The opinion of the court was delivered by: Wolfson, United States District Judge
Presently before the Court is a motion by MICROS, Merchant Link, and Paymentech ("defendants"), to dismiss the federal antitrust and state law unfair competition claims of plaintiff Heartland ("Heartland") pursuant to Fed. R. Civ. P. 12(b)(6). Defendants assert that Heartland has failed to adequately plead its tying and conspiracy claims, and further, that Heartland lacks standing to bring its tying claim. In the event that the Court dismisses the federal claim, Defendants asserts that the Court should exercise its discretion to dismiss Heartland's state law claim.
For the following reasons, Defendants' motion to dismiss is denied in its entirety.
I. Background And Procedural History
Since Defendants move to dismiss Heartland's complaint pursuant to Fed. R. Civ. P. 12(b)(6), all facts alleged in the complaint are assumed to be true.
Heartland is a credit and debit card processing corporation incorporated in Delaware with its principle place of business in New Jersey. Complaint, ¶ 15. Heartland provides credit and debit card processing and additional services for more than 160,000 restaurants, hotels and retail merchants throughout the United States. Id. Defendant MICROS is the leading developer of restaurant point-of-sale ("POS") information systems, including hardware and software for such systems and operational applications, as well as back office applications that include inventory, labor and financial management. Id. ¶ 16. Defendant Merchant Link is a network-based gateway company that provides merchants with a single interface to connect with all major payment processors, such as Heartland and Paymentech. Merchant Link is a wholly owned subsidiary of Paymentech. Id. ¶ 17. Defendant Paymentech is the largest payment processor in the world and is therefore a direct competitor of plaintiff Heartland. Id. ¶18.
To understand the tying and conspiracy theories alleged in the complaint, it is necessary to understand how credit card transactions are processed in the restaurant business. A restaurant merchant purchases a POS information system, from a company such as MICROS, "which is the modern-day equivalent of cash registers of the past" and "enable[s] a merchant to, inter alia, take debit and credit card payments from customers," Id. ¶ 19. In order to process credit and debit card transactions, the merchant also requires the services of a processing company such as plaintiff Heartland or defendant Paymentech. Merchants pay processors on a fee-per-transaction basis. Heartland's per transaction fee ranges from $0.01 to $0.12, depending on the volume of transactions for the particular merchant. Id. ¶ 49.
Further, the merchant's POS system must be connected with the processing company's computer, and this requires an interface: "In order for credit or debit card transactions to be processed, an interface - which is a software program that enables the transfer of transaction data between the merchant's POS system and the processing company's computer - is required." Id. ¶ 33. This interface is traditionally provided in one of two ways. Id. One method is to have a direct interface between the POS system and the processor. "This is to say that, when a merchant purchases a POS system, the POS system will already have one or more interfaces in it to connect directly with one or more processors. If the POS system does not have an interface to the merchant's preferred processor, the merchant can arrange for such an interface for an additional charge." Id. ¶ 33. The second method involves using a software program or "gateway" that "acts as a terminal to which the transaction data from a POS system is routed . . . and . transferred to any number of processing companies." Id. ¶ 34. Third party companies provide gateway services and charge merchants an additional fee per transaction. Id. ¶¶ 34-35.
