Will American Express Reward Antitrust Defendants?
On June 25, 2018, the United States Supreme Court ruled in favor of American Express (“AmEx”) in Ohio v. American Express Co., 138 S. Ct. 2274 (2018), one of the most significant government antitrust enforcement actions in recent times. In 5-4 decision, the Supreme Court agreed with AmEx that the relevant market for purposes of analyzing the competitive effects of AmEx’s anti-steering rules, which contractually prohibit merchants from discouraging customers from using an AmEx card at the point of sale, is a single “two-sided” transaction market that simultaneously encompassed both sides of the AmEx payment platform.
The Supreme Court affirmed the Second Circuit, holding that the Department of Justice had failed to prove that AmEx had market power or that its anti-steering rules resulted in higher prices, restricted output, or restricted competition among credit card companies when both sides of its platform (i.e., the cardholder side as well as the merchant side) were considered at once. AmEx, 138 S. Ct. at 2287-89. The Court noted that “[t]o the contrary, while these agreements have been in place, the credit-card market experienced expanding output and improved quality.” Id.
The AmEx decision marks the first time that the Supreme Court has held that antitrust plaintiffs must prove their case within a single market composed of two sides in an antitrust case. The concept of two-sided platforms or markets is not a new economic concept, but what is new is the requirement that antitrust claimants must prove that the restraints they are challenging led to higher overall (hypothetical) prices, output, and competition in a market composed of two different sides at once. It was not enough, in other words, for the government to prove that the anti-steering restraints harmed merchants in the form of higher prices they paid; the government also needed to prove that an overall hypothetical price paid by both sides of the platform was also inflated.
This requirement of proving overall effects within a single hypothetical market is a potential boon for antitrust defendants who operate two-sided platforms. Plaintiffs will inevitably find challenges in proving that such a defendant has market power or has harmed competition in such a single, two-sided market, in part because it has never been done on those terms before.
The question is, how far will the AmEx ruling extend? Many companies certainly operate two-sided platforms that link distinct customers on different sides and in which one side benefits from the participation of those on the other side of the platform. This dynamic is increasingly frequent with the rise of software providers that offer platforms that promote interconnectedness. For example, ride-sharing applications, such as Uber or Lyft, seek riders on one side and drivers on the other. If rates are too high, then the application might be less successful in obtaining ridership. If rates are set too low, then they might not be able to attract enough drivers. Similar dynamics exist in advertisement-based businesses, whether traditional newspaper or magazine business models that cater business from both readers and from advertisers, or new technology, such as search engines (e.g., Google, Yahoo!, Bing) or social media sites (e.g., Facebook, Instagram). In short, many cutting-edge companies potentially in antitrust cross-hairs might invoke two-sided market doctrine.
Yet not every company that could be said to operate a two-sided platform will be able to avail itself of the AmEx ruling. A farmer’s market could be said to connect buyers and sellers on two different sides of a platform, but if it facilitated a price-fixing agreement among its sellers, it is not clear it could avail itself of the AmEx ruling. And Justice Thomas’s characteristically concise majority opinion in AmEx does little to indicate how the ruling might apply beyond American Express’s own platform.
Five months out, early indications are that the decision may have limited reach outside of the payment card industry. To date, not a single lower court has followed the Supreme Court in finding a single relevant market that was composed of two sides. Even before the Supreme Court affirmed the Second Circuit’s decision, lower courts applying the Second Circuit’s decision applied the twosided construct narrowly. For example, in U.S. Airways, Inc. v. Sabre Holdings Corp., No. 11-cv-2725 (LGS), 2017 WL 1064709, at *8 (S.D.N.Y. Mar. 21, 2017), defendants made a motion for judgment as a matter of law after a jury found that the relevant market for a Global Distribution System (“GDS”) was one-sided. GDS provides services for airlines and travel providers, on one side, to distribute schedule, fare and booking information to travel agents, and allows travel agents, on the other side, to search for, book and manage travel reservations. Id. at *1. The District Court denied defendants’ motion following the Second Circuit’s Amex decision, noting that while “[t]he vocabulary of two-sidedness is new, . . . courts have long addressed claims and developed case law involving businesses now recognized as two-sided platforms by closely examining the competitive realities of the market. . . . The ultimate goal of defining the relevant market remains to identify the market participants and competitive pressures that restrain an individual firm’s ability to raise prices or restrict output.” Id. at *8 (quotations omitted).
Following AmEx, defendants in In re National Collegiate Athletic Association Athletic Grant-in-Aid Cap Antitrust Litigation, Case No. 14-md-02541-CW, 2018 WL 4241981 (N.D. Cal. Sept. 30, 2018) (“NCAA”), moved for reconsideration of the court’s adoption of plaintiff’s relevant market definition arguing there was a question of fact whether a two-sided market existed for athletic services. Id. at *1. But the court reaffirmed its prior determination, distinguishing AmEx on the grounds that NCAA involved horizontal restraints (rather than the purely vertical restraints at issue in AmEx), and finding that defendants failed to provide sufficient evidence of a “twosided” market for student athletes. Id. at *6. These cases indicate that lower courts may be open to arguments about the limited reach of the AmEx decision and limit it to the unique facts of that case.
In this regard, AmEx may prove to have a similarly limited reach as the last time Justice Thomas wrote the majority opinion in a Section 1 case—Texaco Inc. v. Dagher, 547 U.S. 1 (2006). There, the Court rejected a per se analysis of the pricing decisions of a fully integrated joint venture, in which the venture participants maintained no separate identity in the relevant markets. That decision also contained some language suggesting it may sweepingly protect “joint ventures” among competitors, but has been largely limited to its unique facts in the lower courts. See, e.g., Starr v. Sony BMG Music Entm’t, 592 F.3d 314, 326 (2d Cir. 2010) (distinguishing Dagher). The question whether AmEx will prove to have large rewards for antitrust defendants thus remains an open one.