In United States v. American Express Co., et al., Eastern District of New York Judge Nicholas Garaufis held that, in the absence of further direction from the Supreme Court or the Second Circuit, he would not require a plaintiff to prove that a defendant has market power in order to show that a vertical restraint violates Section 1 of the Sherman Act.1  In the circuit split that currently exists on this issue, Judge Garaufis’ decision further cements Second Circuit courts’ position in favor of not requiring market power in order to establish a Section 1 claim for vertical restraint cases.

Background and Arguments

In 2010, the Department of Justice and attorneys general of seventeen states (collectively, “the plaintiffs”) brought suit against Visa, MasterCard and American Express, challenging their alleged practice of prohibiting merchants from “steering” consumers to use less expensive payment cards.  Visa and MasterCard ultimately settled with the plaintiffs, but American Express did not.

One of American Express’s arguments in support of summary judgment was that the plaintiffs must (and could not) establish that American Express had market power in the relevant market to prove a violation of Section 1 of the Sherman Act.2  American Express based its argument on the Supreme Court’s 2007 decision in Leegin Creative Leather Prods., Inc. v. PSKS, Inc., which reversed 100 years of precedent in holding that vertical minimum resale price restraints were no longer subject to the per se rule of automatic illegality but, rather, were subject to an in-depth competitive effects analysis under the “rule of reason.”3 The plaintiffs opposed summary judgment, arguing, that Leeginprovided alternative ways to prove a Section 1 violation in vertical restraint cases.  According to the plaintiffs, Leegin permitted a plaintiff to demonstrate a Section 1 violation by either (1) proving that the defendant has market power, or (2) proving that the defendant’s challenged behavior had actual detrimental effects on competition.4

District Court’s Holding and Analysis

In its summary judgment ruling, the District Court noted that a split exists among the Circuit Courts on the question of whether market power is a requirement of a Section 1 violation, or merely a means by which a violation could be proven.  Judge Garaufis noted that the Fifth, Seventh, and Eighth Circuits support American Express’ view that a plaintiff must prove market power in order to establish that a defendant’s vertical restraint is unlawful.5  However, Judge Garaufis noted that the Second Circuit has yet to adopt this approach, and has instead held that market power is not a requirement to show a Section 1 violation if a plaintiff can prove actual adverse effect on competition.6  The Fourth and Eleventh Circuits follow similar approaches to the Second Circuit.7

As a result, Judge Garaufis declined to change the law in the Second Circuit and held that the plaintiffs did not have to prove that American Express had market power.8

According to Judge Garaufis, “market power is an alternative method by which a plaintiff may establish a Section 1 violation if [it is] unable to prove that the challenged conduct has an actual adverse effect on competition.”9  Judge Garaufis interpreted Leegin as saying that market power is a significant consideration in a Section 1 rule of reason analysis, but not a requirement to establish violation.10

The plaintiffs argued that they could show that American Express’s alleged “anti-steering” rules had an actual adverse effect on competition, thereby satisfying their burden in a Section 1 claim.11  As evidence of adverse effect on competition, the plaintiffs claimed that American Express charged high merchant fees and that competition would exist among credit cards if the “anti-steering” rules were not in place.12   Additionally, the plaintiffs argued that although they had no such obligation, they could prove that American Express had market power because market share is different from market power.13  The District Court agreed with the plaintiffs’ contention that market share does not equate to market power, and held that summary judgment was inappropriate because the issues of adverse effect on competition and market power were subject to disputes of material fact that should be resolved at trial.14

Because the plaintiffs could sustain the Section 1 claim by showing an adverse effect on competition (rather than market power), and because Judge Garaufis concluded that there were material facts in dispute, summary judgment was denied for American Express.15

Conclusion

The District Court’s decision in this case is notable because it makes clear that Second Circuit law still currently remains that market power is a factor, but not a requirement, to prove an unlawful vertical restraint of trade.  The decision should be good news to plaintiffs litigating in the Second Circuit because it provides them with multiple avenues to prove a Section 1 violation.  Furthermore, Judge Garaufis agreed with the plaintiffs that market power can exist without market share, thereby allowing plaintiffs to bring Section 1 claims against defendants who may not be the largest players in a relevant market, but who nevertheless have power and can adversely affect competition.  This case should be monitored to see if any subsequent appellate proceedings (at the Second Circuit or, possibly, the Supreme Court) result in further clarifications on this important substantive standard for vertical restraint cases.