Heartland's antitrust claims, based on tying and a conspiracy to restrain trade, attack the same underlying conduct. Heartland alleges that MICROS has market power in the table service POS system market, with a market share in excess of fifty percent in that market, Id. ¶ 32,*fn1 and further, that defendants are engaged in a scheme to use MICROS' market power in furtherance of an illegal anti-competitive arrangement. Heartland alleges that "MICROS and Merchant Link entered into an agreement pursuant to which MICROS' devices exclusively use Merchant Link services for the transmission of electronic transactions . . . from MICROS' terminals and network and help desk services for such terminals." Id. ¶ 37. Hence, "only Paymentech's subsidiary Merchant Link can serve as the interface for any transaction emanating from a MICROS POS system." Id. "MICROS . . . imposes on purchasers of its POS systems the condition that they use only Merchant Link." Id. ¶ 40. It follows that the arrangement between MICROS and Merchant Link allegedly (1) precludes a merchant from obtaining a direct interface between its MICROS POS system and a processor and (2) precludes a merchant from using a gateway other than defendant Merchant Link to connect to a processor.*fn2
An important part of the arrangement is that Merchant Link's gateway fees are allegedly atypical in at least two ways. First, although "[g]ateways are a service provided by third-party software companies, who charge merchants an additional fee for each transaction," Id. ¶ 34, the "Defendants have arranged it so that the gateway fee is billed to the processors, rather than to merchants directly." Id. ¶ 36. In other words, Heartland and other processors who compete with Paymentech are charged Merchant Link's gateway fee, not the merchants who purchase MICROS' POS system. Second, Merchant Link charges an allegedly supracompetitive rate for its services. Gateway charges are "commonly volume-driven" and "a large restaurant chain would be able to obtain a lower gateway fee rate of $0.01 to $0.02 (or even less) per transaction." Id. ¶ 35. "Merchant Link, however, charges a supracompetitive rate for its 'services.' Instead of the usual volume-driven per transaction fee, Merchant Link - taking full advantage of the exclusive arrangement afforded to it by MICROS - charges a flat rate of $0.04 per transaction . . . regardless of transaction volume." Id. ¶ 38.
Further, Merchant Link's alleged supracompetitive rate "cannot be challenged because of the tie imposed by MICROS customers," Id., i.e., merchants can only use MICROS POS systems, the alleged leader in the table services POS system market, on the condition that they refrain from using any interface other than Merchant Link's gateway. Because Paymentech owns Merchant Link, Paymentech is the only processor in the market who can avoid Merchant Link's gateway fee when servicing merchants who use a MICROS system. "Paymentech, as the ultimate owner of the gateway, is free to avoid this gateway fee - in whole or in part - since Paymentech would merely be charging itself for the use of its own gateway. This benefit is not shared by Paymentech's competitors, whose costs have been uniformly raised by this unorthodox MICROS-Merchant Link pricing arrangement." Id.¶ 36.
Heartland alleges the supra competitive rate charged by Merchant Link in the interface market weakens competition in the processing market by inflating the costs of processing for all processors (who service MICROS-using merchants) except, of course, Paymentech. Id. Since Paymetech can avoid the Merchant Link gateway fee when providing processing services to merchants who use MICROS POS systems, this "allows Paymentech to increase its price to merchants while still under-bidding its competitors [, e.g., Heartland] every time." Id. Paymentech can underbid Heartland and other processors who, in order to avoid operating at a loss, must "pass on the [Merhant Link] fee to the merchant, resulting in an artificially high charge to the merchant." Id. ¶ 44.*fn3 Since Paymentech is not subject to Merchant Link's gateway fee, it can underbid Heartland and other processors in the processing market, which has allegedly been inflated by defendants' arrangement. Id. ¶¶ 45, 46.*fn4 "The MICROS-Merchant Link tie . . . has eliminated price competition and raised the cost of processing from a MICROS POS such that a transaction which previously cost the merchant $0.04 to process with Heartland now costs . . . $0.08." Id. ¶ 57. "Paymentech can undercut Heartland by agreeing to charge the merchant $0.06 per transaction, because it can absorb the Merchant Link fee, reap a $0.02 benefit over the competitive rate and still be $0.02 cheaper than the competition [, such as Heartland.] Id. As a result, "Heartland has lost significant market share in MICROS using restaurants since the inception of defendants' scheme." Id. ¶ 53. Heartland estimates its lost profits from losing customers in the restaurant POS processing market to be in excess of $10 million. Id. ¶ 67. Additionally, because of Merchant Link's gateway fee, Heartland has "lower profit margins on customers [using a MICROS system that] Heartland is able to" procure or retain. Id. ¶ 54.
