On June 25, the U.S. Supreme Court ruled that American Express’s contractual “antisteering provisions” did not violate section 1 of the Sherman Act.1 In a 5-4 decision split along ideological lines, the conservative justices in the majority determined that the plaintiffs did not carry their burden of showing that Amex’s antisteering provisions result in anticompetitive effects in a properly defined product market. Antisteering is the practice by which one credit card company prohibits a merchant from encouraging customers to use another credit card company’s card. The Supreme Court’s ruling confirmed that relevant market definition is king, the “rule of reason” analysis for antitrust claims remains the dominant standard, and the dynamics of a specific industry are key to that analysis. In particular, the Court signaled a hostility to rule of reason challenges where markets have experienced rapid increases in output and strong innovation, even if a plaintiff can arguably point to certain price increases.
The Credit Card Market
Both consumers and merchants depend on credit card networks for transactions to work — card networks extend the cardholder credit to make a purchase and they provide merchants quick, guaranteed payment. As such, the credit card market is considered a “two-sided platform.” The Supreme Court characterized this particular structure as a “transaction platform” because a sale to one side of the platform can only occur with a simultaneous sale to the other side.
Consumers look for credit cards with low fees, high benefits (such as rewards programs), and a large network of stores that accept the card. Merchants are interested in lower merchant fees (the percentage of a transaction that the network charges on a purchase) and a large network of consumers who will then use those cards to purchase their goods.
The merchant fees are used to fund cardholder rewards, and cards providing for greater rewards are generally subject to higher merchant fees. In other words, higher fees to merchants are used to fund effectively lower prices to cardholders. The credit card network must carefully balance the prices to both cardholders and merchants because cardholders will not use a card that is not accepted by many merchants and merchants will not be interested in a credit card network with few cardholders.
Visa and Mastercard have a different business model than American Express. Those companies derive more than half of their revenues from the interest charged to cardholders for credit balances that extend past a billing period. Amex, by contrast, relies primarily on higher merchant fees to achieve revenues and fund its reward programs. As a result of this model, fewer merchants accept Amex than Visa and Mastercard.
Because of Amex’s higher merchant fees, even merchants that do accept Amex could try to dissuade consumers from using Amex at the point of sale in favor of credit card companies with lower associated fees. However, since the 1950s, Amex has included “antisteering provisions” in its merchant contracts, prohibiting merchants from restricting consumers’ use of Amex or stating a preference that consumers use another credit card at the point of sale. These provisions prompted the dispute before the Supreme Court.
In 2010, the U.S. Department of Justice and a group of state attorneys general brought a civil antitrust enforcement action in the U.S. District Court for the Eastern District of New York against the largest three credit card networks, challenging each network’s antisteering provisions in merchant agreements. Visa and Mastercard entered into consent judgments and rescinded their antisteering rules. Following a seven-week bench trial, the district court held that the Amex antisteering rules violate section 1 of the Sherman Act because they “short-circuit[ed] the ordinary price-setting mechanism” in the credit card industry, causing “an absence of price competition” and “dramatically” higher merchant fees.2 The district court held that antisteering rules dissuaded the credit card networks from competing against one another on merchant fees because merchants could not reward networks that charged lower fees with higher transaction volumes by steering customers to the lower-fee networks. Crucially, the trial court defined the relevant market based on only the merchant half of the platform and rejected Amex’s argument that both the merchant and consumer sides of the platform must be examined together.
On appeal, the Second Circuit reversed.3 It held that, because of the interdependence between each side of the market, the district court erred by not considering the merchant and cardholder sides of the platform together as one market. The Second Circuit also determined that Amex did not have market power and concluded that the district court erred by only looking at Amex’s ability to increase merchant prices while not also considering the benefits (i.e., price discounts) to cardholders. To prove anticompetitive effects using higher prices, the court stated, the plaintiffs were required to provide, at minimum, a “reliable measure of American Express’s two-sided price that appropriately account[ed] for the value or cost of the rewards paid to cardholders.” In the absence of this proof, the Second Circuit reversed the liability finding.
