Roundup of 2016 Federal Antitrust and Privacy Court Decisions

• Publication year: 2017
• Author: By Thomas N. Dahdouh

ROUNDUP OF 2016 FEDERAL ANTITRUST AND PRIVACY COURT DECISIONS

By Thomas N. Dahdouh¹

2016 was marked by several significant defense victories in conduct cases—particularly in the realm of Sherman Act Section 2 monopolization cases. At the same time, the government's winning streak in merger challenges continued unabated, although two of those wins required a trip to the appellate court. And for the second time in twenty years, the FTC was able to successfully block the merger of Office Depot and Staples. On the privacy front, the FTC issued an important decision in LabMD, and fallout continues from the Supreme Court's decision in Spokeo. Below I describe the cases and offer some commentary on the opinions.

I. MARKET POWER DETERMINATIONS IN "TWO-SIDED" PRODUCT MARKETS: UNITED STATES V. AMERICAN EXPRESS CO.2

In 2010, the DOJ filed complaints against Visa, MasterCard, and American Express over rules they applied to their merchants.³ Visa and Mastercard settled with the DOJ; American Express took the matter to trial. At bottom, the American Express rules prohibited merchants from steering consumers to use non-American Express cards. The rules prevented merchants from offering incentives to use rival cards, indicating preference, and disclosing merchant fees to consumers. The DOJ claimed that the credit card companies' rules effectively blocked merchants from rewarding lower-cost competitors with increased volume.⁴ Now, it should be noted that the DOJ did not challenge the rule on mischaracterization of American Express fees or the rule barring fees on Amex transactions. It should also be noted that the lower court had analyzed the credit card rules as vertical restraints under Section 1's rule of reason , but also viewed these restraints as akin to Section 2 exclusionary practices because they hinder interbrand competition.⁵ The lower court found for the government.

The Second Circuit reversed.⁶ According to the appellate court, the trial court improperly looked only at the merchant-side of the market, ignoring the cardholder side.⁷Viewing both sides of this "two-sided" market changed the direct evidence of market power.⁸ Two-sided markets, also called two-sided networks, are economic platforms having two distinct user groups that provide each other with network benefits. Two-sided networks can be found in many industries. Examples include credit cards (composed of cardholders and merchants); healthcare (patients and insurers); recruitment sites (job seekers and recruiters); search engines (advertisers and users); and communication networks, such as the internet. The two markets interact and complement each other, creating positive feedback loops: consumers, for example, prefer credit cards honored by more merchants, while merchants prefer cards carried by more consumers.

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According to the appellate court, the evidence of American Express raising prices without losing merchants, which the lower court felt showed market power,⁹ was really just American Express offering greater rebates and incentives to consumers.¹⁰ Similarly, the appellate court felt that the more general evidence that American Express had a "loyal" cardholder base, which the lower court felt also showed market power,¹¹ was, again, just evidence that customers valued American Express cards greatly because American Express offered greater quality.¹² Since greater quality is akin to lower prices, the appellate court felt that that evidence did not show market power so much as it showed that American Express was popular with cardholders.¹³ The problem with this tack is that customer loyalty—an unwillingness to switch—is often evidence of market power.¹⁴ Injecting the inherently subjective notion of quality improvements into market power determinations may also not be helpful.

The Second Circuit also noted that a significant percentage of merchants do not use American Express at all, and seemed content that this somehow militated against a finding of market power.¹⁵ But, this is a marketplace where price discrimination is possible. It is at least plausible that the credit card companies know which merchants are likely to want the kind of customer that is an American Express cardholder and thus can successfully price discriminate against particular merchant customers. Consequently, the proper inquiry for the market power determination is not what the merchants outside the price discrimination market—the inframarginal ones who are not now accepting American Express—do in the face of a price increase. Rather, it is what the marginal merchants in that market do—the ones who may be utilizing American Express now but may drop off in the face of a price increase.¹⁶ One must remember the test for market power is what happens to marginal customers in the face of a price increase—if they stay it is significant evidence of market power.

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Interestingly, the third peg that the lower court had rested a finding of market power on, American Express's 26.4% market share, was not rejected out of hand by the appellate court as possibly showing market power.¹⁷ This is true as a matter of analysis—proof of actual effects can serve as an alternative proof of market power even where a defendant's market share is not so impressive.¹⁸ But the Second Circuit felt that that level of market share alone could not itself support a finding of market power, given the problems with the lower court's other findings on market power.¹⁹

At times, the Second Circuit's market power section reads as if it were not just talking about market power, but also balancing the anticompetitive potential of the restraints at issue against the asserted business justifications.²⁰ Under the rule of reason, the test is whether a restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects. But that inquiry is very different from the market power test. Consequently, much of the Second Circuit's market power section may be criticized for mixing up two inquiries that really ought to remain separate. For example, at one point in the market power discussion, the court appears to suggest that determining whether American Express has market power might somehow "disturb the present functioning of the payment-card industry."²¹ The court states, "[w]e 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."²² Whether a particular practice is on balance anticompetitive is a separate inquiry from whether a company has market power. In other words, a company can have market power, but its practices may in fact not be anticompetitive. The Court of Appeals appears to be conflating the two inquiries.

There is also a telling footnote in the opinion about how barring American Express from enforcing these rules could reduce American Express' market share.²³ The Second Circuit strayed from its proper focus in the market power section. While the possibility of reduced market share is definitely relevant to a rule of reason balancing analysis, it is not a proper subject for the market power analysis. Market power analysis ought not be a value-laden exercise—it is an objective determination of whether or not a company has "power over price"—that is, the ability to raise price without significant loss so as to render the price increase unprofitable or the power to exclude competition.²⁴

Next, the Second Circuit chided the district court for focusing too much on higher prices for merchants.²⁵ According to the Second Circuit, the lower court needed to also consider benefits to cardholders.²⁶ But, even in this regard, there are telling red flags that do not jibe with the Second Circuit's conclusion that American Express does not have market power. Indeed, the Second Circuit concedes that the district court was correct that higher prices to merchants were not passed through 100% to cardholders in the form of benefits.²⁷ As the court noticed, "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."²⁸ The absence of a full pass-through is striking evidence against the Second Circuit's conclusion that American Express does not have market power. But, since the appeals court says that it is plaintiff's burden to show how the practice in question raised prices to all consumers—both cardholders and merchants, DOJ lost.²⁹

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The court may have unnecessarily muddied the analytical waters by conflating market power analysis with the rule of reason balancing test. By doing so, it has raised questions about whether any market participant in a two-sided market could ever have market power. And that in turn raises some questions about whether this decision is going to be used to greenlight exclusionary conduct in two-sided markets. Healthcare, for example, has similar two-sided markets with the actual decision-maker (consumer) divorced from the actual payor (insurance companies/businesses). Payors have often sought to steer patients to lower cost providers by, for example, lowering copays for those lower cost providers or otherwise encouraging patients to use them. Payors will employ "tiered networks," and place lower-cost providers in the top tier, where patient copays are lower. These efforts have generally been thought of as procompetitive for the very reason that DOJ brought the American Express case—steering by customers is generally procompetitive because it increases interbrand competition. More recently, however, some providers have sought to restrict payors' ability to steer patients. Just last year, the Department of Justice sued the Carolinas HealthCare System, alleging that the anti-steering rules that it imposed on payors violated Section 2.³⁰ And, in...