Featured Expert Column: Antitrust & Competition Policy — U.S. Department of Justice
By Anthony W. Swisher, a Partner in the Washington, DC office of Squire Patton Boggs (US) LLP.
With the New Year comes the opportunity to consider the cases to the U.S. Supreme Court will hear in the second half of its October Term 2017. As has become routine in the last several years, the Court has an antitrust case on its docket. In Ohio v. American Express Co., the justices will have the opportunity to consider the proper application of the rule of reason to vertical agreements between credit card companies and merchants. The case presents important substantive issues, but also provides a chance to see whether the Court’s recent trends in antitrust enforcement will continue. The justices will hear arguments in the case on February 26.The American Express (“Amex”) non-discriminatory provisions, or “NDPs,” prevent a merchant that accepts Amex cards from engaging in strategic behavior to steer customers toward use of a different payment card that might carry a lower transaction fee for the merchant. Amex’s NDPs prevent a merchant from by steering a customer The plaintiffs in the case—the U.S. Department of Justice and a group of state attorneys general—brought a Sherman Act § 1 claim against Amex, alleging that the NDPs constituted unreasonable restraints that suppressed interbrand competition by preventing merchants from favoring lower-cost payment methods by customers.
The U.S. District Court for the Eastern District of New York agreed with plaintiffs and held that Amex’s NDPs constituted an anticompetitive restraint. The Second Circuit reversed. The appeals court held that in limiting its analysis to the NDPs’ effects on merchants, the trial court failed to consider the two-sided market in which Amex operated and the NDPs’ benefits to consumers.
The Supreme Court granted certiorari, setting up an opportunity for it to weigh in on the proper application of the rule of reason. The Court’s decision will be fascinating for antitrust lawyers and their clients, both for the substantive issues involved and for what the decision might signal about the Court’s antitrust jurisprudence going forward.
What will the Court say about two-sided markets?
A key issue is what the Supreme Court says about “two-sided markets.” Unlike some § 1 cases that involve a dispute over the proper framework for analysis—per se illegality vs. the rule of reason—in American Express the parties agree that Amex’s conduct is properly analyzed under the rule of reason. Where the parties disagree is over the appropriate scope of the rule-of-reason analysis.
The district court limited its consideration of Amex’s conduct to its effects on the merchants. It considered whether, by preventing merchants from encouraging customers to use less costly payment cards, Amex unreasonably restrained competition for transaction-processing services provided to merchants. The court of appeals held that the district court’s view was too narrow, and that the court should properly have considered the benefits to consumers that Amex is able to offer as a result of the fees it collects from merchants.
The Second Circuit referred to the interplay between merchants and consumers as a “two-sided market,” in which Amex must attract sufficient merchants to make its card attractive to consumers, and sufficient consumers to make its card attractive to merchants. The Second Circuit’s characterization is a useful way of thinking about the case, and caused the court to reverse the narrower decision of the district court which failed to consider the challenged conduct’s effect on consumers.
But in a sense, the two-sided-market paradigm is nothing new. Vertical cases involving both price and non-price restraints have effects on both merchants and consumers. For example, a manufacturer imposing an exclusive territory on its retailers must balance the impact on consumers with the impact on its distributors. Such conduct has long been evaluated under the rule of reason precisely because courts have recognized its benefits to consumers in the form of enhanced interbrand competition, despite the restrictions on intrabrand competition imposed on retailers.
It will be interesting to see if the Court fits this case into established vertical precedent, or if it upholds the Second Circuit’s two-sided market paradigm as a mode of analysis.
Will the decision have application beyond its narrow facts?
The payment card industry is not the only one that could be said to involve a “two-sided market.” Health plans must attract employers to provide a member base, and must attract physicians to provide care to its members. Marketplaces—whether physical, like a shopping mall, or electronic—must attract sufficient buyers to attract sellers, and sufficient sellers to attract buyers. Whatever the Court says about two-sided markets in American Express will be of interest not just to the consumer financial industry, but more broadly as well.
Will the Supreme Court continue its string of pro-defendant decisions?
The Court has been particularly active in antitrust over the last 20 years. It has had occasion to speak on many areas of antitrust doctrine, with the notable exception of merger matters (as I discussed in a 2017 WLF Legal Backgrounder). Recent Supreme Court antitrust jurisprudence has not been kind to plaintiffs. As the Court has increasingly applied modern economic theory to antitrust claims, it has moved away from economically questionable, plaintiff-friendly precedents of the 1950s and 60s. American Express bears watching to see if the Court continues its defendant-friendly trend.