Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-04276/USCOURTS-cand-3_04-cv-04276-10/pdf.json

Nature of Suit Code: 410
Nature of Suit: Antitrust
Cause of Action: 15:15 Antitrust Litigation

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SHERI L. KENDALL, et al., 

Plaintiffs,

 v.

VISA U.S.A. INC., et al.,

Defendants. /

No. C 04-04276 JSW

ORDER GRANTING VISA U.S.A.

INC.’S AND MASTERCARD’S

MOTIONS TO DISMISS

WITHOUT LEAVE TO AMEND

Now before the Court are the motions of defendant VISA U.S.A. Inc. (“VISA”) and

defendant MasterCard International Incorporated (“MASTERCARD”) to dismiss and/or to

strike each of Plaintiffs’ claims against them pursuant to Rule 12(b)(6) and 12(f) of the Federal

Rules of Civil Procedure. Having carefully read the parties’ papers and considered the

arguments and the relevant legal authority, the Court hereby GRANTS VISA’s and

MASTERCARD’s motions to dismiss Plaintiffs’ claims without leave to amend.

BACKGROUND

Plaintiffs are various merchant, retail and service businesses who bring this action

against VISA, MASTERCARD, and the Bank Defendants, who are credit card issuing and/or

acquiring banks (collectively, “Defendants”). Through their member banks, VISA and

MASTERCARD (for ease of reference, the network defendants are referred to herein as “the

Consortiums”) issue various forms of payment cards. Member banks can issue VISA or 

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MASTERCARD payment cards to consumers and set interest rates, fees, and other terms for

cardholders. (First Amended Complaint (“FAC”), ¶¶ 8-11.) Member banks also individually

contract with retailers on behalf of VISA or MASTERCARD to purchase payment card

transactions. Id. Member banks may function as either “issuing” banks or “acquiring” banks,

or both. Id. 

When a customer pays with a payment card, the “acquiring” bank purchases the

payment card receipt (or electronic equivalent) from the retailer for the amount of payment less

a “merchant discount fee.” Through the VISA or MASTERCARD system, the acquiring bank

then receives reimbursement from the cardholder’s “issuing” bank for the purchase price less an

“interchange fee” – a preset fee consented to by all issuing and acquiring banks on the VISA or

MASTERCARD network. The issuing bank then profits by the amount of the interchange fee,

while the acquiring bank profits by the amount of the merchant discount fee less the interchange

fee. In a credit card system, the issuing bank rather than the merchant bears the risk of

nonpayment by the cardholder. See National Bancard Corp. (NaBanco) v. Visa U.S.A., Inc.,

779 F.2d 592, 595 (11th Cir. 1986). 

Plaintiffs’ claims are directed at payment card transaction fees. In their first amended

complaint, Plaintiffs allege that Defendants’ conduct in setting merchant discount and

interchange fees amounts to horizontal price fixing under Section 1 of the Sherman Antitrust

Act (“Sherman Act”), 15 U.S.C. § 1. Plaintiffs again allege that Defendants’ conduct violates

Section 16 of the Clayton Act, 15 U.S.C. § 26. 

VISA moves to dismiss the amended complaint and/or to strike certain allegations

pursuant to Federal Rules of Civil Procedure 12(b)(6) and 12(f). VISA contends that the first

and second causes of action are barred by Illinois Brick v. Illinois, 431 U.S. 720 (1977), the

third cause of action fails to failure to state a claim, and the fourth cause of action does not

provide an independent ground for relief.

MASTERCARD moves to dismiss the amended complaint on the basis that Plaintiffs

lack standing to assert the first and second causes of action for violations of Section 1 of the

Sherman Act based on the alleged fixing of the interchange fee and the “Citigroup allegation,”

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that the third cause of action fails to state an independent antitrust claim, and that the fourth

cause of action fails to provide a basis for injunctive relief for a violation of another antitrust

law.

Because the issues raised in both VISA and MASTERCARD’s motions to dismiss

overlap significantly, the Court will address the substance of the two motions together, and

delineate the differences where appropriate.

