COMPETITION LAW AS COMMON LAW: AMERICAN EXPRESS AND THE EVOLUTION OF ANTITRUST.

• Author: Katz, Michael L.
• Position: Symposium: The Post-Chicago Antitrust Revolution

INTRODUCTION 2062 I. THE EVOLUTION OF COMPETITION LAW 2065 II. THE SUBSTANTIVE MEANING THAT HAS EVOLVED IN THIS PROCESS 2071 III. THE RULE OF REASON 2072 IV. UNITED STATES V. AMERICAN EXPRESS 2074 V. OHIO V. AMERICAN EXPRESS 2077 A. The Court's Decision to Grant Certiorari 2077 B. The Court's Reformulation of the Rule of Reason 2078 C. Specific Holdings 2081 1. Vertical Restraints Must Be Assessed Within a Formally Defind Antitrust Market 2081 2. The Conduct of a Transaction Platform Must Be Examined in a Single Market Encompassing Both Sides of the Platform 2084 3. In Order to Prove Harm to Competition Directly, Plaintiffs Must Prove That the Challenged Conduct Increased the Two-sided Price Above the Competitive Level or Reduced Output in the Market 2090 a.The Court's Two-Sided Price Test 2092 b.The Court's Output Test 2095 4. The No-Steering Rules Protected Amex Good Will and Prevented Free Riding 2099 VI. APPLE V. PEPPER AND THE UNCERTAIN LEGACY OF THE AMERICAN EXPRESS CASE 2101 CONCLUSION 2105 INTRODUCTION

"[N]o statute," Justice Scalia observed, "can be entirely precise, and... some judgments, even some judgments involving policy considerations, must be left to the officers executing the law and to the judges applying it." (1) This is particularly true of antitrust law because the core antitrust statutes are very brief and imprecise. (2) Indeed, as the Supreme Court explained in National Society of Professional Engineers, "[t]he legislative history makes it perfectly clear that [Congress] expected the courts to give shape to the statute's broad mandate by drawing on common law tradition." (3) Accordingly, "[f]rom the beginning the Court has treated the Sherman Act as a common-law statute." (4) In effect, Congress has delegated to the courts the fleshing out of both the normative standards to be applied in assessing conduct and the process by which courts determine whether these standards are violated. This delegation "permits the law to adapt to new learning." (5)

The courts have two fundamental functions in such an institutional setting. First, the courts must identify applicable normative rules and principles, both substantive and institutional, to guide antitrust decisions. By substantive, we mean those that further the fundamental objectives of antitrust law, which are encompassed at present in the "consumer welfare standard." (6) By institutional, we mean legal rules and principles that: (a) are administrable by generalist courts; (b) base decisions on matters that are in principle provable by the kinds of evidence that are likely to be available as a practical matter; (c) tend to minimize error costs; and (d) offer predictable guidance for the public. The second function is the one commonly ascribed to the courts: to assess the facts in a case in the light of the normative rules and principles and render a decision. Antitrust courts generally rely on various forms of a structured rule of reason in fulfilling both functions. (7)

In a common law-like process, neither function can be well served by imagining a static world in which normative legal standards and institutional considerations can be taken as fixed. Both must be understood, and refined as appropriate, in the light of advances in economic learning and judicial experience that are relevant to the pending case while at the same time giving appropriate deference to precedent. As the Supreme Court explained in Leegin, "[j]ust as the common law adapts to modern understanding and greater experience, so too does the Sherman Act's prohibition on 'restraint[s] of trade' evolve to meet the dynamics of present economic conditions." (8)

We examine the implications of the common law nature of antitrust for the development and application of the rule of reason. (9) We argue that the antitrust rule of reason should be shaped, not just to guide correct application of existing law to the facts of the case (the second fundamental judicial function), but also to enable the courts to participate constructively in the common law-like evolution of antitrust law in the light of changes in economic learning and business and judicial experience (the first fundamental judicial function).

