A recent US Supreme Court decision is  likely to have an impact on antitrust practice: Ohio v American Express 585 U. S. [to be determined] (2018), available here.

In short, the case is about the correct antitrust treatment of anti-steering provisions introduced by American Express (Amex) into its contracts with merchants. The United States and several States (collectively, the plaintiffs) sued Amex, claiming that its anti-steering provisions violate §1 of the Sherman Act. The District Court agreed, finding that the credit-card market should be treated as two separate markets—one for merchants and one for cardholders—and that Amex’s anti-steering provisions are anticompetitive because they prevent competition in the merchant side of the market and results in higher merchant fees. The Second Circuit reversed; it determined that the credit-card market is a single market, not two separate ones; and that Amex’s anti-steering provisions did not infringe the Sherman Act. You may remember that I reviewed the Circuit court decision almost two years ago, in my email of 30 September 2016.

The case is particularly important because it required the Court to determine how two-sided markets should be defined, and, concomitantly, to provide guidance on how to deal with situations where there is prima facie antitrust harm in one side of the market under the rule of reason. The Supreme Court was divided 5-4, which requires me to devote as much attention to Justice Breyer’s dissent as to Justice Thomas majority opinion. As a result, I’m afraid this will be a long review.

  • The facts of the case were as follows. Amex provides services to two different groups (cardholders and merchants) who depend on the platform to intermediate between them. When a cardholder buys something from a merchant who accepts Amex credit cards, Amex processes the transaction through its network, promptly pays the merchant, and subtracts a fee (the ‘merchant fee’). For cardholders, the network extends them credit, which allows them to make purchases without cash and to defer payment until later. Cardholders also can receive rewards based on the amount of money they spend, such as airline miles, points for travel, or cash back. For merchants, the network allows them to avoid the cost of processing transactions and offers them quick, guaranteed payment. This saves merchants the trouble and risk of extending credit to customers, and it increases the number and value of sales that they can make.

Amex, Visa, MasterCard, and Discover are the four dominant participants in the credit-card market. Visa, which is by far the largest, has 45% of the market as measured by transaction volume. Amex and MasterCard trail with 26.4% and 23.3%, respectively. Visa and MasterCard have significant structural advantages over Amex, in that they began as bank cooperatives. As a result, almost every bank that offers credit cards is in the Visa or MasterCard network. Amex competes with them by using a different business model, which focuses on cardholder spending rather than cardholder lending – as do Visa and MasterCard, which earn half of their revenue by collecting interest from their cardholders. To encourage cardholder spending, Amex provides better rewards than the other credit-card companies. Amex must continually invest in its cardholder rewards program to maintain its cardholders’ loyalty. But to fund those investments, it must charge merchants higher fees than its rivals.

Although this business model has stimulated competitive innovations in the credit-card market, it sometimes causes friction with merchants. To avoid higher fees, merchants sometimes attempt to dissuade cardholders from using Amex cards at the point of sale – a practice known as “steering.”  Amex has introduced anti-steering provisions in its contracts with merchants to combat this since the 1950s. The anti-steering provision prohibits merchants from discouraging customers from using their Amex card after they have already entered the store and are about to buy something, thereby avoiding Amex’s fee. The anti-steering provisions do not, however, prevent merchants from steering customers toward debit cards, checks, or cash.

It was not disputed that Amex’s anti-steering provisions should be judged under the rule of reason using a three-step burden-shifting framework. Under this framework, the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market. If the plaintiff carries its burden, then the burden shifts to the defendant to show a procompetitive rationale for the restraint. If the defendant makes this showing, then the burden shifts back to the plaintiff to demonstrate that the procompetitive efficiencies could be reasonably achieved through less anticompetitive means.

The question before the Supreme Court was whether the plaintiffs had satisfied the first step of the rule of reason – i.e., whether they have proved that Amex’s anti-steering provisions have a substantial anticompetitive effect that harms consumers in the relevant market. This, in turn, hinged on whether the relevant market included only merchants – which had to pay higher fees to American Express as a result of the anti-steering provision – or both merchants and cardholders – with the latter benefitting from additional rewards funded through higher merchant fees. As such, the relevant question before the court was how to correctly define a two-sided market.

