Filed: Sep. 26, 2016
Latest Update: Mar. 03, 2020
Summary: 15-1672 United States v. American Express Company UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT _ August Term, 2015 (Argued: December 17, 2015 Decided: September 26, 2016) Docket No. 15-1672 _ UNITED STATES OF AMERICA, STATE OF MARYLAND, STATE OF MISSOURI, STATE OF VERMONT, STATE OF UTAH, STATE OF ARIZONA, STATE OF NEW HAMPSHIRE, STATE OF CONNECTICUT, STATE OF IOWA, STATE OF MICHIGAN, STATE OF OHIO, STATE OF TEXAS, STATE OF ILLINOIS, STATE OF TENNESSEE, STATE OF MONTANA, STATE OF NEBRASK
Summary: 15-1672 United States v. American Express Company UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT _ August Term, 2015 (Argued: December 17, 2015 Decided: September 26, 2016) Docket No. 15-1672 _ UNITED STATES OF AMERICA, STATE OF MARYLAND, STATE OF MISSOURI, STATE OF VERMONT, STATE OF UTAH, STATE OF ARIZONA, STATE OF NEW HAMPSHIRE, STATE OF CONNECTICUT, STATE OF IOWA, STATE OF MICHIGAN, STATE OF OHIO, STATE OF TEXAS, STATE OF ILLINOIS, STATE OF TENNESSEE, STATE OF MONTANA, STATE OF NEBRASKA..
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15‐1672
United States v. American Express Company
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
______________
August Term, 2015
(Argued: December 17, 2015 Decided: September 26, 2016)
Docket No. 15‐1672
____________
UNITED STATES OF AMERICA, STATE OF MARYLAND, STATE OF
MISSOURI, STATE OF VERMONT, STATE OF UTAH, STATE OF ARIZONA,
STATE OF NEW HAMPSHIRE, STATE OF CONNECTICUT, STATE OF
IOWA, STATE OF MICHIGAN, STATE OF OHIO, STATE OF TEXAS, STATE
OF ILLINOIS, STATE OF TENNESSEE, STATE OF MONTANA, STATE OF
NEBRASKA, STATE OF IDAHO, STATE OF RHODE ISLAND,
Plaintiffs‐Appellees,
STATE OF HAWAII,
Plaintiff,
‐v.‐
AMERICAN EXPRESS COMPANY, AMERICAN EXPRESS TRAVEL RELATED
SERVICES COMPANY, INC.,
Defendants‐Appellants,
MASTERCARD INTERNATIONAL INCORPORATED, VISA INC.,
Defendants,
CVS HEALTH, INC., MEIJER, INC., PUBLIX SUPER MARKETS, INC.,
RALEY’S, SUPERVALU, INC., AHOLD U.S.A., INC., ALBERTSONS LLC,
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., H.E. BUTT
GROCERY CO., HYVEE, INC., THE KROGER CO., SAFEWAY INC.,
WALGREEN CO., RITE‐AID CORP., BI‐LO LLC, HOME DEPOT USA, INC.,
7‐ELEVEN, INC., ACADEMY, LTD., DBA ACADEMY SPORTS +
OUTDOORS, ALIMENTATION COUCHE‐TARD INC., AMAZON.COM, INC.,
AMERICAN EAGLE OUTFITTERS, INC., ASHLEY FURNITURE
INDUSTRIES INC., BARNES & NOBLE, INC., BARNES & NOBLE
COLLEGE BOOKSELLERS, LLC, BEALL’S, INC., BEST BUY CO., INC.,
BOSCOVS, INC., BROOKSHIRE GROCERY COMPANY, BUC‐EE’S LTD,
THE BUCKLE, INC., THE CHILDRENS PLACE RETAIL STORES, INC.,
COBORNS INCORPORATED, CRACKER BARREL OLD COUNTRY STORE,
INC., D’AGOSTINO SUPERMARKETS, INC., DAVIDS BRIDAL, INC., DBD,
INC., DAVIDS BRIDAL CANADA INC., DILLARD’S, INC., DRURY HOTELS
COMPANY, LLC, EXPRESS LLC, FLEET AND FARM OF GREEN BAY,
FLEET WHOLESALE SUPPLY CO. INC., FOOT LOCKER, INC., THE GAP,
INC., HMSHOST CORPORATION, IKEA NORTH AMERICA SERVICES,
LLC, KWIK TRIP, INC., LOWE’S COMPANIES, INC., MARATHON
PETROLEUM COMPANY LP, MARTIN’S SUPER MARKETS, INC.,
MICHAELS STORES, INC., MILLS E‐COMMERCE ENTERPRISES, INC.,
MILLS FLEET FARM, INC., MILLS MOTOR, INC., MILLS AUTO
ENTERPRISES, INC., WILLMAR MOTORS, LLC, MILLS AUTO
ENTERPRISES, INC., MILLS AUTO CENTER, INC., BRAINERD LIVELY
AUTO, LLC, FLEET AND FARM OF MENOMONIE, INC., FLEET AND
FARM OF MANITOWOC, INC., FLEET AND FARM OF PLYMOUTH, INC.,
FLEET AND FARM SUPPLY CO. OF WEST BEND, INC., FLEET AND FARM
OF WAUPACA, INC., FLEET WHOLESALE SUPPLY OF FERGUS FALLS,
INC., FLEET AND FARM OF ALEXANDRIA, INC., NATIONAL
ASSOCIATION OF CONVENIENCE STORES, NATIONAL GROCERS
ASSOCIATION, NATIONAL RESTAURANT ASSOCIATION, OFFICIAL
PAYMENTS CORPORATION, PACIFIC SUNWEAR OF CALIFORNIA, INC.,
P.C. RICHARD & SON, INC., PANDA RESTAURANT GROUP, INC.,
PETSMART, INC., RACETRAC PETROLEUM, INC., RECREATIONAL
EQUIPMENT, INC., REPUBLIC SERVICES, INC., RETAIL INDUSTRY
LEADERS ASSOCIATION, SEARS HOLDINGS CORPORATION,
2
SPEEDWAY LLC, STEIN MART, INC., SWAROVSKI U.S. HOLDING
LIMITED, WAL‐MART STORES INC., WHOLE FOODS MARKET GROUP,
INC., WHOLE FOODS MARKET CALIFORNIA, INC., MRS. GOOCH’S
NATURAL FOOD MARKETS, INC., WHOLE FOOD COMPANY, WHOLE
FOODS MARKET PACIFIC NORTHWEST, INC., WFM‐WO, INC., WFM
NORTHERN NEVADA, INC., WFM HAWAII, INC., WFM SOUTHERN
NEVADA, INC., WHOLE FOODS MARKET, ROCKY MOUNTAIN/
SOUTHWEST, L.P., THE WILLIAM CARTER COMPANY, YUM! BRANDS,
INC., SOUTHWEST AIRLINES CO.
Movants.
______________
Before:
WINTER, WESLEY, and DRONEY, Circuit Judges.
______________
Appeal from a decision of the United States District Court for the Eastern
District of New York (Garaufis, J.) dated February 19, 2015, finding that
American Express (“Amex”) unreasonably restrained trade by entering into
agreements containing nondiscriminatory provisions (“NDPs”) barring
merchants from (1) offering cardholders any discounts or nonmonetary
incentives to use cards that are less costly for merchants to accept, (2) expressing
preferences for any card, or (3) disclosing information about the costs to
merchants of different cards. The District Court held Amex liable for violating
§ 1 of the Sherman Act, 15 U.S.C. § 1, and enjoined Amex from enforcing its
NDPs. We find that without evidence of the NDPs’ net effect on both merchants
and cardholders, the District Court could not have properly concluded that the
NDPs unreasonably restrain trade in violation of § 1. We therefore REVERSE.
EVAN R. CHESLER, Cravath, Swaine & Moore LLP, New
York, NY (Peter T. Barbur, Kevin J. Orsini, Cravath,
Swaine & Moore LLP; Donald L. Flexner, Philip C.
Korologos, Eric J. Brenner, Boies, Schiller & Flexner
3
LLP, on the brief), for Defendants‐Appellants American
Express Company and American Express Travel Related
Services Company, Inc.
NICKOLAI G. LEVIN, Attorney, U.S. Department of Justice,
Antitrust Division, Washington, D.C. (Sonia K.
Pffaffenroth, Deputy Assistant Attorney General, Craig
W. Conrath, Mark H. Hamer, Andrew J. Ewalt, Kristen
C. Limarzi, Robert B. Nicholson, James J. Fredricks,
Daniel E. Haar, Attorneys, U.S. Department of Justice,
Antitrust Division; Mike DeWine, Ohio Attorney
General, Mitchell L. Gentile, Assistant Ohio Attorney
General, on the brief), for Plaintiffs‐Appellees the United
States, et al.
______________
WESLEY, Circuit Judge:
Defendants‐Appellants American Express Company and American
Express Travel Related Services Company, Inc. (collectively, “American Express”
or “Amex”) appeal from a decision of the United States District Court for the
Eastern District of New York (Garaufis, J.) dated February 19, 2015, finding that
Amex unreasonably restrained trade in violation of § 1 of the Sherman Act, 15
U.S.C. § 1, by entering into agreements containing nondiscriminatory provisions
(“NDPs”) barring merchants from (1) offering customers any discounts or
nonmonetary incentives to use credit cards less costly for merchants to accept, (2)
expressing preferences for any card, or (3) disclosing information about the costs
4
of different cards to merchants who accept them. See United States v. Am. Express
Co., 88 F. Supp. 3d 143 (E.D.N.Y. 2015). In addition to holding Amex liable for
violating § 1, the District Court permanently enjoined Amex from enforcing its
NDPs. See Order Entering Permanent Injunction as to the American Express
Defs., United States v. Am. Express Co., No. 10‐cv‐4496 (NGG)(RER), 2015 WL
1966362 (E.D.N.Y. Apr. 30, 2015), ECF No. 683.
For the reasons that follow, we REVERSE and REMAND with instructions
to enter judgment in favor of Amex.
I. BACKGROUND
A. Credit‐Card Industry–A General Overview
Since its inception in the 1950s, the credit‐card industry has generated
untold efficiencies to travel, retail sales, and the purchase of goods and services
by millions of United States consumers.1 Every card transaction necessarily
involves a multitude of economic acts and actors. The end users—the cardholder
and a merchant—rely on those acts and actors to provide essential,
1 This opinion pertains exclusively to credit cards. Though Amex argued before the
District Court that the relevant market should include debit cards and other alternative
payment types as well as a proposed submarket comprising payment‐card services
provided to travel and entertainment (“T & E”) merchants, Amex has abandoned this
argument on appeal.
