Source: https://www.law.cornell.edu/supremecourt/text/16-1454
Timestamp: 2018-11-20 07:42:37
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OHIO v. AMERICAN EXPRESS CO. | US Law | LII / Legal Information Institute
OHIO v. AMERICAN EXPRESS CO. ( )
Credit cards have become a primary way that consumers in the United States purchase goods and services. When a cardholder uses a credit card to buy something from a merchant, the transaction is facilitated by a credit-card network. The network provides separate but inter-related services to both cardholders and merchants. For cardholders, the network extends them credit, which allows them to make purchases without cash and to defer payment until later. Cardholders also can receive rewards based on the amount of money they spend, such as airline miles, points for travel, or cash back. For merchants, the network allows them to avoid the cost of processing transactions and offers them quick, guaranteed payment. This saves merchants the trouble and risk of extending credit to customers, and it increases the number and value of sales that they can make.
Two-sided platforms differ from traditional markets in important ways. Most relevant here, two-sided platforms often exhibit what economists call “indirect network effects.” Evans & Schmalensee 667. Indirect network effects exist where the value of the two-sided platform to one group of participants depends on how many members of a different group participate. D. Evans & R. Schmalensee, Matchmakers: The New Economics of Multisided Platforms 25 (2016). In other words, the value of the services that a two-sided platform provides increases as the number of participants on both sides of the platform increases. A credit card, for example, is more valuable to cardholders when more merchants accept it, and is more valuable to merchants when more cardholders use it. See Evans & Noel 686–687; Klein 580, 584. To ensure sufficient participation, two-sided platforms must be sensitive to the prices that they charge each side. See Evans & Schmalensee 675; Evans & Noel 680; Muris, Payment Card Regulation and the (Mis)Application of the Economics of Two-Sided Markets, 2005 Colum. Bus. L. Rev. 515, 532–533 (Muris); Rochet & Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Assn. 990, 1013 (2003). Raising the price on side A risks losing participation on that side, which decreases the value of the platform to side B. If participants on side B leave due to this loss in value, then the platform has even less value to side A—risking a feedback loop of declining demand. See Evans & Schmalensee 675; Evans & Noel 680–681. Two-sided platforms therefore must take these indirect network effects into account before making a change in price on either side. See Evans & Schmalensee 675; Evans & Noel 680–681. 1
Sometimes indirect network effects require two-sided platforms to charge one side much more than the other. See Evans & Schmalensee 667, 675, 681, 690–691; Evans & Noel 668, 691; Klein 585; Filistrucchi 300. For two-sided platforms, “ ‘the [relative] price structure matters, and platforms must design it so as to bring both sides on board.’ ” Evans & Schmalensee 669 (quoting Rochet & Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. Econ. 645, 646 (2006)). The optimal price might require charging the side with more elastic demand a below-cost (or even negative) price. See Muris 519, 550; Klein 579; Evans & Schmalensee 675; Evans & Noel 681. With credit cards, for example, networks often charge cardholders a lower fee than merchants because cardholders are more price sensitive. 2 See Muris 522; Klein 573–574, 585, 595. In fact, the network might well lose money on the cardholder side by offering rewards such as cash back, airline miles, or gift cards. See Klein 587; Evans & Schmalensee 672. The network can do this because increasing the number of cardholders increases the value of accepting the card to merchants and, thus, increases the number of merchants who accept it. Muris 522; Evans & Schmalensee 692. Networks can then charge those merchants a fee for every transaction (typically a percentage of the purchase price). Striking the optimal balance of the prices charged on each side of the platform is essential for two-sided platforms to maximize the value of their services and to compete with their rivals.
Amex, Visa, MasterCard, and Discover are the four dominant participants in the credit-card market. Visa, which is by far the largest, has 45% of the market as measured by transaction volume. 3 Amex and MasterCard trail with 26.4% and 23.3%, respectively, while Discover has just 5.3% of the market.
