The Antitrust Division of the Department of Justice (the “DOJ”) and seven states filed a civil antitrust suit against three major credit card companies – American Express, MasterCard and Visa – challenging rules that prevent merchants from providing discounts, rewards, and information about credit card costs to consumers at the point of sale. The complaint alleges that these merchant restraints have suppressed competition among credit card companies by prohibiting merchants from offering discounts or other benefits to customers for the use of a particular credit card.  

At the same time, the DOJ announced that it has filed a proposed settlement with Visa and MasterCard that, if approved by the court, would require the two companies to allow merchants to offer discounts, incentives, and information to consumers to encourage the use of payment methods that are less costly to the merchant. The DOJ’s case against American Express will continue.  

Although the credit card industry has a long history of government antitrust enforcement and private antitrust litigation, this lawsuit is the latest example of Antitrust Division Assistant Attorney General Varney’s interest in “explor[ing] vertical theories and other new areas of civil enforcement.”1 It should put all companies on notice that the antitrust authorities will investigate and challenge not only agreements among horizontal competitors, but vertical agreements between producers and distributors, even if the producer has a market share of less than 25% in a concentrated market. In 2009, American Express had a 24% share of the general purpose credit card market, and American Express, MasterCard, and Visa had a combined share of 94%.  

Background

American Express, MasterCard, and Visa each provide network infrastructure to authorize, settle, and clear credit card transactions for millions of merchants across the United States. Every time a consumer uses a credit card to pay for a purchase from a merchant, the merchant must pay a fee to these companies for accepting the credit card and processing the transaction (“merchant fees”). When merchants agree to accept a particular credit card brand, they must abide by that brand’s network rules.  

According to the complaint, American Express, MasterCard, and Visa’s network rules that prohibit merchants from encouraging consumers to use a competing credit card with lower merchant fees have restrained merchants from fostering competition among credit card networks at the point of sale. Specifically, the DOJ alleges that the restraints have limited competition among credit card companies, resulting in higher merchant fees (and thus higher prices to consumers), in violation of Section 1 of the Sherman Act.  

The complaint alleges that these merchant restraints have limited competition in (1) the market for general purpose credit card network services (as distinguished from debit cards, department store cards, prepaid cards, and gift cards); and (2) the market for general purpose credit card network services provided to travel and entertainment merchants (e.g., airlines, hotels, and rental car companies), which the DOJ alleges is a price discrimination market (a market where a seller charges different customers different prices for the same services). The complaint further alleges that Visa, MasterCard, and American Express each possess market power. Among other things, the complaint alleges that high market shares, the ability to price discriminate, high merchant fees, and single-homing by consumers (using only one brand of credit card) are all consistent with market power in highly concentrated markets.  

Absent the challenged merchant restraints, the DOJ alleges, merchants would be free to use various methods, such as discounts, rewards or other incentives, to encourage customers to use credit cards that impose lower acceptance and processing fees on merchants. In order to retain merchants, the credit card networks would respond to merchant preferences by competing more vigorously on fees and services to merchants. The DOJ asserts that the increased competition among credit card networks would lead to lower merchant fees and better service terms. Further, according to the DOJ, because the challenged merchant restraints result in higher costs to merchants, and merchants pass these costs on to consumers, retail prices for goods and services are generally higher for consumers.  

As part of the proposed settlement, MasterCard and Visa entered into a consent decree (which is subject to federal court approval) whereby they are enjoined from adopting, maintaining, or enforcing any rule, or entering into or enforcing any agreement that prevents any merchant from: (1) offering a price discount, rebate, free or discounted product or service, or other benefit to customers for using a particular brand of credit card or particular form of payment (e.g., debit card or personal check); (2) expressing a preference for the use of a particular brand or type of credit card; (3) promoting a particular brand or type of credit card or particular form of payment through posted information; or (4) communicating to consumers the reasonably estimated or actual costs incurred by the merchant when a customer pays with a particular brand or type of credit card.  

Notwithstanding the proposed settlement with MasterCard and Visa, the DOJ will continue its case against American Express, which declined to settle the charges against it.

Implications  

The case should put all companies, particularly those in concentrated industries, on notice that vertical agreements between producers and distributors (as well as horizontal agreements among competitors) are subject to scrutiny by antitrust authorities. This could affect even firms that are not the largest in their market and/or that have relatively small market shares.  

In general, the antitrust authorities would be unlikely to challenge (at least successfully in court) potentially restrictive vertical agreements with distributors or other business partners, including nondiscrimination provisions and most favored nation-type protections, in the absence of market power. Courts have typically declined to find market power where, as in this case, firms have shares as low as 25%. The DOJ’s latest allegations, however, suggest that in concentrated industries, such as credit card network services, a small market share, by itself, will not insulate firms from antitrust scrutiny. Firms with similar shares should take care when imposing vertical restraints on customers and distributors, and should consult counsel to evaluate and consider the potential antitrust risks before entering into such agreements.  

It is unclear, however, whether the DOJ will seek to extend the principles on which the complaint is based beyond the credit card industry. For example, factors such as single-homing by consumers and multi-homing by merchants (accepting more than one brand of credit card), two-sided market externalities (customers value cards that are accepted by many merchants, while merchants value cards that are used by many customers), the credit card companies’ alleged ability to price discriminate, and the highly concentrated nature of the credit card industry may make this case unique.