DISCUSSION

A. Legal Standard on Motion to Dismiss and Motion to Strike.

A motion to dismiss for failure to state a claim will be denied unless it appears beyond

doubt that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley

v. Gibson, 355 U.S. 41, 45-46 (1957). All allegations of material fact are taken as true and

construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co.,

80 F.3d 336, 337-38 (9th Cir. 1996). Dismissal is proper only where there is no cognizable

legal theory or an absence of sufficient facts alleged to support a cognizable legal theory. 

Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The Court is not, however, bound to

accept as true conclusory allegations of law or legal conclusions couched as a factual allegation. 

Papasan v. Allain, 478 U.S. 265, 286 (1986); Arpin v. Santa Clara Transp. Agency, 261 F.3d

912, 923 (9th Cir. 2001) (internal quotation omitted). For private antitrust claims, if the facts

“do not at least outline or adumbrate a violation of the Sherman Act, the plaintiffs will get

nowhere merely by dressing them up in the language of antitrust.” Rutman Wine Co. v. E&J

Gallo Winery, 829 F.2d 729, 736 (9th Cir. 1987). 

Federal Rule of Civil Procedure 12(f) provides that a court may “order stricken from any

pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous

matter.” Immaterial matter “is that which has no essential or important relationship to the claim

for relief or the defenses being pleaded.” California Dept. of Toxic Substance Control v. ALCO

Pacific, Inc., 217 F. Supp. 2d 1028, 1032 (C.D. Cal. 2002) (internal citations and quotations

omitted). Impertinent material “consists of statements that do not pertain, or are not necessary

to the issues in question.” Id. Motions to strike are regarded with disfavor because they are

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 In their original complaint in this matter, Plaintiffs alleged that VISA and

MASTERCARD set only the interchange fee, which then “established” the basis or floor for

the merchant discount rates. (See Complaint, ¶ 21(a).) Plaintiffs lack standing to assert such

claims because they have not suffered the requisite antitrust injury from the Consortiums’

setting of the interchange rate. See, e.g., Associated General Contractors of Cal., Inc. v.

State Council of Carpenters, 459 U.S. 519, 539 (1983) (plaintiff failed to demonstrate

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often used as delaying tactics and because of the limited importance of pleadings in federal

practice. Colaprico v. Sun Microsystems Inc., 758 F. Supp 1335, 1339 (N.D. Cal. 1991). The

possibility that issues will be unnecessarily complicated or that superfluous pleadings will cause

the trier of fact to draw unwarranted inferences at trial is the type of prejudice that is sufficient

to support the granting of a motion to strike. Cal. Dept. of Toxic Substances Control, 217 F.

Supp. at 1028.

B. Standing Under Section 1 of the Sherman Act.

The Supreme Court in Illinois Brick, in an effort to “increase effectiveness and deterrent

power [of] private treble damages suits [which are] vital to the enforcement of the antitrust

laws,” held that recovery for damage incurred by “indirect purchasers” is barred. Illinois Brick,

431 U.S. at 736; see also Royal Printing Co. v. Kimberly-Clark Corp., 621 F.2d 323, 325-26

(9th Cir. 1980). The Court held that permitting the use of pass-on theories “essentially would

transform treble-damages actions into massive efforts to apportion the recovery among all

potential plaintiffs that could have absorbed part of the overcharge from direct purchasers to

middlemen to ultimate consumers. However appealing this attempt to allocate the overcharge

might seem in theory, it would add whole new dimensions of complexity to treble-damages

suits and seriously undermine their effectiveness.” Illinois Brick, 431 U.S. at 737. Courts are

not permitted to determine “what portion of [an] illegal overcharge was ‘passed on’ . . . and

what part was absorbed by the middlemen” because such an analysis would “involve all the

evidentiary and economic complexities that Illinois Brick clearly forbade.” Royal Printing, 621

F.2d at 327; see also Lucas Auto. Eng’g, Inc. v. Bridgestone/Firestone, Inc., 140 F.3d 1228,