Heartland alleges MICROS both fails to disclose and intentionally conceals the nature of the above arrangement:
[N]either MICROS nor its agents specifically disclose the Merchant Link tie-in, or the exorbitant fee that accompanies it, to its customer in its sale and maintenance agreements. In fact, MICROS sales personnel intentionally conceal the Merchant Link fee from prospective merchants prior to sale. Consequently, the vast majority of merchants who purchase a MICROS POS system do not find out - and indeed, do not have the means to find out - about the exorbitant Merchant Link fees until after they have purchased their MICROS system.
Id. ¶ 51. Moreover, merchants are "locked in" by the MICROS-Merchant Link arrangement because, "as MICROS POS systems cost in excess of $24,000.00, the cost of switching to a different, non-MICROS POS system so as to avoid the Merchant Link fee is too high for most, if not all, restaurant merchants." Id.
Heartland alleges that all of the defendants benefit from, and thus have an incentive to agree to and participate in, the above anti-competitive arrangement. Merchant Link receives its gateway fees at a supracompetive rate. Paymentech "can under-bid Heartland and other low cost processors and get more customers," while its competitors, "well aware of Paymentech's competitive advantage, are forced to forgo virtually all profit in a losing attempt to maintain market share." Id.¶ 7. Further, the arrangement "provides Paymentech with an advantage in bidding for processing business because it knows from its gateway [,i.e., from Merchant Link, its subsidiary,] the identity of any new merchant that is coming on line with Mircros well before the competition does," which is "competitively valuable information." Id. MICROS benefits because "[p]art of the Merchant Link fee collected by Paymentech is paid by Paymentech to MICROS. This per transaction stream of revenue is hidden from MICROS' customers and allows MICROS to secretly derive revenue over and above what it achieves from the sales and services of its POS systems. Id. ¶ 8. Additionally, MICROS benefits because "the effect of the Merchant Link tie shifts the entire technical support burden away from MICROS and its distributors and puts the expense and burden on the processor." Id.
Finally, Heartland alleges that there is no legitimate business reason for MICROS to require merchants to use Merchant Link as an interface. Heartland alleges:
There is . . . no legitimate business reason that merchants be forced to use Merchant Link over any other third party gateway provider or the processors' own interface. Gateway services can be provided by an number of software companies. Further, the services that Merchant Link provides to merchants are illusory, because they do not provide any added value. There is no increased efficiency or security associated with use of Merchant Link. There is nothing special about the 800 numbers, dedicated lines or internet gateway offered by Merchant Link. Indeed, these same services are provided by - and, in practice, are actually rendered by - the processor. . . The only purpose in interposing Merchant Link between the POS system and the processor is to impose fees on Paymentech's competitors.
On November 26, 2007, Heartland brought this lawsuit, attacking the above scheme through tying and general conspiracy claims under the 15 U.S.C. §1. Heartland charges defendants with an unlawful tying arrangement that uses MICROS' market power to unlawfully force merchants to use only Merchant Link's gateway, resulting in a not insubstantial amount of commerce being affected. Id. ¶¶ 61-66. Heartland also charges defendants with a conspiracy to unreasonably restrain trade, and specifically, to raise the costs of Paymentech's competitors and increase Paymentech's market share. Id. ¶ 72. Lastly, Plaintiff charges Defendant Paymentech with unfair competition under New Jersey law. Id. ¶ 77. The complaint seeks to recover treble damages under § 4 of the Clayton Act, 15 U.S.C. §15, including but not necessarily limited to (1) the $2.7 million Heartland pays Merchant Link annually, (2) lost profits as a result of lost business, believed to be in excess of $10 million, and (3) lower profit margin on existing customers who use Merchant Link. Id. ¶ 74.
When considering a motion to dismiss a complaint pursuant to Fed R. Civ. P. 12(b)(6), the court must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (quotation marks omitted). Fed R. Civ. P. 8(a)(2) requires a short and plain statement showing that the plaintiff is entitled to relief. In Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955 (2007), the court elaborated on the short and plain statement requirement with respect to the concerted action element of an antitrust conspiracy claim:
While a complaint attacked by a Fed. R. Civ. P. 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level. . . . [S]tating 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 ...