Antitrust and Unfair Competition Law

Supreme Court Rules That American Express’s Two-Sided Market Must Be Assessed As A Whole, Finding That Credit-Card Companies’ Anti-Steering Provisions Do Not Violate Sherman Act Section 1

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Harrison (Buzz) Frahn, Thomas M. Cramer, Lily Cron (Summer Associate)
Simpson Thacher & Bartlett LLP

In an 5-4 opinion authored by Justice Clarence Thomas, the Supreme Court ruled on June 25, 2018, that American Express’s (“Amex”) practice of using anti-steering provisions, which prevent merchants from offering customers incentives to use credit cards with lower fees, is not an “unreasonable restraint on trade” in violation of Section 1 of the Sherman Act. The credit-card industry is a two-sided market, meaning that in a single transaction, credit-card companies serve both cardholders and merchants. The Supreme Court found that because of their interdependence, the two groups of customers make up a single market to be assessed together. In applying the “rule of reason” to evaluate the anti-steering provisions’ effects on the credit-card market as a whole, the Court found a lack of evidence of anticompetitive effects, instead determining that the provisions encourage competition and innovation.


The credit-card industry, predominantly controlled by Amex, Visa, MasterCard, and Discover, operates as a “two-sided platform,” meaning that it serves and intermediates two distinct groups: cardholders and merchants. Credit-card companies provide different services to each group, credit and rewards to cardholders and transaction processing and guaranteed payment to merchants. The two sides are mutually dependent because neither can receive these services without a single common transaction provided by the credit-card company. The link between the two groups causes “indirect network effects,” in that the value of the credit card to the cardholder depends on how many merchants accept the card and, in turn, the value of the credit card to the merchant depends on the number of cardholders. If merchant fees are too high, merchants will not accept the card. If merchants do not accept the card, or if the card offers suboptimal rewards, cardholders will choose not to use that card, which further incentivizes merchants to not accept it. Therefore, the credit-card platform must optimize its pricing on both sides, as to not create a “feedback loop of declining demand.” Ohio v. Am. Express Co., No. 16-1454, 2018 U.S. LEXIS 3845, at *1 (2018). This price optimization often results in disproportionate pricing between the two sides in order for credit-card platforms to offer good value on their services and remain competitive. In Amex’s case, this means high merchant fees and no interest fees for cardholders.

The Court explained how Amex’s business model differs from that of its main competitors, Visa and MasterCard. Whereas Visa and MasterCard offer limited rewards and charge merchants lower fees, appealing to a broad market of both sets of customers, Amex offers superior rewards for cardholders, which encourages more spending and attracts wealthier cardholders. Because those wielding an Amex are willing to spend more, Amex can charge merchants higher fees.

Recognizing Amex cardholders’ willingness to spend more, merchants attempted to avoid Amex’s higher fees by utilizing “steering” techniques, which incentivize cardholders to use other payment methods at the point of sale. “A merchant might tell the customer, for example, ‘American Express costs us more,’ or ‘please use Visa if you can,’ or ‘free shipping if you use Discover.’” Id. at *37. The merchant still gets the business of the Amex cardholder, but avoids the high merchant fee. To prevent this practice, Amex put anti-steering provisions in its contracts with merchants that disallow merchants from engaging in steering. Amex’s business model has shaped the credit-card industry, as competitors like Visa and MasterCard now offer similarly structured premium cards.

Government Asserts That AMEX’s Anti-steering Provisions Have Anticompetitive Effects

In October 2010, the United Stated Department of Justice, along with several individual states (collectively, “Plaintiffs”), brought a claim in the Eastern District of New York asserting that Amex’s anti-steering provisions violate Sherman Act Section 1 by imposing an “undue restraint on trade.” The district court determined that the cardholder and merchant markets were distinct, holding Amex’s anti-steering provisions to be an anticompetitive exercise of market power because they led to higher merchant fees. The Second Circuit reversed, holding that the two sides of the credit card market made up a singular market, in which they found no anticompetitive effects resulting from anti-steering provisions, reversing the district court’s determination.

To succeed on a Section 1 claim, Plaintiffs were required to prove that Amex’s anti-steering provisions are an “unreasonable restraint on trade” under State Oil Co. v. Kahn, 522 U.S. 3, 10 (1997). The Supreme Court did not find the provisions to be per se unreasonable, which is typically the case for agreements between competitors, known as horizontal restraints on trade. The Court determined instead that the anti-steering provisions are a vertical restraint on trade because they are agreements between businesses at various levels of distribution, making them not a per se violation.

The Court therefore applied the “rule of reason,” a “three-step, burden shifting framework” requiring a fact-specific assessment of the restraint’s effect on market competition “to distinguish between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer’s best interest.” Id. at *17 (quoting Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 866 (2007)).

In assessing the first step, the Court found that Plaintiffs did not meet their burden of proving “that Amex’s anti-steering provisions have a substantial anticompetitive effect that harms consumers in the relevant market.” Id. at *3. If Plaintiffs had met the burden of the first step, the burden would shift “to the defendant to show a procompetitive rationale for the restraint,” after which the burden would shift back to the plaintiff to prove that “the procompetitive efficiencies could be reasonably achieved through less anticompetitive means.” Id.