5
interdependent services. Take, for example, a cardholder who pulls into a gas
station to refuel her car. The cardholder takes out her credit card—for which she
pays an annual fee while also receiving frequent flyer miles on her favorite
airline for every dollar spent—inserts the card into the credit‐card slot on the gas
pump, and fills her tank with gas. Her credit card is immediately charged for the
transaction, and the station owner receives payment quickly—minus a fee.
The simple transaction of gassing up a car by use of a credit card is
enabled by a complex industry involving various commercial structures
performing various essential functions. Responsibility for issuing cards and
paying retailers for sales using them, extending credit to the cardholders, and
collecting amounts due from them can be vested in one firm or in a multiplicity
of firms engaged in a division of specified functions and connected in a network
by contractual arrangements.
Retailers will not accept credit‐card purchases without a guarantee of
quick reimbursement. Returning to the customer at the gas pump, it would limit
credit‐card use if the gas station had to have a reimbursement contract with the
particular entity that issued the card to the car owner. The establishment of an
umbrella network of individual firms–usually banks–that both issue cards and
6
contract with merchants allows the gas buyer to have a card issued by Bank A,
while the gas station has a reimbursement contract with Bank B. Bank A and
Bank B in turn have an arrangement in which Bank A reimburses Bank B for the
purchase of gas and bills the consumer. In the lingo of the industry, Bank A is
the issuer and Bank B is the acquirer.2 Typically, banks in the network both issue
and acquire, and consumers need only find a retailer that accepts a card owned
by the consumer and not worry about whether the retailer deals with the card
issuer.
From the cardholders’ perspective, many cardholders may find
convenience in carrying and using more than one card. Cards come with
varying fees and offer benefits with different values to different consumers.
Some cards offer airline miles, others points towards hotel stays or cash back
rewards while others offer both rewards benefits and enhanced security.
The benefits of a particular card to a consumer are also largely affected by
its acceptability among those who sell goods or services to consumers.
Widespread acceptance of a card among sellers in turn depends heavily upon
widespread acceptance among the consumers targeted by each seller. Retail
2 Almost all credit‐card companies employ umbrella networks. As the reader will soon
see, Amex is the exception.
7
sellers get the benefits not only of increased trade because of consumer
convenience, but also of not having to choose between limited cash‐only sales
and extending credit to consumers. Extensions of credit are administratively
costly and commercially risky. However, sellers must cover some of the costs of
a credit card’s attracting customers, including efforts to build the prestige
attached to certain cards, carrying out all the tasks of extending credit, and
bearing responsibility for the risks of extending credit to individual consumers.
In the end, both the credit‐card industry and those who sell goods and
services target the same group of consumers, albeit in the guise, respectively, of
cardholders and purchasers of goods and services.
B. The “Two‐Sided Market”
The functions provided by the credit‐card industry are highly
interdependent and, at the cardholder/merchant‐acceptance level, result in what
has been called a “two‐sided market.”3 The cardholder and the merchant both
3 See Lapo Filistrucchi et al., Market Definition in Two‐Sided Markets: Theory and Practice 5
(Tilburg Law School Legal Studies Research Paper Series No. 09/2013), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2240850 (hereinafter Filistrucchi et
al. (2013)); David S. Evans, The Antitrust Economics of Multi‐Sided Platform Markets, 20
YALE J. ON REG. 325, 328 (2003). Two‐sided markets were first clearly identified in the
early 2000s by economists Jean‐Charles Rochet and Jean Tirole, a 2014 Nobel laureate.
Rochet and Tirole formally defined the concept as follows:
8
depend upon widespread acceptance of a card.4 That is, cardholders benefit
from holding a card only if that card is accepted by a wide range of merchants,
and merchants benefit from accepting a card only if a sufficient number of
cardholders use it.5
The interdependency that causes price changes on one side can result in
demand changes on the other side.6 If a merchant finds that a network’s fees to
accept a particular card exceed the benefit that the merchant gains by accepting
that card, then the merchant likely will choose not to accept the card. On the
other side, if a cardholder finds that too few merchants accept a particular card,
[A] market is two‐sided if 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; in other words, the price
structure matters, and platforms must design it so as to bring both sides
on board.
Jean‐Charles Rochet & Jean Tirole, Two‐Sided Markets: A Progress Report, 37 RAND J.
ECON. 645, 664–65 (2006).
4 See Jean‐Charles Rochet & Jean Tirole, An Economic Analysis of the Determination of
Interchange Fees in Payment Card Systems, 2 REV. NETWORK ECON. 69, 71 (2003), available at
https://www.researchgate.net/publication/24049673_An_Economic_Analysis_of_the_De
termination_of_Interchange_Fees_in_Payment_Card_Systems.
5 See id. at 72; see also Benjamin Klein et al., Competition in Two‐Sided Markets: The
Antitrust Economics of Payment Card Interchange Fees, 73 ANTITRUST L.J. 571, 580 (2006)
(hereinafter Klein et al. (2006)) (“[T]he value of a payment system to consumers
increases with the number of merchants that accept the card and the value of a payment
system to merchants increases with consumer use of the card.”).
6 See David S. Evans & Michael Noel, Defining Antitrust Markets When Firms Operate Two‐
Sided Platforms, 2005 COLUM. BUS. L. REV. 667, 695 (2005).
9
then the cardholder likely will not want to use that card in the first place.
Accordingly, in order to succeed, a credit‐card network must “find an effective
method for balancing the prices on the two sides of the market.”7 This can be a
difficult task since cardholders’ and merchants’ respective interests are often in
tension: merchants prefer lower network fees, but cardholders desire better
services, benefits, and rewards that are ultimately funded by those fees.
To balance the two sides of its platform, a two‐sided market typically
charges different prices that reflect the unique demands of the consumers on
each side.8 Within the credit‐card industry, cardholders are generally less willing
to pay to use a certain card than merchants are to accept that same card, and thus
a network may charge its cardholders a lower fee than it charges merchants.9
Because merchants care about card usage while cardholders care about card
7 Rochet & Tirole, Interchange Fees, supra note 4, at 72.
8 See id. at 73.
9 See Klein et al., supra note 5, at 573–74 (explaining that merchants typically bear a
larger fraction of the total costs of a payment‐card system than do cardholders “not due
to payment card system market power over merchants, but because demand sensitivity
generally is much greater on the cardholder side of the market than on the merchant
side of the market”).
10
acceptance, it may even make sense for a network to charge only merchants for
usage while charging cardholders only for access to the card in the first place. 10
C. Historical Development of the Credit‐Card Industry
The modern payment‐card industry began in 1949 with the “Diner’s
Club,” a joint venture between two individuals who used a small sum of start‐up
capital to register fourteen New York restaurants for participation.11 Diner’s
Club initially charged participating restaurants seven percent of the total tab and
gave cards away to diners for free. This model was so successful that by its first
anniversary, Diner’s Club boasted a membership of over 330 U.S. restaurants,
hotels, and nightclubs. At that point, though it had begun charging a
membership fee to its 42,000 cardholders, Diner’s Club was earning over three
quarters of its revenue from the merchant side of its platform.
10 See Evans & Noel, supra note 6, at 682; see also id. at 668 (“Empirical surveys of
industries based on [two‐sided platforms] find many examples of prices that are low, or
even negative, so that customers on one side are incentivized to participate in the
platform.”).
11 See David S. Evans, Some Empirical Aspects of Multi‐Sided Platform Industries, 2 REV.
NETWORK ECON. 191 (2003), reprinted in Davis S. Evans & Richard Schmalensee, The
Industrial Organization of Markets with Two‐Sided Platforms, COMPETITION POLICY
INTERNATIONAL (Spring 2007), reprinted in PLATFORM ECONOMICS: ESSAYS ON MULTI‐
SIDED BUSINESSES 1, 282 (David S. Evans ed. 2011). Prior to 1950, payment cards were
issued only by retailers for use in their stores. Then and now, these “store cards”
operate as one‐sided markets because they are distributed to only a single set of
consumers: cardholders. See id. at 283.
11
Amex, which had long been a major player in the travel and entertainment
(“T & E”) business, entered the payment‐card industry in the early 1950s already
having acquired consumers on both sides of the platform.12 Thanks to this
established position, Amex was initially able to set its cardholder fee higher than
the Diner’s Club cardholder fee and thereby cultivate a prestigious, upscale
image of “exclusiv[ity].”13 Amex then attracted merchants by setting its
merchant fee slightly lower than the contemporary Diner’s Club merchant fees.14
Despite Amex’s initial success in getting both sides on board its platform,
it had no previous experience extending credit and thus struggled for some time
to become profitable.15 In the early 1960s, Amex was able to alleviate this
12 Amex originally formed in 1850 as an express mail company. See David S. Evans &
Richard Schmalensee, More than Money, in PAYING WITH PLASTIC (3d ed. 2012), reprinted
in PLATFORM ECONOMICS, supra note 11, at 282, 285–86.
13 Evans, Empirical Aspects, supra note 11, at 42–43 (internal quotation marks omitted).
14 See id. at 42–43.
See Evans & Schmalensee, More than Money, supra note 11, at 286. Relying on the
15
parties’ written submissions and expert testimony offered at trial, the District Court
explained the basics of credit as follows:
Credit cards enable cardholders to make purchases at participating
merchants by accessing a line of credit extended to the cardholder by the
issuer of that card. Cardholders are invoiced for purchases typically once
per month and often have a grace period during which payment may be
made. The delay between a purchase event and the cardholder’s deadline
for paying the bill on which that purchase appears is referred to as the
12
problem by increasing cardholder fees and pressuring cardholders to make
timely payments.16 Amex first turned a profit in 1962 and by 1966 was the
volume leader in the payment‐card industry.17
In the meantime, Visa and MasterCard entered the market, opting to
pursue slightly different pricing strategies than any of the payment‐card
companies that came before. The predecessors of Visa, MasterCard, and other
similar networks entered the market in the mid‐1960s as banking cooperatives
that collaborated on a card brand to pool the merchants that individual member
banks of the cooperative had signed up on their respective cards.18 Following
several years of nationwide experimentation with various types of cooperative
card systems, the enactment of federal usury laws, and numerous antitrust
lawsuits against the new payment‐card associations, Visa and MasterCard
“float,” and it enables cardholders to temporarily defer payment on their
purchases at no additional cost (i.e., without paying interest).
