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American Express: Key Insights as Trial Ends

The long trial in United States v. American Express has come to an end: on September 18, 2014, the parties exchanged post-trial briefing and on October 9, 2014, the court held oral argument. News reports suggest that the Court (Judge Garaufis in the Eastern District of New York) was looking for ways to avoid court intervention (including urging the parties to settle) and suggest that, if it did find an antitrust violation, the Court would consider holding additional proceedings to determine the appropriate remedies.

As many of you know, the core allegation underlying this case, brought by the United States Department of Justice and a number of additional states (together, the “Government”), is that American Express barred its merchants from offering incentives for customers to use credit cards with lower retail charges or other forms of payment. The Government claimed that American Express’s “anti-steering” rules prevented merchants from directing consumers to more favorable forms of payment and thus harmed the competitive process. American Express countered that the Government failed to prove an actual adverse effect on competition; that its merchant rules have significant procompetitive justifications; that the Government failed to correctly identify the market; and that the evidence establishes that American Express lacks antitrust market power.

After six weeks of trial—including testimony from merchants, competing credit card companies, and economic experts—there are numerous factual issues for the Court to resolve. Hotly contested facts include:

● The relevant market.  The Government claimed the relevant market includes only credit card purchases. American Express argued that the evidence showed that debit cards compete in the same market as credit cards.

● Effects on competition.  The Government argued that what it termed American Express’s “anti-steering provisions” (American Express referred to them as “non-discrimination provisions”) harmed competition by increasing the fees credit card companies charged merchants for purchases made with major credit cards. American Express argued that the evidence did not show that merchant fees were higher than they might have been absent American Express’s non-discrimination provisions: indeed, American Express claimed that following the Government’s consent decree with Visa and MasterCard, merchant fees have actually increased.

● Market power.  The Government argued that American Express’s market share, coupled with “cardholder insistence” (i.e., that “many Amex cardholders so strongly prefer to pay with Amex that they will ‘walk away’ from or ‘spend less’ at any merchant that does not accept Amex”) resulted in market power. American Express noted that it held only 26% of the relevant market (only 14% if debit cards are included) and lacked market power.

However the Court rules on these factual issues, the American Express litigation also brings to the surface a fundamental dispute about the application of antitrust law in a two-sided market. The parties seemingly agreed that there are two relevant markets within the credit card industry: (1) the merchant market, in which credit card companies could arguably compete by offering lower fees to merchants and (2) the cardholder market, where the credit card companies compete to attract card users and use the fees to offer incentives to customers, such as travel and gift programs. American Express argued that even if its restrictions had some adverse effects in the merchant-side market, those effects were outweighed by procompetitive justifications in the cardholder market. American Express noted that it is “widely recognized that vertical restraints can increase interbrand competition by facilitating product differentiation and competition on quality”—and claimed that its non-discrimination provisions allowed it to improve services in the cardholder market. The Government disagreed and claimed the procompetitive justifications were irrelevant, citing cases rejecting the argument that “anticompetitive effects in one market could be justified by procompetitive consequences in another.” The Court’s analysis and balancing of any procompetitive effects will likely inform treatment of two-sided industries in antitrust cases going forward.

You can read the Government’s post-trial memorandum here and American Express’s post-trial memorandum here. You can also view the presentation that accompanied the Government’s closing argument here.