Opinion analysis: Divided court defines credit-card networks as single two-sided market, rejecting antitrust challenge to anti-steering provision
on Jun 25, 2018 at 6:12 pm
Today, the Supreme Court ruled that American Express’ anti-steering provisions do not violate the federal antitrust laws. In a 5-4 decision, Justice Clarence Thomas wrote that credit networks such as Amex provide services to cardholders and merchants in a “special type of two-sided platform known as a ‘transaction platform,’” and that this platform is a relevant market for the purposes of antitrust analysis in this vertical-restraints case.
According to the majority, the district court did not define the relevant market properly and the plaintiffs below, Ohio and 10 other states, failed to meet their burden of proving that the challenged anti-steering provision caused competitive harm in a properly defined market. Thomas was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Samuel Alito and Neil Gorsuch. Justice Stephen Breyer, joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan, dissented.
The case arose from a Sherman Act Section 1 complaint filed by the U.S. Department of Justice and 17 states that challenged provisions in contracts between American Express and merchants that accept Amex credit cards.
In credit-card transactions, a platform such as the one operated by Amex effectively connects cardholder buyers and merchant sellers, allowing the buyers to obtain the product or service immediately and pay later, and the merchant to receive prompt, guaranteed payment. Amex charges a fee to merchants for each transaction with an Amex card. Merchant fees can vary and the district court found in this case that the Amex merchant fees were historically higher than the fees of other networks. Because the price a buyer pays for the item does not change depending on the particular credit card used, merchants prefer to accept credit cards with lower merchant fees. The Amex anti-steering contract provision prohibited merchants from steering customers to use another credit card or means of payment at the moment of the purchase.
The issue in the case was whether Amex’s anti-steering contract provision was an unreasonable restraint of trade prohibited by the Sherman Act. As I explained in my preview, vertical price and non-price agreements are judged under the rule of reason, which provides that business practices only violate the antitrust law when their effect is to restrain trade unreasonably. Traditionally, plaintiffs have the burden of identifying and describing the challenged conduct and showing that it causes harm to competition. If they meet that burden, the burden shifts to the defendants to establish procompetitive benefits from the conduct. The district court found that the plaintiffs had met their burden, establishing a prima facie case by showing that there was an actual harm to competition in the market for cardholder services for merchants. The 2nd Circuit reversed, holding that the relevant market was the entire two-sided market, consisting of both merchants and cardholders, and that the plaintiffs had failed to show actual or predicted harm in that market. Today, the Supreme Court accepted the 2nd Circuit’s market definition for this particular type of market, and held that the plaintiffs had not proved that the anti-steering provision adversely affected competition.
The majority and dissent agreed on the burden-shifting structure of an antitrust rule of reason case, but little else. Citing a number of scholarly articles, Thomas described modern credit-card transactions as part of a “special type” of two-sided platform called “transaction” platforms. Two-sided markets in general involve sales of products or services to two different sets of buyers. For the majority, a transaction platform requires a simultaneous sale to both sides of the market — that is, the consumer cardholder and the merchant — facilitated by the credit-card platform. These two-sided platforms involve “indirect network effects” because the value of each side of the platform depends on the other side of the platform – the more consumers that use Amex cards, the more merchants are likely to accept Amex cards for payment. In a footnote, Thomas stated that, in competitive markets, these indirect network effects “encourage” firms to increase prices and profits on one side of the platform and divert them to the other side to increase the number of participants on that side of the market.
With that as background, the majority sketched out areas of agreement between the parties: The challenged anti-steering provisions are vertical agreements, the proper antitrust analysis involves a three-step burden-shifting rule of reason, and the plaintiff must prove a substantial anticompetitive effect to shift the burden of going forward with the evidence to the defendant. There was also agreement that the anticompetitive effects can be shown directly by actual harm to competition or by proof of market power and “some evidence” of harm. At this stage, the government is relying on direct evidence of competitive harm. However, the majority stated that market definition is required, even when plaintiffs assert direct evidence of actual anticompetitive effects. Distinguishing Federal Trade Commission v. Indiana Federation of Dentists because it involved horizontal agreements, the court stated that “vertical restraints are different” because there is usually no risk to competition absent market power, so the market and the defendant’s market shares must be identified.