Am. Express Co., 88 F. Supp. 3d at 153 (citations omitted).
16 See Evans & Schmalensee, More than Money, supra note 11, at 286–87.
17 See id. at 288.
See David S. Evans & Richard Schmalensee, Interchange Fees and Their Regulation (May
18
2005), reprinted in PLATFORM ECONOMICS, supra note 11, at 314, 325.
13
emerged as the two national associations that “[j]ust about every bank in the card
field” became “convinced” they must join.19
D. Credit Cards Today20
Credit‐card transaction volume in the United States is shared primarily by
four networks: Visa (45%), American Express (26.4%), MasterCard (23.3%), and
Discover (5.3%).21 Visa and MasterCard operate cooperative or “open‐loop”
systems that involve as many as five distinct actors, including the network,
cardholder, merchant, issuer, and acquirer.22 On one side of the platform, the
issuer acts as an intermediary between the network and the cardholder. On the
other side of the platform, the acquirer typically acts as an intermediary between
the network and the merchant. The issuer and acquirer are typically banks.
When a cardholder uses his or her card to make a purchase, the transaction
information is sent immediately to the acquirer, who discharges the cardholder’s
Evans & Schmalensee, More than Money, supra note 11, at 290 (internal quotation
19
marks omitted).
20
The facts in this and the following sections are drawn largely from the District Court’s
Findings of Fact, much of which was taken from the parties’ Joint Statement of
Undisputed Fact, see Parties’ Stipulated Statements of Fact, Am. Express Co., No. 10‐cv‐
4496 (NGG)(RER) (filed June 6, 2014), ECF No. 447‐1 (hereinafter “Jt. Stmt.”), and none
of which are in dispute.
21 The parties stipulated that these percentage figures were accurate as of 2013.
22 For a graphical depiction of this system, see infra Addendum Figure 1.
14
obligations by paying the merchant the funds owed on the transaction. As the
price for handling this transaction, the acquirer charges the merchant a
merchant‐discount fee. The amount of the merchant‐discount fee is determined
in large part by the interchange fee, which is paid by the acquirer to the issuer as
the price for handling its transactions with the cardholder.23 The optimal
interchange fee depends on several factors, including “the split of total costs
between issuer and acquirer, the demand elasticities for both types of users, and
the intensity of competition in both the issuing and acquiring markets.”24
The merchant discount is typically a percentage discount rate multiplied
by the purchase price. The bulk of the merchant discount is the interchange fee,
the rate of which varies according to (1) the merchant’s industry, and (2) the
cardholder’s chosen card product. Because Visa and MasterCard use
interchange fees to fund cardholder rewards, such as cash back or airline miles,
high rewards cards are generally subject to higher interchange rates and thus
cost more for merchants to accept. Visa and MasterCard do not directly set the
interchange fee, but “they influence these prices by implementing interchange
For a diagram outlining the allocation of fees between the parties involved in this
23
system, see infra Addendum Figure 2.
24 Rochet & Tirole, Interchange Fees, supra note 4, at 75 (emphases omitted).
15
fees that flow from the acquiring bank (where the merchant’s account is credited)
to the card‐issuing bank (where the consumer’s account is debited).”25
In contrast to Visa and MasterCard, Amex is a proprietary network that
operates a “closed‐loop” system. Within this closed loop, Amex acts not only as
the middleman network but also as both the issuer and acquirer for the vast
majority of transactions involving its cards.26 Therefore, in most cases,27 Amex
maintains direct relationships with both its cardholders and merchants by
“provid[ing] issuing services to cardholders, acquiring and processing services to
merchants, and network services to both sides of the platform in order to
facilitate the use and acceptance of its payment cards.”28 Special App. 16. The
Amex system is sometimes referred to as a “three‐party” system because the
network (i.e., Amex itself) serves as the only intermediary between the
cardholder and merchant.
25 Klein et al., supra note 5, at 572.
26 For a graphical depiction of this system, see infra Addendum Figure 3.
Amex occasionally uses third‐party banks as issuers. At the present time, nine third‐
27
party banks issue Amex cards, accounting for roughly one percent of Amex’s total U.S.
charge volume per year.
For a diagram outlining the allocation of fees between the parties involved in this
28
system, see infra Addendum Figure 2.
16
Within its closed‐loop system, Amex directly sets the interchange fee so as
to maximize profit.29 Setting the interchange fee also allows Amex to set the
accompanying merchant‐discount fee and cardholder benefits directly.30 Amex
charges a single discount rate for all Amex card products, meaning that
regardless of whether a cardholder uses Amex’s highest rewards card or its
lowest, the merchant still must pay the same fee in order to accept the Amex
card.
Unlike Visa and MasterCard, which run “lend‐centric” models deriving
more than half their revenues from interest charged to cardholders for unpaid
balances on the cardholder’s charges for a given billing period, Amex runs a
“spend‐centric” model whose revenues are primarily dependent on merchant‐
discount fees. This model is critical to Amex’s merchant value proposition,
which is that merchants who accept Amex gain access to “marquee” cardholders
who tend to spend more on both an annual and per‐transaction basis than
customers using alternative payment methods.31 Amex’s model is also critical to
29 Rochet & Tirole, Interchange Fees, supra note 4, at 72.
30 See Klein et al., supra note 5, at 590–91.
“Marquee buyers” are defined as certain customers on one side of a two‐sided market
31
who are “extremely valuable to customers on the other side of the market.” Evans,
Empirical Aspects, supra note 11, at 37. The existence of marquee buyers “tends to reduce
17
its cardholder value proposition, which features a robust rewards program and
numerous other benefits, including customer service, fraud protection, and
purchase and return protection.
Both merchants and cardholders engage in “multihoming,” meaning that
both cardholders and merchants may choose to use or accept several different
cards.32 Multihoming tends to lower prices by functioning essentially as an
availability of substitutes.33 This downward pricing pressure “is not entirely a
free lunch” for all consumers, however, because increased multihoming on one
side of the platform allows the card network to charge more to consumers on the
other side, for whom fewer substitutes might be available.34 A cardholder often
has more choices of payment method than a merchant has the ability to accept,
and thus the cardholder may simply opt not to own cards that charge
membership fees or offer relatively few cardholder benefits. Largely due to
the price to all buyers and increase[] it to sellers.” Id. (identifying Amex as an example
of a company that benefits from marquee buyers insofar as these buyers allow Amex
“to charge a relatively high merchant discount as compared to other card brands,
especially for their corporate card, because merchants view[] the American Express
business clientele as extremely attractive.”).
32 See Evans & Noel, supra note 6, at 690.
33 See Evans, Antitrust Economics, supra note 5, at 346.
34 Id. at 347.
18
multihoming, not all merchants or all cardholders use all payment‐card
networks. Approximately three million of the total nine million U.S. merchant
locations that accept credit cards—that is, roughly one out of every three—do not
accept Amex cards.
E. Competition Within The Credit‐Card Industry
The credit‐card industry continues to be characterized by formidable
barriers to entry. These barriers arise because of the nature of the industry and
the requirements a network must fulfill before entering it. A network in the
credit‐card industry must be prepared to issue huge amounts of credit, and thus
the network itself must have access to huge amounts of money. The network’s
credit must of course be rock solid because merchants will not deal with an
issuer without absolute certainty that the issuer will meet its obligations. As the
District Court recognized, potential new entrants also face a “chicken and egg
problem” wherein “a firm attempting entry into the [payment‐card] network
market would struggle to convince merchants to join a network without a
significant population of cardholders and, in turn, would also struggle to
convince cardholders to carry a card associated with a network that is accepted
at few merchants.” Am. Express Co., 88 F. Supp. 3d at 190.
19
Throughout the 1960s and 1970s, Visa, MasterCard, and Amex competed
fiercely with one another for consumers on both sides of their platforms.35 Amex
sought to keep up with Visa and MasterCard by expanding outward from the T
& E market to include “everyday spend” merchants such as gas stations,
supermarkets, and pharmacies. It also sought to increase both its merchant and
cardholder value propositions by introducing its membership‐rewards program
for cardholders and developing new technologies to better leverage the
advantages of its closed‐loop system for merchants.36
In the 1980s, this competition led Visa and MasterCard to adopt
exclusionary rules preventing member institutions from issuing card products on
the Amex or Discover networks.37 Visa and MasterCard also ran campaigns
highlighting Amex’s smaller merchant‐acceptance network, consumers’ resulting
Diner’s Club floundered during this time, in part because it failed to keep up with
35
newly emerging competition from the bank card associations. Today, Diner’s Club has
shrunk to almost nothing in the United States. See Evans & Schmalensee, More than
Money, supra note 11, at 287.
The District Court found that “[b]y retaining end‐to‐end control of all spending data
36
on its network, American Express is able to sell its merchants information on and
analysis of its cardholders’ spending behaviors, allowing the merchant to engage in
more effective targeted marketing or identify new locations for geographic expansion,
among other applications.” Am. Express Co., 88 F. Supp. 3d at 159.
These exclusionary rules were the subject of the litigation in United States v. Visa
37
U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003).
20
perceptions of the utility and value of Amex’s card products, and Amex’s higher
merchant‐discount rates. These campaigns, which included the “It’s Everywhere
You Want To Be” and “We Prefer Visa” initiatives, were remarkably effective,
leading Amex’s overall share of payment‐card charge volume to dip from about
25% in 1990 to 20% in 1995.
Amex responded to Visa’s and MasterCard’s exclusionary rules and
campaigns by strengthening contractual restraints designed to control how
merchants treat Amex cardholders at the point of sale. These restraints, known
as non‐discriminatory provisions (“NDPs”), had existed in Amex’s card‐
acceptance agreements in some form or another since the 1950s, but Amex
tightened them considerably in the late 1980s and early 1990s to ensure that
merchants could not state a preference for any payment‐card network other than
Amex.