1233 (9th Cir. 1998) (“The indirect purchaser rules serves to avoid the complications of

apportioning overcharges between direct and indirect purchasers and to eliminate multiple

recoveries.”)1

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requisite antitrust injury because it was “neither a consumer nor a competitor in the market in

which the trade was restrained.”); see also Cargill, Inc. v. Monfort of Colorado, Inc., 479

U.S. 103, 113 (1986) (“a private plaintiff must allege threatened loss or damage ‘of the type

the antitrust laws were designed to prevent and that flows from that which makes defendants’

acts unlawful.’”) (citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 497

(1977)).

This contention is the independent basis for much of MASTERCARD’s current

motion to dismiss. To the extent Plaintiffs’ claims are premised upon the setting only of the

interchange fee, MASTERCARD’s argument is well-taken. However, the First Amended

Complaint alleges that the Consortiums set, either directly or indirectly, the merchant

discount rate, which, for the purpose of resolving the pending motions, is the more troubling

of the allegations now before the Court.

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1. Allegations That the Consortiums Indirectly Set Merchant Discount

Fees.

In their amended complaint, Plaintiffs attempt to aver that VISA and MASTERCARD

somehow, indirectly, set the merchant discount fees. However, viewed in context, each

allegation is constructed on the premise that VISA’s and MASTERCARD’s interchange fee sets

the minimum, or floor, for the merchant discount fee. (See, e.g., FAC ¶ 8 (“a minimum

merchant discount fee . . . is established, both directly and indirectly, by the Consortiums”); ¶ 9

(merchants are charged by the acquiring banks “the amount of the interchange rate fixed by the

Consortiums as the minimum merchant discount fee”); ¶ 11 (“a merchant discount fee . . . is

established, both directly and indirectly, by the Consortiums. Most of the merchant discount fee

is the interchange rate which is established by the Consortiums.”) (citation omitted).)

Plaintiffs’ damages theory is based therefore on the allegation that the Consortiums set

the interchange fee to acquirers who then pass it along to merchants as a component of what

Plaintiffs allege to be inflated merchant discount rates. To the extent Plaintiffs contend that

therefore the Consortiums “indirectly” set the merchant discount rates, those claims are

precluded by operation of the Illinois Brick bar on recovery for indirect purchasers. See Illinois

Brick, 431 U.S. at 746; see also Kansas v. Utilicorp United Inc., 497 U.S. 199, 216 (1990)

(holding that there was no exception to Illinois Brick even where the direct purchaser almost

certainly passed on the entire cost of alleged overcharge to the indirect purchaser); see also In

re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 691 F.2d 1335, 1342

(9th Cir. 1982) (“indirect purchasers of price-fixed goods may not maintain an antitrust damage

action for overcharges passed on to them by direct purchasers from the defendant.”) 

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2. Allegations That the Consortiums Directly Set Merchant Discount

Fees.

In addition to the claims of indirect control over the merchant discount rates which are

expressly precluded by the holding in Illinois Brick, Plaintiffs attempt to aver that VISA and

MASTERCARD directly set the merchant discount rates. (See, e.g., FAC ¶¶ 8-11, 16

(“minimum merchant discount fee . . . is established . . . directly . . . by the Consortiums”).) 

First, in order to avoid the bar of Illinois Brick, Plaintiffs cannot allege that VISA and

MASTERCARD directly negotiate with certain merchants to promote the Consortiums’

acceptance in the marketplace. Plaintiffs have expressly excluded from the class all “merchants

who negotiate merchant discounts directly with VISA and/or MASTERCARD or receive

payments directly from them.” (FAC, ¶ 16.) Those merchants that directly negotiate with the

networks are explicitly excluded from the class of Plaintiffs and therefore, are not currently

before the Court alleging an antitrust injury for the direct setting of the merchant discount rates

by VISA or MASTERCARD. 

Second, to the extent that Plaintiffs aver that the Consortiums directly set the merchant

discount rates for those merchants in the plaintiff class, those allegations are conclusory. 