The plaintiffs appealed, and the Supreme Court granted certiorari.
The Supreme Court Decision
The Supreme Court affirmed the Second Circuit, finding that the plaintiffs failed to discharge their initial burden under the rule of reason of proving that the antisteering policies had actual anticompetitive effects. This decision, penned by Justice Thomas, turned on the relevant product market definition. In the majority’s view, the nature of a credit card network’s two-sided platform is critical. These two-sided platforms exhibit indirect network effects, meaning price cannot be raised to one side of the platform without risking a decline in demand from the other side. In other words, if a credit card network raises merchant fees, causing fewer merchants to accept that card, then the credit card network also risks losing consumers who may be upset if merchants stop taking the card. The Supreme Court determined that, because a credit card network facilitates a single transaction between merchants and consumers, these indirect effects are even more pronounced. Therefore, this two-sided platform needed to be analyzed as a whole to assess the impact of Amex’s antisteering provisions. Competition could not be accurately assessed by examining one side of the platform in isolation.
Under this framework, the Court determined that the plaintiffs’ claims that antisteering provisions led to higher merchant fees were not enough to prove the required anticompetitive effects: “Focusing on merchant fees alone misses the mark because the product that credit-card companies sell is transactions, not services to merchants, and the competitive effects of a restraint on transactions cannot be judged by looking at merchants alone.” Instead, the plaintiffs had to prove that Amex’s policies increased the total cost of transactions above a competitive level, reduced the number of transactions, reduced quality, or otherwise decreased competition in the overall credit card market. They failed to do so.
The Court found that the plaintiffs failed to offer any evidence that the price of credit card transactions on both sides of the platform was above competitive levels. Indeed, the plaintiffs did not offer a reliable measure showing Amex’s transaction prices or profit margins.
Moreover, the Court pointed out there were signs in the market that competition was healthy: (1) higher merchant fees lead to increased services and rewards programs for cardholders, which stimulates cardholder spending, in turn benefiting merchants; (2) output of credit card transactions had increased approximately 30 percent, not decreased; (3) the credit card industry experienced rapid innovation and quality improvements while the antisteering policies have been in place; (4) Visa and Mastercard now offer more premium cards to compete with Amex, and credit card networks expanded the availability of their services to low-income customers; and (5) competition constrained Amex’s prices and, at times, forced Amex to lower its prices. Most importantly, the Court concluded that antisteering provisions do not prevent Visa, Mastercard or Discover from competing against Amex by offering lower merchant fees or promoting their broader merchant acceptance.
The Court determined that the plaintiffs’ evidence of anticompetitive effects was not only inadequate, it was ambiguous. For example, Visa and Mastercard’s merchant fees continued to increase, even at stores where Amex was not accepted. This evidence suggested that market dynamics other than the antisteering provisions, such as increased competition for cardholders through greater cardholder rewards and benefits, was the cause of higher merchant fees.
Finally, the majority was concerned with the issue of free-riding. Because of the rewards and benefits offered, Amex typically attracts wealthier cardholders who spend more money. Amex, thus, entices merchants to join its network because it delivers these wealthier cardholders to the merchants’ doorsteps. However, if a merchant then dissuades an Amex cardholder from using Amex at the point of sale, then the merchant is free-riding on Amex’s investments to get the cardholder to shop at that store, while avoiding paying the Amex merchant fee. The Court also noted that an Amex cardholder’s lack of acceptance at one store may make the cardholder less likely to use Amex at another store. This would undermine Amex’s model of focusing on cardholder spending to provide better rewards to consumers.
Although the result in the Supreme Court’s decision turned heavily on the specific dynamics of the credit card industry, there are lessons learned from this opinion and insights regarding how lower courts may use the opinion in the future.
1 Ohio v. Am. Express Co., No. 16-01454 (U.S. June 25, 2018).
2 United States v. Am. Express Co., 88 F. Supp. 3d 143, 151 (E.D.N.Y. 2015).
3 United States v. Am. Express Co., 838 F.3d 179, 207 (2d Cir. 2016).
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.