Think Tanks weigh in on Ohio vs. Amex

Next month, the US Supreme Court will hear what legal experts describe as one of the most important antitrust cases in years. The focus of this dispute is on credit card fees and the rights of credit card networks to restrict business from recommending or offering incentives for customers that charge them less fees. At issue, however, is a crucial point of interpretation on how the rule of reason applies to multisided platforms and markets, which are becoming increasingly pervasive business models across the world economy.

The simple facts of the case are:

• A district court ruled American Express was illegally using its market power to restrict competition between credit card platforms.
• The second circuit of appeals court overturned the decision, saying the practice could have positive effects on the economy.

The second circuit decided it wasn’t fair to consider American Express’s relationship with retailers in isolation. Credit card networks run two-sided markets, peddling services simultaneously to shop owners and cardholders. Retailers want lower fees, and customers want airline miles and rental-car insurance. The networks cover these perks with revenue from transaction fees. Complaints about unfair treatment from stores had to be balanced against the way those decisions impact customers, the appeals court ruled.

The three following briefs amici curiae, go to the heart of this discussion.

Arguing in favor of the Second Circuit’s ruling is the Computer and Communications Industry Association.

This Court has explained that “the purpose of the inquiries into market definition and market power” in antitrust cases “is to determine whether an arrangement has the potential for genuine adverse effects on competition.” FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 460 (1986). In case after case, the Court has emphasized that these inquiries
require a close examination of “the economic reality of the market at issue.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 467 (1992); see United States v. Sealy, Inc., 388 U.S. 350, 359 (1967) (rule of reason requires a focus on “the context of the particular industry”). This Court’s guidance concerning the rule of reason counsels caution when courts apply tests created in the context of single-sided markets to multi-sided firms.
Multi-sided firms are constrained by the availability of substitute products, but they may also face the additional constraint of interrelated demand from multiple sets of customers. One effect of suchinterrelated demand is to limit a multi-sided firm’s ability to unilaterally raise prices or reduce output.

If the tests of market definition and market power fail to account for these additional constraints, they may cause multi-sided firms to appear to enjoy power over price and output when they are, in fact, engaged in vigorous competition. Without considering the actual effects of multi-sidedness, courts may not be able to reliably determine whether a Sherman Act plaintiff has carried its prima facie burden to establish “the potential for genuine adverse effects on competition.” Ind. Fed’n of Dentists, 476 U.S. at 460.

This Court has warned against ignoring “[t]he cost of false positives” when crafting antitrust rules. Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004). Ignoring the competitive realities of multi-sided firms would raise the risk of false positives and “interminable litigation,” id., stifling pro-competitive conduct and pro-consumer innovation. It would allow plaintiffs to base a prima facie case on little more than a caricature of a multi-sided firm’s competitive position, penalizing healthy competition and deterring the development of valuable new products and services that benefit both competition and consumers.

Read full brief HERE.

Arguing for the ruling to be overturned is Brief amicus curiae of American Antitrust Institute.

A prima facie case does not require showing harm to both sides of a two-sided platform. The court of appeals’ conclusion to the contrary is flawed, as an initial matter, because the relevant harms and benefits are those to the market(s) and consumers as a whole; even if higher benefits to Amex cardholders fully offset the higher fees charged to Amex merchants, anticompetitive harm would remain. In any event, an overall harm requirement is not legally supportable. The case law involving two-sided platforms does not impose such a requirement. Nor can such a requirement rest on plaintiffs’ supposedly erroneous market definition, for two reasons. First, as explained in the next part, a relevant market may comprise one side of a two-sided platform. And second, a showing of actual detrimental effects, which the district court found here, obviates the need for plaintiffs to define a relevant market.

An “overall harm” requirement is not supported by a danger of “false positives.” Assuming arguendo that increased benefits to Amex cardholders may properly be considered to be a procompetitive benefit, rather than part of the distortion of the competitive process, separating the cardholder and merchant sides of the platform means only that establishing anticompetitive harm on the merchant side shifts the burden to the defendant to establish offsetting benefits on the cardholder side.

Read full brief HERE.

Also arguing for the ruling to be overturned is Brief amicus curiae of Open Markets Institute.

By introducing a special rule for “two-sided” markets, the Second Circuit needlessly departed from a longstanding approach to antitrust law. Its new rule greatly raises the burden that a plaintiff in the “two-sided” market context must carry at the very earliest stage of litigation. Not only is the new rule unjustified, it is pegged to a concept that is contested and ill-defined.

Defendant companies ranging from airlines to chicken processors could reasonably claim that they meet the definition of “two-sided,” winning themselves more favorable judicial review. Basing a fundamental and often decisive inquiry on a slippery definition is a mistake. Troublingly, the Second Circuit’s approach also risks exempting from effective antitrust scrutiny the dominant tech platforms, including Amazon, Google, and Facebook. These firms enjoy dominant positions in key markets that provide ample opportunity for anticompetitive conduct, underscoring the need for robust antitrust enforcement. Yet if the Second Circuit’s rule is upheld, a wide range of anticompetitive activity would become virtually beyond reach, given the far higher burden that plaintiffs would have to meet to establish even a prima facie case. In practice, this approach would risk immunizing dominant platforms from effective antitrust review. Because this result is intolerable, and because it rests on shaky and malleable economic reasoning, this Court should reverse the Second Circuit’s decision.

Read full brief HERE.

For access to all filings: SCOTUS Blog