Ohio v. American Express: Should Tech Giants Thank Amex?

Sunday, October 7th, 2018 at 12:39 pm by Joyce Jung Min Yeo

On June 25, 2018, the U.S. Supreme Court held that American Express’ anti-steering provisions do not violate the Sherman Act. In a 5-4 decision, the Court characterized the credit card market as a two-sided transaction platform, in which the credit card companies provide services to two distinct but interrelated markets: cardholders and merchants. Consequently, the plaintiffs bore the burden to prove the anticompetitive effects from both the merchants’ and the cardholders’ side before considering the procompetitive effects. While the antitrust laws are meant to promote free and fair competition that would benefit consumers through “lower prices, better quality and greater choice,” it is questionable whether the extra burden put on the plaintiffs to prove the anticompetitive effects on both sides of the market would help further such fundamental goals of antitrust. In fact, this case may create loopholes for large technology companies with two-sided platforms to abuse their market power at the expense of fair competition.

American Express (hereafter “Amex”) operates as a two-sided transaction platform, where a sale cannot be made “to one side of the platform without simultaneously making a sale to the other.”[1] In this light, Amex supplies a single product – credit card transaction – that is “jointly consumed by a cardholder and a merchant,” rather than two distinct services.[2]

To compete with Visa and MasterCard’s structural advantage of high transaction volume and broader merchant acceptance, Amex developed a different business model. Focusing on spending volume, Amex charges higher merchant fees to provide better rewards for the cardholders.

For Amex’s spend-centric business model to work, Amex employs anti-steering provisions in which merchants agree to refrain from “steering” customers to use a different brand with lower merchant fees. Visa and MasterCard also used such anti-steering provisions in the past, but when the Department of Justice, joined by attorneys general of 18 states, filed a suit against the major credit card networks (Visa, MasterCard, and Amex) in 2010, Visa and MasterCard quickly settled and removed the provisions. Given the significance of the provision to its business model, Amex chose to continue to trial on the alleged violations.

SCOTUS Opinion

The issue presented to the Court was whether Amex’s anti-steering provision violates the Sherman Act. In determining whether a provision violates federal antitrust law, Courts have asked whether the provision in question unreasonably restrains trade. An unreasonable restraint can either be unreasonable per se or unreasonable as judged under the “rule of reason.”

If the restraint is found to be unreasonable as judged under the “rule of reason,” then a three-part burden shifting framework is employed. Applying the burden-shifting framework, plaintiff initially bears the burden to prove the anticompetitive effect of the restraint in the relevant market. Once the plaintiff meets that burden, the defendant then must demonstrate whether there is adequate procompetitive effect or rationale to offset the restraint. Finally, the burden shifts back to the plaintiff to identify a reasonable alternative that is less anticompetitive while still achieving procompetitive efficiencies. However, it is very difficult in practice, if not impossible, for the defendant to prove such offsetting procompetitive effect. Consequently, most disputes, including this case, center around whether the plaintiff has met the initial burden of proving anticompetitive effects.

Both parties agreed that the anti-steering provision is a vertical restraint subject to analysis under the “rule of reason.” Reaffirming the lower court’s decision, the Supreme Court held that the plaintiffs failed to meet the initial burden, and thus the anti-steering provision does not violate the Sherman Act.

Two-sided Markets

Not all two-sided markets require the examination of both sides of a platform. For instance, when the indirect network effect is minor or when the effect only operates in one direction (i.e. newspapers: the value of the newspaper for the readers does not increase as the number of advertisements increase, whereas the value for the advertisers increases as the number of readers increase), it is not necessary to examine both sides when weighing competitive effects in an antitrust context.

However, there is no clear guideline that distinguishes the two-sided markets that are subject to examination of anticompetitive effects on both sides from those that are exempt from such requirements. Although the Supreme Court held that the credit card market deserves to be analyzed as a whole instead of two distinct services, the Court noted that it might be unnecessary to lump both sides depending on the gravity and the direction of the indirect network effect.[3] Such fuzzy standard seems to be an invitation to open the floodgate of litigations on clarifying the requirements.

Other Two-Sided Transaction Platforms

The majority decision in this case will likely have far reaching consequences when it is applied to other two-sided transaction platforms in the technology industry. For instance, Facebook and Google can argue that they are also two-sided transaction platforms subject to the holding of this case, since it serves two interrelated markets—users and advertisers. However, one may distinguish Facebook and Google from the credit card industry in that they lack the one-to-one direct relationship between the parties and the simultaneous nature of the transaction.

Other examples that may be subject to the holding of this case are e-commerce businesses like Amazon and ride-sharing apps like Uber. Amazon and Uber have stronger arguments than Facebook and Google, since they directly and simultaneously connect either the buyers and the sellers or the riders and the drivers. In fact, Makan Delrahim, the U.S. Assistant Attorney General for the Antitrust Division, noted that “to the extent that [Amazon] creates that transaction and you bring in third party sellers and buyers, [Amazon] could benefit from [the ruling].

Proving Harm on the Consumer’s Side

Little attention is given in the case to consumer harm in such two-sided markets. Although it would be very difficult, it is not impossible to prove the anticompetitive effects of the anti-steering provisions on the cardholders’ side. If the plaintiff could prove that the merchants built in the highest merchant fees, which is very likely to be Amex’s, to the price of their goods across the board, consumers without Amex are effectively hurt by the anti-steering provision. Moreover, those without Amex do not enjoy the perks and rewards of using Amex that it would have been very difficult for Amex to prove the procompetitive effects if the case proceeded to the second step of the burden-shifting framework.

Next steps?

The case leaves us with a fuzzy standard and a lot of questions unanswered. Moving forward, the district courts may opt to limit the holding to the credit card industry or they may apply it to various forms of two-sided platforms like the ones mentioned above. In any case, it would be interesting to see how antitrust case law develop in today’s digital era.

[1] Ohio v. American Express, 558 U.S. _____ (2018), slip op. at 2.

[2] Id., syllabus at 2.

[3] Id., slip op. at 12.

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