Amex’s standard NDPs are contained in section 3.2 of Amex’s Merchant
Regulations. The NDPs provide that a merchant who accepts Amex cards may
not engage in the following behaviors:
indicate or imply that [it] prefer[s], directly or indirectly, any
Other Payment Products over [Amex’s] Card,
try to dissuade Cardmembers from using the Card,
21
criticize or mischaracterize the Card or any of [Amex’s]
services or programs,
try to persuade or prompt Cardmembers to use any Other
Payment Products or any other method of payment (e.g.,
payment by check),
impose any restrictions, conditions, disadvantages or fees
when the Card is accepted that are not imposed equally on all
Other Payment Products, except for electronic funds transfer,
or cash and check,38
engage in activities that harm [Amex’s] business or the
American Express Brand (or both), or
promote any Other Payment Products (except [the
merchant’s] own private label card that [it] issue[s] for use
solely at [the merchant’s] Establishments) more actively than
[it] promote[s] [Amex’s] Card.
38 In accordance with the Durbin Amendment, Amex’s NDPs do not prevent merchants
from offering discounts or otherwise steering customers to use cash, check, debit, or
automated clearing house (“ACH”) transfers. Plaintiffs in this litigation have not
challenged the NDPs insofar as they prohibit merchants from imposing fees when
accepting Amex cards that are not “imposed equally on all Other Payment Products,”
nor have Plaintiffs challenged the NDPs to the extent that they prohibit merchants from
“mischaracteriz[ing]” the Card or “engag[ing] in activities that harm [Amex’s] business
or the American Express Brand (or both).” See Am. Compl. ¶ 28, ECF Dkt. No. 53
(quoting Amex’s Standard NDPs).
22
App. 923. Amex actively monitors for non‐compliance with its NDPs via
oversight of the merchant’s client manager at Amex and the merchant’s charge
volume, random on‐site visits, and cardholder complaints and reports.39
Amex designs its NDPs to curb merchant steering and thus preserve what
it refers to as “welcome acceptance,” a term describing cardholders’ enjoyment of
“a frictionless and consistent point‐of‐sale experience when using their American
Express cards.” Am. Express Co., 88 F. Supp. 3d at 225 (internal quotation marks
omitted). Although merchants across various industries regularly try to “steer”
their customers toward certain purchasing decisions via strategic product
placement, discounts, and other deals, steering within the credit‐card industry
can be harmful insofar as it interferes with a network’s ability to balance its two‐
sided net price. Accordingly, Amex’s NDPs (and other networks’ similar
restraints) aim to increase cardholders’ certainty as to whether its cards will be
accepted and on what terms. Certainty that Amex cards will be accepted makes
39 Not all merchants are bound by Amex’s standard NDPs. Certain merchants,
including Sears, Crate & Barrel, Home Depot, and Hilton Hotels & Resorts, have
negotiated the right to steer toward their private label or co‐brand cards. Even these
merchants, however, remain subject to restrictions on whether and how they can
influence a customer’s payment‐card choice at the point of sale.
23
the network more attractive to cardholders—and, in turn, cardholders’ use of the
Amex network makes its cards more attractive for merchants to accept.
F. Procedural History of This Case
On October 4, 2010, the United States Government and seventeen Plaintiff
States (collectively, “Plaintiffs”) sued Amex, Visa, and MasterCard for
unreasonably restraining trade in violation of § 1.40 Plaintiffs alleged in their
complaint that absent the anti‐steering provisions contained in each networks’
respective merchant agreements—including Amex’s NDPs—merchants would
be able to use steering “at the point of sale to foster competition on price and
terms among sellers of network services” by encouraging customers to use less
expensive or otherwise preferred cards. App. 136. The complaint alleged further
that Amex, Visa, and MasterCard used anti‐steering provisions to suppress
interbrand competition by blocking competition from rival networks and
removing incentives for networks to reduce card fees. See App. 128, 148–49.
In 2011, Visa and MasterCard entered into consent judgments and
voluntarily rescinded their anti‐steering provisions. Amex, however, proceeded
The seventeen states are Maryland, Missouri, Vermont, Utah, Arizona, New
40
Hampshire, Connecticut, Iowa, Michigan, Ohio, Texas, Illinois, Tennessee, Montana,
Nebraska, Idaho, and Rhode Island. Though Hawaii was originally an eighteenth
Plaintiff State, it stipulated to the dismissal of its claims without prejudice before trial.
24
to a seven‐week bench trial in the United States District Court for the Eastern
District of New York in the summer of 2014. After trial, the District Court
concluded that Plaintiffs had “shown by the preponderance of the evidence that
Amex’s NDPs violate the U.S. antitrust laws” and that “[Amex’s] NDPs create an
environment in which there is nothing to offset credit‐card networks’
incentives—including American Express’s incentive—to charge merchants
inflated prices for their services.” Am. Express Co., 88 F. Supp. 3d at 150. In
reaching this conclusion, the District Court made the following findings:
1) Relevant Market: A payment‐card network sits at the center of a
two‐sided platform that “comprises at least two separate, yet
deeply interrelated, markets: a market for card issuance, in which
Amex and Discover compete with thousands of Visa‐ and
MasterCard‐issuing banks; and a network services market, in
which Visa, Mastercard, Amex, and Discover compete to sell
acceptance services.” Id. at 151. Despite the two‐sided nature of
the platform, however, the relevant market for antitrust analysis
in this case is only the market for “network services.” Id. (citing
United States v. Visa USA, Inc., 344 F.3d 229 (2d Cir. 2003)).
2) Market Power: “American Express possesses sufficient market
power in the network services market to harm competition, as
evidenced by its significant market share, the market’s highly
concentrated nature and high barriers to entry, and the insistence
of Defendants’ cardholder base on using their American Express
cards—insistence that prevents most merchants from dropping
acceptance of American Express when faced with price increases
or similar conduct.” Id.
25
3) Anticompetitive Effects: “Plaintiffs have proven that American
Express’s NDPs have caused actual anticompetitive effects on
interbrand competition. By preventing merchants from steering
additional charge volume to their least expensive network, for
example, the NDPs short‐circuit the ordinary price‐setting
mechanism in the network services market by removing the
competitive ‘reward’ for networks offering merchants a lower
price for acceptance services. The result is an absence of price
competition among American Express and its rival networks.”
Id.
In conjunction with its liability determination, the District Court permanently
enjoined Amex from enforcing its NDPs for a period of ten years.
Amex timely appealed.
II. DISCUSSION
On appeal from a bench trial, this Court reviews a district court’s findings
of fact for clear error and its conclusions of law de novo. Beck Chevrolet Co. v. Gen.
Motors LLC, 787 F.3d 663, 672 (2d Cir. 2015). “The application of law to
undisputed facts is also subject to de novo review.” Id. (citing Deegan v. City of
Ithaca, 444 F.3d 135, 141 (2d Cir. 2006)). A finding of fact is clearly erroneous
when, “although there is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a mistake has been
committed.” Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985)
(internal quotation marks omitted).
26
A. Governing Law
Section 1 of the Sherman Act prohibits “[e]very contract . . . in restraint of
trade or commerce among the several States.” 15 U.S.C. § 1. “To prove a § 1
violation, a plaintiff must demonstrate: (1) a combination or some form of
concerted action between at least two legally distinct economic entities that (2)
unreasonably restrains trade.” Geneva Pharms. Tech. Corp. v. Barr Labs. Inc., 386
F.3d 485, 506 (2d Cir. 2004). Though the Sherman Act could be read literally to
strike down virtually every contract that exists, the Supreme Court has
recognized repeatedly that “the Sherman Act was intended to prohibit only
unreasonable restraints of trade.” Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of
Univ. of Okla., 468 U.S. 85, 98 (1984) (emphasis added).
The Sherman Act aims to “protect[] competition as a whole in the relevant
market, not the individual competitors within that market.” Tops Mkts., Inc. v.
Quality Mkts., Inc., 142 F.3d 90, 96 (2d Cir. 1998). Disputes between business
competitors thus are not the proper subjects of antitrust actions. See Capital
Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 543 (2d Cir.
1993). This limitation, in addition to supporting judicial economy, is based on
the antitrust principle that “[p]rocompetitive or efficiency‐enhancing aspects of
27
practices that nominally violate the antitrust laws may cause serious harm to
individuals, but this kind of harm is the essence of competition and should play
no role in the definition of antitrust damages.” Atl. Richfield Co. v. USA Petroleum
Co., 495 U.S. 328, 344 (1990) (internal quotation marks omitted).
To determine whether a practice unreasonably restrains trade in violation
of the Sherman Act, courts apply one of two rules designed to provide guidance
in forming judgments about the competitive significance of challenged restraints.
See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885–87 (2007).
Under the per se rule, certain practices, e.g., horizontal price‐fixing or market
division with no purpose other than to limit competition, are entitled to a
conclusive presumption of unreasonableness and thus considered per se illegal.
See Bogan v. Hodgkins, 166 F.3d 509, 514 (2d Cir. 1999) (citing Arizona v. Maricopa
Cty. Med. Soc’y, 457 U.S. 332, 344 (1982)). All other practices are analyzed under
the rule of reason. See id.; see also Leegin, 551 U.S. at 885 (“The rule of reason is
the accepted standard for testing whether a practice restrains trade in violation of
§ 1.”).
“Agreements within the scope of § 1 may be either ‘horizontal,’ i.e.,
‘agreement[s] between competitors at the same level of the market structure,’ or
28
‘vertical,’ i.e., ‘combinations of persons at different levels of the market structure,
e.g., manufacturers and distributors.’” Anderson News, L.L.C. v. Am. Media, Inc.,
680 F.3d 162, 182 (2d Cir. 2012) (quoting United States v. Topco Assocs., Inc., 405
U.S. 596, 608 (1972)). “Restraints imposed by agreement between competitors
have traditionally been denominated as horizontal restraints, and those imposed
by agreement between firms at different levels of distribution as vertical
restraints.” Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730 (1988). Vertical
restraints “are generally judged under the rule of reason.”41 Anderson News, at
183 (internal quotation marks omitted); see also Leegin, 551 U.S. at 907 (“Vertical
price restraints are to be judged according to the rule of reason.”); Cont’l T.V., Inc.
v. GTE Sylvania Inc., 433 U.S. 36, 59 (1977) (“When anticompetitive effects are
shown to result from particular vertical restrictions they can be adequately
policed under the rule of reason, the standard traditionally applied for the
majority of anticompetitive practices challenged under [§] 1 of the Act.”).
41 Though the Supreme Court once suggested in a footnote that vertical price restraints
might warrant differential treatment under the law from vertical non‐price restraints,
see Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 51 n.18 (1977), it later clarified
that there is “little economic justification” for any differential treatment, Leegin, 551 U.S.
at 904. Accordingly, both vertical price restraints and vertical non‐price restraints are
analyzed under the rule of reason.