Visa and MasterCard have significant structural advantages over Amex. Visa and MasterCard began as bank cooperatives and thus almost every bank that offers credit cards is in the Visa or MasterCard network. This makes it very likely that the average consumer carries, and the average merchant accepts, Visa or MasterCard. As a result, the vast majority of Amex cardholders have a Visa or MasterCard, but only a small number of Visa and Master-Card cardholders have an Amex. Indeed, Visa andMasterCard account for more than 432 million cards in circulation in the United States, while Amex has only 53 million. And while 3.4 million merchants at 6.4 million locations accept Amex, nearly three million more locations accept Visa, MasterCard, and Discover. 4
Amex competes with Visa and MasterCard by using a different business model. While Visa and MasterCard earn half of their revenue by collecting interest from their cardholders, Amex does not. Amex instead earns most of its revenue from merchant fees. Amex’s business model thus focuses on cardholder spending rather than card-holder lending. To encourage cardholder spending, Amex provides better rewards than other networks. Due to its superior rewards, Amex tends to attract cardholders who are wealthier and spend more money. Merchants place a higher value on these cardholders, and Amex uses this advantage to recruit merchants.
In October 2010, the United States and several States (collectively, plaintiffs) sued Amex, claiming that its antisteering provisions violate §1 of the Sherman Act, 26Stat. 209, as amended, 15 U. S. C. §1. 5 After a 7-week trial, the District Court agreed that Amex’s antisteering provisions violate §1. United States v. American Express Co., 88 F. Supp. 3d 143, 151–152 (EDNY 2015). It found that the credit-card market should be treated as two separate markets—one for merchants and one for cardholders. See id., at 171–175. Evaluating the effects on the merchant side of the market, the District Court foundthat Amex’s antisteering provisions are anticompetitive because they result in higher merchant fees. See id., at 195–224.
Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspir-acy, in restraint of trade or commerce among the several States.” 15 U. S. C. §1. This Court has long recognized that, “[i]n view of the common law and the law in this country” when the Sherman Act was passed, the phrase “restraint of trade” is best read to mean “undue restraint.” Standard Oil Co. of N. J. v. United States, 221 U. S. 1, 59–60 (1911). This Court’s precedents have thus understood §1 “to outlaw only unreasonable restraints.” State Oil Co. v. Khan, 522 U. S. 3, 10 (1997) (emphasis added).
In this case, both sides correctly acknowledge that Amex’s antisteering provisions are vertical restraints—i.e., restraints “imposed by agreement between firms at different levels of distribution.” Business Electronics, supra, at 730. The parties also correctly acknowledge that, like nearly every other vertical restraint, the anti-steering provisions should be assessed under the rule of reason. See Leegin, supra, at 882; State Oil, supra, at 19; Business Electronics, supra, at 726; Continental T. V., Inc. v. GTE Sylvania Inc., 433 U. S. 36, 57 (1977).
Here, the plaintiffs rely exclusively on direct evidence to prove that Amex’s antisteering provisions have caused anticompetitive effects in the credit-card market. 6 To assess this evidence, we must first define the relevant market. Once defined, it becomes clear that the plaintiffs’ evidence is insufficient to carry their burden.
Because “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law,” Eastman Kodak Co. v. Image Technical Services, Inc., 504 U. S. 451, 466–467 (1992), courts usually cannot properly apply the rule of reason without an accurate definition of the relevant market. 7 “Without a definition of [the] market there is no way to measure [the defendant’s] ability to lessen or destroy competition.” Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U. S. 172, 177 (1965); accord, 2 Kalinowski §24.01[4][a]. Thus, the relevant market is defined as “the area of effective competition.” Ibid. Typically this is the “arena within which significant substitution in consumption or production occurs.” Areeda & Hovenkamp §5.02; accord, 2 Kalinowski §24.02[1]; United States v. Grinnell Corp., 384 U. S. 563, 571 (1966). But courts should “combin[e]” different products or services into “a single market” when “that combination reflects commercial realities.” Id., at 572; see also Brown Shoe Co. v. United States, 370 U. S. 294, 336–337 (1962) (pointing out that “the definition of the relevant market” must “ ‘correspond to the commercial realities’ of the industry”).
