause of action for failure to state a claim upon which relief 6 can be granted. Fed. R. Civ. P. 12(b)(6). A motion to dismiss under Rule 12(b)(6) tests the 7 complaint’s sufficiency. See N. Star Int’l v. Ariz. Corp. Comm’n., 720 F.2d 578, 581 (9th 8 Cir. 1983). The court must assume the truth of all factual allegations and “construe them 9 in the light most favorable to [the nonmoving party].” Gompper v. VISX, Inc., 298 F.3d 10 893, 895 (9th Cir. 2002); see also Walleri v. Fed. Home Loan Bank of Seattle, 83 F.2d 11 1575, 1580 (9th Cir. 1996). 12 As the Supreme Court explained, “[w]hile a complaint attacked by a Rule 12(b)(6) 13 motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to 14 provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and 15 conclusions, and a formulaic recitation of the elements of a cause of action will not do.” 16 Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007) (internal citations and 17 quotation marks omitted). Instead, the allegations in the complaint “must be enough to 18 raise a right to relief above the speculative level.” Id. at 1965. A complaint may be 19 dismissed as a matter of law either for lack of a cognizable legal theory or for insufficient 20 facts under a cognizable theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 21 534 (9th Cir. 1984). 22 23 III. DISCUSSION 24 Defendants contend Plaintiff’s Complaint should be dismissed for the following 25 three reasons: (a) PPL failed to define a relevant market; (b) PLL failed to allege that Shift4 26 possesses market power in either alleged relevant market; and (c) PLL fails to allege an 27 injury to competition. See ECF No. 19-1. The Court addresses each contention in turn. 28 /// 3 3:18-cv-00786-L-AGS 1 a. PLL Has Not Defined a Relevant Product Market 2 To properly state an antitrust claim under the Sherman Act, plaintiffs must plead a 3 relevant market. Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1044-45 (9th Cir. 4 2008). Although plaintiffs are not required to plead a relevant market with specificity, 5 “[t]here are . . . some legal principles that govern the definition of an antitrust ‘relevant 6 market’ and a complaint may be dismissed under Rule 12(b)(6) if the complaint’s ‘relevant 7 market’ definition is facially unsustainable.” Id. at 1045. Both a geographic and a product 8 market must be included in a relevant market. Big Bear Lodging Ass’n v. Snow Summit, 9 Inc., 182 F.3d 1096, 1104 (9th Cir. 1999). A product market “must encompass the product 10 at issue as well as all economic substitutes for the product.” Newcal Indus., 513 F.3d at 11 1045. 12 interchangeability of use” or sufficient “cross-elasticity of demand” with the relevant 13 product. Id. (quoting Brown Shoe v. United States, 370 U.S. 294, 325 (1962)). A relevant 14 market lacking economic substitutes falls short of incorporating “the group or groups of 15 sellers or producers who have actual or potential ability to deprive each other of significant 16 levels of business.” Id. (quoting Thurman Indus., Inc. v. Pay ‘N Pak Stores, Inc., 875 F.2d 17 1369, 1374 (9th Cir. 1989)). “[W]ell-defined submarkets may exist which, in themselves, 18 constitute product markets for antitrust purposes.” Brown Shoe, 370 U.S. at 325. To bring 19 an antitrust claim grounded on a submarket, “the plaintiff must be able to show (but need 20 not necessarily establish in the complaint) that the alleged submarket is economically 21 distinct from the general product market.” Newcal Indus., 513 F.3d at 1045. The Supreme 22 Court laid out “ practical indicia” of an economically distinct submarket in Brown Shoe: 23 “industry or public recognition of the submarket as a separate economic entity, the 24 product’s peculiar characteristics and uses, unique production facilities, distinct customers, 25 sensitivity to price changes, and specialized vendors.” 370 U.S. at 325. Within relevant product markets, economic substitutes have a “reasonable 26 PLL alleges the following two relevant product markets in the Complaint: (1) 27 Payment interfaces for Defendant-Owned POS systems for MLTSR; and (2) payment 28 interfaces for POS systems specializing in MLTSR. ECF No. 1 at 24-25. PLL also alleges 4 3:18-cv-00786-L-AGS 1 that the relevant geographic market for both alleged product markets is the United States. 2 Id. at 26.3 3 Defendants contend PLL’s Complaint fails to allege why the relevant market is 4 limited to payment interfaces for POS systems servicing MLTSR. ECF No. 19-1 at 15-16. 5 Specifically, Defendants assert that PPL arbitrarily defines the bounds of the payment 6 interface market servicing MLTSR. Id. at 17. However, the Court disagrees as Plaintiff 7 seems to define its relevant market as a submarket of a broader payment interface market. 