Last year’s Antitrust Annual Report described American Express’ sweeping victory over the Department of Justice (DOJ) and 17 state Attorneys General (AGs) in the Second Circuit pertaining to its use of Non-Discrimination Provisions (NDPs) in its merchant contracts – that is, contractual provisions that forbid merchants from trying to influence consumers to use lower cost forms of payment. But the Second Circuit’s decision was not the end of the dispute. The Supreme Court agreed to hear the case – only without the DOJ’s continued participation.

The Winding Road to the Supreme Court

On September 26, 2016, the Second Circuit reversed the district court’s holding in favor of the DOJ and a group of AGs that American Express’ use of NDPs unreasonably restrained trade in the ‘network services market,’ because the NDPs prevented merchants from steering consumer volume to less expensive forms of payment.1 The Second Circuit found several errors in the district court’s decision, all of which, the circuit court said, were the result of the district court’s failure to properly account for the two-sided nature of the credit card industry and the effect of consumer reaction to merchants who would drop out of a credit card network in response to higher prices. To the Second Circuit, this failure caused the district court to make flawed findings with respect to market definition and market power, among other things.

In the wake of the Second Circuit’s reversal, the question facing the DOJ was whether to petition the Supreme Court for certiorari. The dilemma, however, was that the new presidential administration had not nominated, and the Senate had not confirmed, anyone to fill certain key leadership positions within the DOJ. While awaiting action by the President and Senate, the DOJ sought, and the Supreme Court granted, two extensions to its time to file a certiorari petition, first to May 5, 2017, then to June 2, 2017. With the leadership positions still unfilled at the latter of these deadlines, the DOJ opted not to petition the Supreme Court to review the case.

However, a group of 11 AGs did file such a petition.2 The AGs contended that the Supreme Court should use the American Express case as a vehicle to provide guidance to the lower courts on how to properly apply the rule of reason analysis, because “‘nowhere’ is the combination of ‘vague rules’ and ‘high stakes’ ‘more deadly than in antitrust litigation under the rule of reason.’” The AGs illustrated this point by showing that it was only after years of investigation and a seven-week trial that they found out that they had focused on the “wrong market.” Further, the AGs claimed that the Second Circuit’s decision was incorrect, because it conflicted with the Supreme Court’s market definition precedent and improperly shifted the burden to the DOJ and the AGs to affirmatively disprove the existence of pro-competitive benefits (when the burden should have been on American Express to prove the existence of those benefits).

In an unusual move, the DOJ filed a brief opposing the AGs’ certiorari petition.3 While agreeing with the AGs’ legal arguments, the DOJ opposed certiorari because “neither [the Supreme Court] nor any other circuit has squarely considered the application of the antitrust laws to two-sided platforms as such.” Rather than granting certiorari now, the DOJ said that the Court should “await [ ] further percolation in the lower courts before taking up such novel legal issues.”

Nonetheless, over the DOJ’s and American Express’ objections, the Supreme Court granted certiorari.

Supreme Court Briefing

On December 7, 2017, the AGs submitted their opening merits brief to the Supreme Court.4 The AGs made three primary arguments. First, that the NDPs limit interbrand, rather than just intrabrand, competition, so a lower standard of proof should be required than in other vertical restraint cases. Moreover, regardless of whether a lower standard applies, the AGs claimed that the DOJ and the AGs sufficiently showed that the NDPs reduced competition and resulted in higher prices because merchants could not steer consumer volume to lower cost forms of payment.

Second, the AGs claimed that the circuit court erred because requiring the DOJ to show that reduced competition on the merchant side (that potentially led to higher merchant fees) was ‘offset’ by increased competition on the consumer side (in the form of benefits to consumers, such as cardholder rewards) conflicted with Supreme Court precedent. Essentially, the AGs claimed, antitrust law does not allow private companies to choose the dimensions on which they compete and that competition across all dimensions produces optimal results.

Third, the circuit court’s acceptance of American Express’ ‘offset’ argument tainted its product market definition analysis. The AGs argued that the Supreme Court has endorsed a product market definition test that focuses on interchangeability. It was therefore improper, according to the AGs, for the Second Circuit to collapse credit card merchant services and credit card consumer services into a single market because those services are not interchangeable, despite the fact that the pricing of the two services are interdependent.

The DOJ filed a brief in support that largely echoed the AGs’ arguments.5 The DOJ added that it had demonstrated, and the district court made a factual finding, that the NDPs actually caused anti-competitive effects, which obviates the need to define the market. As a result, the DOJ said that the Court need not opine on market definition in this case. The DOJ also argued that the Second Circuit erred by requiring the DOJ to refute the existence and extent of cardholder benefits as part of its prima facie case. While the DOJ conceded that cardholder benefits, and the interdependence of the merchant and cardholder markets, are relevant, the DOJ argued that it is American Express’ burden to establish those benefits, not the DOJ’s burden to refute them at the outset.

On January 26, 2018, American Express filed its opposition brief in which it made two primary arguments for upholding the Second Circuit’s decision.6 First, as a matter of law and economics, a firm without market power cannot unlawfully restrain trade under the rule of reason by using vertical restraints because “curtailing supply unilaterally will simply result in a loss of market share, because other suppliers will fill the gap.” American Express contended that the AGs do not contest the Second Circuit’s holding that American Express does not have market power. Second, American Express argued that the DOJ and the AGs failed to demonstrate harm to competition. During the period in which the NDPs were in effect, “quantity and quality of output in the market for credit card services have increased sharply,” and the AGs’ only argument to the contrary is that prices American Express charged to merchants increased. American Express downplayed these price increases as evidence of anti-competitive effects because “given the… two-sided nature of the market… merchant prices in isolation do not provide an accurate proxy for output.” Instead, American Express insisted that the market can only be properly analyzed by considering the cardholder and merchant sides of the market together. American Express claimed that the AGs one-sided focus and position that the NDPs are illegal because they “restrict ‘the competitive process’” amounted to an inappropriate relaxation of their burden under the rule of reason. American Express concluded that “in the absence of market power, the antitrust laws rely on competition – not court-imposed regulation – to promote consumer welfare.”

Conclusion

The Supreme Court is expected to issue its decision by the end of June 2018. Regardless of which side prevails, the Supreme Court’s decision could provide guidance on how lower courts should apply the rule of reason, and it could have major impacts on how markets are analyzed in antitrust cases going forward, particularly in industries that have interrelated, but distinct, components.