29
Courts apply the rule of reason using a three‐step burden‐shifting
framework. First, a plaintiff bears the initial burden of demonstrating that a
defendant’s challenged behavior “had an actual adverse effect on competition as
a whole in the relevant market.” Capital Imaging, 996 F.2d at 543. Examples of
actual anticompetitive effects include reduced output, decreased quality, and
supracompetitive pricing. See Tops Mkts., 142 F.3d at 96; Capital Imaging, 996 F.2d
at 546–47.
If the plaintiff cannot establish anticompetitive effects directly by showing
an actual adverse effect on competition as a whole within the relevant market, he
or she nevertheless may establish anticompetitive effects indirectly by showing
that the defendant has “sufficient market power to cause an adverse effect on
competition.” Tops Mkts., 142 F.3d at 96; see also K.M.B. Warehouse Distribs., Inc. v.
Walker Mfg. Co., 61 F.3d 123, 129 (2d Cir. 1995) (“‘[W]here the plaintiff is unable
to demonstrate [an actual adverse effect on competition,] . . . it must at least
establish that defendants possess the requisite market power’ and thus the
capacity to inhibit competition market‐wide.” (quoting Capital Imaging, 996 F.2d
at 546)). Because “[m]arket power is but a ‘surrogate for detrimental effects,’”
Tops Mkts., 142 F.3d at 96 (quoting FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 461
30
(1986)), “[a] plaintiff seeking to use market power as a proxy for adverse effect
must show market power, plus some other ground for believing that the
challenged behavior could harm competition in the market, such as the inherent
anticompetitive nature of the defendant’s behavior or the structure of the
interbrand market,” id. at 97.
Once the plaintiff satisfies its initial burden to prove anticompetitive
effects, the burden shifts to the defendant to offer evidence of any pro‐
competitive effects of the restraint at issue. See Geneva Pharms., 386 F.3d at 507. If
the defendant can provide such proof, then “the burden shifts back to the
plaintiff[] to prove that any legitimate competitive benefits offered by
defendant[] could have been achieved through less restrictive means.” Id. (citing
Capital Imaging, 996 F.2d at 543).
Courts must be careful to avoid confusing healthy competition with the
anticompetitive exercise of market power. “Adverse” effects among different
sellers “can actually enhance market‐wide competition by fostering vertical
efficiency and maintaining the desired quality of a product.” K.M.B., 61 F.3d at
127–28. Further, when output expands at the same time that prices increase,
“rising prices are equally consistent with growing product demand” as with
31
anticompetitive behavior. Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp.,
509 U.S. 209, 237 (1993). “Under these conditions, a [fact‐finder] may not infer
competitive injury from price and output data absent some evidence that tends
to prove that output was restricted or prices were above a competitive level.” Id.
“Ultimately, it remains for the factfinder to weigh the harms and benefits
of the challenged behavior.” Capital Imaging, 996 F.2d at 543. To prevail on a § 1
claim, a plaintiff must show more than just an adverse effect on competition
among different sellers of the same product. See K.M.B., 61 F.3d at 127. “The
overarching standard is whether defendants’ actions diminish overall
competition, and hence consumer welfare.” Id. (emphasis added) (internal
quotation marks omitted).
B. Analysis
At the outset, all parties and the District Court agree that Amex’s NDPs
are a vertical restraint, meaning that they result from agreements setting terms
between buyers and sellers. See Appellant’s Br. at 2 (“The NDPs are non‐price
vertical restraints that prevent merchants—which also function as distributors of
Amex’s product—from reaping the benefits of accepting Amex cards while
simultaneously damaging Amex’s brand and Amex’s relationship with its
32
cardholders.”); Appellee’s Br. at 50 (“Amex’s NDPs are vertical restraints
because Amex and the merchants are at ‘different levels of distribution,’ and
because the imposition of Amex’s NDPs was not alleged to be the product of a
‘horizontal’ agreement with any of its [credit‐card] network rivals.”); Am. Express
Co., 88 F. Supp. 3d at 167 (“As non‐price vertical restraints between firms at
different levels of production—namely, between the network and its merchant‐
consumers—American Express’s NDPs are properly analyzed under the rule of
reason.”).42
We agree that the NDPs are a vertical restraint. The challenged
agreements are between Amex and merchants, rather than laterally among
competing networks. The Plaintiffs’ claim in this case is premised upon Amex’s
use of NDPs as a condition of a merchant or provider accepting Amex cards from
consumers purchasing the merchants’ goods or services; some merchants wish to
attract Amex cardholders but then deal only on Visa’s and MasterCard’s terms.
Both the Plaintiffs and the District Court flagged alleged distinctions between the
42
NDPs and other vertical restraints, see Am. Express Co., 88 F. Supp. 3d at 168; Appellee’s
Br. at 50–51, in apparent attempts to recast the vertical restraints as horizontal. We have
never drawn this type of distinction between any varieties of vertical restraints and
decline to do so here. Moreover, because we apply the rule of reason to both vertical
and horizontal restraints, see supra note 41 and accompanying text, we find that any
such distinction is without meaningful difference to the antitrust analysis in this case.
33
Many vertical restraints by a product‐creator are imposed on market
intermediaries to induce those dealing with the ultimate consumer to promote
the particular product. Resale price maintenance, for example, induces retailers
to advertise or otherwise promote a product without fear that a firm without
promotion expenses will undercut the price of the goods. See Leegin, 551 U.S. at
892–93. Exclusive dealerships achieve a similar result. It is primarily for this
reason that legal and economic scholars often view vertical restraints as having
procompetitive effects.43
1. Market Definition
The District Court’s definition of the relevant market in this case is fatal to
its conclusion that Amex violated § 1. The District Court concluded that
Plaintiffs proved that Amex’s “NDPs have caused and continue to cause actual
harm to competition in the network services market” by showing that the NDPs
43 See, e.g., Richard A. Posner, Vertical Restraints and Antitrust Policy, 72 U. CHI. L. REV.
229, 250 (2005) (“Another name for [loyalty] might be low transaction costs and
customer inertia, which might be another name for economizing on transaction costs.”);
Benjamin Klein, Andres V. Lerner, Kevin M. Murphy, Lacey L. Plache, Competition in
Two‐Sided Markets: The Antitrust Economics of Payment Card Interchange Fees, 73
ANTITRUST L.J. 571, 574 (2006) (“Letting merchants who have agreed to accept a
payment card and display the payment system’s symbol decide which of the system’s
cards to accept and which to reject would impose a significant cost on the payment
system’s brand name by undermining consumer expectations of guaranteed acceptance.
. . . Such demands would impose an externality on the entire payment card system, and
eventually lead some merchants to drop acceptance of the payment system’s cards.”).
34
“sever the essential link between the price and sales of network services by
denying merchants the opportunity to influence their customers’ payment
decisions and thereby shift spending to less expensive cards.” Am. Express Co.,
88 F. Supp. 3d at 207. In the District Court’s view, “the NDPs short‐circuit the
ordinary price‐setting mechanism in the network services market by removing the
competitive ‘reward’ for networks offering merchants a lower price for
acceptance services.” Id. at 151 (emphasis added).
This Court defines the relevant market “as all products ‘reasonably
interchangeable by consumers for the same purposes.’” Geneva Pharms., 386 F.3d
at 496 (quoting United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 395
(1956)). “[M]arket definition is a deeply fact‐intensive inquiry,” Todd v. Exxon
Corp., 275 F.3d 191, 199 (2d Cir. 2001) (Sotomayor, J.), because its purpose is “to
identify the market participants and competitive pressures that restrain an
individual firm’s ability to raise prices or restrict output,” Geneva Pharms., 386
F.3d at 496. The proper market definition thus can be determined “only after a
factual inquiry into the ‘commercial realities’ faced by consumers.” Eastman
Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 482 (1992) (quoting United States
v. Grinnell Corp., 384 U.S. 563, 572 (1966). “The basic principle is that the relevant
35
market definition must encompass the realities of competition.” Balaklaw v.
Lovell, 14 F.3d 793, 799 (2d Cir. 1994) (internal quotation marks omitted)).
The District Court erred in excluding the market for cardholders from its
relevant market definition. The District Court expressly “decline[d] to . . .
collaps[e] the issuance and network services markets into a single platform‐wide
market for transactions” on the ground that it “takes the concept of two‐
sidedness too far.” Am. Express Co., 88 F. Supp. 3d at 172, 173. Instead, the
District Court focused on Amex’s NDPs “[a]s non‐price vertical restraints
between firms at different levels of production—namely, between the network
and its merchant‐consumers.” Id. at 167 . It then defined the relevant market as
one for “network services,” meaning the market for “core enabling functions
provided by networks, which allow merchants to capture, authorize, and settle
transactions for customers who elect to pay with their credit or charge card.” Id.
at 171 (emphasis added).
The District Court erred in patterning its relevant market inquiry largely
after that undertaken by this Court in Visa. Visa called for analysis of the relevant
product market to determine whether Visa’s and MasterCard’s exclusionary
rules were agreements restraining trade in violation of the Sherman Act. See
36
Visa, 344 F.3d at 237–30; United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322, 335–
40 (S.D.N.Y. 2001). The exclusionary rules at issue prohibited Visa’s and
MasterCard’s thousands of member banks from issuing cards on the Amex or
Discover networks, thereby resulting in “the total exclusion of American Express
and Discover from a segment of the market for network services.” Visa, 344 F.3d
at 240.
In Visa, this Court defined the relevant market as the market for payment‐
card “network services,” in which the sellers are the four major payment‐card
networks and the buyers are both card issuers and merchants:
[T]he four payment card networks compete with one another in a
market for network services. General purpose card networks . . .
provide the infrastructure and mechanisms through which general
purpose card transactions are conducted, including the authorization,
settlement, and clearance of transactions. Whereas in the market for
general purpose cards, the issuers are the sellers, and cardholders are
the buyers, in the market for general purpose card network services, the
four networks themselves are the sellers, and the issuers of cards and
merchants are the buyers.
Id. at 239 (emphasis added) (citations and internal quotation marks omitted).
This Court then found that the exclusionary rules were anticompetitive because
they “decreas[ed] network services output and stunt[ed] price competition” by
precluding Amex’s and Discover’s participation in the relevant market. Id. at
37
240–41; see also id. at 243 (“In the market for network services, where the four
networks are sellers and issuing banks and merchants are buyers, the
exclusionary rules enforced by Visa U.S.A. and MasterCard have absolutely
prevented Amex and Discover from selling their products at all.” (bolded
emphasis added)).
