Payment Logistics Limited v. Lighthouse Network, LLC et al
Filing
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ORDER denying 104 Defendants' Motion to Dismiss and denying 114 Plaintiff's Motion for Leave to File a sur-reply. Signed by Judge M. James Lorenz on 11/30/2020. (jpp)
Case 3:18-cv-00786-L-AGS Document 123 Filed 11/30/20 PageID.5591 Page 1 of 12
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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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PAYMENT LOGISTICS LIMITED,
Case No.: 3:18-cv-00786-L-AGS
Plaintiff,
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v.
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ORDER GRANTING DEFENDANTS’
MOTION TO DISMISS [doc. no. 104]
AND DENYING PLAINTIFF’S
MOTION TO FILE A SUR-REPLY
[doc. no. 114]
LIGHTHOUSE NETWORK, LLC et al.,
Defendants.
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Pending before the Court is Defendants’ motion to dismiss Plaintiff’s second
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amended complaint. Plaintiff opposed the motion and Defendants replied. To the extent
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Defendants raised new arguments in their reply, the arguments were not considered in
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this order. See Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007) ("The district court
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need not consider arguments raised for the first time in a reply brief."). Accordingly,
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Plaintiff’s motion to file a sur-reply (doc. no. 114) is denied as moot. The Court decides
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the motions on the briefs without oral argument. See Civ. L. R. 7.1 (d.1). For the reasons
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stated below, Defendants’ motion to dismiss is granted.
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I.
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BACKGROUND
Plaintiff Payment Logistics Limited (“PLL”) alleges antitrust violations in the
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payment processing industry for mid-to-large table-service restaurants. Between 2017
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and 2019, through horizontal and vertical acquisitions, Defendant Lighthouse Network,
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LLC (“Lighthouse”) acquired some of Plaintiff’s competitors and vertically integrated its
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services. Plaintiff claims Defendants’ mergers and acquisitions substantially lessen
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competition.
Restaurants1 utilize the following products and services to process customers’ card
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payments: (1) point-of-sale (“POS”) systems, which are comprised of hardware,
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software, and external support services that enable merchants to manage restaurant
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operations and process payments; (2) merchant account services, which enable merchants
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to connect to a network of credit and debit card companies for authorization and
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settlement of electronic payment transactions; and (3) direct processors and/or payment
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interfaces, which transmit payment data from POS systems to merchant account service
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networks. (Second Am. Compl., doc. no. 117 (“SAC”),2 at 6-7).3
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Restaurant owners purchase POS systems, which serve as the “brain” of the
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restaurant operations, managing everything from seating and reservations, patrons’
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orders, assisting the kitchen to prepare orders so that the patrons at the same table
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uniformly receive their courses at the appropriate time, inventory tracking, recording
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employee time, financial and productivity oversight, as well as payment processing.
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(SAC ¶¶ 37, 38.) The POS system represents a significant investment in time, money
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and business disruption for the restaurant, and is therefore rarely switched more than
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every five to seven years. (Id. ¶¶ 38, 73.) POS dealers assist restaurants in selecting the
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POS system to fit their needs. (Id. at 7.) If the need arises, rather than changing the
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The relevant segment of the restaurant industry is mid-to-large table-service
restaurants. All references to restaurants relate to this segment.
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The first and second amended complaints, as well as the parties’ motion to dismiss
briefing were filed under seal pursuant to leave of Court. Redacted public versions were
separately filed at docs. no. 59, 98, 115 (Plaintiff’s opposition).
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Page numbers referenced herein are assigned by the electronic case filing system.
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entire POS system, a restaurant is more likely to upgrade its software, including the
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payment interface and/or merchant account service. (Id. ¶ 38.)
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Once a restaurant installs a POS system, it may be limited to the payment
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interface(s) and/or merchant account service provider(s) already integrated in the system
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or that can quickly become integrated. (SAC ¶ 74.) Software developers who create
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POS systems dictate which payment interfaces are capable of integration with their POS
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system software. (Id.) A POS system may offer multiple payment interfaces, allowing a
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restaurant owner a choice of payment interfaces, and consequently also a choice of
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merchant account service providers. (Id. ¶ 77.)
Since approximately 2014, the industry has been undergoing “significant
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consolidation,” resulting in alliances or acquisitions vertically integrating POS systems,
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payment interfaces, and merchant account service providers. (SAC ¶ 79; see also First
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Am. Compl., doc. no. 88, ¶ 60.) Such networks are considered “closed.” (SAC ¶ 79.)
