On February 18, 2015, American Express lost its court battle with the Department of Justice's Antitrust Division over the card's Non-Discrimination Provisions ("NDPs"), which prohibited merchants from steering customers to another network's cards. The American Express case demonstrates that two commonly-held beliefs about antitrust in America are false. First, the decision shows that the DOJ is willing and able to litigate complex rule-of-reason cases through trial. Second, like the DOJ's other recent vertical restraints cases, this decision reminds us that vertical restraints by firms with market power are still risky and require careful antitrust analysis.
After a seven-week trial, Judge Garaufis in the United States District Court for the Eastern District of New York issued a 150-page decision siding with the Department of Justice (DOJ), ruling that American Express's NDPs were restraints of trade in violation of Section 1 of the Sherman Act. The decision is based on a full Rule of Reason analysis of competitive effects of American Express's anti-steering provisions. The trial spun out of the DOJ's October 2010 suit of Visa, MasterCard and American Express challenging the cards' NDPs. Visa and MasterCard settled, agreeing to modify their rules to permit forms of discounting at the point of sale and to allow merchants to encourage the use of other card brands, while American Express chose to defend its NDPs at trial.
Complexities in Vertical Restraints
Companies often ask their suppliers or customers to promote the company's products, or to avoid promoting competing products. In general, "vertical restraints" (i.e., agreements between firms at different levels of production and distribution setting the terms on which they may buy or sell goods and services) are viewed as pro-competitive. For example, a manufacturer's requirement that a distributor market the manufacturer's product in a defined territory usually results in better customer service in that territory, which promotes competition. American Express's loss demonstrates how vertical agreements that prohibit customers from promoting the products of other sellers can violate the antitrust laws.
Court Finds that American Express's Anti-Steering Rules are Anti-Competitive
The court noted that the credit card industry is "complex" and "a critical component of the commerce in the United States." It defined the market for determining if the challenged anti-steering rules adversely affect competition as "the market for general purpose credit and charge card network services" in the United States. It held that debit card networks do not compete against credit card networks, because most merchants will not switch from accepting credit cards to accepting only debit cards in response to an increase in the fees they pay to accept credit cards. The court concluded that American Express has market power, notwithstanding its 26.4% share of the relevant market. The court did not rely solely on market share in determining that American Express has market power. The judge considered additional factors, such as:
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concentration in the market (there are only four major credit card networks);
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barriers to entry (no new entrants since Discover in 1985);
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some cardholders' insistence on using American Express cards, and;
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the pricing practices of American Express (including "repeatedly and profitably" raising prices to merchants, and profitably charging higher prices than other card networks, without significant loss of merchant acceptance of its cards).
Of note, the court agreed with the Department of Justice that where there is evidence of adverse effects on competition, it was not necessary to show that American Express had market power. The court determined that American Express's anti-steering rules injured competition by reducing American Express's incentive, as well as those of Visa, MasterCard and Discover, to offer merchants lower credit card rates. "There is nothing to offset credit card networks' incentives—including American Express's incentive—to charge merchants inflated prices for their services," the judge wrote. "This, in turn, results in higher costs to all consumers who purchase goods and services from these merchants."
The Court Rejects American Express's Arguments that its Anti-Steering Rules have Pro-Competitive Benefits
American Express offered several pro-competitive benefits of its NDPs, including chiefly that they safeguarded American Express's ability to effectively compete against lower-priced credit card networks. The court rejected this argument as a matter of law, holding that "[t]o find the NDPs to be reasonable restraints on trade because they shield American Express's preferred business strategy from a legitimate form of interbrand competition, especially competition on the basis of price, would amount to 'nothing less than a frontal assault on the basic policy of the Sherman Act.'"
Takeaway: The DOJ's Win in American Express Will Likely Result in Increased Antitrust Challenges to Vertical Restraints
The DOJ will likely continue to push complex rule-of-reason cases through to trial. As the DOJ noted in its press release announcing the American Express decision, "[w]ith this achievement, we are sending an unambiguous message that the Department of Justice is prepared to litigate any case, no matter how complex . . . ." It will also continue to examine vertical restraints by firms with market power. Prior cases (specifically the DOJ's prior vertical restraints cases against United Regional Health Care System and Blue Cross Blue Shield of Michigan) have shown a trend of the DOJ casting a more critical eye on companies gaining or maintaining market power through vertical restraints, and the American Express decision solidifies the agency's resolve. As Bill Baer, the Assistant Attorney General in charge of the Antitrust Division, noted in a speech last week, ""[W]e will pay close attention to abuse of market power – for example, to contracting practices, such as anti-tiering, anti-steering, and most favored nation clauses, that threaten competitive harm."