In Visa, the horizontal restraint in the market for network services had an
anticompetitive effect not only in that market but also in the market for
cardholders’ obtaining the general purpose cards. Visa’s discussion of the market
for network services as separate from the market for general purpose cards was,
therefore, consistent with antitrust principles. Separating the two markets here–
analyzing the effect of Amex’s vertical restraints on the market for network
services while ignoring their effect on the market for general purpose cards–
ignores the two markets’ interdependence. Separating the two markets allows
legitimate competitive activities in the market for general purposes to be
penalized no matter how output‐expanding such activities may be. The relevant
market in this case is not the same as the relevant market in Visa because the two‐
sided platform at issue here is a single firm operating within the broader
“network services” industry at issue in Visa. The relationship between the two
38
consumer sides of a platform that provide network services is not the same as the
relationship between the various platforms competing with one another within
the network‐services industry. Unlike the contested conduct in this case, the
contested conduct in Visa occurred not among different sides of the same
network platform, but rather between the platforms themselves.44
Moreover, the vertical restraints at issue in this case are markedly different
from the horizontal restraints that were at issue in Visa. In contrast to Amex’s
NDPs, the Visa panel understood the Visa and MasterCard exclusionary rules at
issue not as vertical restraints, but rather as a “horizontal restraint adopted by
20,000 competitors.” Visa, 344 F.3d at 242. Amex’s NDPs, unlike Visa’s and
MasterCard’s exclusionary rules, are agreements between Amex and its
merchants, not agreements between competing payment‐card networks.
The Visa panel thus did not conduct a rule‐of‐reason analysis to determine
whether vertical restraints were inhibiting competition on one particular side of a
two‐sided platform. Instead, the Visa panel conducted a rule‐of‐reason analysis
to determine whether horizontal restraints were inhibiting competition on one
particular level of competition contained within a two‐sided platform:
44 For a graphical depiction of the salient differences, see infra App. Figure 5.
39
Competition in the payment card industry takes place at the “network”
level, as well as at the “issuing” and “acquiring” levels. At the network
level, the four brands compete with one another to establish brand loyalty in
favor of the Visa, MasterCard, Amex, or Discover card. At the issuing
level, approximately twenty thousand banks that issue Visa and
MasterCard cards to customers compete with one another and with
Amex and Discover. Unlike the network services market, which has
only four major participants, approximately 20,000 entities compete
for customers in the issuing market, and no single participant is
dominant.
Visa, 344 F.3d at 237 (emphases added). Consequently, Visa does not provide the
template for resolution of this case.
To define the relevant market, this Court often applies a “hypothetical
monopolist test” (“HMT”) asking whether a hypothetical monopolist acting
within the proposed market “would be ‘substantially constrain[ed]’ from
increasing prices by the ability of customers to switch to other producers.” Todd,
275 F.3d at 202 (alteration in original) (quoting AD/SAT, Div. of Skylight, Inc. v.
Associated Press, 181 F.3d 216, 228 (2d Cir. 1999)). Under the HMT, “‘[a] market is
any grouping of sales whose sellers, if unified by a hypothetical cartel or merger,
could profitably raise prices significantly above the competitive level. If the sales
of other producers substantially constrain the price‐increasing ability of the
hypothetical cartel, these others are part of the market.’” AD/SAT, 181 F.3d at
40
228 (emphasis omitted) (quoting 2A Phillip E. Areeda et al., ANTITRUST LAW
¶ 533, at 169).
The Court implements the HMT by imagining that a hypothetical
monopolist has imposed a small but significant non‐transitory increase in price
(“SSNIP”) within the proposed market. If the hypothetical monopolist can
impose this SSNIP without losing so many sales to other products as to render
the SSNIP unprofitable, then the proposed market is the relevant market. By
contrast, if consumers are able and inclined to switch away from the products in
the proposed market in sufficiently high numbers to render the SSNIP
unprofitable, then the proposed market definition is likely too narrow and
should be expanded.
The District Court also erred in its application of the HMT. As an initial
matter, the District Court did not apply the HMT to define the relevant market
but instead employed it only to exclude debit cards from the market it had
already defined in a conclusory manner, i.e., the market for network services.45
We note briefly that the District Court apparently did not use its own relevant
45
market definition when analyzing both anticompetitive effects and market power. The
District Court defined “network services” as no more than the services provided by a
payment‐card platform “to facilitate the use and acceptance of its payment cards.” Am.
Express Co., 88 F. Supp. 3d at 157. It then recognized explicitly that the network fee
comprises only one part of the full merchant‐discount rate subtracted from the
41
Furthermore, even had the District Court not defined the relevant market
prematurely, its HMT analysis failed to quantify the change in cardholder
behavior resulting from decreased merchant demand to use the hypothetical
monopolist’s network for credit‐card transactions.
The District Court found that “there is limited direct quantitative evidence
in the record from which the court might make a definitive calculation of either
merchants’ or cardholders’ sensitivity to pricing changes in the network services
market.” Id. at 179. Instead of balancing hypothetical effects on merchant
behavior against hypothetical effects on cardholder behavior, however, the
District Court considered cardholder behavior only with respect to a merchant’s
decision to join a payment‐card network in the first place. See id. (finding it
“highly unlikely that merchant attrition resulting from [a hypothetical
monopolist’s imposition of a SSNIP in the proposed product market] would be
merchant’s profit at the point‐of‐sale. See id. at 157 (“[T]he merchant discount fee is
primarily comprised of three elements: a percentage interchange fee, an acquirer fee,
and a network fee.”). These findings notwithstanding, the District Court analyzed
anticompetitive effects with respect to the full merchant‐discount rate, not simply the
fees associated with “network services.” See, e.g., id. at 215 (finding that “American
Express’s merchant restraints have allowed all four networks to raise their swipe fees
more easily and more profitably than would have been possible were merchants
permitted to influence their customers’ payment decisions”); id. at 219 (concluding that
removal of Amex’s NDPs would “result in lower swipe fees charged to merchants”).
We need not decide here whether this inconsistency constitutes error because, in any
event, the District Court defined the relevant market incorrectly.
42
sufficient to render it unprofitable, given the high rates of credit‐insistent spend
merchants would place at risk by switching away from credit card acceptance”).
A proper application of the HMT in this case would not have merely
assumed that a decrease in quantity of network services demanded by merchants
facing a SSNIP would be too small to render the accompanying price increase
unprofitable. The District Court instead should have considered the extent to
which even a low level of merchant attrition might cause some cardholders to
switch to alternative forms of payment. Application of the HMT to a two‐sided
market must consider the feedback effects inherent on the platform by
accounting for the reduction in cardholders’ demand for cards (or card
transactions) that would accompany any degree of merchant attrition.
Although the District Court claimed that it “account[ed] for the two‐sided
features of the credit‐card industry in its market definition inquiry,” it expressly
declined “to define the relevant product market to encompass the entire multi‐
sided platform.” Am. Express Co., 88 F. Supp. 3d at 174. This was error because
the price charged to merchants necessarily affects cardholder demand, which in
turn has a feedback effect on merchant demand (and thus influences the price
charged to merchants). In order to retain cardholders, a network may need to
43
increase cardholder benefits—or, viewed another way, “decrease prices” to
cardholders.46 This may call for an increase in merchant fees to fund the
increased cardholder rewards. If an increase in merchant fees leads to merchant
attrition high enough to render the increased merchant fees unprofitable for the
network, then the network will not raise merchant fees and consequently will not
increase cardholder rewards. This, in turn, may cause the network to lose
cardholders.
2. Market Power
“Market power is the power to force a purchaser to do something that he
would not do in a competitive market.” Eastman Kodak, 504 U.S. at 464 (internal
quotation marks omitted); see also E. I. du Pont de Nemours & Co., 351 U.S. at 391
(“[Market] power is the power to control prices or exclude competition.”). It
may be shown directly “by evidence of specific conduct indicating the
defendant’s power to control prices or exclude competition.” K.M.B., 61 F.3d at
129 (internal quotation marks omitted). If no direct evidence exists, market
power may be inferred based on market share. See Todd, 275 F.3d at 199 (“One
Plaintiffs’ own expert, Dr. Michael Katz, recognized that an increase in the value of
46
cardholder rewards is “equivalent to a price decrease” to cardholders. App. 919.
44
traditional way to demonstrate market power is by defining the relevant product
market and showing defendants’ percentage share of that market.”).
The District Court found that, regardless of whether Plaintiffs had proven
anticompetitive effects directly, they had successfully discharged their burden
under the rule of reason indirectly by showing that Amex possesses sufficient
market power to affect competition adversely in the relevant market. See Am.
Express Co., 88 F. Supp. 3d at 187. Based on the record, the District Court found
that Amex, which “accounted for 26.4% of [credit] card purchase volume in the
United States” as of 2013, “is the second largest [credit] card network when
measured by charge volume.”47 Id. at 188. It found further that “charge volume
is the most direct measure of output in this particular market, and is also the
47 Amex argues that its 26.4% market share “is a red flag that counsels against a finding
[of] market power” because “no court in any circuit has ever found that a firm violated
Section 1 with a share of the relevant market below 30 percent absent proof of
horizontal collusion, and courts in this Circuit have recognized that ‘firms with market
shares of less than 30% are presumptively incapable of exercising market power.’”
Amex Br. 70 (quoting Commercial Data Servers, Inc. v. Int’l Bus. Machs. Corp., 262 F. Supp.
2d 50, 74 (S.D.N.Y. 2003) (internal quotation marks omitted) (collecting cases)). The
District Court rejected this argument in a footnote stating that “[m]arket share is but
one factor considered when attempting to approximate a defendant firm’s power in a
relevant market, and that a firm’s share falls below some arbitrary threshold cannot
disprove allegations of market power without reference to the other competitive
dynamics at play.” Id. at 189 n.23. Though we agree with the District Court that market
share is “one factor” relevant to market power analysis, we decline to establish any
strict threshold of market share sufficient to establish a § 1 violation.
45
primary determinant of the remuneration networks receive from merchants in
exchange for network services.” Id. at 189.
