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From Antitrust Law Daily, February 26, 2018

High Court grapples with two-sided markets in AmEx case

By Jeffrey May, J.D.

The U.S. Supreme Court was warned today that if it adopts the approach for analyzing vertical restraints involving two-sided markets advocated by state and federal antitrust enforcers then a tsunami of false positives will follow in lower courts. Evan R. Chesler, a partner at Cravath, Swaine & Moore LLP, argued on behalf of American Express (AmEx), as the High Court heard oral argument on an antitrust challenge to AmEx’s so-called anti-steering rules. Based on the questioning, a unanimous decision of the Court is unlikely (Ohio v. American Express Co.Dkt. 16-1454).

State attorneys general successfully petitioned the Court to review the Second Circuit's decision, reversing a February 2015 determination of the federal district court in Brooklyn, New York, in favor of the U.S. Justice Department and a number of states. The court issued an order prohibiting AmEx from enforcing non-discriminatory provisions (NDPs) in contracts with merchants. These NDPs or anti-steering rules prohibit merchants who accept AmEx cards from directing customers to alternative credit card brands. The merchants were not permitted to disclose the fees to consumers.

In 2010, when the government brought the case against AmEx, it made similar allegations against charge card transaction networks MasterCard and Visa. MasterCard and Visa agreed to settle the charges at that time. The government contends that AmEx’s decision to fight the suit continues to prevent competition among the networks.

According to Chesler, the government took the position that an antitrust plaintiff can make out a prima facie rule-of-reason case when the plaintiff fails to prove the price of the product and merely that there’s been an increase to part of that price. It was suggested that the government instead needed to take into account the benefits to consumers from card rewards and not just the impact on merchants from the rule.

"The burden then falls to the defendant to disprove what the plaintiff has failed to prove," Chesler said. "That will create mischief."

Justice Neil M. Gorsuch appeared to support the position of AmEx. He noted that vertical restraints were generally pro-competitive. He pointed to the "long and painful experience with vertical restraints going back to Dr. Miles . . . which took decades to correct." He suggested that in this case there was no evidence of restricted output and questioned whether there was any evidence, on a net basis, that consumers paid more.

Eric E. Murphy, State Solicitor of Ohio, who argued on behalf of the petitioning states, said that the challenged restraint "has the same effects that we would anticipate happening with a horizontal cartel." Murphy argued that consumers have fewer options than they would if these anti-steering rules were not in place.

Justice Sonia Sotomayor seemed to be in agreement. She said that this vertical restraint is stopping horizontal competition.

Justice Elena Kagan also seemed to be skeptical of the anti-steering rules. She suggested that this vertical restraint is different from others, and that it reinforces a market of high cost/high service products and prevents a business strategy based on a low-cost card.

Justice Ruth Bader Ginsburg asked counsel for the petitioning states to comment on the Second Circuit's view that for a credit card transaction both services to merchants and services to cardholders must be considered.

"Competition should decide what is the appropriate ratio between merchant fees and cardholder rewards," Murphy said. He contended that AmEx should not be permitted to insulate its high reward/high cost card from competition from low cost/low reward cards through the anti-steering rules.

U.S. views. The Court also heard from the Justice Department. Deputy Solicitor General Malcolm L. Stewart, arguing in support of the petitioners, said that while it was "entirely legitimate for AmEx to pursue a strategy where it produces higher rewards for cardholders and charges a premium," the Second Circuit erred by holding that the government did not make out a prima facie case.

Noting that the Justice Department had initially considered the case inappropriate for Supreme Court review due to the novelty of the two-sided market issue, Stewart expressed his view that the Court should approach the case with caution. The Court "shouldn't attempt to articulate a sort of unified field theorem that would cover all two-sided markets," he said.

Attorneys: Eric E. Murphy, State Solicitor of Ohio, for Petitioners. Evan R. Chesler (Cravath, Swaine & Moore LLP) for American Express Co. Malcolm L. Stewart, Deputy Solicitor General for Department of Justice.

Companies: American Express Co.

MainStory: TopStory Antitrust

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