The US Supreme Court has held that American Express’s anti-steering provisions do not violate antitrust law, but the closeness of the justices’ vote and their specifying of credit card networks as a “transaction” platform may limit the variety of two-sided markets to which the ruling will apply.
The justices today divided on conservative versus liberal lines, with those appointed by Republicans in the majority and those appointed by Democrats offering the dissent. The majority ruled that the relevant market in the case was two-sided – to cover both sides of the transaction carried out when a credit card is used – and that the US Department of Justice did not show at trial that the challenged provisions were anticompetitive.
The DOJ sued Visa, Mastercard and American Express in 2010 under section 1 of the Sherman Act for requiring businesses that accept their credit cards not to steer customers toward other cards that cost less for the business to accept. Visa and Mastercard promptly settled by promising to remove the offending clauses from their contracts with merchants.
But Amex defended its anti-steering provisions as necessary for its business model, in which the high fee charged to merchants for each transaction made with an American Express card funds benefits for its cardholders.
Customers with Amex cards on average are wealthier; the cards historically had to be paid in full each month and did not permit carrying a balance paid off over time with interest. The credit card company argued that it needed the anti-steering provisions to prevent merchants from drawing in Amex cardholders with the promise of accepting their high-reward cards, but then dissuading the customers from using those cards by steering them to another means of payment.
This defence did not succeed at trial in New York federal district court. In 2015, Judge Nicholas Garaufis found that Amex had market power due to its cardholders’ insistence on using it, and that the DOJ had shown direct evidence of anticompetitive effects from Amex’s rules, which the company had not shown sufficient procompetitive justifications to overcome.
However, the US Court of Appeals for the Second Circuit stayed Judge Garaufis’s ruling from taking effect, and ultimately reversed it. The appellate court held in September 2016 that the lower court had not properly analysed the relevant market as two-sided, and that the DOJ had not met its burden to show that the restrictions “made all Amex consumers on both sides of the platform – ie, both merchants and cardholders – worse off overall”.
Under the Trump Administration, the DOJ declined to seek Supreme Court review. Several states that were co-plaintiffs took up the case and petitioned the high court, although the DOJ argued against taking the appeal on the grounds that the novel issues should be allowed to develop in the lower courts.
The Supreme Court nonetheless agreed to hear the case, whereupon the DOJ filed an amicus brief supporting the states and received time to speak at oral arguments. Hearing the case this past February, Democratic appointees Elena Kagan, Sonia Sotomayor and Stephen Breyer indicated that they saw the provisions as anti-competitive, while Republican Neil Gorsuch defended the rules.
In the opinions issued today, those signs were borne out. Justice Gorsuch joined the majority, for which Justice Clarence Thomas wrote; Justice Breyer authored the dissent joined by Justices Kagan, Sotomayor and Ruth Bader Ginsburg.
Chief Justice John Roberts would have assigned the majority opinion, while Justice Ginsburg – as the most senior justice in the minority – would have assigned the dissent.
Justice Thomas laid out a credit card market in which “Visa and MasterCard have significant structural advantages over Amex,” where many more customers carry and merchants accept their cards compared to American Express.
With a business model in which revenue comes almost entirely from merchant fees, Amex “has stimulated competitive innovations in the credit-card market, increasing the volume of transactions and improving the quality of the services”, the court held.
Before assessing the government’s direct evidence of anticompetitive effects from vertical restraints, the majority said it had to define a relevant market. It ruled that “courts must include both sides of the platform – merchants and cardholders – when defining the credit-card market,” because “credit-card networks are a special type of two-sided platform known as a ‘transaction’ platform.”
Notably, a large number of platforms through which buyers and sellers transact for products and services – Amazon Marketplace, eBay, Uber and so on – could be categorised as transactional platforms. However, the label appears less of a fit for platforms such as Facebook that are advertising-supported services.
Justice Thomas specifically noted, “A market should be treated as one sided when the impacts of indirect network effects and relative pricing in that market are minor,” giving ad-supported newspapers as an example of such a market.
He dismissed as “unpersuasive” the government’s argument that the anti-steering rules enabled Amex to charge anticompetitive higher fees to merchants. The evidence instead “suggests that the cause of increased merchant fees is not Amex’s anti-steering provisions, but rather increased competition for cardholders and a corresponding marketwide adjustment in the relative price charged to merchants,” Justice Thomas wrote.
Given that output as measured in the number of credit card transactions rose, and merchant fees have fallen and cardholder benefits risen since Amex entered the credit card market in the 1950s, the majority concluded that the government had not met its initial burden of proving anticompetitive effects from the Amex provisions.
Justice Breyer, a former lawyer in the US DOJ’s antitrust division, began the dissent by describing the case as typifying the “American approach” of dealing with high merchant fees by suing under antitrust law rather than directly regulating fees.
He insisted that the courts need not define a relevant market because the DOJ had directly shown anticompetitive effects by citing the raising of Amex’s merchant fees in recent years and rival credit card Discover’s inability to use its lower fees to attract merchants to prefer its card. He criticised the majority for failing to address how such effects themselves were evidence of market power.
Even if market definition were necessary, Justice Breyer said, the trial court had done it correctly by seeing credit card transactions as involving two related, complementary markets: Amex’s services to cardholders, and its services to merchants.
“The phrase ‘two-sided transaction platform’ is not one of antitrust art – I can find no case from this court using those words,” he wrote. Justice Breyer said connecting two groups of customers in simultaneous transactions with indirect network effects was “commonplace”, a feature of farmers’ markets, travel agents and internet retailers that allow other producers to sell over their networks.
He assailed the majority’s new rule for two-sided transaction platforms as creating a far broader exception to antitrust law than the cited economics would support, pointing out that the economists require such a platform to be able to “affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount”.
Even if the majority were right about defining a market, and right in its two-sided definition, Justice Breyer said, it still would be wrong in concluding that the government had not met its burden, because the DOJ did show that Amex did not reduce the price paid by cardholders – in the form of higher benefits – in an amount equal to the higher fees charged to merchants.
Finally, Justice Breyer took on the majority’s use of the three-step burden-shifting framework. Amex had said that with a single market at issue, its benefits for cardholders had to be weighed against any harms to merchants in the initial step of determining if the plaintiff had shown the restraint to be anticompetitive. But the government said that such procompetitive justifications belonged in the second step.
Justice Breyer said the majority had addressed procompetitive justifications in the first step, yet ignored the trial court’s findings that Amex could reduce the likelihood of merchants steering customers to use other credit cards by reducing its merchant fees, and could adapt its model to a market with price competition on such fees.
The DOJ declined to comment. The Ohio attorney general’s office, which led the states in the Supreme Court appeal, said it “is disappointed in this ruling. Consumers benefit when there is more competition in the marketplace.”
Counsel to American Express
Cravath Swaine & Moore
Partners Evan Chesler, Peter Barbur, Kevin Orsini and Rory Leraris in New York
Munger Tolles & Olson
Partner Benjamin Horwich is assisted by Justin Raphael in San Francisco
Lead counsel to the states
Ohio Attorney General’s Office
Mike DeWine, Eric Murphy, Michael Hendershot, Hannah Wilson, Ryan Harmanis and Brian Jordan
Counsel to the United States of America
Solicitor General Noel Francisco, Deputy Solicitor General Malcolm Stewart and assistant to the Solicitor General Brian Fletcher
Makan Delrahim, Kristen Limarzi, Robert Nicholson, James Fredricks, Craig Conrath, John Read, Nickolai Levin and Andrew Ewalt