swisherFeatured Expert Column: Antitrust & Competition Policy — U.S. Department of Justice

By Anthony W. Swisher, a Partner in the Washington, DC office of Baker Botts LLP

As vertical issues continue to attract attention in the world of antitrust, the U.S. Supreme Court’s decision in Ohio v. American Express was a long-awaited milestone.  The outcome of the decision was not surprising—many commenters had predicted that a Court that has generally been skeptical of antitrust plaintiffs would uphold the U.S Court of Appeals for the Second Circuit’s decision in favor of American Express—but a few features of the decision were noteworthy.

Recall that the case involved Amex’s use of non-discriminatory provisions, or “NDPs,” that 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. At issue was whether the NDPs constituted unreasonable restraints that suppressed interbrand competition by preventing merchants from favoring lower-cost payment methods by customers.

As in so many antitrust cases, the decision turned, at least superficially, on the relevant market definition. In considering whether the plaintiffs had shown an anticompetitive effect, the district court had found that the proper focus of analysis was purely on the merchant side of the equation; i.e., did the NDPs have a negative impact on merchants, regardless of their benefits to cardholders? The Second Circuit, by contrast, found that the district court erred in taking such a narrow view.  The appeals court held that the proper analysis must consider the two-sided nature of the markets at issue as well as consider the challenged conduct’s impact not just on merchants, but on consumers as well.

Justice Thomas, writing for the Court, upheld the Second Circuit. The Court found that the proper analysis must consider the challenged conduct’s impact on both merchants and cardholders, and that under that rubric, plaintiffs had failed to demonstrate an anticompetitive effect resulting from the DNPs. Thus, the Court found there was no need to consider procompetitive justifications for the conduct, or less restrictive alternatives, as plaintiffs had failed to make the required threshold showing of an anticompetitive effect.  The Court found persuasive Amex’s view that merchant fees, and restrictions on merchants, cannot be viewed in isolation but must be viewed in the context of the benefits offered to cardholders.

In the course of its decision the Court made a few observations that are particularly interesting and will be important for antitrust practitioners and their clients to keep an eye on in the future.  First, it will be interesting to see how the scope of the American Express ruling plays out in subsequent lower court decisions.  The Court expressly limited its holding not just to two-sided markets, but to “two-sided transaction platforms,” which it found constitute a single product.

The Court noted that many transactions feature multiple parties on two sides of a transaction, but that does not necessarily mean that the transactions have the characteristics of a “two-sided transaction platform.”  The key feature of a two-sided transaction platform, according to the Court, is that “they cannot make a sale to one side of the platform without simultaneously making a sale to the other.”  (Op. at 2.)

Two-sided transaction platforms thus feature indirect network effects. “A credit card . . . is more valuable to cardholders when more merchants accept it, and is more valuable to merchants when more cardholders use it. . . .”  (Op. at 3.)  These indirect network effects were central to the Court’s finding that consumer and merchant pieces must be considered together.  They mean that raising the price to one side of the transaction platform (in this case, the merchant), “risks losing participation on that side, which decreases the value of the platform” to consumers.  (Id.)  In other words, the two pieces combine to form a single product and a single market.

Thus, the Court distinguished a credit card platform—where every transaction between a consumer and the card platform of necessity involves a simultaneous transaction between the card platform and a merchant—from, for example, a newspaper.  A newspaper may sell advertising on one side, and sell subscriptions on the other, but need not sell both simultaneously.  Additionally, the Court noted that newspapers do not feature the same indirect network effects, as a reader may be largely indifferent to the amount of advertising in a newspaper.  (Op. at 12.)

Whether the Court’s narrow formulation of two-sided transaction platforms will serve to narrow the practical applicability of the American Express decision going forward remains to be seen.  Despite the Court’s attempt to distinguish those narrow facts from more common situations involving multiple actors on two or more sides of a transaction, one could envision the Court’s reasoning being applied to any number of similar situations.

Regardless of the ultimate scope of the Court’s holding, it is clear that showing an impact on only one side of a two-sided platform is not sufficient.  “Evidence of a price increase on one side of a two-sided transaction platform cannot by itself demonstrate an anticompetitive exercise of market power.”  (Op. at 15.)  Rather, a plaintiff must prove that the challenged conduct “increased the cost of credit-card transactions above a competitive level, reduced the number of credit-card transactions, or otherwise stifled competition in the credit-card market.” (Id.)

Second, as in many other vertical restraint cases, the Court emphasized the benefits of promoting interbrand competition as a justification for the conduct at issue.  The Court noted that Amex’s practices have spurred competition among other credit cards.  “To compete for the valuable cardholders that Amex attracts, both Visa and MasterCard have introduced premium cards that, like Amex, charge merchants higher fees and offer cardholders better rewards.” (Op. at 6).  Moreover, the Court found that Amex’s rules promote interbrand competition by stemming “negative externalities.”  Allowing merchants to steer cardholders away from a particular form of payment undermines “the cardholder’s expectation of . . . a frictionless transaction.”  (Op. at 19.)  According to the Court, one merchant thus has the potential to impose an externality that “endangers the viability of the entire Amex network.”  (Id.)

Finally, the Court provided an endorsement of the importance of relevant market definition in a vertical case.  In other contexts—specifically merger analysis—the U.S. antitrust enforcement agencies have sometimes dispensed with market definition, instead trying to rely on direct evidence of an anticompetitive effect (such as an increase in prices).

The Court was notably skeptical of such an approach in the context of vertical restraints cases.  As Justice Thomas noted, vertical restraints are virtually universally evaluated under the rule-of-reason, and frequently are supported by sound business rationales and present no anticompetitive effect.  Unlike horizontal restraints that frequently involve an agreement not to compete, “[v]ertical restraints often pose no risk to competition unless the entity imposing them has market power, which cannot be evaluated unless the Court first defines the relevant market.” (Op. at 11, n.7).

The Court’s emphasis on interbrand competition and the necessity of the consideration of market power within a properly defined relevant market put American Express in line with the Court’s other recent vertical restraint cases.  Despite the narrow 5-4 holding, the decision stands as another in a line of recent antitrust cases viewing claims of vertical restraints with skepticism.