8 See, e.g., Brown Shoe, 370 U.S. at 325. “The boundaries of such a submarket may be 9 determined by examining such practical indicia as industry or public recognition of the 10 submarket as a separate economic entity, the product’s peculiar characteristics and uses, 11 unique production facilities, distinct customers, distinct prices, sensitivity to price changes, 12 and specialized vendors.” Ibid. To this point, PLL has yet to engage in discovery where 13 presumably it hopes to identify the areas of actual or potential competition that are 14 economically significant enough to define the relevant submarket. Thurman Indus., 875 15 F.3d at 375. At this stage of the litigation, the Court finds that Plaintiff’s relevant market 16 allegations are not so conclusory that dismissal is warranted for this reason. 17 Defendants also contend that PLL does not define the set of economic substitutes for 18 PLL’s payment interface product. ECF No. 19-1 at 18. In particular, Defendants assert 19 that PLL artificially limits the payment interface market by excluding POS systems that 20 connect directly to MAS systems. Id. at 17-18. A product market “must encompass the 21 product at issue as well as all economic substitutes for the product.” Newcal Indus., 513 22 F.3d at 1045. Defendants correctly highlight that PLL’s currently-pled relevant market 23 excludes POS systems with direct connections to MAS systems, like Digital Dining and 24 Dinerware. See ECF No. 1 at 26, 28. Although PLL alleges that “direct connections are 25 26 27 28 3 Defendants have not raised any argument claiming that the alleged geographic market is improper. ECF No. 19-1 at 15-19. For that reason, the Court will only address PLL’s relevant product market allegations. 5 3:18-cv-00786-L-AGS 1 typically used by large, enterprise restaurants with more than ten locations[,]” the Court 2 finds that this allegation does not remove direct connections from the market as an 3 economic substitute. PLL excludes direct connection POS systems, claiming that the 4 expense and need for sophisticated, internal technology personnel would be too onerous 5 for MLTSR. See ECF No. 1 at ¶ 30. That conclusion is not sufficient as PLL did not allege 6 facts supporting that there is no “reasonable interchangeability of use” or sufficient “cross- 7 elasticity of demand” for direct connection POS systems in the MLTSR payment interface 8 market. It is undisputed that POS systems with direct connection capability share a relevant 9 functionality with payment interfaces—to securely collect and transfer payment 10 transaction data between the POS system and the MAS. Thurman Indus., 875 F.2d at 1374 11 (defining relevant market as “the group or groups of sellers or producers who have actual 12 or potential ability to deprive each other of significant levels of business []”). For that 13 reason, the Court infers that reasonable interchangeability of use exists for direct 14 connection POS systems within the payment interface products. As such, the Court finds 15 PLL’s definition for payment interfaces for POS systems specializing in MLTSR market 16 is facially unsustainable and GRANTS the Defendants’ motion to dismiss. 17 Moreover, as currently alleged, this case is not one where a single brand of a product 18 or service can be a relevant market. See Eastman Kodak Co. v. Image Technical Servs., 19 Inc., 504 U.S. 451, 481-82 (1992). In Eastman Kodak, the Supreme Court found that the 20 relevant market was comprised of “only those companies that service Kodak machines” 21 since “service and parts for Kodak equipment are not interchangeable with other 22 manufacturers’ service and parts[.]” Eastman Kodak, 504 U.S. at 482. The Supreme Court 23 reasoned that “[t]he relevant market for antitrust purposes is determined by the choices 24 available to Kodak owners.” Id. at 481-82 (citation omitted). 25 PLL has not factually alleged how MLTSR merchants could not, at the time of 26 contract execution, confirm whether use of Defendants’ POS systems obligates merchants 27 to solely use of the Shift4 Corp. payment interface. The payment interfaces market is not 28 unique to Defendants’ POS systems servicing MLTSR merchants. In fact, Defendants’ 6 3:18-cv-00786-L-AGS 1 POS Systems, Restaurant Manager, Future POS, POSitouch, and Lighthouse were serviced 2 by multiple payment interfaces prior to the merger—PLL, DataCap and PAX. PLL now 3 speculates that, post-merger, MLTSR merchants would be locked in to Defendants’ 4 payment interface, Shift4 Corp., if Defendants began charging additional fees to use other 5 available payment interfaces, not that the choices of interfaces available diminished due to 6 the merger. POS dealers and MLTSR merchants are free to negotiate and contract with 7 Defendants’ POS systems in whatever manner they deem fiscally beneficial. While