Lessons from Amex for Platform Antitrust Litigation

• Publication year: 2021

98 Nebraska L. Rev. 345. Lessons from Amex for Platform Antitrust Litigation

Lessons from Amex for Platform Antitrust Litigation

Evan Chesler(fn*)
David Korn(fn**)

TABLE OF CONTENTS

I. Introduction .......................................... 346

II. A Brief History of a Long Litigation ................... 347
A. The District Court Rules for Plaintiffs Based on a One-Sided Market Definition ...................... 348
B. The Second Circuit Reverses, Applying a Two-Sided Market Definition ................................. 349
C. The Supreme Court Affirms, Embracing a Two-Sided Market Definition ........................... 349

III. Lessons from Amex ................................... 352
A. Lesson One: A Full Rule of Reason Analysis-Not Some Form of Relaxed Review Advocated by the Government-Applies to Vertical Agreements Between a Platform and Customers on One Side of the Platform ...................................... 352
B. Lesson Two: For That Rule of Reason Analysis, a Plaintiff First Must Define a Relevant Market That Includes Both Sides of Two-Sided Transaction Platforms ......................................... 353
C. Lesson Three: When the Relevant Market Is Two-Sided, a Plaintiff Must Demonstrate That the Challenged Conduct Harmed Competition in the Market as a Whole ................................ 356

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IV. Misperceptions About Amex ........................... 358
A. Fallacy One: Two-Sided Market Definition Does Not Apply to "Mature" Platforms ....................... 358
B. Fallacy Two: A Platform's Conduct Should Be Condemned If Platform Consumers on One Side Are "Subsidized" by Those Who Do Not Use the Platform .......................................... 359
C. Fallacy Three: Amex Will Complicate and Confuse Antitrust Analysis in a Wide Range of Cases ....... 361

I. INTRODUCTION

Ohio v. American Express (Amex)(fn1) is the first case in the United States in which a court addressed the proper antitrust analysis of claims against two-sided platforms.(fn2) The overarching lesson from Amex is that the Supreme Court combined existing antitrust doctrine with modern economic analysis of multisided platforms to reach a decision that best captures economic reality.(fn3) In applying traditional antitrust analysis, the Supreme Court elaborated on (some critics say departed from) the canonical "rule of reason" cases in ways that can have meaning for antitrust litigation involving two-sided platforms. In some respects, what the Court said has meaning for the rule of reason more broadly.

This Article, written one year after the decision, highlights several lessons from the Court: (1) vertical agreements by two-sided platforms are reviewed using a full rule of reason analysis, not an abbreviated or relaxed approach; (2) as a threshold step to that analysis, a plaintiff must define a relevant market that includes both sides of two-sided transaction platforms; and (3) when the relevant market is two-sided, the plaintiff bears the burden of demonstrating harm to competition in the market as a whole, which means evidence of price and output

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effects on one side of the platform is not sufficient to show harm, nor is evidence of customer loyalty ("insistence") that the platform earns by paying incentives.

This Article also addresses some of the criticisms and misperceptions surrounding the decision. Namely, that a subsidy running to customers on one side of a two-sided platform is (or should be), by itself, a basis for antitrust intervention; that a two-sided market definition need not apply to "mature" transaction platforms; and that the Supreme Court's decision will create uncertainty for platforms and their customers in terms of the types of agreements that may run afoul of the Sherman Act and the burden of proof.

II. A BRIEF HISTORY OF A LONG LITIGATION

In October 2010, U.S. Attorney General Eric Holder announced that the Department of Justice and seventeen states were suing Visa, MasterCard, and American Express based on provisions in the credit card networks' contracts with merchants. Specifically, the government alleged that nondiscrimination provisions (NDPs) in each network's contracts with merchants harmed competition by preventing merchants from steering customers to other forms of payment at the point of sale. A decade earlier, Visa and MasterCard lost a significant antitrust challenge brought by the government to those networks' exclusivity arrangements with card-issuing banks. This time, Visa and MasterCard settled immediately and agreed to change their rules. Amex, however, took the position that the government's case against it was seriously flawed and that the NDPs allowed Amex to compete on an even playing field with the dominant Visa and MasterCard brands.

The government's theory focused almost entirely on merchants, but for Amex the key to the case was the government's exclusion of the cardholder. The government argued that Amex's rules violated the antitrust laws because they prevented price competition at the merchant point of sale, where merchants were unable to steer to credit card networks that offered lower merchant rates. Amex argued that the government's theory missed the way credit card networks compete. Amex and other networks are two-sided platforms that connect one merchant and one cardholder in a simultaneous transaction. Demand between the two sides is interconnected: if a network struggles to gain acceptance on one side of the platform, it will have a tough time keeping consumers on the other side. But if a network expands on one side, it becomes more attractive to the other. Amex's business model sparked heated competition in the credit card industry by providing generous rewards and benefits to cardholders, which were funded with merchant fees. But to fully appreciate that competition, it is essential to examine both sides of the Amex platform. Although eco-

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nomic analysis of two-sided platforms has become well-established in the academic literature in the last two decades, before the Amex case it had not been commonly used in the courtroom.

A. The District Court Rules for Plaintiffs Based on a One-Sided Market Definition

At a 2014 bench trial in the Eastern District of New York, the government's expert agreed that "an assessment of market definition, market power and competitive effects should account for the two-sided nature of the market" and testified that "[i]t is critical not to draw unwarranted and misleading conclusions by focusing solely on one side of a two-sided market."(fn4) The district court found that credit card networks are simultaneous two-sided platforms with two sides that "are inextricably linked with one another."(fn5) However, the court concluded that the relevant market was limited to "network services"- the half of the platform where credit card networks compete for merchant acceptance-because "conflat[ing] these separate avenues of competition into a single product market for 'transactions' that is coextensive with the platform itself" would "take[] the concept of two-sidedness too far" and "impermissibly and unnecessarily frustrate the court's analysis."(fn6)

Based on a one-sided market definition, the district court concluded that the government met its burden to demonstrate harm to competition in two ways. First, the court made a finding of market power not because of Amex's market share (26% of transaction volume), but instead due to "cardholder insistence" (i.e., consumer loyalty that could cause cardholders to shop less at merchants that did not accept Amex cards).(fn7) Second, the court focused on direct evidence of what it characterized as harm to competition in the form of increased rates charged to merchants, although the court noted that the government presented no empirical evidence that the NDPs had resulted in a higher "two-sided price" (the price charged across Amex's entire platform, accounting for both discount revenue and the expense of providing cardholder rewards).(fn8)

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B. The Second Circuit Reverses, Applying a two-sided Market Definition

On appeal, the Second Circuit found that the district court erred by excluding cardholders from its market definition. Noting the "commercial realities" of the market, including the joint and simultaneous nature of cardholder and merchant demand, the Second Circuit concluded that "[s]eparating the two markets here-analyzing the effect of Amex's vertical restraints on the market for network services while ignoring their effect on the market for general purpose cards-ignores the two markets' interdependence" and "allows legitimate competitive activities in the market for general purposes to be penalized no matter how output-expanding such activities may be."(fn9)

Applying a two-sided relevant market definition, the Second Circuit also disagreed with the district court's conclusions that Amex possessed sufficient market power to affect competition adversely in the relevant market and that the nondiscrimination provisions had an actual adverse effect on competition. As for market power, the Second Circuit rejected insistence as a basis for market power because cardholder loyalty simply reflects "competitive benefits on the cardholder side of the platform and the concomitant competitive benefits to merchants who choose to accept Amex cards."(fn10) As for direct evidence of harm to competition, the Second Circuit held that the district court...