  • The majority opinion, written by Justice Thomas and joined by Justices Gorsuch, Alito, Kennedy and Roberts, was that both sides of the two-sided credit-card market – cardholders and merchants – must be considered when defining the market where anticompetitive effects occur.

Credit-card companies bring merchants and cardholders together and, therefore, operate what economists call a “two-sided platform” which offers different products or services to two different groups who both depend on the platform to intermediate between them. Credit-card networks are best understood as supplying only one product – the transaction – that is jointly consumed by a cardholder and a merchant. The key feature of transaction platforms is that they cannot make a sale to one side of the platform without simultaneously making a sale to the other.

The value of the services that a two-sided platform provides will increase in tandem with the number of participants in each side of the platform. A credit card, for example, is more valuable to cardholders when more merchants accept it, and is more valuable to merchants when more cardholders use it.

To ensure sufficient participation, two-sided platforms must be sensitive to the prices that they charge each side, and take indirect network effects into account before making a change in price on either side. Sometimes indirect network effects require two-sided platforms to charge one side much more than the other. With credit cards, for example, networks often charge cardholders a lower fee than to merchants because cardholders are more price-sensitive. In fact, the network might well lose money on the cardholder side by offering rewards such as cash back, airline miles, or gift cards. The network can do this because increasing the number of cardholders increases the value of accepting the card to merchants and, thus, increases the number of merchants who accept it.  In other words, the fact that two-sided platforms charge a price that is below or above cost to one side of the market merely reflects differences in the two sides’ demand elasticity, not market power or anticompetitive pricing. Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services. Accordingly, the two-sided market for credit-card transactions should be analysed as a whole.

Since they cannot make a sale unless both sides of the platform simultaneously agree to use their services, two-sided transaction platforms exhibit more pronounced indirect network effects and interconnected pricing and demand. Transaction platforms such as credit card networks are thus better understood as “suppl[ying] only one product”—transactions. Evaluating both sides of a two-sided transaction platform is necessary to accurately assess competition. Only other two-sided platforms can compete with a two-sided platform for transactions.

It follows that the plaintiffs failed to carry their burden to show anticompetitive effects because their argument—that Amex’s anti-steering provisions increase merchant fees—wrongly focuses on just one side of the market. Evidence of a price increase on one side of a two-sided transaction platform cannot, by itself, demonstrate an anticompetitive exercise of market power. Instead, plaintiffs must prove that Amex’s anti-steering provisions increased the cost of credit-card transactions above a competitive level, reduced the number of credit-card transactions, or otherwise stifled competition in the two-sided credit-card market. They are said to have failed to do so:

  1. As regards an increase in price, the plaintiffs’ case relied exclusively on Amex’s increased merchant fees. But these reflect increases in the value of its services and the cost of its transactions, as they are used to offer its cardholders a more robust rewards program, which is necessary to maintain cardholder loyalty and encourage the level of spending that makes it valuable to merchants. As such, the increase in merchant fees after the inclusion of anti-steering provisions does not in itself reflect an ability to charge above a competitive price.

  2. Evidence that Amex’s merchant-fee increases between 2005 and 2010 were not entirely spent on cardholder rewards does not prove that Amex’s anti-steering provisions gave it the power to charge anticompetitive prices. Anticompetitive prices are those that restrict output. Output of credit-card transactions increased during the relevant period, and the plaintiffs did not show that Amex charged more than its competitors.

  3. Amex’s anti-steering provisions did not stifle competition among credit-card companies. To the contrary, the market has experienced expanding output and improved quality since they were adopted. Competition between credit-card networks with respect to merchant fees has also not been restricted by the anti-steering provisions, with Amex’s competitors having exploited its higher merchant fees to their advantage. Lastly, there is nothing inherently anticompetitive about the anti-steering provision: it actually stems negative externalities in the credit-card market and promotes interbrand competition.

