By Jeremy K. Robinson, CaseyGerry — as Published in the Daily Journal
On Monday, the United States Supreme Court reaffirmed both the critical importance – and difficulty – of defining the product market in antitrust cases. Market definition is often one of the most hotly contested issues in antitrust litigation, with both sides pushing for a definition that compels the parties’ desired outcome.
That struggle played out once again in Ohio v. American Express, the high court’s latest foray into Sherman Act jurisprudence. American Express ultimately prevailed in that case in large part because five justices, led by Justice Clarence Thomas, bought into the credit card giant’s “two-sided transaction” market characterization. Four dissenting justices felt this definition conflated two separate markets, with Justice Stephen Breyer penning their views. The justices split along the now-familiar ideological lines that have characterized many of the court’s more controversial decisions.
First, some background. In the United States, the credit card market is dominated by four players: Visa, Mastercard, American Express, and Discover. Visa is by far the largest participant, comprising about 45% of the market by itself. Mastercard has about 26%, American Express 23%, and Discover 5%. Rather than compete with Visa and Mastercard directly, American Express offers a somewhat different credit card model. Visa and Mastercard make a lot of their income from interest on credit while American Express makes the majority of its money from merchant fees. American Express attracts customers by offering greater rewards for card use than other companies, and pays for those rewards by charging sellers higher transactional fees. Because American Express cardholders are generally affluent, merchants desiring their business will accept American Express despite the inflated fees.
Savvy merchants, however, began suggesting to buyers they prefer Visa and Mastercard over American Express, without expressly saying why. American Express voiced its displeasure with this practice by inserting a clause in its merchant contracts basically telling merchants to knock it off. These “anti-steering” provisions are the subjects of Ohio v. American Express.
The plaintiffs in Ohio v. American Express were the United States and several individual states. They claimed American Express’s “anti-steering” clauses violated § 1 of the Sherman Act because they were an unreasonable restraint on trade. The plaintiffs conceded the clauses were not a per se violation of the Act – a category usually reserved for vertical restraints such as price fixing conspiracies – and instead argued for the “rule of reason” approach.
The rule of reason analysis requires a confusing ping-pong style burden-shifting analysis where the plaintiff must first show the challenged restraints have a substantial anticompetitive effect. If the plaintiff is successful, the burden shifts to the defendant to show a legitimate pro-competitive rationale for the practices. If the defendant succeeds at that, the plaintiff may still overcome that showing by demonstrating less anticompetitive methods to achieve the desired result.
Here, the Supreme Court never got past the first prong thanks to the way it defined the market. Writing for the majority, Justice Thomas adopted the view of the Second Circuit and held that the credit card market is a “two-sided transaction platform.” Meaning, one side cannot function without the other and, from the card issuer’s perspective, any transaction automatically involves a “sale” to both the consumer and the merchant.
This market definition was fatal to the plaintiffs. While they were able to show an anticompetitive effect on the merchant side of the market – in the form of higher fees that many merchants had little choice but to swallow – they could not make the same showing for the consumer side. Indeed, the transaction looks identical to the consumer regardless of which card is used. The plaintiffs had urged the court to find, as the district court had below, they did not need to craft a detailed market definition because they had direct evidence of anticompetitive price hikes, but the high court majority did not see it that way.
With its preferred market definition in hand, the Supreme Court wasted little time in disposing of the plaintiffs’ Sherman Act claims. The court noted, and the plaintiffs basically admitted, that there was no showing of anticompetitive effects on the purchaser side of the market. The court also found noteworthy the fact that the credit card market has grown substantially during the time the anti-steering clauses have been in effect, reading that as a de facto rejection of the anticompetitive claims.
Justice Breyer, writing for the dissent, contended that American Express’s “anti-steering” clauses have a clear disruptive impact on price competition in the credit card market because American Express can raise its fees at will and merchants are prohibited from suggesting customers pay with another card. Thus, Breyer says, competitors have no incentive to offer lower prices to merchants because that won’t increase their market share.
Justice Breyer also disputed the majority’s focus on the consumer side of the transaction, saying simply, “I am not aware of any support for that view in antitrust law.” Pointing to a previous Supreme Court decision holding that classified ad sales to merchants by a newspaper was a distinct market from newspaper sales to the reading public, he contended precedent was just the opposite.
It is not clear how much impact Ohio v. American Express will have outside the credit card field, given the market definition espoused by the court. But, antitrust law is notoriously imprecise, and any Supreme Court case analyzing the Sherman Act is usually mined for every last nugget of information that could add clarity. If nothing else, the holding does suggest a § 1 plaintiff will have to proffer a precise market definition – even in cases where the plaintiff has direct evidence of anticompetitive conduct. And, it probably signals the current court does not favor an expansive view of antitrust jurisprudence.
Jeremy K. Robinson is a partner with San Diego-based Casey Gerry Schenk Francavilla Blatt & Penfield, LLP, and is chair of the firm’s Motion and Appellate Practice.