Recent litigation involving American Express (10) offers an excellent setting in which to examine this issue. The case raised central questions regarding the antitrust treatment of a very important business model that had not previously been addressed in antitrust cases. It culminated in the Supreme Court's decision in Ohio v. American Express Company. (11)

American Express acts as a "platform" that facilitates interactions between card-accepting merchants and card-holding consumers. Many of the world's most prominent firms operate similar platform business models that facilitate interactions among different groups of users. For example, Amazon joins merchants and consumers; Apple joins app sellers with iPhone and iPad users through the App Store; Facebook and Google connect advertisers with consumers engaged in social networking and online search, respectively; and Uber joins drivers and riders. Although neither the platform business model nor antitrust litigation regarding platform conduct is new, (12) the platform business model has become increasingly prominent--especially for platforms with digital infrastructures--and there have been very significant developments in recent years in the economic analysis of platform competition. (13) Indeed, research on platform competition has been the most active area of competition economics research over the past fifteen years. And, while earlier cases involved platform businesses--including payment networks--the litigation involving American Express is the first to focus specifically on how to account for the possibility that the challenged conduct has opposing effects on user welfare on different sides of the platform, as well as the first to consider how the new economic learning about platforms should inform antitrust doctrine.

It appears likely that platform competition will be one of the most active areas of antitrust litigation over the coming decade. A healthy common law-like process would enable the law to adapt as appropriate in the light of new learning and new experience. Unfortunately, the Supreme Court in the American Express case applied the rule of reason in a way that hinders such adaptation.

1. THE EVOLUTION OF COMPETITION LAW

   The antitrust statutes are broad and general, and antitrust law applies to almost all aspects of commerce. (14) Judicial decision making in antitrust thus needs to be able to adapt to: (a) the development of new technologies, business models, and market circumstances; (b) the evolution of economic thinking with respect to both substantive antitrust standards and fact-finding tools that is the result of new theoretical work and empirical findings; and (c) the accumulation of judicial experience with respect to the application of antitrust principles in litigation.

   The broad nature of the antitrust statutes makes it relatively straightforward to account for new technologies and business models when they can be adequately assessed by generally accepted economic principles, frameworks, and techniques. And the courts are well suited to engage in the fact-intensive, case-specific inquiries required to determine how existing principles can be adapted to new business practices and market circumstances. (15)

   But what happens when there is disagreement as to whether or how existing economic principles apply to new forms of conduct? And how can the courts incorporate new economic learning when there is no consensus even among economists regarding what constitutes valid new learning? These questions can arise both with respect to new forms of commercial conduct for which there are no applicable legal precedents and for familiar forms of conduct when new learning calls into question existing precedents. The latter raises the question of when fidelity to legal precedent should apply to economic reasoning embedded or assumed in legal propositions. (16)

   In a common law process, the law arises inductively from decided cases, rather than deductively from statutes or other codes. In effect, courts decide individual cases, and the legal principle on which a decision is based is inferred from the decision and the facts of the case. That principle is then applicable in future cases decided by that or inferior courts. The obligation of courts to apply that principle in future cases is embodied in the notion of stare decisis. Broadly speaking, stare decisis enables courts to decide cases without rethinking legal questions that have already been addressed, helps ensure that like cases are decided in a similar fashion, and thus enhances the predictability and perceived fairness and legitimacy of the law.

   But stare decisis is subject to two important limitations, which enable the law to evolve. First, the decision in an earlier case need not control a later case if the later case is different in ways that make application of the earlier decision inappropriate. Lawyers and courts thus need to determine whether the later case is distinguishable from the earlier case. Legal principles do not have to be cast aside whenever there are material new facts. But the extension of a legal principle to materially different circumstances is not an application of stare decisis; it is instead the creation of a new legal rule or the modification of an old one.

   Second, the earlier case can be overruled--its legal principle rejected--if it no longer seems appropriate or correct. (17) This second limitation on stare decisis does not mean that legal precedents should be overruled whenever they are thought to be incorrect. To the contrary, in a case involving the interpretation of a federal statute, the Supreme Court explained that

   stare decisis has consequence only to the extent it sustains incorrect decisions; correct judgments...