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This means that the POS system may be compatible only with a specific payment
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interface or interfaces, and the payment interface may be aligned with a specific merchant
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account service provider. (Id. at 5; see also id. ¶¶ 3, 64, 78.) In contrast, payment
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interfaces that are compatible with multiple POS systems or merchant account networks
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are considered “neutral” or “independent.” (Id. at 5; see also id. ¶¶ 3, 64.) Prior to
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consolidation, many POS systems offered multiple payment interfaces, each providing
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restaurant owners with a choice of payment interfaces and merchant account service
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providers. (Id. ¶ 77.) With consolidation, many POS systems became “closed.” (See id.
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¶ 80.)
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Whether a payment interface is closed or neutral makes a difference. (SAC ¶ 64.)
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Neutral or independent payment interfaces charge restaurants the same data transmission
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fee regardless of the merchant account service provider, while closed interfaces charge
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more for merchant account services outside the closed network. (Id. at 5.)
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Plaintiff provides independent payment interfaces and merchant account services
in the relevant restaurant segment. Prior to the mergers and acquisitions that form the
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basis for this action, Lighthouse owned Harbortouch, a POS system, and provided
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merchant account services. (SAC ¶¶ 5-6.) In the summer and fall of 2017, Lighthouse
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acquired three POS systems (Restaurant Manager, Future POS, and POSitouch). (Id. ¶¶
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5, 80, 81.) After the acquisition, it “restricte[ed] POS Dealers’ promotion of non-
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Lighthouse-affiliated Payment Interfaces, such as PLL.” (Id. ¶ 80.)
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In January 2018, Lighthouse acquired Defendant Shift4 Corporation (“Shift4
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Corp.”), a payment interface company. (Id. ¶ 6.) Lighthouse created Defendant Shift 4
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Payments, LLC (“Shift4”), a new company which consolidated the three levels of the
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payment processing industry: POS systems, payment interfaces, and merchant account
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services. (Id.)
Prior to the acquisition, Shift4 Corp. was an independent payment interface
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compatible with multiple merchant account service providers. (SAC ¶¶ 6, 22, 64.) As
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part of the merger, Lighthouse planned to eliminate Shift4 neutrality to increase
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transaction fees. (Id. ¶ 6.) In February 1, 2018, Defendants started to steer the
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restaurants using Defendant-owned POS systems to Shift4 for payment processing.
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(SAC ¶¶ 90-91.) They sought to accomplish this by charging restaurants higher fees for
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processing payments outside the Shift4 network. (Id. ¶¶ 10, 90-91.)
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In 2018, Shift4 negotiated strategic partnerships with two independent software
vendors who provided software for POS systems Maitre’D and Micros. (SAC ¶ 6.)
In September 2019, Defendants acquired Defendant Merchant Link, LLC
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(“Merchant Link”), one of the largest payment interfaces in the relevant restaurant
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segment. (SAC ¶ 11.) With this acquisition, Defendants increased their share of the
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payment interface market for POS systems in the relevant restaurant segment to 47%.
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(Id. ¶¶ 11, 86.) Before the acquisition, Merchant Link was an independent payment
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interface. (Id. at 4; see also id. ¶ 84.) Post-acquisition, Defendants started “attempting to
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coerce” Merchant Link users to migrate to the Shift4 interface. (Id. ¶ 11.)
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The majority of Merchant Link clients in the relevant market use Micros, one of
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the largest POS systems. (SAC ¶¶ 11, 24.) Merchant Link has a “special relationship”
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with Micros, which Plaintiff contends Defendants will be “able to exploit” “to limit
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independent Payment Interfaces’ access” to the restaurant clients using Micros POS
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systems. (Id. ¶¶ 11, 85.)
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As a stated investment goal, Lighthouse planned to increase its revenues by
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switching its POS systems to Shift4 and charging restaurants a fee if they switched away
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from Shift4 payment processing or Lighthouse merchant account services. In the long
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run they planned to exploit restaurants’ reluctance to switch POS systems by increasing
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payment processing fees even for those restaurants which stayed with Shift4. (Id. ¶¶ 7,
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10, 12-13.)
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According to Plaintiff, there are only three neutral POS systems left in the relevant
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restaurant segment (Maitre’D, Micros, and Focus POS) on which independent payment
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interfaces can compete. (Id. ¶ 104.) These POS systems represent 17% of the relevant
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market.
Plaintiff asserts five causes of action. First, it contends that Lighthouse’s
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acquisition of Shift4 Corp. to create Shift4 Payments violates § 7 of the Clayton Act, 15
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U.S.C. § 18, because it is likely to substantially lessen competition. (SAC ¶ 123.)
