American Express, the Rule of Reason, and the Goals of Antitrust

• Jurisdiction: United States,Federal
• Citation: Vol. 98
• Publication year: 2021

98 Nebraska L. Rev. 319. American Express, the Rule of Reason, and the Goals of Antitrust

American Express, the Rule of Reason, and the Goals of Antitrust

Harry First(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 319

II. The Debate over the Consumer Welfare Standard ...... 322

III. Applying the Rule of Reason .......................... 328
A. The General Framework ........................... 328
B. Step One .......................................... 331
C. Muddying the Waters ............................. 334
D. The Bottom Line: An Analytical Mess .............. 336

IV. The Rule of Reason and MultiSided Platforms ........ 337

V. Missing in Action: The Consumer Welfare Standard . . . 340

VI. Conclusion ............................................ 343

I. INTRODUCTION

Antitrust enforcement affects more than just price and output-it's part of our everyday lives, from the price of groceries at the market to the cost of prescription drugs.

-Senator Amy Klobuchar(fn1)

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On February 26, 2018, the Supreme Court heard oral argument in Ohio v. American Express.(fn2) The Court had granted certiorari on petition of the State of Ohio and ten other state plaintiffs in a suit originally brought by the United States Department of Justice and sixteen states. Although the United States eventually joined Ohio in urging the Supreme Court to reverse the lower court's decision,(fn3) it was the State Solicitor of Ohio, Eric Murphy, who took the lead on oral argument.

It didn't take Justice Gorsuch long to start the questioning. One minute and six seconds into Murphy's argument, Justice Gorsuch stopped him with this:

JUSTICE GORSUCH: We're not here to protect competitors, right, Mr. Murphy?

MR. MURPHY: Correct.

JUSTICE GORSUCH: Or-or necessarily even merchants. The antitrust lawsare aimed at protecting consumers; you'd agree with that?

MR. MURPHY: Correct, although in this-

JUSTICE GORSUCH: Okay. So, given that, there's no evidence of restricted output in this case, correct?

MR. MURPHY: I-I would agree that it's-there's-it's ambiguous. There's no [evidence] one way or the other about whether-whether it has restricted output.

JUSTICE GORSUCH: And that's normally what the antitrust laws care about, is deadweight loss. That's the primary concern of antitrust activity, wouldn't you agree?

MR. MURPHY: Correct. . . .(fn4)

Ohio lost the case. Justice Gorsuch joined the majority opinion. Justice Breyer authored the dissenting opinion, in which Justices Ginsburg, Sotomayor, and Kagan joined. He began the dissent in a somewhat curious way:

For more than 120 years, the American economy has prospered by charting a middle path between pure laissez-faire and state capitalism, governed by an antitrust law dedicated to the principle that markets, not individual firms and certainly not political power, produce the optimal mixture of goods and services. By means of a strong antitrust law, the United States has sought to avoid the danger of monopoly capitalism. Long gone, we hope, are the days

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when the great trusts presided unfettered by competition over the American economy.

This lawsuit is emblematic of the American approach. Many governments around the world have responded to concerns about the high fees that credit-card companies often charge merchants by regulating such fees directly. The United States has not followed that approach. The Government instead filed this lawsuit, which seeks to restore market competition . . . .(fn5)

Ohio v. American Express came to the Supreme Court as a fully litigated rule of reason case. The government plaintiffs had won at trial, but the Second Circuit Court of Appeals upended the district court's decision.(fn6) Persuaded by American Express (Amex) that the district court's market definition had not adequately taken account of the two-sided aspect of Amex's product, and without saying exactly how the market should be defined, the court of appeals held that the district court "erred in excluding the market for cardholders from its relevant market definition."(fn7) Given this failure, the plaintiffs had not met their "initial burden" of showing "net harm to Amex consumers as a whole-that is, both cardholders and merchants."(fn8)

It was these two aspects of the Second Circuit's decision-how to define the market and what proof was necessary for the plaintiffs to meet their "initial burden" of showing anticompetitive effect-that were to be the focus of the legal arguments before the Supreme Court. So why did Justice Gorsuch lead with a question on consumer welfare, output, and deadweight loss? And why did Justice Breyer lead with a spirited defense of the "American approach" to using antitrust litigation, rather than government regulation, to restrain the power of the "great trusts"?