Markets are usually defined by starting with the product at issue and then identifying reasonable substitutes from the buyers’ point of view. However, the majority stated, “commercial realities” may require inclusion of different products or services in a single market, citing United States v. Grinnell Corp. (1966) and Brown Shoe Company Inc. v. United States (1962). Accordingly, the majority wrote that price increases on the merchant side of the two-sided credit card platforms may not reflect either market power or competitive harm. Therefore, both sides of the platform must be included in credit-card markets. The majority took care to limit this rule, noting that “two-sided transaction platforms, like the credit-card market, are different,” so not every two-sided market constitutes a relevant market for antitrust purposes. The key distinction is that a credit-card platform is a transaction platform that facilitates a single, simultaneous transaction.
Having defined the relevant market, the majority stated that the competitive effects must include both the merchant side and the consumer/buyer side of the credit-card transaction. Credit card firms sell transactions, the majority stressed, so plaintiffs must prove that the anti-steering provision increased the cost of transactions or reduced the number of transactions as compared to competitive markets. In this case, they failed to do so. Higher merchant fees were not sufficient proof and, in any case, might indicate a competitive market in which the consumer side of the market was receiving benefits, such as rebates or airline miles. Finally, the majority observed that the credit-card market has expanded, offering a larger variety of cards to diverse consumers and more credit cards overall.
In dissent, Breyer began with a short history of the antitrust rule of reason. He noted that everyone agrees that step one of the analysis requires plaintiffs to show the fact or likelihood of anticompetitive effects and that the issue in this case is how to apply step one. Then the dissent diverged from the majority almost completely. Relying on Indiana Federation of Dentists, Breyer emphasized that market definition is not always required because it is merely a surrogate for actual competitive effects.
The dissent went on to fault the majority’s market definition for incorrectly conflating complementary products rather than using substitutes to define a relevant product market. Complementary products, Breyer argued, are those that function in tandem so that output likely increases together — for example, gasoline and car tires, tennis balls and tennis rackets, and so forth. Breyer found no support in antitrust law for treating customer- or buyer-related services and merchant-related services as a single market. Accordingly, using consumer substitution or, as in Grinnell, producer substitution, as the test, he argued that the market is merchant-related credit-card services, at least as part of step one of the rule of reason.
Breyer found no support in case law or economic literature for the majority’s definition of a market for “two-sided transaction platforms” that include four elements: different products or services, different groups of customers, connection by the platform and simultaneous transactions. Characterizing the definition as “novel,” the dissent failed to find adequate justification for a special rule of market definition, and concluded that traditional principles of market definition should apply to this industry.
Pointing to footnote 7 in the majority opinion, Breyer also noted that the majority “seems categorically to exempt vertical restraints from the ordinary ‘rule of reason’ analysis that has applied to them since the Sherman Act’s enactment in 1890.” He asserted that this would be a new development, because, although the majority cites Leegin Creative Leather Products Inc. v. PSKS Inc. in support, that case did not create such a “novel exemption.”
Finally, Breyer maintained that the government had proved its prima facie case even under the market definition employed by the 2nd Circuit and the majority. He concluded that the “majority’s decision in this case is contrary to basic principles of antitrust law, and it ignores and contradicts the District Court’s detailed factual findings, which were based on an extensive trial record.”
The case is important for the announcement of a new requirement of proof of market definition and market power at step one of the rule of reason in vertical-restraints cases, even when plaintiffs seek to prove competitive harm by direct evidence. It also appears to announce a new relevant market for transaction platforms, which may be distinguishable from other two-sided markets. From now on, plaintiffs may be required to prove total competitive harm summing both sides of the market at step one of a rule of reason case.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel on an amicus brief in support of the petitioners in this case. The author of this post is not affiliated with the firm.]