Broad Market Definition Did Not Allow for a Finding of “Unreasonable Restraint on Trade”

The Court’s holding turned on the definition of the relevant market. The Court explained that a combination of products and services can together constitute a single market, the “arena within which significant substitution in consumption or production occurs.” Id. at *19 (quoting United States v. Grinnell Corp., 384 U.S. 563, 571 (1966)). The interdependent nature of pricing and resulting indirect network effects of Amex’s two-sided platform led the Court to determine that price increases on one side of the platform would only be anticompetitive if it “increased the overall cost of the platform’s services.” Id. at *20. Therefore, given the commercial reality that the credit-card industry operates as a single market, both the merchant and cardholder aspects of Amex’s business must be assessed together as a single market.

The Court distinguished the two-sided credit-card transaction platform from other two-sided platforms with less severe indirect network effects, where markets should be assessed separately. The Court offered the example of newspapers, which are a two-sided platform serving both readers and advertisers. The two customer groups are somewhat interdependent because as readership increases so does the price of advertising space. However, these effects only flow one way, as readership is not substantially affected by the amount of advertising, making the services provided to the two sides of the platform distinguishable. A newspaper lacks the single transaction seen with credit cards that simultaneously serves both sides of the market fueling the feedback loop. Unlike newspapers, the transactional nature of credit cards requires the network to “find the balance of pricing that encourages the greatest number of matches between cardholders and merchants,” establishing a single market. Id. at *21-22. The Court also emphasized that viewing the market as a whole is necessary to accurately assess competition, as only a credit-card company selling transactions to both merchants and cardholders could compete.

In a dissenting opinion, Justice Stephen Breyer argued that market definition is not always required and altogether disagreed with the majority’s determination that there is a singular two-sided credit-card market. In Justice Breyer’s view, the two sides are merely complementary, rather than cohesive. Further, Justice Breyer argued that, even accepting the majority’s market definition, anticompetitive effects were proved by the government.

The Government’s Evidence Was Deemed Insufficient to Overcome Rule of Reason Analysis

The government argued that Amex’s anti-steering provisions are anticompetitive because they increase merchant fees, asserting three theories, each of which the Court rejected. The Court found that the government’s direct evidence failed to demonstrate that Amex’s anti-steering provisions “increased cost of credit-card transactions above a competitive level, reduced the number of credit card transactions, or otherwise stifled competition in the credit-card market.” Id. at *24-25. Thus, the Court found that the government failed to meet the burden of the first step of the “rule of reason.”

The Court found that “the plaintiffs did not offer any evidence that the price of credit-card transactions was higher than the price one would expect to find in a competitive market.” Id. at *25. Beyond the fact that the government failed to provide reliable evidence of Amex’s transaction prices and profit margins compared to its competitors, the Court found that Amex’s increased merchant fees were indicative of the increased value of its services. Therefore, Amex was not charging a supra-competitive price. “That Amex allocates prices between merchants and cardholders differently from Visa and MasterCard is simply not evidence that it wields market power to achieve anticompetitive ends.” Id. at *26. The Court also found that evidence that Visa and MasterCard’s merchant fees have increased at locations where Amex is not accepted showed that the anti-steering provisions are not the cause of the increased fee. Instead, the Court held that the increase in merchant fees is due to “increased competition for cardholders and a corresponding market wide adjustment in the relative price charged to merchants.” Id.

The Court was unpersuaded that the government’s evidence that proceeds from Amex’s increased merchant fees were not entirely spent on cardholder rewards demonstrated that the anti-steering provisions gave Amex the power to charge anticompetitive prices. An increase in the number of credit card transactions during the relevant time period showed that output was not restricted, demonstrating a lack of anticompetitive effects. “Where . . . output is expanding at the same time prices are increasing, rising prices are equally consistent with growing product demand.” Id. at *27 (quoting Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 237 (1993)).

“The plaintiffs also failed to prove that Amex’s anti-steering provisions have stifled competition among credit-card companies.” Id. at *27. The Court pointed out that despite the presence of Amex’s anti-steering provisions, the credit-card industry has continued to flourish, increasing in both output and quality. Other leading credit-card providers have been incentivized to offer premium cards with better rewards. Merchant fee competition among credit card companies is robust, as evidenced by Amex’s history of at times lowering its fees to meet demand. Visa, MasterCard, and Discover’s increased market share resulting from their lower merchant fees was also indicative. In sum, contrary to the government’s position, the Court found that anti-steering provisions ultimately encourage competition.


The Court’s decision in Ohio v. American Express applied a broad understanding of competition in vertical markets. The decision established the required preliminary step of defining the market in vertical restraint cases. This holding heightens the burden for plaintiffs in Section 1 claims in the context of two-sided markets, requiring plaintiffs to prove unfair restraint on trade encompassing both sides of the market. In the short term, this decision may impact the policies of Visa and MasterCard, both of which eliminated anti-steering provisions in 2010 after settling similar antitrust litigation. More broadly, this Court’s decision may benefit growing technology companies that employ interdependent, multisided transactional markets.

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