But two-sided transaction platforms, like the credit-card market, are different. These platforms facilitate a single, simultaneous transaction between participants. For credit cards, the network can sell its services only if a mer-chant and cardholder both simultaneously choose to usethe network. Thus, whenever a credit-card network sells one transaction’s worth of card-acceptance services to a merchant it also must sell one transaction’s worth of card-payment services to a cardholder. It cannot sell transaction services to either cardholders or merchants individually. See Klein 583 (“Because cardholders and merchants jointly consume a single product, payment card transactions, their consumption of payment card transactions must be directly proportional”). To optimize sales, the network must find the balance of pricing that encourages the greatest number of matches between cardholders and merchants.
Because they cannot make a sale unless both sides of the platform simultaneously agree to use their services, two-sided transaction platforms exhibit more pronounced indirect network effects and interconnected pricing and demand. Transaction platforms are thus better understood as “suppl[ying] only one product”—transactions. Klein 580. In the credit-card market, these transactions “are jointly consumed by a cardholder, who uses the payment card to make a transaction, and a merchant, who accepts the payment card as a method of payment.” Ibid. Tellingly, credit cards determine their market share by measuring the volume of transactions they have sold. 8
Evaluating both sides of a two-sided transaction platform is also necessary to accurately assess competition. Only other two-sided platforms can compete with a two-sided platform for transactions. See Filistrucchi 301. A credit-card company that processed transactions for merchants, but that had no cardholders willing to use its card, could not compete with Amex. See ibid. Only a company that had both cardholders and merchants willing to use its network could sell transactions and compete in the credit-card market. Similarly, if a merchant accepts the four major credit cards, but a cardholder only uses Visa or Amex, only those two cards can compete for the particular transaction. Thus, competition cannot be accurately assessed by looking at only one side of the platform in isolation. 9
In addition, the evidence that does exist cuts against the plaintiffs’ view that Amex’s antisteering provisions are the cause of any increases in merchant fees. Visa and Master-Card’s merchant fees have continued to increase, evenat merchant locations where Amex is not accepted and, thus, Amex’s antisteering provisions do not apply. See 88 F. Supp. 3d, at 222. This suggests that the cause of increased merchant fees is not Amex’s antisteering provisions, but rather increased competition for cardholders and a corresponding marketwide adjustment in the relative price charged to merchants. See Klein 575, 609.
In addition, Amex’s competitors have exploited itshigher merchant fees to their advantage. By charging lower merchant fees, Visa, MasterCard, and Discover have achieved broader merchant acceptance—approximately 3 million more locations than Amex. Id., at 204. This broader merchant acceptance is a major advantage for these networks and a significant challenge for Amex, since consumers prefer cards that will be accepted everywhere. Ibid. And to compete even further with Amex, Visa and MasterCard charge different merchant fees for different types of cards to maintain their comparatively lower merchant fees and broader acceptance. Over the long run, this competition has created a trend of declining merchant fees in the credit-card market. In fact, since the first credit card was introduced in the 1950s, merchant fees—including Amex’s merchant fees—have decreased by more than half. See id., at 202–203; Paying With Plastic 54, 126, 152.
Lastly, there is nothing inherently anticompetitive about Amex’s antisteering provisions. These agreements actually stem negative externalities in the credit-card market and promote interbrand competition. When merchants steer cardholders away from Amex at the point of sale, it undermines the cardholder’s expectation of “welcome acceptance”—the promise of a frictionless transaction. 88 F. Supp. 3d, at 156. A lack of welcome acceptance at one merchant makes a cardholder less likely to use Amex at all other merchants. This externality endangers the viability of the entire Amex network. And it undermines the investments that Amex has made to encourage increased cardholder spending, which discourages investments in rewards and ultimately harms both cardholders and merchants. Cf. Leegin, 551 U. S., at 890–891 (recognizing that vertical restraints can prevent retailers from free riding and thus increase the availability of “tangible or intangible services or promotional efforts” that enhance competition and consumer welfare). Perhaps most importantly, antisteering provisions do not prevent Visa, MasterCard, or Discover from competing against Amex by offering lower merchant fees or promoting their broader merchant acceptance. 10
In sum, the plaintiffs have not satisfied the first step of the rule of reason. They have not carried their burden of proving that Amex’s antisteering provisions have anticompetitive effects. Amex’s business model has spurred robust interbrand competition and has increased the quality and quantity of credit-card transactions. And it is “[t]he promotion of interbrand competition,” after all,that “is . . . ‘the primary purpose of the antitrust laws.’ ” Id., at 890.
