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Media Alerts - United States v. American Express Company - Second Circuit
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September 28, 2016
  United States v. American Express Company - Second Circuit
Headline: Second Circuit Reverses, Holding Amex's Non-Discriminatory Provisions in Merchant Contacts Do Not Violate Sherman Anti-Trust Act.

Area of Law: Antitrust

Issue(s) Presented: Whether American Express' anti-steering clauses, inserted as part of the non-discriminatory provisions in their agreements with merchants, violate §1 of the Sherman Antitrust Act.

Brief Summary
: The Second Circuit reversed the United States District Court for the Eastern District of New York's decision that had found American Express (Amex) violated §1 of the Sherman Antitrust Act by imposing and monitoring non-compliance with contractual provisions preventing merchants from indicating a preference for particular credit cards and related prohibitions. The district court found that these restraints had an actual anticompetitive effect on interbrand competition. The Second Circuit disagreed, finding plaintiffs failed to meet their burden of demonstrating an anticompetitive effect on the whole market because the district court erred in excluding cardholders from, and counting only merchants in, its definition of the relevant market.

To read the full decision, please visit:

Extended Summary:
In 2010, the United States Government and seventeen states (collectively "Plaintiffs") sued American Express ("Amex), Visa, and MasterCard for unreasonably restraining trade in violation of the Sherman Act § 1.40. The complaint alleged, in essence, that certain anti¿steering provisions contained in each credit card networks' agreements with merchants suppress interbrand competition by blocking competition and removing incentives for networks to reduce card fees. In 2011, Visa and MasterCard entered consent judgments voluntarily rescinding their anti-steering provisions, but Amex proceeded to trial in the United States District Court for the Eastern District of New York. The district court found for Plaintiffs, holding that Amex's anti-steering provisions violate United States. antitrust laws and permanently enjoined Amex from enforcing the provisions for ten years. Amex appealed.

Section 1 of the Sherman Antitrust Act prohibits contracts that restrain trade or commerce among the States. To constitute a violation, plaintiffs must prove two elements: (1) a combination or some form of concerted action between at least two legally distinct economic entities that (2) unreasonably restrains trade. Amex's contracts with merchants include specific standard non-discrimination provisions (NDPs) that prohibit merchants from trying to dissuade consumers from using Amex cards or indicating a preference for other credit cards, among a few other related restrictions. Amex's NDPs at issue are classified as a vertical restraint on merchants. For vertical restraints, courts use a three-step burden shifting framework to analyze an anti-trust claim. Plaintiffs bear the initial burden of demonstrating a defendant's challenged behavior had "an actual adverse effect on competition as a whole in the relevant market." A plaintiff who cannot establish anticompetitive effects directly by showing an actual adverse effect on competition, may do so indirectly by showing that the defendant "has sufficient market power to cause an adverse effect on competition." Once the initial burden is satisfied, the burden shifts to the defendant to offer evidence of any pro-competitive effects of the restraint at issue. Finally, if the defendant meets its burden, plaintiff must prove that any legitimate competitive benefits offered could have been achieved through less restrictive means.

In finding an anti-trust violation, the district court found Amex's NDPs denied merchants the opportunity to influence their customers' payment decisions and thereby shift spending to less expensive cards. On appeal, the Second Circuit disagreed. In analyzing whether Plaintiffs satisfied their initial burden, the district court improperly defined the relevant market and that error was "fatal" to its finding a Sherman Act violation. Specifically, the Second Circuit found the district court erred in excluding the market for cardholders from its relevant market definition and analysis. The Second Circuit found that the district court erred in only accounting for the merchant side when it came to increasing merchant fees because those may be a result of offsetting the increase in cardholder rewards in an effort to not lose cardholders or to attract new ones. The Second Circuit reasoned that prices charged to merchants affect cardholder demands which in turn affect merchant demand. Accordingly, to retain cardholders, a network may need to increase cardholder benefits, by perhaps decreasing prices to cardholders, and this may lead to an increase in merchant fees to fund increased cardholder rewards. If merchant fees are increased such that merchant fees are unprofitable for the network, then they will not be raised and cardholder rewards will also not be raised. This may cause the network to lose cardholders. Thus, the court concluded, merchant pricing is only one half of the equation and the two sides cannot be considered in isolation.

The Second Circuit also concluded that Amex's 26.4% market share was not sufficiently indicative of it creating a barrier to entry for other competitors to demonstrate an indirect adverse effect on competition. It thus found that it was an error for the district court to have relied on cardholder insistence as support for its finding of market power. Although an increase in the value of cardholder rewards attracts customer loyalty, the court determined it is also equivalent to a price decrease to the cardholder which brings down the net price across the entire platform. Accordingly, the court reasoned, cardholder insistence has the opposite effect in that it makes it worthwhile for merchants to accept Amex cards. Ultimately, the court concluded that Amex's market power is a result of its rewards programs and perceived prestige due to Amex cardholders regarding the card as cheaper than competing Visa and MasterCard cards. The court found that the NDPs simply protect the program and that prestige, and outlawing the NDPs would appear to reduce this protection and likely result in increasing competitor market shares. As a result, the Second Circuit concluded plaintiffs did not meet their burden of showing that Amex harmed consumerism as a whole, both to cardholders and merchants.

To read the full opinion, visit:

Panel: Judge Winter, Judge Wesley, and Judge Droney

Argument Date: 12/17/2015

Date of Issued Opinion: 9/26/2016

Docket Number:

Decided: Reversed and remanded to enter judgment in favor of Amex.

Case Alert Author: Belino Voshtina

Counsel: Evan R. Chesler, Cravath, Swaine & Moore LLP, New York, NY (Peter T. Barbur, Kevin J. Orsini, Cravath, Swaine & Moore LLP; Donald L. Flexner, Philip C. Korogolos, Eric J. Brenner, Boies, Schiller & Flexner, LLP on the brief) for Defendants-Appellants American Express Company and American Express Travel Related Service Company, Inc. Nickolai G. Levin, Attorney, U.S. Department of Justice, Antitrust Division, Washington, D.C. (Sonia K. Pffaffenroth, Deputy Assistant Attorney General, Craig W. Conrath, Mark H, Hamer, Andrew J. Ewalt, Kristen C. Limarzi, Robert B. Nicholson, James J. Fredericks, Daniel E. Haar, Attorneys, U.S. Department of Justice, Antitrust Division; Mike DeWine, Ohio Attorney General, Mitchell L. Gentile, Assistant Ohio Attorney General, on the brief) for Plaintiffs-Appellees the United States, et al.

Author of Opinion:
Judge Wesley

Second Circuit

Case Alert Circuit Supervisor: Professor Elyse Diamond

    Posted By: Elyse Diamond @ 09/28/2016 09:04 AM     2nd Circuit  

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