Ultimately, the District Court concluded that Amex “enjoy[s] significant
market share in a highly concentrated market with high barriers to entry, and [is]
able to exercise uncommon leverage over [its] merchant‐consumers due to the
amplifying effect of cardholder insistence and derived demand.” Id. at 188. To
reach this conclusion, the District Court engaged in an extensive analysis of
Amex’s pricing practices, including its Value Recapture (“VR”) initiative
conducted between 2005 and 2010, its ability to price discriminate between
various industry segments, and its policy of charging merchants a premium over
its competitors’ rates. Id. at 195–98. The District Court’s finding of market power
rested primarily on its analysis of the VR initiatives and its assessment of
cardholder insistence.48 See id. at 188 (highlighting “the amplifying effect of
48 The District Court found that the price discrimination evidence was of “limited
probative value” because Plaintiffs did not provide any reliable measure of Amex’s per‐
transaction margins across its industry groups. Am. Express Co., 88 F. Supp. 3d at 198.
Similarly, although the District Court received evidence of merchant pricing premiums,
it concluded ultimately that “given the absence of clarity with respect to whether Amex
maintains a premium in today’s market and whether such premium is or has been
justified by the network’s differentiated value propositions, the court finds Plaintiffs’
evidence of Amex’s pricing premium to be of limited utility in the present market
power analysis,” id. at 202.
46
cardholder insistence and derived demand” and the price increases imposed
during the VR initiatives while finding that “Plaintiffs’ other pricing arguments
are less persuasive, and are ultimately unnecessary to the court’s finding that
American Express possesses market power”).
Amex’s VR initiatives comprised “a series of targeted price increases in
certain industry segments between 2005 and 2010, with the stated purpose of
better aligning its prices with the value it perceived as being delivered to both
cardholders and merchants.” Id. at 195–96. The VR initiatives collectively
“comprised at least twenty separate price increases accomplished through a
combination of increased discount rates, new or increased per transaction fees,
and reduced side payments to merchants.” Id. at 196. These increases “were
imposed on an industry‐specific basis, with several merchant segments—
typically those with relatively high rates of cardholder insistence—targeted for
multiple rounds of price hikes.” Id.
Analyzing the evidence before it, the District Court found that “American
Express’s ability to impose significant price increases during its Value Recapture
initiatives between 2005 and 2010 without any meaningful merchant attrition is
compelling evidence of [Amex’s] power in the network service market.” Id. at
47
198. Emphasizing that it was “unaware of any large merchant in the United
States that elected to cancel its acceptance of Amex cards in response to the Value
Recapture price increases,” id. at 197, the District Court concluded that the
“ability to profitably impose such price increases across a broad swath of its
merchant base with little or no meaningful buyer attrition is compelling proof of
[market] power,” id. at 196.
The District Court erred in its evaluation of the Value Recapture program
by failing to recognize that increased demand on the cardholder side of the
platform expands value on the merchant side. In other words, the District Court
did not acknowledge that increases in merchant fees are a concomitant of a
successful investment in creating output and value. In order to remain
competitive on the cardholder side of the platform, a payment‐card network
might need to increase cardholder rewards—or, in other words, cut prices to
cardholders.49 This, in turn, might diminish the network’s profitability from the
hypothetical price increase. If the network chose in that situation not to increase
cardholder rewards, then merchant attrition likely would continue increasing as
49 See supra note 46.
48
a result of the reduction in cardholders. Over time, the reduction in transactions
could make the hypothetical price increase unprofitable.
The District Court erred in concluding that “increases in merchant pricing
are properly viewed as changes to the net price charged across Amex’s
integrated platform,” Am. Express Co., 88 F. Supp. 3d at 196 (emphasis added),
because merchant pricing is only one half of the pertinent equation. The District
Court heard testimony that “[p]ayments made to obtain or retain co‐brand
partnerships . . . benefit the issuing side of Amex’s business by opening new
channels for acquiring cardholders.” Id. at 203. It expressly declined to factor
that evidence into its VR analysis, however, on the basis that those benefits did
not accrue on the merchant side of the platform. See id. at 203–04 (declining to
use benefits to cardholders “to offset the price paid by those companies for
network services in their capacity as Amex‐accepting merchants” (emphasis
added)). Because the two sides of the platform cannot be considered in isolation,
it was error for the District Court to discard evidence of “‘two‐sided price’
calculations . . . intended to capture the all‐in price charged to merchants and
consumers across Defendants’ entire platform.” Id. at 203.
49
More problematically, the District Court’s finding of market power was
premised in large part on “cardholder insistence,” a term it used to describe “the
segment of Amex’s cardholder base who insist on paying with their Amex cards
and who would shop elsewhere or spend less if unable to use their cards of
choice.” Id. at 191. The District Court noted that Amex’s “26.4% share of a
highly concentrated market with significant barriers to entry” likely would not
suffice to prove market power alone “were it not for the amplifying effect of
cardholder insistence.” Id. at 190–91. Amex’s “highly insistent or loyal
cardholder base [was] critical to the court’s finding of market power” because, in
the District Court’s view, “cardholder insistence effectively prevents merchants
from dropping American Express.” Id. at 191–92.
It was error for the District Court to have relied on cardholder insistence as
support for its finding of market power. Cardholder insistence results not from
market power, but instead from competitive benefits on the cardholder side of
the platform and the concomitant competitive benefits to merchants who choose
to accept Amex cards. As Plaintiffs’ own expert explained, an increase in the
value of cardholder rewards—which attracts customer loyalty—is “equivalent to
a price decrease” to the cardholder, and thus it brings down the net price across
50
the entire platform. App. 919. A firm that can attract customer loyalty only by
reducing its prices does not have the power to increase prices unilaterally.
Cardholder insistence is exactly what makes it worthwhile for merchants
to accept Amex cards—and thus cardholder insistence is exactly what makes it
worthwhile for merchants to pay the relatively high fees that Amex charges. The
District Court found specifically that a significant source of Amex cardholder
insistence is its cardholder rewards: “Cardholder insistence is derived from a
variety of sources. First, and perhaps most importantly, cardholders are
incentivized to use their Amex cards by the robust rewards programs offered by
the network.” Am. Express Co., 88 F. Supp. 3d at 191; see also id. at 191 n.25
(quoting Plaintiffs’ expert’s testimony that Amex’s “very attractive rewards
program” is “the big source of insistence” for most Amex cardholders (internal
quotation marks omitted); id. at 191 (“Amex’s industry‐leading corporate card
program . . . drives a significant degree of insistent spending . . . .”). Further, the
District Court found that Amex’s cardholder insistence and “current market
share would dissipate if the company were to stop investing in those programs
that make its product valuable to cardholders.” Id. at 195. That Amex might not
enjoy market power without continuing investment in cardholder benefits
51
indicates, if anything, a lack of market power; evidence showing that Amex must
compete on price in order to attract consumers does not show that Amex has the
power to increase prices to supracompetitive levels.
The District Court’s finding that cardholder insistence “effectively
prevents merchants from dropping American Express,” id. at 192, ignores the fact
that roughly one‐third of credit card‐accepting merchants in the United States
currently do not accept Amex. As explained by the economist amici, “[t]here is
no meaningful economic difference between ‘dropping American Express’ . . .
and a decision not to accept American Express in the first place.” Econ. Amicus
Br. 7. A merchant chooses whether or not to accept a particular credit card based
on an individualized assessment of the various costs and benefits associated with
accepting that card. Because different merchants face different costs and
benefits, they can—and in fact do—reach different conclusions about whether or
not to accept that card. A single merchant running a pool supply store in a small
town, for example, very well might choose not to accept Amex because the
products he sells, such as pool toys and cleaning supplies, do not generate
enough profit to justify paying the relatively high fees he would be charged to
accept Amex cards. By contrast, a major home appliance outlet is more likely to
52
pay Amex’s merchant fees because it sells higher‐ticket items that cardholders
may wish to purchase using their Amex cards. For his or her part, the
cardholder may be more likely to purchase a high‐ticket item from a merchant
who accepts Amex because this purchase will yield relatively high cardholder
rewards and benefits—but it is less likely that the cardholder will insist on using
Amex for small purchases, like pool cleaning supplies, that yield fewer
cardholder rewards.50 In this way, cardholder insistence is precisely what makes
accepting Amex cards worthwhile for those merchants that do.
The NDPs prevent a merchant from seeking high‐end clientele by
advertising acceptance of Amex cards but then, at the critical point of sale,
offering that clientele a discounted price for not using the Amex card. In this
case, we see no monopolistic danger in this purpose. Amex has a legitimate
interest in seeing that cardholders who take advantage of amenities offered to
Amex cardholders simply by virtue of owning the card are not enticed to use
their Visa or MasterCard by card‐connected discounts from merchants. For
For similar reasons, a doctor may choose to not accept American Express from her
50
patients for co‐payments. The high cost of merchant fees from American Express may
cut in to the doctor’s profit margins, and the doctor has little concern about “marquee
buyers.” Her patients come to her because they think she is a good doctor—and even if
her patients would prefer some frequent flyer miles from using a credit card for the co‐
payment they won’t switch doctors just for the miles.
53
example, Amex does not want a cardholder who takes ample advantage of such
amenities—and prestige—when travelling to be talked into accepting a discount
at the point of purchase of lawn furniture by paying with Visa or MasterCard.
We conclude that, so long as Amex’s market share is derived from
cardholder satisfaction, there is no reason to intervene and disturb the present
functioning of the payment‐card industry. Whatever market power Amex has
appears, on this record, to be based on its rewards programs and perceived
prestige, i.e., Amex cardholders regard the card as cheaper than competing Visa
and MasterCard cards. The NDPs protect that program and that prestige.
Outlawing the NDPs would appear to reduce this protection—and likely with
the result of increasing the market shares of Visa and MasterCard.51
3. Actual Adverse Effect on Competition
The District Court’s erroneous market definition caused its anticompetitive
effects finding to come up short, for it failed to consider the two‐sided net price
accounting for the effects of the NDPs on both merchants and cardholders.
51 One of the ironies of this case is that the government, which usually worries about
oligopolists engaging in indirect collusion leading to pricing similarities, seeks relief in
this case that might drive the three cards to greater similarities. Indeed, the differences
between the major payment cards have narrowed over time, as one might expect from
healthy competition. The relief sought by the government in this case could even
increase market concentration by reducing Amex’s share to Visa’s and MasterCard’s
benefit.