PLL 8 alleges that “contracts are complex and negotiated with the POS Dealer rather than the 9 merchant,” the Court cannot reasonably infer that merchants could not instruct their POS 10 dealer to negotiate terms that would allow the merchant to change payment interfaces at 11 will. See ECF No. 1 at ¶ 31. As such, the Court finds this market definition unsuitable to 12 the extent explicit contractual provisions form the boundaries of the submarket. See 13 Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir. 1997). In addition, PLL has not alleged 14 any practical indicia of an economically distinct submarket. Accordingly, the Court finds 15 PLL’s market definition for Payment interfaces for Defendant-Owned POS systems for 16 MLTSR unsuitable and GRANTS the Defendants’ motion to dismiss. 17 b. PLL Has Failed to Allege Sufficient Market Power in Either Alleged Market 18 “A failure to allege power in the relevant market is a sufficient ground to dismiss an 19 antitrust complaint.” Rick-Milk Enters., Inc. v. Equilon Enters., LLC, 532 F.3d 963, 972 20 (9th Cir. 2008). There are two way to prove market power, direct or circumstantial 21 evidence. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995). When 22 using direct evidence, a plaintiff must “put [] forth evidence of restricted output and supra 23 competitive prices . . .” Id. However, use of circumstantial evidence requires a plaintiff to 24 “(1) define the relevant market, (2) show that the defendant owns a dominant share of that 25 market, and (3) show that there are significant barriers to entry and show that existing 26 competitors lack the capacity to increase their output in the short run.” Id. (Internal citation 27 omitted). Where, as here, PLL fails to sufficiently allege a relevant market definition, the 28 Court deems it is impossible to determine market power. As such, the Court finds that PLL 7 3:18-cv-00786-L-AGS 1 has failed to sufficiently allege market power as the relevant market has not been 2 sufficiently defined yet. Accordingly, the Court GRANTS Defendants’ motion on this 3 ground. 4 c. PLL Failed to Allege an Antitrust Injury 5 Mergers or acquisitions “in any line of commerce or in any activity affecting 6 commerce in any section of the country, [where] the effect of such acquisition may be 7 substantially to lessen competition or to tend to create a monopoly” are prohibited by 8 section seven of the Clayton Act. 15 U.S.C. § 18. To state a section seven claim, like any 9 antitrust claim, a plaintiff must allege an antitrust injury—some harm to competition 10 resulting from defendant’s behavior. Pool Water Prods. V. Olin, 258 F.3d 1024, 1034 (9th 11 Cir. 2001). Under this section, a plaintiff must allege that the acquisition will create an 12 appreciable danger of anticompetitive consequences. United States v. Philadelphia Nat’l 13 Bank, 374 U.S. 321, 364 (1963). 14 competition itself has been injured rather than merely competitors. Rutman Wine Co. v. E 15 & J Gallo Winery, 829 F.2d 729, 734 (9th Cir. 1987). To allege an injury to competition, 16 plaintiff must allege (1) the relevant markets in which competition has been injured and (2) 17 the anticompetitive effects caused by the alleged restraint within the markets with factual 18 detail. Les Shockley Racing v. Nat’l Hot Rod Ass’n, 884 F.2d 504, 508 (9th Cir. 1989) 19 (citing Rutman Wine, 829 F.2d at 736). “[A] claimant must, at a minimum, sketch the 20 outline of the antitrust violation with allegations of supporting factual detail.” Id. Injury to competition requires allegations that 21 As follows from the Court’s reasoning above, PLL did not allege an antitrust injury 22 because PLL failed to include direct connection POS systems into the relevant markets or 23 explain with sufficient factual detail why they should not be included. Accordingly, the 24 Courts GRANTS Defendants’ motion on this ground and will not discuss the sufficiency 25 of the anticompetitive effect allegations. 26 /// 27 /// 28 /// 8 3:18-cv-00786-L-AGS 1 d. Leave to Amend Complaint 2 When dismissing a complaint for failure to state a claim, “a district court should 3 grant leave to amend even if no request to amend the pleading was made, unless it 4 determines that the pleading could not possibly be cured by the allegations of other facts.” 5 Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (internal citations omitted). 6 Here, PLL requests leave to amend its complaint. The Court finds that the deficiencies in 7 the initial complaint could be cured by amendment. As such, the Court GRANTS PLL’s 8 request for leave to amend its initial complaint. 9 10 IT IS SO ORDERED. 11 Dated: October 23, 2018 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 3:18-cv-00786-L-AGS
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