In an important qualification, the majority’s Opinion notes that it is not always necessary to consider both sides of a two-sided platform when defining a market. A market should be treated as one sided when the impacts of indirect network effects and relative pricing in that market are minor. Newspapers that sell advertisements, for example, arguably operate a two-sided platform because the value of an advertisement increases as more people read the newspaper; but each side of the platform would normally still be assessed as different markets. However, this is just not the case as regards credit-card markets.

  • The dissent was written by Justice Breyer and joined by Justices Ginsburg, Kagan and Sottomayor. The thrust of the argument is that: (i) it is clear that the anti-steering provision has prima facie anticompetitive effects. Any pro-competitive effects should not fall to be analysed at the first step of analysis (where the burden of proof falls on the plaintiff) but at a second stage where evidence of an objective justification for a prima facie anticompetitive practice should be adduced by the defendant; (ii) market definition need not take into account the two-sides of the market to identify prima facie anticompetitive effects under the rule-of-reason.

The dissent summarises the district court findings of fact, which all pointed towards the existence of significant anticompetitive effects. These findings are that: (i) the anti-steering provisions limited or prevented price competition among credit-card firms for the business of merchants, and “disrupt[ed] the normal price-setting mechanism” in the market;  (ii) Amex raised the prices it charged merchants on 20 separate occasions since 2005 without fear of large merchants responding to the price increases by encouraging shoppers to use a different credit card because any such steering was contractually precluded – and that such merchants testified they would have engaged in just such steering had they been allowed; (iii) despite the price increases, Amex did not lose the business of any large merchant. Nor did American Express increase benefits (or cut credit-card prices) to Amex cardholders in tandem with the merchant price increases. This was indicative of market power; (iv) in the absence of the anti-steering provisions, prices to merchants would likely have been lower. Consumers throughout the economy paid higher retail prices as a result, and they were denied the opportunity to accept incentives that merchants might otherwise have offered to use less-expensive cards; (v) the District Court added that it found no offsetting procompetitive benefit to shoppers. Indeed, it found no offsetting benefit of any kind.

The dissent considers that, since the District Court found strong direct evidence of anticompetitive effects, a discussion of market definition was legally unnecessary at step 1. This was disputed by the Majority opinion, which held that market definition is necessary because the anti-steering provisions are “vertical restraints” and “[v]ertical restraints often pose no risk to competition unless the entity imposing them has market power, which cannot be evaluated unless the Court first determines the relevant market”. The dissent contests this as it ignores previous case law that proof of actual adverse effects on competition is, a fortiori, proof of market power. Without such power, the restraints could not have brought about the anticompetitive effects that the plaintiff proved.

Going into market definition, the Dissent considers that there is no support in prior case law for looking at the two-sides of the credit-card market at step one of the rule of reason. Instead, in a prior case regarding newspapers and advertising, the Court held that an antitrust court should begin its definition of a relevant market by focusing narrowly on the good or service directly affected by a challenged restraint – in that case, the newspaper’s advertising policy. In any event, the majority’s analysis lacks any explanation as to why, given the purposes that market definition serves in antitrust law, the fact that a credit-card firm can be said to operate a “two-sided transaction platform” means that its merchant-related and shopper-related services should be combined into a single market. After all, normally it would not matter whether a company sells related, or complementary, products, i.e., products which must both be purchased to have any function, such as ignition switches and tires, or cameras and film. It is well established that an antitrust court in such cases looks at the product where the attacked restraint has an anticompetitive effect. The majority disputes this approach by relying on an academic article which devotes one sentence to the question whether two-sided markets can be equated to complements; however, even if complements and platforms are not perfectly comparable, the majority opinion still failed to explain why they are relevant as to substitutability. There is nothing in antitrust law that suggests that a court, when presented with an agreement that restricts competition should abandon traditional market definition approaches and include in the relevant market services that are not substitutes of the restrained good.