“Since the purpose [in a Sherman Act §1 case] of the inquiries into . . . market power is [simply] to determine whether an arrangement has the potential for genuine adverse effects on competition, ‘proof of actual detrimental effects, such as a reduction in output,’ can obviate the need for an inquiry into market power, which is but a ‘surrogate for detrimental effects.’ ”Indiana Federation of Dentists, supra, at 460–461 (quoting 7 P. Areeda, Antitrust Law ¶1511, p. 429 (3d ed. 1986)).
Third, if the defendant successfully bears this burden, the antitrust plaintiff may still carry the day by showing that it is possible to meet the legitimate objective in less restrictive ways, or, perhaps by showing that the legitimate objective does not outweigh the harm that competition will suffer, i.e., that the agreement “on balance” remains unreasonable. 7 Areeda & Hovenkamp ¶1507a,at 442.
Sales of the two basic card services are related. A shopper can pay for a purchase with a particular credit card only if the merchant has signed up for merchant-related card services with the company that issued the credit card that the shopper wishes to use. A firm in the credit-card business is therefore unlikely to make money unless quite a few merchants agree to accept that firm’s card and quite a few shoppers agree to carry and use it. In general, the more merchants that sign up with a particular card company, the more useful that card is likely to prove to shoppers and so the more shoppers will sign up; so too, the more shoppers that carry a particular card, the more useful that card is likely to prove to merchants (as it obviously helps them obtain the shoppers’ business) and so the more merchants will sign up. Moreover, as a rough rule of thumb (and assuming constant charges), the larger the networks of paying merchants and paying shoppers that a card firm maintains, the larger the revenues that the firm will likely receive, since more payments will be processed using its cards. Thus, it is not surprising that a card company may offer shoppers incentives (say, points redeemable for merchandise or travel) for using its cardor that a firm might want merchants to accept its card exclusively.
The District Court also found that, in the absence of the provisions, prices to merchants would likely have been lower. Ibid. It wrote that in the late 1990’s, Discover, one of American Express’ competitors, had tried to develop a business model that involved charging lower prices to merchants than the other companies charged. Id., at 213. Discover then invited each “merchant to save money by shifting volume to Discover,” while simultaneously offering merchants additional discounts “if they would steer customers to Discover.” Ibid. The court determined that these efforts failed because of American Express’ (and the other card companies’) “nondiscrimination provisions.” These provisions, the court found, “denied merchants the ability to express a preference for Discover or to employ any other tool by which they might steer share to Discover’s lower-priced network.” Id., at 214. Because the provisions eliminated any advantage that lower prices might produce, Discover “abandoned its low-price business model” and raised its merchant fees to match those of itscompetitors. Ibid. This series of events, the court concluded was “emblematic of the harm done to the competitive process” by the “nondiscrimination provisions.” Ibid.
Here the District Court found that the challenged provisions have had significant anticompetitive effects. In particular, it found that the provisions have limited or prevented price competition among credit-card firms for the business of merchants. 88 F. Supp. 3d, at 209. That conclusion makes sense: In the provisions, American Express required the merchants to agree not to encourage customers to use American Express’ competitors’ credit cards, even cards from those competitors, such as Discover, that intended to charge the merchants lower prices.See id., at 214. By doing so, American Express has “disrupt[ed] the normal price-setting mechanism” in the market. Id., at 209. As a result of the provisions, the District Court found, American Express was able to raise merchant prices repeatedly without any significant loss of business, because merchants were unable to respond to such price increases by encouraging shoppers to pay with other cards. Id., at 215. The provisions also meant that competitors like Discover had little incentive to lower their merchant prices, because doing so did not lead to any additional market share. Id., at 214. The provisions thereby “suppress[ed] [American Express’] . . . competitors’ incentives to offer lower prices . . . resulting in higher profit-maximizing prices across the network services market.” Id., at 209. Consumers throughout the economy paid higher retail prices as a result, and they were denied the opportunity to accept incentives that merchants might otherwise have offered to use less-expensive cards. Id., at 216, 220. I should think that, considering step 1 alone, there is little more that need be said.