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Second, Plaintiff contends that the acquisition of Merchant Link by Shift 4 Payments
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violates § 7 of the Clayton Act, 15 U.S.C. § 18, because it is likely to substantially lessen
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competition. (Id. ¶ 132.) Third and fourth, Plaintiff contends that Defendants have
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attempted to monopolize, or, alternatively, that they monopolize, the relevant markets in
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violation of § 2 of the Sherman Act, 15 U.S.C. § 2. (Id. ¶¶ 142, 148.) For the foregoing
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causes of action, Plaintiff alleges two relevant markets, payment interfaces for POS
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systems in the relevant restaurant segment, and, more narrowly, payment interfaces for
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the POS systems Defendants own: Restaurant Manager, Future POS, POSitouch, and
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Harbortouch. (Id. ¶¶ 124, 133, 141, 147.) Finally, Plaintiff contends that Defendants
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require restaurants that use Defendant-owned POS systems to use the Shift4 payment
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interface and that this constitutes unlawful tying in violation of Section 1 of the Sherman
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Act, 15 U.S.C. § 1. (Id. ¶¶ 153-55.) The Court has subject matter jurisdiction pursuant to
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28 U.S.C. § 1331.
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Plaintiff claims that Defendants’ conduct is likely to force it and other independent
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payment interfaces out of the relevant markets, or, alternatively, deprive them of millions
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of dollars in revenue. (SAC ¶¶ 125-28, 133-37, 142, 144, 150, 156.) Specifically,
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Plaintiff alleges it has lost to Shift4 approximately 150 accounts worth $800,000 in
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annual revenue and expects to lose more. (Id. ¶¶ 15, 94.) It also claims that at least two
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other independent payment interfaces in the relevant restaurant segment have been
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similarly harmed, forcing one to exit the market. (Id. ¶ 95.) Finally, Plaintiff claims that
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Defendants’ conduct is likely to harm consumers by reducing their choice of payment
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interfaces and, ultimately, enabling Defendants to charge restaurants supracompetitive
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prices. (Id. ¶¶ 125, 134, 144, 150.)
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Plaintiff requests declaratory relief, an order requiring Shift4 to divest assets to
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restore competitive conditions pre-acquisitions, as well as treble damages. (SAC at 70-
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71.) Plaintiff’s request for a preliminary injunction was denied. (See doc. no. 85.)
Defendants move to dismiss Plaintiff’s second amended complaint pursuant to
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Federal Rule of Civil Procedure 12(b)(6). They argue that the complaint does not
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adequately allege antitrust injury, a relevant market, market power in either of the
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relevant markets, or an illegal tie.
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II.
LEGAL STANDARD
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A motion under Rule 12(b)(6) tests the sufficiency of the complaint. Navarro v.
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Block, 250 F.3d 729, 732 (9th Cir. 2001).4 Dismissal is warranted where the complaint
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lacks a cognizable legal theory. Shroyer v. New Cingular Wireless Serv., Inc., 622 F.3d
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1035, 1041 (9th Cir. 2010). Alternatively, a complaint may be dismissed where it
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Unless otherwise noted, internal quotation marks, ellipses, brackets, citations, and
footnotes are omitted from quotations.
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presents a cognizable legal theory yet fails to plead essential facts under that theory.
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Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir. 1984).
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A pleading must contain “a short and plain statement of the claim showing that the
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pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). In reviewing a Rule 12(b)(6) motion,
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the Court must assume the truth of all factual allegations and construe them most
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favorably to the nonmoving party. Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997,
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999 n.3 (9th Cir. 2006). However, legal conclusions need not be taken as true merely
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because they are couched as factual allegations. Bell Atlantic Corp. v. Twombly, 550 U.S.
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544, 555 (2007). Similarly, “conclusory allegations of law and unwarranted inferences
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are not sufficient to defeat a motion to dismiss.” Pareto v. Fed. Deposit Ins. Corp., 139
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F.3d 696, 699 (9th Cir. 1998). When ruling on a motion to dismiss, the Court may
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consider the facts alleged in the complaint, documents attached to the complaint, and
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documents relied upon but not attached to the complaint when authenticity is not
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contested. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001).
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III.
DISCUSSION
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“In addition to the traditional limitations upon standing imposed by the
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Constitution, Congress imposed additional limitations upon those who can recover
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damages under the antitrust laws” by enacting Section 4 of the Clayton Act, 15 U.S.C. §
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15(a). Pool Water Prods. v. Olin Corp., 258 F.3d 1024, 1034 (9th Cir. 2001). “These
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limitations are sometimes referred to as the antitrust standing requirements.” Id.