As to the economic literature in which the majority opinion relies, it does not support such a wide-reading of platforms. As the economists who coined the term (i.e. Roche and Tirole) explain, if a “two-sided market” meant simply that a firm connects two different groups of customers via a platform, then “pretty much any market would be two-sided, since buyers and sellers need to be brought together for markets to exist and gains from trade to be realized.” The defining feature of a “two-sided market,” according to these economists, is that “the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount.” That requirement appears nowhere in the majority’s definition. By failing to limit its definition to platforms that economists would recognize as “two sided” in the relevant respect, the majority carves out a much broader exception to the ordinary antitrust rules than the academic articles it relies on could possibly support. Even as limited to the narrower definition that economists use, however, the academic articles the majority cites do not support the majority’s flat rule that firms operating “two-sided transaction platforms” should always be treated as part of a single market for all antitrust purposes. Rather, the academics explain that for market-definition purposes, “[i]n some cases, the fact that a business can be thought of as two-sided may be irrelevant” including because “nothing in  the analysis of the practices [at issue] really hinges on the linkages between the demands of participating groups.” Neither the majority nor the academic articles it cites offer any explanation for why the features of a “two-sided transaction platform” justify always treating it as a single antitrust market, rather than accounting for its economic features in other ways.

Lastly, the plaintiffs met their burden of proof of demonstrating anticompetitive effects. As the majority Opinion admits that the plaintiffs “offer[ed] evidence” that Amex “increased the percentage of the purchase price that it charges merchants . . . and that this increase was not entirely spent on cardholder rewards’. Indeed, the plaintiffs did not merely “offer evidence” of this—they persuaded the District Court, which made an unchallenged factual finding that the merchant price increases that resulted from the anti-steering  provisions “were not wholly offset by additional rewards expenditures or otherwise passed through to cardholders, and resulted in a higher net price.”

By defining the market as two-sided, the majority opinion tries to dismiss these conclusions. However, this evidence also shows that the price of credit card transactions”—considering both fees charged to merchants and rewards paid to cardholders—“was higher than the price one would expect to find in a competitive market”. In the face of this problem, the majority retreats to saying that even net price increases do not matter after all, absent a showing of lower output, because if output is increasing, “‘rising prices are equally consistent with growing product demand.’” This argument, unlike the price argument, has nothing to do with the credit-card market being a “two-sided transaction platform’. Furthermore, it is wrong: ‘It is true as an economic matter that a firm exercises market power by restricting output in order to raise prices. But the relevant restriction of output is as compared with a hypothetical world in which the restraint was not present and prices were lower. The fact that credit-card use in general has grown over the last decade, as the majority says (…) says nothing about whether such use would have grown more or less without the non-discrimination provisions. And because the relevant question is a comparison between reality and a hypothetical state of affairs, to require actual proof of reduced output is often to require the impossible—tantamount to saying that the Sherman Act does not apply at all (emphasis added).

In practice, the problem with this is that the Majority lumps together the various steps of the rule of reason. Amex might wish to argue that the anti-steering provisions, while anticompetitive in respect to merchant-related services, nonetheless have an adequate offsetting procompetitive benefit in respect to its cardholder-related services. Such procompetitive justifications should be discussed not at step 1, but at steps 2 and 3 of the “rule of reason” inquiry. This would require Amex to show just how this particular anticompetitive merchant-related agreement has procompetitive benefits in the shopper-related market. In doing so, Amex would need to overcome the District Court’s factual findings that the agreement had no such effects.

Comment: This is a thoughtful, detailed and important decision, even if its importance will undoubtedly depend on how it is construed.

The judgment seems to create a new requirement of defining the market and proving market power at step one of the rule of reason in vertical-restraints cases, even when plaintiffs seek to prove competitive harm by direct evidence. However, it could – and undoubtedly will – be argued that the majority thought that there was no direct evidence of competitive harm given the market definition.

The other main impact of the decision may be as regards the market definition of multi-sided markets. Here, the decision seems to be open to two different readings. There is a narrow reading that requires market definition in platform markets to take into account network effects. According to this reading, this judgment is limited to credit-card markets, where these effects are such as to render necessary taking into account the two-sides of the market. There is also a wider reading that holds that all transaction markets should take both sides of the market into account, and that this could lead to a presumption that such an approach is well-suited to multi-sided markets as long as network effects are shown.