54
Though acknowledging that it had no “empirical evidence that the NDPs have
resulted in a higher two‐sided price,” id. at 215, the District Court nevertheless
maintained that Plaintiffs had provided sufficient circumstantial evidence and
expert testimony to support the conclusion that the NDPs had anticompetitive
effects on the market as a whole. This finding hinged on the District Court’s
conclusion that “[p]roof of anticompetitive harm to merchants, the primary
consumers of American Express’s network services, is sufficient to discharge
Plaintiffs’ burden in this case.”52 Id. at 208 (emphasis added).
This analysis erroneously elevated the interests of merchants above those
of cardholders. Under the direct method of proving by the rule of reason that
Amex violated § 1, Plaintiffs bore the initial burden to show that Amex’s NDPs
have “an actual adverse effect on competition as a whole in the relevant market.”
K.M.B., 61 F.3d at 127 (emphasis added) (internal quotation marks omitted).
Here, the market as a whole includes both cardholders and merchants, who
comprise distinct yet equally important and interdependent sets of consumers
sitting on either side of the payment‐card platform. The NDPs simultaneously
52
The District Court also concluded that Plaintiffs offered sufficient proof of harm on the
cardholder side of the market in the form of higher retail prices. This conclusion is erroneous, as
it fails to take into account offsetting benefits to cardholders in the form of rewards and other
services.
55
affect competition for merchants and cardholders by protecting the critically
important revenue that Amex receives from its relatively high merchant fees.
The revenue earned from merchant fees funds cardholder benefits, and
cardholder benefits in turn attract cardholders. A reduction in revenue that
Amex earns from merchant fees may decrease the optimal level of cardholder
benefits, which in turn may reduce the intensity of competition among payment‐
card networks on the cardholder side of the market.
By attracting cardholders, Amex delivers a significant benefit to
merchants: Amex cardholders. Amex cardholders are considered “marquee
buyers” within the payment‐card industry; they tend not only to be more
affluent than cardholders on competitor networks, but they also spend more on
average per transaction than other cardholders and do so more often.53 See Am.
Express Co., 88 F. Supp. 3d at 200–01. Even if Amex cardholders were not
marquee buyers, however, merchants still would benefit from Amex’s NDPs
insofar as those NDPs help attract cardholders.54
53 See supra note 31.
54 See Klein et al., supra note 4, at 580 (explaining that “the value of a payment system to
[cardholders] increases with the number of merchants that accept the card and the
value of a payment system to merchants increases with [cardholder] use of the card.”).
56
The District Court fairly observed that Amex’s “price increases were not
wholly offset by additional rewards expenditures or otherwise passed through to
cardholders.” Id. at 215. Indeed, evidence on the record suggests—and Amex
conceded at oral argument—that not all of Amex’s gains from increased
merchant fees are passed along to cardholders in the form of rewards. Even so,
the fact remains that “the evidentiary record does not include a reliable measure
of the two‐sided price charged by American Express that correctly or
appropriately accounts for the network’s expenses on the cardholder side of the
platform.” Id. at 199 n.30. A finding that not every dime of merchant fees is
passed along to cardholders says nothing about other expenses that Amex faces,
let alone whether its profit margin is abnormally high.
Because the NDPs affect competition for cardholders as well as merchants,
the Plaintiffs’ initial burden was to show that the NDPs made all Amex
consumers on both sides of the platform—i.e., both merchants and cardholders—
worse off overall. Plaintiffs’ argument that the language “as a whole” means
only that they were required to show harm to competition in general (rather than
to only a single competitor) is unavailing. See Pls.’ Br. 69–70. Whether the NDPs
had pro‐competitive effects on cardholders—let alone whether any alleged pro‐
57
competitive effects on cardholders outweigh “anticompetitive” effects on
merchants—has no bearing on whether Plaintiffs carried their initial burden
under the rule‐of‐reason analysis to show anticompetitive effects on the relevant
market “as a whole.” See K.M.B., 61 F.3d at 127. It was not Amex’s burden to
disprove anticompetitive effects; it was Plaintiffs’ burden to prove them.
Plaintiffs might have met their initial burden under the rule of reason by
showing either that cardholders engaged in fewer credit‐card transactions (i.e.,
reduced output), that card services were worse than they might otherwise have
been (i.e., decreased quality), or that Amex’s pricing was set above competitive
levels within the credit‐card industry (i.e., supracompetitive pricing). At trial,
however, they offered no such proof. To the contrary, the evidence presented at
trial suggested that industry‐wide transaction volume has substantially increased
and card services have significantly improved in quality. At oral argument,
Plaintiffs conceded that credit‐card networks are offering more and better
cardholder benefits than ever before, including enhanced fraud‐protection
services, airline miles, and cash‐back rewards. Increased investment in
cardholder rewards has accompanied a dramatic increase in transaction volume
across the entire credit‐card industry: in 2013, total combined transaction volume
58
from all four major payment networks represented approximately $2.4 trillion,
marking an eight‐percent increase from 2012 and a thirty‐percent increase from
2008. See App. 2428.
This evidence of increased output is not only indicative of a thriving
market for credit‐card services but is also consistent with evidence that Amex’s
differentiated closed‐loop model, supported by its NDPs, has increased rather
than decreased competition overall within the credit‐card industry. The District
Court thus erred by “infer[ring] competitive injury from price and output data
absent some evidence that tends to prove that output was restricted or prices
were above a competitive level.” Brooke Grp. Ltd., 509 U.S. at 237.
Without evidence of the net price affecting consumers on both sides of the
platform, the District Court could not have properly concluded that a reduction
in the merchant‐discount fee would benefit the two‐sided platform overall.
Because Plaintiffs provided neither “a reliable measure of American Express’s
per transaction margins,” Am. Express Co., 88 F. Supp. 3d at 198, nor “a reliable
measure of American Express’s two‐sided price that appropriately accounts for
59
the value or cost of the rewards paid to cardholders,” id. at 215, they failed to
meet their burden to show anticompetitive effects directly.55
CONCLUSION
The District Court erred here in focusing entirely on the interests of
merchants while discounting the interests of cardholders. This approach does
not advance overall consumer satisfaction. Though merchants may desire lower
fees, those fees are necessary to maintaining cardholder satisfaction—and if a
particular merchant finds that the cost of Amex fees outweighs the benefit it
gains by accepting Amex cards, then the merchant can choose to not accept
Amex cards. Indeed, many merchants have already made and continue to make
this choice.
Plaintiffs bore the burden in this case to prove net harm to Amex
consumers as a whole—that is, both cardholders and merchants—by showing
55 Amex argues on appeal that the District Court’s liability determination and injunction
each separately violate the rule of Colgate, which states that “‘the [Sherman Act] does
not restrict the long recognized right of [a] trader or manufacturer . . . freely to exercise
his own independent discretion as to parties with whom he will deal.’” In re Adderall
XR Antitrust Litig., 754 F.3d 128, 134 (2d Cir. 2014) (first and second alterations in
original) (quoting United States v. Colgate & Co., 250 U.S. 300, 307 (1919); see also
Monsanto Co. v. Spray‐Rite Serv. Corp., 465 U.S. 752, 761 (1984) (“A manufacturer of
course generally has a right to deal, or refuse to deal, with whomever it likes, as long as
it does so independently.”). We need not decide this question, however, because we
have already determined that the liability determination should be reversed.
60
that Amex’s nondiscriminatory provisions have reduced the quality or quantity
of credit‐card purchases. Given the District Court’s explicit finding that neither
party provided reliable evidence of Amex’s costs or profit margins accounting
for consumers on both sides of the platform, and given evidence showing that
the quality and output of credit cards across the entire industry continues to
increase, we conclude that Plaintiffs failed to carry their burden to prove a § 1
violation. Accordingly, we REVERSE and REMAND the case with instructions
to enter judgment in favor of Amex.
61
ADDENDUM
Figure 1
The basic functions of as many as five distinct actors comprising the Visa
and MasterCard cooperative, open‐loop systems.
Cardholder Side NETWORK Merchant Side
Actor Cardholder Issuer NETWORK Acquirer Merchant
Function Purchases Cardholder’s Middleman. Merchant’s Sells goods
goods and bank. Brings bank. and services
services Provides together Responsible to
from cards to merchants & for both cardholders.
merchants. cardholders, acquirers merchant
collects with acquisition
payment, cardholders and
and & issuers. accepting
commonly card
provides transaction
cardholder data from
rewards merchants
such as cash for
back or verification
airline miles. and
processing.
Examples Citibank; Visa; First Data
JPMorgan MasterCard Corporation;
Chase; Bank Chase
of America; Paymentech
Capital One
Figure 256
The bassic relatio
onships annd interacctions betw
ween acto
ors in the V
Visa and
MasterrCard coop perative, open‐loop p networkks.
56 Rochet & Tirole, IInterchange Fees, supra note 3, at 774.
63
Figure 3
The basic functions of the three actors in the American Express proprietary,
closed‐loop system.
Cardholder AMERICAN EXPRESS Merchant
Side Side
Actor Cardholder Issuer NETWORK Acquirer Merchant
Function Purchases Provides Middleman. Responsible Sells goods
goods and cards to Brings for both and
services cardholders, together merchant services to
from collects merchants acquisition cardholders
merchants. payment, & acquirers and .
and with accepting
commonly cardholders card
provides & issuers. transaction
cardholder data from
rewards merchants
such as cash for
back or verification
airline and
miles. processing.
Examples American American American
Express Express Express
64
Figure 457
The bassic relatio
onships annd interacctions betw
ween the aactors in tthe
proprieetary, clossed‐loop A
American Express ssystem.
57 Rochet & Tirole, IInterchange Fees, supra note 3, at 772.
65
Figure 5
The relationship of the markets at issue in Visa and the markets at issue in
this case can be visualized this way:
Visa
GENERAL PURPOSE CARDS GENERAL PURPOSE CARD
NETWORK SERVICES
Specific Actor Actor Specific
Identities Identities
20,000 Issuers Sellers Networks Visa;
member MasterCard
banks
Cardholders Buyers Issuers58 20,000 member
banks
American Express
Cardholder Side NETWORK Merchant Side
Actor Cardholder Issuer NETWORK Acquirer Merchant
This Court recognized in Visa that “[n]etworks also compete for merchants”—but
58
because this bore on its analysis only insofar as it relied on merchant testimony that
merchants could not afford to discontinue accepting Visa or MasterCard, see Visa, 344
F.3d at 239–40, merchants have been omitted from the “buyers” column of this table for
the sake of simplicity.
66
