The opinion of the court was delivered by: John Gleeson, United States District Judge
In May 2006, the plaintiffs in the above-captioned putative class actions filed a supplemental complaint alleging that the then-pending initial public offering ("IPO") of MasterCard stock violated both federal antitrust law and state fraudulent conveyance law. Defendants MasterCard International Incorporated and MasterCard Incorporated (collectively, "MasterCard") and Bank of America, Capital One, JPMorgan Chase, Citigroup, and HSBC (collectively, the "Banks") filed various motions to dismiss the supplemental complaint. I referred these motions to Magistrate Judge James Orenstein. On February 12, 2008, he issued a Report and Recommendation ("R&R") recommending that I dismiss the state law claim, dismiss the Clayton Act claim against the Banks with leave to amend, and deny the motions as to the remaining federal antitrust claims. For the reasons stated below, I grant the motions to dismiss plaintiffs' amended complaint in their entirety with leave to amend.
A. The First Amended Complaint
As most people know, merchants may accept a "payment card," such as a credit card or a debit card, as payment for goods and services. The resolution of this motion requires a detailed understanding of how these payment card transactions work.
MasterCard runs a payment card network. It provides the infrastructure through which a customer's payment makes its way to a merchant. The Banks participate in payment card transactions as an acquiring bank, an issuing bank, or both. An issuing bank issues MasterCard-branded payment cards to customers. An acquiring bank "acquires payment transactions from merchants and acts as a liaison" between the merchant and the issuing bank. First Consolidated Amended Class Action Compl. ("AC") ¶ 8(a). The Banks compete with each other to issue payment cards and "acquire" merchant transactions. AC ¶ 8(a), (n). The Banks also take part in the management of MasterCard, which, prior to May 2006, was organized as a joint venture among more than 23,000 member banks. AC ¶ 54.
In a standard credit card transaction, the customer/cardholder presents her MasterCard to a merchant who has contracted to accept such cards. The merchant sends the transaction data to an acquiring bank, which forwards it to the cardholder's issuing bank. The issuing bank then authorizes or denies the transaction. Following authorization, the merchant submits a payment request to the acquiring bank, which again forwards it to the issuing bank. The issuing bank pays the acquiring bank the purchase price minus a fee (the "interchange fee"). The acquiring bank then pays the merchant but also deducts a fee (the "merchant-discount fee"). MasterCard relays the communications between the acquiring and issuing banks, and its board of directors sets the amount of interchange fees charged on MasterCard's network. AC ¶ 8(l). Visa's network processes transactions and sets fees in an analogous manner. AC ¶ 8(l).
In April 2006 the plaintiffs, merchants who accept Visa and MasterCard payment cards, filed their first amended complaint in this action. They alleged that the Banks, by virtue of their control over the boards of directors of MasterCard and Visa, dictate the amount charged as interchange fees for each network. Further, because so many banks are members of both boards, they "ensure that the Interchange Fees of Visa and MasterCard increase in parallel and stair-step fashion, rather than decreasing in response to competition from each other." AC ¶ 135. The plaintiffs also challenged the networks' "Anti-Steering Restraints," AC ¶8(c), a group of rules promulgated by both Visa and MasterCard which allegedly prevent merchants from encouraging customers to use less expensive forms of payment. AC ¶¶ 234-247. They further allege that Visa has engaged in monopolization in violation of Section 2 of the Sherman Act, id. at ¶¶ 248-54, and that both MasterCard and Visa have engaged in prohibited tying and exclusive dealing arrangements. Id. at ¶¶ 255-71, 272-88, 288-93, and 294-99. Only the allegations regarding interchanges fees are relevant to the disposition of the instant motions to dismiss.
B. The Supplemental Complaint
In May 2006, one month after plaintiffs filed their first amended complaint, MasterCard announced its IPO, in which it proposed to sell approximately 60 million shares of MasterCard Class A common stock to the public. To effectuate this offering, MasterCard first redeemed and reclassified all of its outstanding common stock, approximately 100 million shares, then held by its member banks. Each former shareholder received 1.35 shares of MasterCard Class B common stock for each share of old stock it held. All former shareholders also received a single share of Class M stock. MasterCard Incorporated, Amendment No. 8 to Form S-1 Registration, filed May 23, 2006.*fn1
The three new classes of MasterCard stock convey different control rights. Class A shares have standard voting rights. These shares may not be held by MasterCard's member banks, and no individual entity may own more than 15% of the outstanding Class A stock. Class B shares have no voting rights. They may be transferred among member banks and sold to outside investors, in which case they convert to Class A shares. However, Class B shareholders have a right of first refusal over the sale of Class B shares to outside investors. Class Pls.' First Supplemental Class Action Complaint ("SC") ¶ 82. Class M shareholders may vote to elect up to three members of MasterCard's board of directors, but no more than one quarter of all directors. Class M shareholders, collectively, also have the power to veto "1) any sale of all, or substantially all, of the company's assets; 2) any merger or consolidation of the company; 3) any waiver of beneficial ownership limitations in the certificate of incorporation; and 4) any discontinuation of the core payments business." Id. at ¶ 83.