Dismissal of claims is proper where there is an absence of facts alleged sufficient to support a

cognizable legal theory. Navarro, 250 F.3d at 732. The Court is not bound to accept as true

conclusory allegations of law or legal conclusions couched as a factual allegation. See, e.g.,

Papasan, 478 U.S. at 286; Arpin, 261 F.3d at 923. For purposes of deciding a motion to

dismiss, the Court does not have to accept every allegation in the complaint as true in

considering the sufficiency of the allegations; rather, the Court should examine whether

conclusory allegations follow from the description of facts as alleged by the plaintiff. See

Holden v. Hagopian, 978 F.2d 1115, 1121 (9th Cir. 1992). 

In context, each time Plaintiffs aver that the Consortiums set the merchant discount fees

directly, Plaintiffs quote United States v. VISA U.S.A., Inc. (“VISA I”) in which the Southern

District of New York court stated “[m]erchant acceptance of a card brand is also defined and

controlled at the system level and the merchant discount rate is established, directly and

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indirectly, by the networks.” 163 F. Supp. 2d 322, 338 (S.D. N.Y. 2001) (citing the trial and

deposition transcripts before that court); see FAC, ¶¶ 8-11. 

a. Estoppel Effect of Statement in VISA I.

Plaintiffs cite the decision by the New York court as evidence that the merchant

discount fee is established, directly or indirectly, by the Consortiums. Plaintiffs, however,

cannot rely on the collateral estoppel effect of the statement in that matter. Collateral estoppel

bars the relitigation of an issue that is (1) identical to an issue (2) actually litigated and decided

in prior litigation, when (3) the determination of the issue in the prior litigation was critical and

necessary to support the judgment rendered in the prior litigation. Pool Water Prods. v. Olin

Corp., 258 F.3d 1024, 1031 (9th Cir. 2001). The burden to demonstrate the presence of these

elements is on the party seeking to establish collateral estoppel effect. Id. at 1033. Further, the

factors are applied strictly. It is not sufficient that an issue is “factually similar” to the one in an

earlier case; to satisfy the collateral estoppel factors, the issues must be “identical” and involve

the same facts and surrounding context. Western Oil & Gas Ass’n v. United States EPA, 633

F.2d 803, 809 (9th Cir. 1980). 

Having failed to come forward with any showing to establish that the elements of the

collateral estoppel doctrine are satisfied, the Court cannot rely on the brief statement made in

VISA I on the factually complex record before it in order to determine the veracity of the

conclusory allegations presented here. It is not clear from the opinion of the New York court

that the issue was even contested by the parties or that it was actually litigated. See, e.g.,

Gospel Missions v. City of Los Angeles, 328 F.3d 548, 553 (9th Cir. 2003) (rejecting collateral

estoppel argument where prior issue was “neither framed in the pleadings nor contested by the

parties” in the earlier litigation). The context of the court’s determination and the record before

that court are completely different from the context and record presented to this Court. There

has been no showing that the issues are identical, that they were actually litigated and decided

in the prior litigation, or that the determination of the issue in the prior litigation was critical

and necessary to support the judgment rendered in the prior litigation. See Pool Water Prods.,

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 In this regard, without converting the current motion before the Court to a motion

for summary judgment, the Court has reviewed the full evidentiary record presented by the

parties in their motions for summary judgment. Although the motions for summary

judgment filed by VISA and MASTERCARD, which are fully briefed and set for hearing on

August 19, 2005, will not be necessary as the Court by this order will dismiss the case, the

Court has substantively reviewed those motions and the evidence submitted in conjunction

therein for purposes of resolving the current motions.

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258 F.3d at 1031. Therefore, the statement in the VISA I opinion has no preclusive effect on

this Court. See id. at 1030-31.2

b. The Factual Record Does Not Support Plaintiffs’ Theory.

