On June 25, 2018, the Supreme Court held that American Express Co.’s “non-discrimination” rules that prevented merchants from steering customers to other credit card brands do not violate the federal antitrust laws. Fundamental to the Court’s decision was the two-sided nature of credit card markets, and the need to take into account the benefits to consumers on the “other side” of the market from merchants. This decision may have significant consequences for antitrust enforcement in other two-sided markets, notably the health insurance industry, where large providers have sought to restrict insurers from using network design mechanisms to steer patients away from more costly facilities.

Procedural Background

In 2010, the Department of Justice’s (DOJ) Antitrust Division and 17 states sued AmEx, Visa and MasterCard, seeking to eliminate the rules that credit card companies impose on merchants preventing them from steering consumers to use or not use a particular card at the point of sale. Visa and Mastercard settled with the DOJ in 2011, agreeing to change their policies.

Following a seven-week trial, the Eastern District of New York found in 2015 that AmEx’s anti-steering rules violated the antitrust laws. The District Court held that the credit card market should be treated as two separate markets—one in which services are provided to merchants and a separate market in which services are provided to cardholders. The Court found that AmEx’s anti-steering rules restrained competition in the merchant market by reducing the incentives of credit card companies to reduce merchant fees and resulting in higher merchant fees.

The U.S. Court of Appeals, Second Circuit reversed the District Court’s decision in September 2016, holding that the credit card market should be analyzed as a single, two-sided market with services to merchants on one side and services to cardholders on the other. The Second Circuit held that the District Court erred in concluding that AmEx’s anti-steering rules were anticompetitive because it focused only on the impact of the rules on merchant fees, without considering the benefits to cardholders.

Supreme Court Decision

Agreeing with the Second Circuit and referring to extensive economic literature, Justice Thomas, writing for the 5-4 majority, held that the credit card market is a single, two-sided market. The majority reasoned that the products sold by credit card companies such as AmEx are transactions, whereby a sale cannot be made on one side without the making of a sale on the other. In such a market, the impact of restraints on transactions cannot be judged by looking solely at merchants.

The Court explained that two-sided markets may experience indirect network effects where the value to one group of participants depends on how many members of the other group participate. Here, the value of a credit card to cardholders depends on how many merchants accept it, and the value to merchants depends on how many cardholders use it. Therefore, credit card networks must be sensitive to the prices that they charge on each side and must sometimes charge one side more than the other. According to the majority, where (as here) the indirect network effects are strong, courts must consider both sides of the market to determine whether price increases reflect a negative impact on competition and therefore violate the antitrust laws. As a general rule, a price increase on one side of a two-sided market does not necessarily indicate harm to competition without some evidence of an overall cost increase. In the credit card context, the Court held that increased merchant fees alone did not suffice to demonstrate that AmEx’s agreements with merchants negatively impacted competition.

Both sides of a two-sided platform do not always need to be considered. Where the impact of indirect network effects on relative pricing in the market is minor, the market should be treated as two one-sided markets.

For example, Justice Thomas distinguished Supreme Court precedent in the newspaper industry, explaining that newspapers with paid advertising are appropriately treated as involving two one-sided markets. While the market could arguably behave like a two-sided platform because the value of an advertisement increases as the newspaper’s readership increases, the indirect network effects are weak and operate in only one direction, because newspaper readers are largely indifferent to the amount of advertising that a newspaper contains. By contrast, a credit card platform facilitates a single, simultaneous transaction between participants. The market functions only if the merchant and cardholder simultaneously choose to use the network.

The majority held that there was no evidence that AmEx’s anti-steering rules had stifled competition among credit card companies. Instead, the Court found that the credit card market had experienced expanding output and improved quality while AmEx’s rules were in place, and competition from Mastercard, Visa and Discover continued to constrain AmEx’s ability to increase its fees. The Court noted that the anti-steering rules did not prevent other credit card networks from competing by either offering lower merchant fees or promoting their broader merchant acceptance.

The Dissent

Writing for the dissent, Justice Breyer criticized the majority for requiring an analysis of both sides of the market as being contrary to judicial precedent and economic market-definition principles. Justice Breyer viewed the two sides of the market as two separate markets and the products contained within each as complementary. The dissent would have upheld the District Court’s factual findings that the anti-steering provisions suppressed competition. According to Justice Breyer:

  • AmEx’s ability to raise its fees without losing any meaningful market share showed that AmEx had market power;
  • Absent the anti-steering rules, merchant fees would likely have been lower; and
  • There was no offsetting benefit of any kind.

Notwithstanding its finding of market power, the dissent also found that the factual findings on the negative impact on competition serve as proof of market power in and of itself.

Potential Application to Health Insurance Markets

Newspapers and credit cards are not the only industries exhibiting features of two-sided markets. In the wake of the Supreme Court’s decision, lower courts will have to grapple with how to classify the particular market at issue. Where an analysis of both sides of a two-sided market is required, the broad economic assessment of effects significantly increases a plaintiff’s burden. One example of how courts will respond is likely coming up in the healthcare context.

As we reported in July 2016 and April 2017, the DOJ sued Atrium Health (formerly Carolinas Healthcare System), alleging that its anti-steering contract clauses violated the antitrust laws. Insurers offer consumers tiered or narrow networks in exchange for lower premiums and/or copays as a means to incentivize consumers to utilize lower-cost providers. Arguably, these efforts promote competition in hospital markets and may help control healthcare costs. In an attempt to block these efforts, Atrium’s contract terms restricted insurers’ ability to exclude Atrium hospitals from narrow networks or to incentivize patients to use Atrium competitors in tiered networks.

In a supplemental briefing following the Second Circuit’s AmEx opinion, the DOJ argued that the AmEx opinion did not apply to the Atrium case because the DOJ alleged an undisputed one-sided market for the sale of general acute care inpatient hospital services to insurers. In denying the motion to dismiss, the Atrium court did not address these arguments, noting that the Second Circuit decision was not binding on the court, and that the DOJ’s burden at the motion-to-dismiss stage was relatively light.

As the Atrium case moves forward, with trial scheduled for May 2019, we expect to see significantly more discussion of the application of the AmExcase to healthcare markets. AmEx directs that the entire health insurance market—including any procompetitive impacts of Atrium’s anti-steering restrictions on the provision of healthcare services—be part of the mix.

The Supreme Court also emphasized changes in output as a key indicator of anticompetitive effect, rather than simply accepting that price increases were sufficient evidence. This, too, may complicate and expand the evidence that the DOJ will need to bring to bear to prove anticompetitive impact. On the other hand, while sharing some similarities, credit card markets and health insurance markets are not the same: In health insurance, it is the insurer that operates the “platform,” not the hospital seeking to impose restrictions. In addition, health plan members may benefit from insurer incentives to use lower-cost hospitals, such as lower-priced plans, which need to be balanced against any claimed benefits from the hospital’s policies.