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American Express Inc. prevailed June 25 when the U.S. Supreme Court agreed with its argument that rules about how merchants should treat cardholders don’t violate antitrust laws.
In a 5-4 opinion, the Justices held that the plaintiffs, several U.S. attorneys general, didn’t show anticompetitive effects from AmEx’s rules forbidding merchants to steer customers to credit cards that charge a lower swipe fee than AmEx. The court said that the government had to show that both sides of an AmEx transaction, the customer and the merchant, were hurt when AmEx barred merchants from suggesting that customers use a cheaper card.
The Justice Department originally sued in 2010, arguing that the practice was anticompetitive. A district court agreed in 2015, but the U.S. Court of Appeals for the Second Circuit reversed in 2016, saying the DOJ hadn’t taken into account both sides of a two-sided market that caters both to customers and merchants. The DOJ declined to appeal to the Supreme Court but argued with the states once the case was granted review.
In a statement, American Express called the decision a major victory and cited the opinion that said its “business model has stimulated competitive innovations in the credit-card market.”
Antitrust lawyers and consumer advocates say the decision may make it more difficult to bring antitrust cases against technology companies like Amazon.com and Google Inc. or even big retailers like Walmart Inc.
Given the dearth of guidance on how to analyze these platforms, the court’s decision likely will have enormous impact on how the law develops in these growing markets. “I think it is hard to predict where this will play out,” competition law professor John Newman of the University of Memphis’s Humphrey School of Law told Bloomberg Law.
Newman, who was on the Justice Department’s trial team in the district court, said that showing net effects in complex multi-sided markets, as the court seems to insist plaintiffs must do, may be next to impossible.
Michael Smith, an information technology professor at Carnegie Mellon University’s Heinz College, told Bloomberg Law before the opinion was issued that two-sided markets are “a big part of our economy and growing every day.” They present problems for traditional antitrust analysis without easy answers.
“We need to think carefully about these when it comes to antitrust,” he said, because what we know about them is they tend to be winner-take-all markets.
The Open Markets Institute, which filed a brief supporting the attorneys general in the case, said the court “introduced a special rule for so-called ‘two-sided’ markets, greatly raising the burden that plaintiffs must carry at the very earliest stages of litigation,” the statement said.
“The Supreme Court’s decision risks shielding from effective antitrust scrutiny every dominant tech platform in America, including Amazon, Google, and Facebook,” said Lina Khan, director of legal policy at Open Markets in the statement.
“Every defendant in the whole country, at least for a while, is going to claim to be two-sided,” Cleveland State University antitrust professor Chris Sagers told Bloomberg Law.
Justice Clarence Thomas, writing for himself, Chief Justice John Roberts, and Justices Anthony Kennedy, Samuel Alito, and Neil Gorsuch, said AmEx’s anti-steering rules don’t violate federal antitrust law because there isn’t any evidence they have an anticompetitive effect.
Antitrust plaintiffs must show that the targeted conduct restrains trade, worsening competition in a specific line of business defined as a “relevant market.” Thomas said that the trial court, which heard seven weeks of bench trial on the facts of the case, drew the “relevant market” incorrectly by ignoring the consumer side of the market and focusing only on merchants.
AmEx is in the business of facilitating a two-sided transaction, Thomas said. The nature of a credit card platform is that you can’t make a sale on one side of the market — i.e., the merchant — without a sale happening on the other side — i.e., the cardholder.
Looking at both sides of each transaction, Thomas said the government failed to show that AmEx’s steering rules restricted output of card transactions or raised prices above what a competitive market would have charged.
Thomas cited extensively work by economists David Evans and Richard Schmalensee, who have published several articles on two-sided markets. They also filed a brief in the AmEx case arguing that ignoring both sides of a market, even at the first stage of a case, risks wrong outcomes.
Justice Stephen Breyer, in a dissent joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan, said there is no precedent in antitrust law for melding the shopper and merchant sides of AmEx’s business into a single market. “I am not aware of any support for that view in antitrust law,” he said. “Indeed, this court has held to the contrary.”
Breyer said the challenged provision isn’t in the contract AmEx customers agree to when they use the card. It’s only in the merchant agreement, and it only impacts the merchant side of AmEx’s business. A single AmEx swipe is really two distinct transactions, he reasoned. First, AmEx pays the merchant for goods the customer buys with the card quickly. Second, as much as a month after the sale, it bills the customer for amounts it has reimbursed to merchants.
Two different contracts and two different payments suggests two different markets, Breyer said. He said that the majority’s decision 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.”
Newman pointed to two particular problems for future plaintiffs. First, the majority said that plaintiffs can still seek to show through “direct evidence” that conduct harms competition. However, the court seemed to demand that the plaintiff would have to show market power in a direct evidence case. Prior precedent demanded evidence of market power only in cases that that allege indirect market harm. The court may have raised the burden on private and public enforcement going forward, he said.
Second, the court focused on the volume of AmEx card transactions as “output” and looked for net impacts on the market. That view erects a tough barrier for plaintiffs in complex markets because it ignores other important non-price market impacts, and also can be swamped by unrelated market trends, he said. For example, if customers shifted broadly to credit cards from checks and cash, how can a plaintiffs untangle that larger trend from changes wrought by a card company’s conduct? That could make it more difficult to bring meritorious cases, he said.
Open Markets sees both a higher hurdle for plaintiffs generally and a specific threat for those who would attack anticompetitive practices by tech platforms. Sandeep Vaheesan, policy counsel at Open Markets, said that for plaintiffs, these “new legal burdens further reduce the already slim chances of success in court. The costs and complexity plaguing antitrust litigation will only become significantly worse following today’s decision.”
The case is Ohio, et al. vs. American Express, 6/25/18 , U.S., No. 16-1454, 6/25/18 .
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