Lastly, the Court was urged by both parties to examine closely the record before the

Court as presented in conjunction with the motions for summary judgment, to determine

whether the Court should grant leave to amend with regard to the conclusory allegations in the

amended complaint. Having reviewed the evidence submitted with the pending summary

judgment motions, the Court is satisfied that the factual record does not support Plaintiffs’

claims that the Consortiums directly set the merchant discount fees. The uncontroverted

evidence demonstrates that neither VISA nor MASTERCARD are directly involved in the

setting of the merchant discount rates. (See Declaration of William Sheedy in Support of

VISA’s Motion for Summary Judgment (“Sheedy Decl.”), ¶ 17 (“the merchant discount fee is

the fee set by Visa acquirers and/or their designated third-parties, in their sole discretion based

on agreement with their merchants, and in competition with other Visa acquirers”), ¶ 18

(“Merchant discount fees are negotiated only between merchants and acquirers, and not with

Visa.”), ¶ 19 (“It is certainly the case that IRF [interchange reimbursement fee] is a cost that

acquirers typically seek to recover in the overall fees they charge merchants and thus IRF

generally has an impact on merchant discount rates. But it is only one of a number of costs

acquirers face, including costs for terminal deployment, risk management, customer service,

marketing and sales – to name a few.”), ¶ 20 (“Visa does not set these merchant discount fees. 

My understanding is that the extent to which acquirers can generate an appropriate revenue

stream while recovering these various costs, including IRF, varies greatly and depends upon the

particular acquirer and the particular merchant. The way in which acquirers recover their costs

and generate revenue is entirely within their discretion.”). See also Declaration of Steven Jonas

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 The failure of Plaintiffs to come forward with any evidence to the contrary also

dictates that this Court grant the pending motions to dismiss without leave to amend. It is

clear from the record before this Court that Plaintiffs have failed to demonstrate that they

have standing to sue and have failed to garner evidence which would enable them to generate

a sufficient basis for the Court to find standing should leave be granted. Because the first

amended complaint represents the fifth attempt to allege sufficient claims (three complaints

filed in Reyn’s and two attempts in this matter), and because, after development of the factual

record, Plaintiffs are still unable to marshal sufficient facts to confer standing, the Court

finds in its discretion that amendment in this particular context would be futile and grants the

present motions without leave to amend. 

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in Support of MASTERCARD’s Motion for Summary Judgment (“Jonas Decl.”), ¶ 15

(“MasterCard does not set any acquirer’s merchant discount fee; the acquirers set the merchant

discount fees, which are agreed to by merchants in contracts between merchants and their

acquirers. Further, MasterCard has no input into whether or how an acquirer factors any

interchange fee amount into its merchant discount fee level.”).) 

Because the essential facts demonstrating that neither VISA nor MASTERCARD set the

merchant discount fee are uncontested, and having given Plaintiffs adequate opportunity to

contest those facts in conjunction with the pending motions for summary judgment, the Court is

satisfied that the factual record fails to support Plaintiffs’ conclusory allegations in the First

Amended Complaint that the Consortiums directly set the merchant discount fee.3

4. Exceptions to Illinois Brick Do Not Apply.

Arguing only that Plaintiffs have averred in the amended complaint that the

Consortiums set the merchant discount rates directly, Plaintiffs fail to address whether an

exception to the rule set out in Illinois Brick applies in this matter. Indirect purchasers can sue

for damages if there is no “realistic possibility that the direct purchaser will sue” over the

antitrust violation. Freeman v. San Diego Ass’n of Realtors, 322 F.3d 1133, 1145 (9th Cir.

2003) (citing Royal Printing Co. v. Kimberly-Clark Corp., 621 F.2d 323, 326 (9th Cir. 1980)). 

During oral argument on these motions, the parties were specifically asked to address the issue

of what entity would have standing to make an antitrust claim against the Consortiums should

the Court find that Plaintiffs lack standing. Plaintiffs failed to address the question directly, and

merely reiterated the holding in Freeman. The Consortiums contended that the acquiring banks

would have standing to sue on an antitrust theory regarding the incorporation of the set

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4 See Sheedy Deposition at 46-47; Jonas Deposition at 44-45.