The key to this debate between Justices Gorsuch and Breyer is history. The intriguing question is how this debate affected the decision in American Express. The consequential question for antitrust analysis is whether the Supreme Court's opinion got the rule of reason analysis right.

Taking the last question first, in this Article I argue that the Court's opinion muddled the rule of reason analysis instead of advancing it and misused the concept of "market" along the way. The opinion also has implications for the consumer welfare debate that is now roiling antitrust's waters, but, again, the opinion only confused our understanding of "consumer welfare" as a goal of antitrust. A correct application of the rule of reason in this case, and a cleareyed focus on the ability of consumers to make choices in marketplace transactions,

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should have led the Court to a judgment in favor of the government plaintiffs.

I begin in Part II with a general discussion of the debate over the consumer welfare standard. In Part III of the Article I discuss the overall rule of reason analysis that the Court applies; Part IV examines the effect of two-sidedness on this analysis. In Part V I return to consumer welfare and its confusing use in this case.

II. THE DEBATE OVER THE CONSUMER WELFARE STANDARD

The argument between Justices Gorsuch and Breyer is almost a literal replay of the 1960s argument between Robert Bork and Ward Bowman on one side, and Harlan Blake and William Jones on the other. It was played out initially in Fortune Magazine, subsequently in the Columbia Law Review, and finally one-upped by Bork in his famous book, The Antitrust Paradox.(fn9)

The heart of Bork's argument is wellknown. Antitrust law has a single goal, which Bork called "consumer welfare." Catchy the phrase was, and the Supreme Court picked it up one year after the Antitrust Paradox was published: "Antitrust is a consumer welfare prescription," the Court wrote, citing Bork.(fn10) Gorsuch's opening questions are a direct echo of Bork.

Breyer's opening paragraph is a direct echo-almost a paraphrase-of a core argument that Blake/Jones made in their response to Bork/Bowman. Blake/Jones wrote:

The great virtue of the competitive process is that it makes possible the attainment of a viable economy with a minimum of political interference . . . Is not this the aspect of antitrust which makes it uniquely American? . . .

. . .

[A]ntitrust operates to forestall concentrations of economic power which, if allowed to develop unhindered, would call for much more intrusive government supervision of the economy. Reliance on competitive markets accommo-

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dates our interest in material wellbeing with our distrust of concentrations of political and economic power in private or governmental hands.(fn11)

The debate between Bork and Bowman and Blake and Jones-and between Gorsuch and Breyer-is important for antitrust policy. Bork argued that his single goal of consumer welfare was far preferable to the "loose rhetoric" and "flabby thinking" behind the "many other benefits" that antitrust purportedly could advance.(fn12)

Blake and Jones, on the other hand, argued for multiple goals. In addition to the goal of avoiding more intrusive government regulation to deal with concentrated private power, Blake and Jones included: freedom of choice for consumers (as well as for entrepreneurs); efficient allocation and use of resources; "minimizing maldistributions of wealth" by preventing "sustained extractions of prices unrelated to costs"; encouraging the formation of markets and assuring ease of entry; and protecting participants in markets-"particularly small businessmen"-against exclusionary practices.(fn13) The bottom line for Blake and Jones was that Congress was primarily motivated by a concern for the "abusive behavior of economic giants" and "sympathy for their victims, consumers and businessmen deprived of alternatives and opportunities."(fn14) Is it "even conceivable," they asked rhetorically, that Congress in 1890 "would pass an emotionally charged measure like the Sherman Act out of an exclusive preoccupation with the idea that prices should always equal marginal costs?"(fn15)

The question of antitrust's goals is important, of course, but perhaps as consequential for the debate is the method for achieving those goals. Multiple goals could call for multiple approaches-history, psychology, economics.(fn16) This complicates analysis, but the problem of multiple goals is actually deeper. For many of the multiple goals there is no clear way...