Wiley Rein LLP founding partner Bert W. Rein analyzes the nature of antitrust law in relationship to two-sided markets following Ohio v. American Express.
It is not often that a reader comes away from a 5–4 Supreme Court decision in a hotly contested antitrust case feeling that both sides missed a critical point. But that is exactly the impression created by June’s decision in Ohio v. American Express. Justice Thomas’ majority opinion affirmed the Second Circuit’s decision that American Express’ (“AmEx”) so-called anti-steering provision that precluded contracting merchants from persuading or incentivizing their customers to use lower cost credit cards to charge their purchases had not been shown to create an unreasonable restraint of trade.
The majority rested its decision on what it deemed to be the “two-sided” market in which American Express’ credit card business competes. By “two-sided” the majority explained that in order to capture a credit card transaction for which it could charge a merchant, AmEx both had to persuade consumers to carry its card and persuade merchants to accept it. These two decisions were mutually reinforcing because the more consumers holding AmEx cards, the greater the incentive for merchants to accept AmEx cards and, vice versa, the more widely merchants accepted AmEx cards, the more appeal they had to consumers.
For this reason, a competitor in this two-sided market like AmEx is forced to consider how to balance incurring the added cost of attracting cardholders by giving cardholders superior services and benefits and the level of transaction fees charged to merchants necessary to support added cardholder benefits. Because AmEx’s balancing increased costs, AmEx transaction fees were higher than those imposed by its competitors and AmEx lagged behind them in merchant acceptance. AmEx was accepted at about only one-half of the locations accepting Visa and Mastercard. Even beyond this disadvantage, AmEx faced the risk that merchants accepting both AmEx and, for example, Visa cards in order to avoid losing customers at the threshold, would then seek to reduce their transaction fees by “steering” customers into using the lower fee Visa card at the time of payment. To avoid this risk, AmEx required merchants to agree to the “no steering” provision at issue in the case.
The majority held that AmEx’s anti-steering effort to sustain its superior benefit/high-transaction fee strategy was not “inherently anticompetitive.” It viewed anti-steering as a legitimate means of avoiding merchant free riding on—or merchant disparagement of—AmEx cards. It found that the anti-steering restriction did not prevent credit card competitors from competing for merchant acceptance, did not foreclose AmEx’s competitors from directly incentivizing consumers to use their cards through their own rewards programs and thus did not stifle vigorous competition between credit card companies for transaction fees. Evidence that the anti-steering provisions raised merchant transaction costs above the level that might prevail were the provision prohibited was insufficient to demonstrate an adverse effect on competition in the two-sided credit card market. In the majority’s view, the overall impact of “anti-steering” taking into account both costs imposed on merchants and benefits available to cardholders in the two-sided market had not been shown to be anticompetitive.
Justice Breyer’s dissenting opinion took issue with both the majority’s two-sided market premise and its antitrust conclusion. The dissenters saw no reason to exempt restraints on one side of a two-sided market from independent antitrust scrutiny because of their potential impact on another area of competition. They analogized the two-sided credit card market to the two-sided competition that takes place in newspaper markets where readership is a major factor in determining advertising rates and the level of advertising rates is a factor in determining how much a publisher can spend on attracting readers with superior editorial content. They pointed out that advertising-related restraints nevertheless had been found unlawful without consideration of their impact on editorial quality. In their view, there is almost always a relationship between higher product or service pricing and a seller’s ability to enhance product quality to justify that higher price. Thus, they rejected any novel two-sided market standard and looked to the anti-steering clause’s effect on what they deemed to be a merchant’s ability to reduce its costs by steering consumers to use lower cost credit sales at the time of purchase.
Looking at anti-steering in isolation, the dissenters also challenged the majority’s conclusion that it was not unreasonably restraining. They argued that the record and District Court findings demonstrated that AmEx’s anti-steering provision had allowed it to raise transaction fees without adversely affecting its share of consumer transactions and without a corresponding increase in consumer benefits. Consequently, they concluded that the anti-steering provision was creating market power and competitive harm and could survive only if AmEx were able to demonstrate that anti-steering yielded procompetitive benefits that AmEx could not provide by use of less anticompetitive measures—a standard, they were quick to note, AmEx was unlikely to meet.