On May 22, 2006, the plaintiffs filed the supplemental complaint at issue here. It alleges four causes of action arising from the agreements and transactions underpinning MasterCard's IPO. They assert that the IPO is a pretext, and that the various "Ownership and Control Restrictions" it entails, specifically the 15% limit on ownership of Class A stock and the voting rights of the Class M stock, operate to preserve the Banks' control of MasterCard. SC ¶¶ 10, 100. MasterCard's purported transformation from a joint venture to a "single entity," plaintiffs allege, will insulate its internal actions from the prohibitions of Section 1 of the Sherman Act, which regulates agreements between joint venturers but does not reach the unilateral actions of individual corporations. With effective control of the post-IPO MasterCard enterprise, the Banks will be free to impose or continue the operation of allegedly anticompetitive restraints. Specifically, plaintiffs allege that MasterCard will continue to impose and increase the uniform interchange fees challenged in plaintiffs' first amended complaint and will reinstate the exclusivity arrangements found unlawful in United States v. Visa U.S.A., 163 F. Supp. 2d 322 (S.D.N.Y. 2001), aff'd 344 F.3d 229 (2d Cir. 2003), whereby merchants who wish to accept MasterCard-branded cards must agree to accept only MasterCard and Visa cards and decline to accept American Express or Discover cards. SC ¶ 114. Because these restraints will decrease competition in the relevant market, plaintiffs allege that the agreements leading to the IPO constitute a conspiracy in restraint of trade in violation of Section 1 of the Sherman Act, and that the stock transfers by which the IPO is effected violate Section 7 of the Clayton Act. The plaintiffs also argue that MasterCard did not receive adequate consideration for its release of "its right to assess its Member Banks for liability expenses," (its "assessment right") and that the release was therefore a fraudulent conveyance under New York law. SC ¶¶ 145, 147.
C. Judge Orenstein's Report and Recommendation
In the report and recommendation, Judge Orenstein recommended that I grant the motion in part and deny it in part. As to the antitrust claims, he rejected defendants' contentions that they did not "acquire" stocks or "assets" under Section 7 of the Clayton Act. R&R 14-23. And he concluded, based on the barriers to entry in the relevant market and the ownership restrictions that would prevent an outsider from acquiring control of MasterCard, that the supplemental complaint sufficiently pleaded "that the agreements leading to the IPO will probably result in a substantial lessening of competition," and therefore stated a claim under the Clayton Act. R&R 28. As to the Sherman Act claims, Judge Orenstein noted that the parties had argued the motion "exclusively by reference to the standard relevant under Section 7" of the Clayton Act. Id. at 29. Taking this conduct as an indication that the parties agreed "that the Sherman Act claims stand or fall together with those under the Clayton Act," he also concluded that plaintiffs had properly pleaded their Sherman Act claims. Id. However, Judge Orenstein concluded that the plaintiffs had failed to plead with particularity that MasterCard acted with fraudulent intent or received inadequate consideration in exchange forrelinquishing its assessment right, and therefore recommended that I dismiss plaintiffs' fraudulent conveyance claim. Id. at 36. MasterCard and the Banks filed objections to the report and recommendation, alleging that Judge Orenstein erred in determining that the Clayton Act applied to the challenged transactions and that plaintiffs had adequately pleaded their anticompetitive effect. See MasterCard's Objections to the February 12, 2008 Report and Recommendation Denying in Part Its Motion to Dismiss Class Pls.' Supplemental Compl. Directed to the MasterCard IPO ("MC's Obj."); Bank Defs.' Objections to the Report and Recommendation Regarding Bank Defs.' Mot. to Dismiss Class Pls.' First Supplemental Class Action Compl. ("Banks' Obj."). Plaintiffs responded to these arguments but filed no objections of their own. See Class Pls.' Reply to the Apr. 4, 2008 Objections of MasterCard, Bank of America, Capital One, JPMorgan Chase, Citigroup and HSBC to the Court's Feb. 12, 2008 Report and Recommendation ("Pls.' Reply").
A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a). However, a plaintiff must also "amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible." Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007). Second Circuit precedent applying the Supreme Court's decision in Bell Atlantic v. Twombly, 127 S.Ct. 1955 (2007), makes clear that antitrust claims generally require such amplification. See In re Elevator Antitrust Litig., 502 F.3d 47, 50 & nn.3-4 (2d Cir. 2007).
Section 1 of the Sherman Act ("Section 1") bars "[e]very contract, combination... or conspiracy, in restraint of trade or commerce...." 15 U.S.C. § 1. Section 7 of the Clayton Act ("Section 7") provides, in relevant part, that [n]o person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade Commission [("FTC")] shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.
15 U.S.C. § 18. Thus, while Section 1 regulates agreements and Section 7 regulates acquisitions, both focus on the potentially anticompetitive effects of the challenged conduct. However, Section 1 requires actual "restraint," while Section 7 requires only the possibility of an anticompetitive effect. See Brown Shoe Co. v. United States, 370 U.S. 294, 328-29 (1962). It is therefore generally assumed that if a plaintiff's Section 7 claim cannot survive a motion to dismiss, its Section 1 claim will fail as well. Accordingly, the parties in this case have focused their arguments on whether the plaintiffs have stated a claim under the less demanding standard of Section 7.
To effect MasterCard's IPO, the Banks transferred their old MasterCard stock to MasterCard, and MasterCard then transferred new Class B and M shares to the Banks. The plaintiffs allege that MasterCard thereby "acquir[ed] from the Member Banks the right to set Interchange Fees charged to merchants" in the IPO. SC ¶ 95. Plaintiffs allege that these transactions create the appearance, but not the reality, of an independent MasterCard, and therefore enable MasterCard and the Banks to continue and reimpose various anticompetitive practices.
The defendants first argue that Section 7 does not reach the transactions challenged in the supplemental complaint. MasterCard contends that it merely redeemed its own stock, rather than acquiring the stock or assets of another person. The Banks claim that they did not acquire any stock or assets because the net effect of the IPO was, for them, a divestment of their controlling stake in MasterCard. Thus, for different reasons, both MasterCard and the Banks argue that they did not "acquire...any part of the stock or other share capital... [or] any part of the assets of another person" in the course of the MasterCard IPO. 15 U.S.C. § 18. They also contend that, even if Section 7 does govern the challenged ...