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Section 4 provides in relevant part that
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any person who shall be injured in his business or property by reason of
anything forbidden in the antitrust laws may sue therefor in any district court
of the United States . . ., and shall recover threefold the damages by him
sustained . . ..
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Although the provision is broadly worded to suggest that all persons whose injuries are
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causally related to an antitrust violation could recover damages, its interpretation is
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narrower. Amarel v. Connel, 102 F.3d 1494, 1507 (9th Cir.).
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“The most important limitation is that the private party must prove the existence of
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antitrust injury.” Pool Water Prods., 258 F.3d at 1034; see also Amarel, 102 F.3d at
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1507. “Under Section 4, private plaintiffs can be compensated only for injuries that the
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antitrust laws were intended to prevent.” Pool Water Prods., 258 F.3d at 1034. This
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means that “injury, although causally related to an antitrust violation, nevertheless will
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not qualify as ‘antitrust injury’ unless it is attributable to an anti-competitive aspect of the
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practice under scrutiny.” Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334
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(1990). “If the injury flows from aspects of the defendant's conduct that are beneficial or
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neutral to competition, there is no antitrust injury, even if the defendant's conduct is
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illegal per se.” Pool Water Prods., 258 F.3d at 1034. “[T]he antitrust laws are only
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intended to preserve competition for the benefit of consumers. Consumer welfare is
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maximized when economic resources are allocated to their best use and when consumers
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are assured competitive price and quality.” Id.
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Relying on Amarel v. Connel, Plaintiff argues it has suffered an antitrust injury
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because one form of such injury is “coercive activity that prevents its victims from
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making free choices between market alternatives.” (Pl.’s Opp’n to Defs’ Mot. to Dismiss
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Pl.’s SAC, doc. no. 119 (“Opp’n”), at 24 (citing Amarel, 102 F.3d at 1509)). Amarel
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does not assist Plaintiff, as its facts and the claimed injury present a distinguishable
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scenario.
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As here, in Amarel, the defendants were vertically integrated. See Amarel, 102
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F.3d at 1502. They were cooperatives that integrated all phases of rice production: paddy
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farming, milling, and sale. Id. at 1502, 1500, 1508. Plaintiffs were independent rice
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paddy farmers who sold their rice to independent rice mills. Id. at 1500. Plaintiffs were
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defendants’ competitors “since the cooperatives compete at multiple levels of rice
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production.” Id. at 1508; see also id. at 1509. They alleged a conspiracy among the
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cooperatives and other defendants to eliminate independent rice purchasers, farmers and
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mills by driving the independent mills and farmers from the market or forcing them to
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join one of defendants’ cooperatives. Id. at 1503, 1508. Among other things, plaintiffs
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alleged that defendants succeeded in reducing the number of independent mills to two
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and used their monopoly power (75% of the market) to drive down the prices of paddy
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and milled rice and boycotted one of the independent mills. Id. at 1503. To accomplish
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this, defendants allegedly used predatory pricing to depress the market in which plaintiffs
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sold their rice. Id. at 1508. In addition, defendants boycotted one of the two remaining
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independent mills by refusing to sell rice to it for milling. Id. Plaintiffs alleged they
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were directly harmed by the depressed prices and the threat of losing one of the two mills
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through which they sold their rice. Id.
As here, among other things, defendants challenged plaintiffs’ standing arguing
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that the alleged injury was not the type the antitrust laws were intended to prevent.
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Amarel, 102 F.3d at 1507. The court held that losses caused by predatory pricing confer
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antitrust standing because predatory pricing has the requisite anticompetitive effect. Id.
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at 1508. Predatory pricing is pricing below defendant’s cost when the defendant could
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probably recoup the resulting losses. See Cascade Health Sols. v. PeaceHealth, 515 F.3d
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883, 900 (9th Cir. 2008).
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In the context of pricing practices, only predatory pricing has the requisite
anticompetitive effect. Low prices benefit consumers regardless of how
those prices are set, and so long as they are above predatory levels, they do
not threaten competition. Hence, they cannot give rise to antitrust injury.
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Atl. Richfield, 495 U.S. at 339-40. While the plaintiffs in Amarel claimed predatory
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pricing, Plaintiff here does not. “Absent . . . predation, it is immaterial whether the price
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reduction is the result of illegal price setting, illegal mergers and acquisitions, collusion,
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price discrimination or any other antitrust violation.” Pool Water Prods., 258 F.3d at
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1035.