Here, American Express stands accused not of limiting or harming competition for shopper-related card services, but only of merchant-related card services, because the challenged contract provisions appear only in American Express’ contracts with merchants. That is why the District Court was correct in considering, at step 1, simplywhether the agreement had diminished competition in merchant-related services.
One critical point that the majority’s argument ignores is that proof of actual adverse effects on competition is, a fortiori, proof of market power. Without such power, the restraints could not have brought about the anticompetitive effects that the plaintiff proved. See Indiana Federation of Dentists, supra, at 460 (“[T]he purpose of the inquiries into market definition and market power isto determine whether an arrangement has the potentialfor genuine adverse effects on competition” (emphasis added)). The District Court’s findings of actual anticompetitive harm from the nondiscrimination provisions thus showed that, whatever the relevant market might be, American Express had enough power in that market to cause that harm. There is no reason to require a separate showing of market definition and market power under such circumstances. And so the majority’s extensive discussion of market definition is legally unnecessary.
To justify special treatment for “two-sided transaction platforms,” the majority relies on the Court’s decision in United States v. Grinnell Corp., 384 U. S. 563, 571–572 (1966). In Grinnell, the Court treated as a single market several different “central station services,” including burglar alarm services and fire alarm services. Id., at 571. It did so even though, for consumers, “burglar alarm services are not interchangeable with fire alarm services.” Id., at 572. But that is because, for producers, the services were indeed interchangeable: A company that offered one could easily offer the other, because they all involve “a single basic service—the protection of property through use of a central service station.” Ibid. Thus, the “commercial realit[y]” that the Grinnell Court relied on, ibid., was that the services being grouped were what economists call “producer substitutes.” See 2B Areeda & Hovenkamp ¶561, at 378. And the law is clear that “two products produced interchangeably from the same production facilities are presumptively in the same market,” even if they are not “close substitutes for each other on the demand side.” Ibid. That is because a firm that produces one such product can, in response to a price increase in the other, easily shift its production and thereby limit its compet-itor’s power to impose the higher price. See id., ¶561a,at 379.
Unlike the various types of central station services at issue in Grinnell Corp., however, the shopper-related and merchant-related services that American Express provides are not “producer substitutes” any more than they are traditional substitutes. For producers as for consumers, the services are instead complements. Credit card companies must sell them together for them to be useful. As a result, the credit-card companies cannot respond to, say, merchant-related price increases by shifting production away from shopper-related services to merchant-related services. The relevant “commercial realities” in this case are thus completely different from those in Grinnell Corp. (The majority also cites Brown Shoe Co. v. United States, 370 U. S. 294, 336–337 (1962), for this point, but the “commercial realities” considered in that case were that “shoe stores in the outskirts of cities compete effectively with stores in central downtown areas,” and thus arepart of the same market. Id., at 338–339. Here,merchant-related services do not, as I have said, compete with shopper-related services, and so Brown Shoe Co. does not support the majority’s position.) Thus, our precedent provides no support for the majority’s special approachto defining markets involving “two-sided transaction platforms.”
What about the academic articles the majority cites? The first thing to note is that the majority defines “two-sided transaction platforms” much more broadly than the economists do. As the economists who coined the term explain, if a “two-sided market” meant simply that a firm connects two different groups of customers via a platform, then “pretty much any market would be two-sided, since buyers and sellers need to be brought together for markets to exist and gains from trade to be realized.” Rochet & Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. Econ. 645, 646 (2006). The defining feature of a “two-sided market,” according to these economists, is that “the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount.” Id., at 664–665; accord, Filistrucchi 299. That requirement appears nowhere in the majority’s definition. By failing to limit its definition to platforms that economists would recognizeas “two sided” in the relevant respect, the majority carves out a much broader exception to the ordinary antitrust rules than the academic articles it relies on could possibly support.
American Express, pointing to vertical price-fixingcases like our decision in Leegin, argues that comparing competition-related pros and cons is more common than I have just suggested. See 551 U. S., at 889–892. But Leegin held only that vertical price fixing is subject to the “rule of reason” instead of being per se unlawful; the “rule of reason” still applies to vertical agreements just as it applies to horizontal agreements. See id., at 898–899.