The majority and dissent both focused on two levels of competitive interaction between AmEx and its credit card rivals—persuading consumers to carry a particular card and persuading merchants to accept that card. But neither opinion deals with the peculiar characteristics of how consumers and merchants participate in those interactions. Unlike a typical market choice where selection of one offering precludes another, consumers carrying an AmEx card do not have to forego holding a rival card and merchants accepting AmEx cards are not foreclosed from accepting other cards. Indeed, the anti-steering prohibition at issue has significance because consumers typically carry more than one credit card and merchants allow consumers to use more than one credit card. Thus, it is not surprising that the anti-steering provision’s potentially anti-competitive impact on consumer choices of what cards to carry and merchant choices of what cards to accept was not shown to be substantial. But, the higher transaction fees charged to merchants by AmEx did seem to affect merchants’ willingness to accept the AmEx card because AmEx was accepted at only about half the locations where competing bank cards were accepted. Neither the majority nor the dissent cited record evidence on whether the anti-steering provision, as opposed to the level of transaction fees, had an impact on the number of merchants accepting AmEx cards.
Thus, the majority was clearly right in determining that focusing on the clause’s impact on consumer and merchant acceptance of competing cards, either in isolation or as elements of a two-sided market, would not permit a finding of unlawful restraint. And, the dissent was wrong in arguing that AmEx’s ability to sustain and increase transaction fees paid by merchants established an unreasonable restraint in what it deemed a market for merchant acceptance because rival cards offering lower transaction rates were successfully competing with AmEx in that arena. For merchants, the decision whether to accept AmEx is not a typical buying decision since merchants pay AmEx only when a consumer, not the merchant, chooses to use AmEx rather than a competing card. Thus, Justice Breyer’s analogy between credit card operations and the market for newspaper advertising is inapposite. Unlike advertisers who choose between paying rival media, merchants in the credit card arena only decide whether or not to enable consumers to make a choice between credit cards at the time of purchase.
Rather than attempting to squeeze the anti-steering provision into market models that did not capture commercial reality, both sides might better have focused on the decision point where the anti-steering provision has its intended effect. That decision point arises after both a consumer and merchant have potentially enabled more than one transaction platform and the consumer decides at the point of purchase which one to trigger—i.e., which credit card to present. That consumer decision directly determines merchant costs and credit card issuer revenues.
Credit card companies compete vigorously for consumer use of their cards by offering a variety of services, rewards (including cash back deductions) and credit facilities. AmEx’s anti-steering restriction is intended to eliminate one potential avenue of that competition—inducing merchants to use persuasion or offer money incentives to steer consumers away from AmEx to using cards with lower fees. Thus, the focus of antitrust inquiry should have been whether this foreclosure on one avenue of competition is unreasonable or substantially restrains credit card competition and raises the overall costs of credit card services ultimately borne by consumers.
The critical question is whether permitting merchant steering would force AmEx to reduce its transaction fees as its share of transactions declined and what, if any, impact that reduction would have on benefits to credit card users. If allowing steering reduced merchant transaction costs but correspondingly reduced benefits directly made available to consumers, some transaction costs would be shifted from merchants to consumers. But, absent proof of supra competitive profits in the credit card business, the initial distribution of cost between consumers and merchants would not, in the majority’s view, warrant antitrust intrusion.
The dissent, differing on that point, also points out that merchants subject to anti-steering treat credit card transaction fees as overheads and thus spread them over all customer prices. The result is a subsidy of higher cost-generating AmEx card users by those using lower cost cards. If it were established that, absent the anti-steering provision, merchants would effectively unbundle credit transaction costs and require AmEx users to pay a premium, then the dissenters might have a record base for their conclusion that the clause is an unreasonable restraint on the competitive process and unlawful under Sherman Act § 1.
What the unsatisfying analyses of both majority and dissent seem to mask is a fundamental clash of principle about the need for judicial intervention in economic markets. The majority, composed of justices viewed as conservative, seems loathe to regulate specific commercial practices in markets that appear to be adequately competitive overall. It is inclined to require competitors to find their own responses to unilateral restrictions as competing credit card companies seem to have done. The dissent, composed of justices viewed as liberal, is prepared to use the antitrust laws to push toward what it considers an enhanced competitive process and prohibit practices that diminish price/cost transparency, foster potential cross-subsidization, or are otherwise market-distorting. With the conservative majority now likely to extend for a considerable period, the decision in Ohio v. American Express seems to signal a period of more restrained application of the antitrust laws to commercial practices.
Bert W. Rein, a founding partner of Wiley Rein LLP, is widely recognized as a leading antitrust and commercial litigator and international law expert. He has been on the forefront of constitutional litigation involving the First Amendment and free commercial speech, as well as preemption challenges to regulatory initiatives and tort law expansions.