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Alternatively, the court held that “[a]nother form of antitrust injury is coercive
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activity that prevents its victims from making free choices between market alternatives.”
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Amarel, 102 F.3d at 1509. The court found standing on this basis because the plaintiffs
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alleged that defendants boycotted one of the two remaining independent mills and refused
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to deal with it. Id. “The Supreme Court has identified the anticompetitive effects that
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may flow from group boycotts and concerted refusals to deal.” Id. Unlike in Amarel,
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Plaintiff here does not claim concerted action, boycotts or refusal to deal.
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Moreover, Plaintiff does not claim that choices had been reduced as in Amarel
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(two independent mills) or in CollegeNET, Inc. v. Common Application, Inc., 711 Fed.
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Appx. 405 (9th Cir. 2017) (leaving one dominant provider). (See Opp’n at 24-25 (citing
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Amarel and CollegeNET).) According to the complaint, at least three POS systems are
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available on which independent payment interfaces can compete: Maitre’D, Focus POS
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and Micros. (SAC ¶ 104.) Micros is one of the largest POS systems in the relevant
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restaurant segment. (Id. ¶ 11.) Although Plaintiff alleges that by acquiring Merchant
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Link, Defendants now own the customer information for Merchant Link’s Micros
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customers, Plaintiff does not contend that this precludes it from competing with Shift4 for
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the same Micros customers. (See id. ¶ 85.)
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Further, Plaintiff does not contend that the POS systems Defendants acquired,
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Restaurant Manager, Future POS and POSitouch, are off-limits after the acquisition. For
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example, Plaintiff’s interface is already integrated on the Restaurant Manager POS
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system. (SAC ¶ 69.) Although Plaintiff contends Defendants have “eliminat[ed]
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competition on their POS systems” (Opp’n at 26), the complaint does not support this
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assertion. Plaintiff does not allege that Defendants have precluded restaurants with
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Defendant-owned POS systems from payment processing via Plaintiff’s payment
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interface. Instead, it alleged that, by charging higher fees for other payment interfaces,
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Defendants encourage these customers to choose or switch to Shift4. (See id. ¶¶ 90-92.)
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This does not eliminate competition but makes is harder for independent payment
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interfaces to compete. For example, to compete, Plaintiff could reduce its profit margins
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to absorb the higher fees Defendants charge to its customers. (See Opp’n at 25.) Plaintiff
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has cited no binding authority for the proposition that, in the absence of predatory
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pricing, squeezing a competitor’s profit margin is sufficient to constitute an antitrust
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injury.
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To the extent Plaintiff’s theory of antitrust injury is based on the contention that
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Defendants intended to switch Plaintiff’s customers to Shift4 and then raise the
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processing fees for all customers, not only those processing their payments outside the
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Shift4 network (see Opp’n at 26-27), it is unavailing. See Atl. Richfield, 495 U.S. at 337
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n.7; see also Pool Water Prods., 258 F.3d at 1035 (§ 7 claim).
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Because Plaintiff has not alleged an antitrust injury, the Court need not consider
Defendants’ other arguments for dismissal. Their motion to dismiss is granted.
“In dismissing for failure to state a claim, a district court should grant leave to
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amend even if no request to amend the pleading was made, unless it determines that the
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pleading could not possibly be cured by the allegation of other facts.” Ebner v. Fresh,
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Inc., 838 F.3d 958, 963 (9th Cir. 2016). Rule 15 advises leave to amend shall be freely
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given when justice so requires. Fed. R. Civ. P. 15(a)(2). “This policy is to be applied
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with extreme liberality.” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051
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(9th Cir. 2003).
In the absence of any apparent or declared reason – such as undue delay, bad
faith or dilatory motive on the part of the movant, repeated failure to cure
deficiencies by amendments previously allowed, undue prejudice to the
opposing party by virtue of allowance of the amendment, futility of the
amendment, etc. – the leave sought should, as the rules require, be freely
given.
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Foman v. Davis, 371 U.S. 178, 182 (1962).
Plaintiff’s first amended complaint was dismissed for failure to allege an antitrust
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injury. (See doc. no. 96.) The Court declines to grant leave to amend the same defect.
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See Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1007 (9th Cir. 2009).
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Furthermore, based on the allegations presented in the first and second amended
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complaints, it appears that leave to amend would be futile.
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IV.
CONCLUSION
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For the foregoing reasons, Defendants’ motion to dismiss is granted.
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IT IS SO ORDERED.
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Dated: November 30, 2020
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