| Richard Brunell
Banking & Finance, Vertical Restraints
The American Antitrust Institute (AAI) filed an amicus brief urging the Supreme Court to reverse a lower-court decision that creates a substantial barrier to combatting anticompetitive conduct in the credit card industry and other industries that involve interdependent markets. It was one of 14 amicus briefs filed urging reversal.
The case involves a complaint brought by the Justice Department and several States against American Express (Amex). The government challenged Amex’s business practices that limit competition between the credit card networks (American Express, Visa, MasterCard and Discover) over fees charged to merchants for credit card transactions. Those practices prohibit any merchant that accepts American Express cards from “steering” consumers to use credit cards with lower merchant fees.
After trial, a federal district court in New York found that Amex’s “anti-steering” practices harmed competition by raising merchant fees across the market. Merchants passed on those fees to all consumers in the form of higher prices for their goods and services. Moreover, the practices deterred entry of new, low-cost business models and thereby impaired innovation and consumer choice.
Amex sought to justify its anti-steering rules on theory that the rules prevent free riding by merchants and preserve its differentiated business model based on high fees and high rewards. The district court rejected Amex’s proferred business justifications on legal and factual grounds.
The Second Circuit Court of Appeals reversed the district court, holding that the government had not made a threshold showing of anticompetitive harm because it failed to show that “all Amex consumers on both sides of the platform” were harmed. The burden of proving procompetitive benefits is normally on the defendant. But here, the court of appeals justified shifting the burden of proof to the plaintiffs to show the absence of offsetting cardholder benefits on the ground that credit cards are a “two-sided platform,” where demand and prices on one side affect the other side. In those circumstances, the court said, the relevant market had to include both consumers and merchants, and plaintiffs had to show “net harm” as an initial matter.
AAI’s brief argues that the Second Circuit’s decision is wrong, for several reasons. The court erroneously focused on the effects only on Amex’s business rather than on market-wide harms, which the government clearly established. Moreover, the evidence was sufficient to show “net harm” to Amex cardholders and merchants because Amex did not pass through all (or even most) of its higher merchant fees to cardholders in the form of higher rewards.
More broadly, the brief argues that presence of a two-sided platform does not justify including complementary products in the same relevant market or shifting the burden of proving offsetting benefits to the plaintiffs. The brief argues that feedback effects between two interdependent markets can and should be taken into account under traditional antitrust principles; special rules for interdependent markets are unnecessary.
The brief argues that the Second Circuit’s ruling sets a dangerous precedent because two-sided platforms are increasingly common in the digital era. For example, search engines, social networks, ride sharing, e-commerce, and rental exchanges are all two-sided platforms. Across this broad swath of the economy, the Second Circuit’s special rules would add undue complexity, cost, and uncertainty to already complicated and lengthy litigation under the rule of reason.
The brief points out that accepting the logic of the court of appeals would raise the burden on plaintiffs to show unlawful monopolization by a dominant platform, even when the firm engages in exclusion for the sole purpose of raising prices or deterring innovation. And the logic calls into question whether naked collusion on one side of a two-sided platform would remain per se illegal.
For further information, contact AAI Vice President and General Counsel Richard Brunell at 202-600-9640.