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 See VISA U.S.A., Inc. v. First Data Corporation, et al., C02-1786 JSW; see also

National Bancard Corp. (NaBanco) v. VISA U.S.A., Inc., 596 F. Supp. 1231 (S.D. Fla. 1984),

aff’d, 779 F.2d 592 (11th Cir. 1986).

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interchange fee in the passed on merchant discount fees. Although the record reflects that a

number of the members of the Board of Directors of the Consortiums is comprised of bank

members,4

 there are apparently on the order of 8,000 acquirers in the VISA network and 9,000

members in the MASTERCARD network, a large portion of which are acquiring banks. 

(Sheedy Decl., ¶ 3; Jonas Decl., ¶ 4.) Certainly, any number of those banks could sue and

would be granted standing to do so. 

In addition, the Court notes that processing agents for the member banks have standing

to sue and could make, in essence, the claims alleged herein. In this regard, the Court takes

judicial notice of claims against VISA by First Data Corporation, currently pending before the

undersigned, a lawsuit which contains, inter alia, allegations of antitrust violations with regard

to the setting of interchange rates.5

C. Third Cause of Action Fails to State a Claim Upon Which Relief May Be

Granted.

To the extent Plaintiffs attempt to aver an independent third cause of action for violation

of Section 1 of the Sherman Act under a “consortium marketing” theory, this allegation fails for

the same reasons stated herein. The allegation of price differentials between customers does not

state a claim for an antitrust violation. See Zoslaw v. MCA Distrib. Corp., 693 F.2d 870, 887

(9th Cir. 1982); USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 512 (7th Cir. 1982) (“[N]o

general principle of antitrust law forbids charging different prices to different customers”). 

Based on the foregoing, Plaintiffs’ Section 1 Sherman Act claims against VISA and

MASTERCARD are DISMISSED without leave to amend.

D. CitiGroup Allegations Are Stricken.

MASTERCARD moves against paragraph 15 of the amended complaint, which

concerns the allegations that the 1997 proposal by the CEO of CitiGroup to merge the processes

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of clearing and settlement of payment cards with the clearing and settlement of checks was

rejected. 

Although MASTERCARD’s motion, properly a motion to strike, is rendered moot by

this Court’s determination that the claims against the Consortiums must be dismissed, the

motion is also GRANTED on the merits on the basis that, having no essential or important

relationship to the claim for relief, such allegations are immaterial. See California Dept. of

Toxic Substance Control, 217 F. Supp. 2d at 1032. In addition, there is no indication that

Plaintiffs have standing to make such a claim as the allegation concerns card issuers, not

interchange, merchant acquirers or merchant discount fees. Accordingly, Plaintiffs cannot

make a claim for antitrust injury for allegedly anticompetitive effects on issuers. See, e.g.,

Associated General Contractors, 459 U.S. at 539 (plaintiff failed to demonstrate requisite

antitrust injury because it was “neither a consumer nor a competitor in the market in which the

trade was restrained.”); see also Cargill, 479 U.S. at 113. Such immaterial and baseless

allegations are independently stricken.

E. Section 16 Clayton Act Claim.

Because Plaintiffs’ have failed to state a claim under Section 1 of Sherman Act against

VISA, Plaintiffs’ fourth claim for relief, under Section 16 of the Clayton Act, 15 U.S.C. § 26,

predicated upon a violation Section 1 of the Sherman Act, is also dismissed without leave to

amend. See Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 109 (1986) (threatened

antitrust injury is a prerequisite to equitable relief); see also Lucas Auto. Eng’g, 140 F.3d at

1234-35.

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CONCLUSION

For the foregoing reasons, VISA’s and MASTERCARD’s motions to dismiss and/or to

strike are GRANTED without leave to amend. 

IT IS SO ORDERED.

Dated: July 25, 2005 /s/ Jeffrey S. White 

JEFFREY S. WHITE

UNITED STATES DISTRICT JUDGE

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