I’m pretty sure we will see a flood of papers and commentaries regarding the impact that this decision will have when dealing with Facebook, Google, Amazon, Uber and the like – and my take, for what is worth, is that it has different implications for different types of platforms.

I must say that I struggled with both the majority and the dissent. I am sympathetic to an approach that takes into account the network effects between both sides of a platform when defining the market, as the majority does, but I would have thought that this would be a fact-based exercise. On that basis, concluding that a ‘transaction platform’ should always be perceived as operating in a single market seems to lack a sound basis in fact and in economics. It also fits oddly with the burden-shifting approach deployed for the rule of reason, as it seems to make it extremely difficult to prove anticompetitive effects in those markets, and to deprive of usefulness the second and third steps – where pro-competitive justifications could be submitted and a balancing exercise should be pursued, respectively. As such, a burden-shifting approach according to which anticompetitive effects on one side of a market would suffice to meet the first limb of the test could be thought to be more appropriate. Evidence of pro-competitive effects on the other side of the market could then be adduced at a second stage.

At the same time, while I sympathised with the Dissent’s focus on actual effects of the sanctioned conduct and with its doubts about whether the academic definitions of ‘platform’ are suitable to be deployed in competition enforcement, I find its assertion that platform markets are like markets for complements a bit odd – it may work as an analogy and there may be similarities between the two, but multi-sided markets are different creatures from markets with complementary products.

I think it is worthwhile to mention that, earlier this month, the UK Court of Appeal issued a judgment regarding the correct treatment of payment card systems which adopts a different approach to both the majority opinion and the dissent (but which is clearly more aligned with the dissent). This decision – and, I think, all previous case law on the topic, which follows EU case law – found that a prima facie restriction could be established by reference to only one (i.e. the merchants’) side of the market.

Still, in a multi-sided market where a restriction affects more than one market, the effects of such a restriction on all such markets must be considered, with pro-competitive effects being assessed under Art. 101(3) TFEU. However, when there are negative effects on consumers in one market, those cannot be balanced against and compensated by positive effects on consumers in another market unless the group of consumers in each market is substantially the same. In other words, demonstrating that overall output increased (i.e. increased card usage) does not suffice. Instead, the card companies had to show that real causal links between a prima facie restriction and demonstrable efficiencies. In this case, it had to be shown that the restrictive conduct either increased card usage or increased the efficiencies of transactions which would have been card transactions anyway. Art. 101(3) is only satisfied if the merchants are no worse off as a consequence of the restriction – i.e. unless they obtain greater benefits than the anti-competitive disadvantage imposed upon them, the conduct will be anticompetitive. In this regard, a failure to demonstrate that an increase in merchant fees has been passed through to cardholders in the form of incentives is fatal to any attempt to demonstrate that advantages to the relevant consumers (in this case, merchants) caused by the restriction outweigh the disadvantages inherent in that restriction.

The different approaches on both side of the Atlantic are obviously related to different legal frameworks. However, they also reflect different baseline assumptions about the threshold for triggering antitrust intervention, about what pro-competitive conduct is, and about how multi-sided markets should be dealt with.

Ultimately, I think dealing with multi-sided markets should require a case-by-case, facts-based analysis. After all, we are still learning how to deal with a number of platform-based business models. As such, I’m sceptical of any over-arching rule being adopted at this point in time.

Furthermore, we need to bear in mind that ‘platform’ is a theoretical construct that may need to be reconceptualised from its economic origins in order to be of use in practical antitrust cases. In itself, classifying a business as a platform does not tell us that much. More important is how a business works and the effects that practices in one side of the market have on the other: a point on which I think both the majority opinion and the dissent would agree. The issue, ultimately, is what role should the concept of ‘platform’ play in the light of the goals and methods of antitrust law. This is akin to problems that arise as regards concepts such as market definition and market power, which importance remains more controversial than we usually think – as this decision makes clear.

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