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 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.
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.
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 contract with merchants allows the gas buyer to have a card
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 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."
The interdependency that causes price changes on one side can result in demand changes on the other side.
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.
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.
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.
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.
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.
D. Credit Cards Today
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%).
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 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.
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 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)."
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.
Within its closed-loop system, Amex directly sets the interchange fee so as to maximize profit.
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.
Both merchants and cardholders engage in "multihoming," meaning that both cardholders and merchants may choose to use or accept several different 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.
Throughout the 1960s and 1970s, Visa, MasterCard, and Amex competed fiercely with one another for consumers on both sides of their platforms.
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.
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.
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:
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.
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
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.
In 2011, Visa and MasterCard entered into consent judgments and voluntarily rescinded their anti-steering provisions. Amex, however, proceeded 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:
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.
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, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (internal quotation marks omitted).
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, 104 S.Ct. 2948, 82 L.Ed.2d 70 (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 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, 110 S.Ct. 1884, 109 L.Ed.2d 333 (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, 127 S.Ct. 2705, 168 L.Ed.2d 623 (2007). Under the per se rule, certain practices, e.g., horizontal
"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 `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, 92 S.Ct. 1126, 31 L.Ed.2d 515 (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, 108 S.Ct. 1515, 99 L.Ed.2d 808 (1988). Vertical restraints "are generally judged under the rule of reason."
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
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 `anticompetitive behavior. Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 237, 113 S.Ct. 2578, 125 L.Ed.2d 168 (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).
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 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.").
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, 127 S.Ct. 2705. 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.
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 "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, 76 S.Ct. 994, 100 L.Ed. 1264 (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
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 Visa, 344 F.3d at 237-40; 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:
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 240-41; see also id. at 243 ("In the market for network services,
In Visa, the horizontal restraint in the market for network services had an anticompetitive
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:
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
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.
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 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
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 increase cardholder benefits — or, viewed another way, "decrease prices" to 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, 112 S.Ct. 2072 (internal quotation marks omitted); see also E. I. du Pont de Nemours & Co., 351 U.S. at 391, 76 S.Ct. 994 ("[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 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."
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.
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 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
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.
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.
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"
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 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 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.
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 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.
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. 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."
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
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.
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 procompetitive 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
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, 113 S.Ct. 2578.
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 the value or cost of the rewards paid to cardholders," id. at 215, they failed to meet their burden to show anticompetitive effects directly.
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 that Amex's nondiscriminatory
The basic functions of as many as five distinct actors comprising the Visa and MasterCard cooperative, open-loop systems.
Cardholder Side NETWORK Merchant Side ActorCardholder Issuer NETWORK Acquirer Merchant FunctionPurchases 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. ExamplesCitibank; Visa; First Data JPMorgan MasterCard Corporation; Chase; Bank Chase of America; Paymentech Capital One
Figure 2 56
The basic relationships and interactions between actors in the Visa and MasterCard cooperative, open-loop networks.
The basic functions of the three actors in the American Express proprietary, closed-loop system.
Cardholder AMERICAN EXPRESS Merchant Side Side ActorCardholder Issuer NETWORK Acquirer Merchant FunctionPurchases 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. ExamplesAmerican American American Express Express Express
Figure 4 57
The basic relationships and interactions between the actors in the proprietary, closed-loop American Express system.
The relationship of the markets at issue in Visa and the markets at issue in this case can be visualized this way:
VisaGENERAL PURPOSE CARDS GENERAL PURPOSE CARD NETWORK SERVICES Specific Actor Actor Specific Identities Identities20,000 Issuers SellersNetworks Visa; member MasterCard banks Cardholders BuyersIssuers 5820,000 member banks
American Express Cardholder Side NETWORK Merchant Side ActorCardholder Issuer NETWORK Acquirer Merchant [Editor's Note:The preceding image contains the reference for footnote 58]
Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. ECON. 645, 664-65 (2006).
Am. Express Co., 88 F.Supp.3d at 153 (citations omitted).