Payment card networks must face antitrust suits over fraud liability shift

October 14, 2016


The major credit and debit card networks have lost their bid to toss a class-action suit claiming they conspired to shift liability for fraudulent charges to U.S. merchants that failed to upgrade to EMV chip technology by Oct. 1, 2015.

The merchant plaintiffs alleged sufficient facts to show the networks conspired to roll out the U.S. deployment of EMV chip technology and implement the liability shift in “lockstep,” U.S. District Judge William Alsup of the Northern District of California ruled.

The suit, brought by the operator of a small grocery store chain in Florida and a Miami-area liquor store, names Visa Inc., MasterCard International Inc., American Express Co., Discover Financial Services, various payment-card issuing banks and EMVCo LLC as defendants.

EMVCo develops and manages the technical standards by which EMV chip transactions are processed and maintained, according to the July 15 amended class-action complaint.

AmEx, Discover, MasterCard, Visa and two other card networks, JCB Co. Ltd. and China UnionPay, own equal shares of EMVCo and oversee its operations, the complaint says.

EMV cards

EMV chip cards have small microprocessors, or mini-computers, that contain cardholder and application data. EMV stands for Europay, MasterCard and Visa.

Prior to the adoption of EMV chip technology, credit cards relied on magnetic stripes to communicate information about the card such as the account number and expiration date.

EMV chip-enabled cards are purported to better guard against fraud because they create a unique electronic signature for each transaction.

For merchants, the switch to EMV means adding new in-store technology and internal processing systems.

EMV rollout

Financial institutions in Europe, Latin America, the Asia Pacific region and Canada migrated to EMV over the past decade, according to the suit. As part of the migration, the networks imposed deadlines on merchants for implementing EMV chip technology.

But there were “key differences” between how the switch to EMV happened in the rest of the world and how it happened in the United States, the suit says.

In other parts of the world, the implementation of the EMV liability shift was staggered and was “coupled with offers of reduced interchange fees, extended deadlines or the purchase of necessary terminals or chip card readers,” the suit says.

But in the U.S., the liability shift took place “all at once” without the opportunity for merchants to object or opt out, and without any offers to reduce interchange fees, merchant discount fees or swipe fees, the suit says.

When they imposed the liability shift, the defendants allegedly knew it was “impossible” for millions of merchants to avoid liability for fraudulent charges because the defendants had not certified their EMV chip-card capable terminals

The two plaintiffs claim that since the liability shift, the networks have hit them with more than $25,000 in “chargebacks” for fraudulent transactions.

The defendants filed motions to dismiss in August, arguing among other things that they had “benign” reasons for implementing the liability shift all at one time, including merchant convenience, to avoid merchant confusion and to protect the networks from vulnerability.

Conspiracy adequately alleged

The plaintiffs allegations of conspiracy among AmEx, Visa and MasterCard were sufficient to withstand the defendants’ motion to dismiss, Judge Alsup said.

He pointed to Visa CEO Charlie Scharf’s statement to analysts in March 2014 that Visa would get all the participants in credit card transactions in a room and “work together towards getting much more specific about what we all want to get done by when.”

Judge Alsup also noted MasterCard vice president Krista Tedder’s alleged statement at a May 2015 conference that the “card brands are not going to delay the liability shift date.”

“Tedder could not speak so confidently on behalf of all networks save and except for her knowledge of collusion, for true competition would have driven one or more networks to break ranks and offer more competitive terms,” Judge Alsup wrote.

In addition to this direct evidence of collusion, he found the circumstantial evidence the plaintiffs alleged rendered the conspiracy claim plausible.

“The implementation of the liability shift in the United States departed from pre-existing patterns elsewhere in the world,” Judge Alsup noted.

He also observed that at the time AmEx, Visa and MasterCard were implementing the liability shift in the United States, they were facing the possibility that they could no longer prevent merchants from “steering” customers to payment cards with more merchant-friendly terms.

It was therefore plausible that the card companies conspired to thwart merchants from switching from one card network to another to avoid the liability shift, he said.

Judge Alsup said the lockstep method in which the three networks implemented the liability shift also “cuts in favor” of a plausible conspiracy.

Because Discover did not roll out EMV in Europe, Judge Alsup said the difference-in-implementation factor could not be used to show collusion on its part.

However, the remaining direct and circumstantial evidence was sufficient to show Discover was part of the conspiracy, the judge said.

Judge Alsup granted EMVCo’s motion to dismiss because the allegations against it were “sparse” but required it to preserve evidence.

“Given that the case will go forward against the other defendants, and given that EMVCo will be required to provide discovery (as a nonparty), the possibility remains that evidence will be developed to show complicity by it such that a motion to amend based on newly discovered evidence will be allowed,” he wrote.

B&R Supermarket Inc. et al. v. Visa Inc. et al., No. 16-cv-1150, 2016 WL 5725010 (N.D. Cal. Sept. 30, 2016).