In United States v. American Express Company, the United States and seventeen states brought antitrust claims against credit-card networks, including Visa, MasterCard, and American Express. Plaintiffs challenged the credit-card networks’ use of “Non- Discrimination Provisions” (NDPs) that prohibit merchants from “steering” cardholders at the point of sale to a less expensive or otherwise merchant-preferred form of payment. Plaintiffs alleged that the NDPs constituted an unreasonable restraint of trade in violation of section 1 of the Sherman Act, because the NDPs supposedly suppressed competition among rival credit-card networks by removing their incentives to reduce merchant discounts. Visa and MasterCard each entered into a consent decree with Plaintiffs, pledging to eliminate NDPs from their agreements with merchants, but American Express proceeded to trial.
The District Court found that American Express’s use of NDPs violated section 1, and it permanently enjoined American Express from enforcing the NDPs. The Second Circuit reversed with instructions that judgment be entered for American Express. The Second Circuit found that the District Court’s “erroneous market definition” led to the incorrect conclusion that the NDPs had an anticompetitive effect on the relevant market.
The United States and six of the seventeen plaintiff states are no longer parties. Petitioners consist of the eleven remaining plaintiff states. For the reasons explained in this brief, this Court should reject Petitioners’ arguments, affirm the Second Circuit’s decision, and endorse its reasoning.
Under the rule of reason, did Petitioners’ purported showing that American Express’s anti-steering provisions stifled just one of several forms of competition on the merchant side of the credit-card platform, without consideration of enhanced competition on the consumer side of the two-sided market, suffice to prove anticompetitive effects in a valid relevant market and thereby shift to American Express the burden of establishing any procompetitive benefits from the provisions? Economic analysis confirms that the Second Circuit correctly answered, “No.” The principal issue before this Court—the one that separates the Second Circuit and District Court decisions—is whether challenged conduct in a two-sided market can properly be assessed ignoring its impacts on both sides of the market and ignoring the interactions of those impacts on one another.
NDPs enable networks to compete vigorously for cardholders with rewards and benefits that can be funded only with merchant fees. Although NDPs might stifle one form of competitive pressure on the networks due to their repression of steering, they stimulate more competitive pressure on the networks to persuade merchants to accept their cards with the balance of their fees, services, and the customers they attract. The NDPs allow two-sided market participants to compete for both merchant acceptance and cardholders with two-sided product differentiation—higher or lower merchant fees, corresponding higher or lower cardholder benefits, and corresponding bigger-spending or smaller-spending total customers for the merchants. Without NDPs, individual merchants would be motivated to steer customers to the network with the lowest merchant fees, thereby disabling the two-sided product differentiation.
In the two-sided market, a credit-card network should be permitted under the antitrust laws to compete with a strategy that needs to restrict a merchant that accepts the card from discriminating against its use at the point of sale. To conclude otherwise, as Petitioners urge, would suppress product differentiation in this two-sided market. It would compel a would-be differentiated competitor to mimic the strategies of its rivals. And, by making rival credit-card networks more homogeneous in their service offerings, Petitioners’ proposed interpretation of antitrust law would make the market for credit-card networks more vulnerable to collusion. Those perverse results would harm consumers in the name of advancing Petitioners’ claim that they are supposedly protecting consumers.
This Court should affirm the Second Circuit’s decision and endorse its reasoning. Doing so would recognize the economic and commercial realities of competition in the two-sided market for credit-card networks and better serve this Court’s rationale for having the rule of reason than would this Court’s adoption of Petitioners’ incorrect reasoning.