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The Green Sheet Online Edition

December 10, 2007 • Issue 07:12:01

Heartland files suit, claims processing scheme

In a suit filed in the United States District Court of New Jersey, card processor Heartland Payment Systems alleges MICROS Systems Inc., a leading POS system provider for the restaurant industry, conspired with Chase Paymentech Solutions LLC-owned Merchant Link LLC to effectively deny outside processors free enterprise access to restaurant processing business and artificially inflate payment processing fees for restaurateurs. In the lawsuit, Heartland calls the agreement between MICROS, Merchant Link and Chase Paymentech a "scheme" that is "elegant and insidious." Heartland is seeking preliminary and permanent injunctions banning the alleged anticompetitive practice as well as at least $10 million in damages.

Invoking the Sherman Antitrust Act and New Jersey's unfair competition laws in the Nov. 26, 2007, filing, Heartland claims the restaurants that use the MICROS card payment systems can only have their electronic transactions processed through Merchant Link's payment gateway, what Heartland calls a "tying arrangement."

The suit also claims that if another processor, such as Heartland, seeks to process transactions for a restaurant running on MICROS' POS devices, processors must pay Merchant Link a flat fee per transaction to have payments routed through Merchant Link's gateway to outside processing facilities. Since Merchant Link is solely owned by Chase Paymentech, which reportedly processed 18.2 billion payment transactions in 2006, Heartland is claiming that it is actually paying one of its chief competitors for the privilege of processing payments.

Inflated expectations

But the lawsuit also charges Chase Paymentech with artificially inflating the cost of processing to increase revenues from its restaurant clients and decrease competition in the restaurant market. According to Heartland, when Chase Paymentech charges other processors a fee to use the Merchant Link gateway, the processors must either charge their restaurant customers more for processing or eat the cost themselves. Either way, Heartland contends, Chase Paymentech wins. Either the processor loses business when the restaurant goes elsewhere for cheaper processing or the processor's profit margin is significantly reduced if it is forced to absorb the extra cost.

And, according to Heartland, when a restaurant decides to go elsewhere, Chase Paymentech offers its processing services at a price that is lower than what the other processor was forced to charge but higher than the rate that another processor would charge if it didn't have to raise its rates to compensate for the extra Merchant Link gateway fee.

Robert O. Carr, Chairman and Chief Executive Officer at Heartland, said, "We have repeatedly tried to impress upon MICROS that its exclusive contract with Merchant Link is detrimental to the restaurant industry.

Merchant Link adds no unique value to the transaction clearing process. It sits between MICROS and the card processing industry, serving as a toll collector and gatekeeper for Paymentech.

"By creating this illegal scheme, Paymentech makes it nearly impossible for many restaurant owners to use any other card processor. Adding insult to injury, Paymentech has repeatedly charged restaurant owners a higher price than it would in a truly competitive environment."

Adil Moussa, Analyst at Aite Group LLC, a payments industry advisory firm, said the agreement between MICROS and Merchant Link is "something that has been on processors' minds for some time. It gives an unfair advantage to Paymentech." However, he doesn't know if the agreement is illegal.

However, a legal expert in the payments industry, on the condition of anonymity, told The Green Sheet, "If the facts alleged are accurate, Paymentech and MICROS engaged in a highly effective plan to shut out all other processors from processing credit cards using MICROS POS systems." The source went on to say that, assuming the accuracy of the charges, the lawsuit "is a righteous claim."

Carr said Heartland wants to "re-establish a level, competitive playing field in the table-service restaurant industry where we can compete with Paymentech for MICROS business and win based on our superior pricing structure, service infrastructure and commitment to transaction security.

"The artificial and illegal barrier to entry that Paymentech has constructed through its shrewd and illegal dealings with MICROS must end. We believe that, when all the documents are uncovered and the facts are disclosed in open court, we will put an end to these egregious practices."

The other side

But Peter J. Rogers, Executive Vice President of Business Development at Columbia, Md.-based MICROS, begs to differ. "The lawsuit is without merit," he told The Green Sheet, "and we'll contest it vigorously." Rogers said he wrote the contract with Merchant Link in June 1993, four years before Heartland began processing payments. That contract was put in place in order to "simplify a complicated [payments] system."

Rogers stated that Merchant Link "knows [the MICROS system] intimately," and that if Merchant Link were not there, MICROS would have to train each processor indi-vidually on how to process payments over MICROS devices, which would greatly increase MICROS' operating expenses.

"That is absolutely wrong," countered Charles Kallenbach, General Counsel for Heartland. "We could run on MICROS systems tomorrow." Kallenbach said that MICROS does not want to work directly with other processors - only through Merchant Link - because of the "kick backs," as Kallenbach said, that MICROS receives from Merchant Link. Therefore, "MICROS' incentive ... is to only recommend Merchant Link."

Rogers admitted that they do receive revenue from Merchant Link as part of the contract, but he characterizes Heartland's kick back terminology as its "talking points." Rogers went on to say that "we have had this program in place for 15 years."

The timing of the lawsuit is "completely irrelevant," Kallenbach said. Heartland only noticed the arrangement between MICROS and Merchant Link "a few years ago," when Heartland began to pursue larger restaurant businesses such as franchises and chains, and ran into the MICROS-Merchant Link agreement.

Monopoly, anyone?

Also at issue is whether or not MICROS has a dominant market share in the restaurant sector, and is wielding that power to drive down competition with its Merchant Link-Paymentech partnership. Heartland's lawsuit claims that "MICROS ... holds a market share in excess of 40%," based on data from independent analysts.

Rogers, however, disagreed with that number. He said only 30,000 of the U.S. restaurants that run MICROS systems also use Merchant Link, and 30,000 of the 280,000 total restaurants nationwide, according to Rogers, comes to a 10.7% market share. "We are not a monopolist," he said.

But Kallenbach is unequivocal. "The way that Merchant Link and MICROS' relationship works is an illegal tying relationship," he said. "And it has been hurting us in the marketplace."

"This is the way we do [business]," Rogers said. "They [Heartland] just don't like the way we do it."

"That is true," Kallenbach said. "We don't like the way they do business because it's illegal."

Chase Paymentech stated it believes the "lawsuit is without merit. ... Chase Paymentech and Merchant Link go to great lengths to ensure that they operate at all times with the highest of ethical standards and in full comp-liance with all applicable laws and regulations." Chase Paymentech is a joint venture of JPMorgan Chase & Co. and First Data Corp. end of article

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