Two-Sided Credit Card Markets: The Supreme Court Takes Up Novel Antitrust Issue

Two-Sided Credit Card Markets: The Supreme Court Takes Up Novel Antitrust Issue

Legal Sidebari

Two-Sided Credit Card Markets: The Supreme
Court Takes Up Novel Antitrust Issue
Updated November 13, 2017
The Supreme Court has agreed to hear Ohio v. American Express, an antitrust case brought by a number
of states against the credit card giant that poses the question of how federal antitrust law should treat two-
sided markets. (As discussed in more detail below, two-sided markets are platforms in which two distinct
user groups operate in an interdependent way.) The states are challenging “anti-steering” provisions in
American Express’s contracts with its merchants, provisions that generally prevent the merchants from
encouraging customers to use other credit cards. American Express is important not only for the practices
of the $2.4 trillion credit card industry—with the case having the potential to change the way vendors
accept card payments across the country—but the case also provides the Supreme Court with the
opportunity to guide the lower courts that are increasingly confronting antitrust issues concerning two-
sided markets. As a result, American Express raises several issues for Congress that could implicate its
legislative and oversight roles with respect to the financial services industry and, more generally, the
regulation of two-sided markets.
Antitrust law. Section 1 of the Sherman Antitrust Act prohibits any “contract” “in restraint of trade.”
Because all contracts restrain their parties in some way, however, the Supreme Court has long read this
provision to bar only unreasonable restraints on trade in order to prevent anticompetitive behavior in the
relevant market as a whole. The Supreme Court has concluded that some restraints, such as agreeing with
competitors to fix prices, are so patently anticompetitive that they are “per se” unreasonable and violate
federal antitrust law. When examining restraints that are not within the narrow category of per se
violations of the Sherman Act, however, courts apply a balancing test known as the “rule of reason” to
distinguish between restraints that harm competition and those that merely regulate competition, using a
three-step burden-shifting framework with a final balancing test.
When challenging a restraint under the Sherman Act, a plaintiff must first establish the relevant market in
which the restraint operates—in other words, the area in which the defendant faces competition. A fact-
intensive inquiry, a product market is defined as a set of goods or services that are reasonably
interchangeable (i.e., if one seller were to raise the price of a product, customers would be more likely to
purchase other sellers’ products in that market). The definition of a market—a question at the heart of the
American Express litigation—is a critical one in antitrust law, as a broadly defined market is less likely to
be one in which a single actor can take anticompetitive action and vice versa. After defining the relevant
market, a plaintiff must show that the challenged conduct caused or could cause anticompetitive effects in
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that market (e.g., reduced output or decreased quality of products)—the first step in the rule of reason
analysis. If a plaintiff meets this burden, the burden shifts to the defendant to demonstrate that there is a
procompetitive justification for the challenged restraint. If a defendant does this, the plaintiff may yet
prevail by establishing that the procompetitive benefits could be achieved by a more narrowly tailored
restraint. Ultimately, the court balances the pro- and anticompetitive effects of the defendant’s actions,
striking down restraints whose anticompetitive effects predominate.
As this brief overview suggests, any particular rule of reason analysis is complex and rife with
uncertainty. As the Supreme Court has noted, this uncertainty contributes to “notoriously high litigation
costs and unpredictable results” in antitrust cases, as litigants cannot easily determine beforehand what
the court will determine the relevant market to be or how it will measure pro- and anticompetitive effects.
Ohio v. American Express could provide a vehicle for the Court to clarify how the rule of reason applies
in complex cases, especially those involving two-sided markets, an area where case law is scant.
Two-sided markets. Two-sided markets bring together two different groups of people to facilitate an
interaction between them and must set prices on both sides to account for the interdependence of supply
and demand between them. This is in contrast to a one-sided market where a vendor sells something
directly to a customer without a middleman moderating the exchange. While two-sided markets are not
new—newspapers market to both readers and advertisers—they are only becoming more prevalent in
today’s economy, with eBay, Microsoft, and Google being only a few of the many modern examples of
entities that operate in such markets.
Credit card companies are another example of a two-sided market: they bring together merchants and
consumers and allow them to easily exchange money for goods or services. Credit card companies charge
merchants a fee each time they accept a credit card for payment. American Express generally charges
higher fees to merchants than do other credit card companies such as Visa and MasterCard and uses these
higher fees to offer more benefits to cardholders (e.g., airline miles, cash back rewards, or enhanced
security), who in turn tend to use their American Express cards at the select merchants who accept the
cards. In response to increased competition from Visa and MasterCard, over the last two decades
American Express began inserting and enforcing stricter “anti-steering” provisions in its contracts with
merchants that prevent merchants from encouraging customers to use other credit cards, which merchants
might otherwise do to keep their costs down. “Steering” can be accomplished by expressing a preference
for credit cards other than American Express, or charging lower amounts for goods or services bought
with another credit card, in order to incentivize customers not to use their American Express card, thus
saving the vendor money in fees. The anti-steering provisions, on the other hand, also potentially allow
American Express to fund better benefits for its cardholders.
The central question in American Express is whether both sides of a two-sided market together form a
single market for rule of reason purposes or whether one side should be analyzed on its own as a distinct
market. This is a tricky question because actions affecting one side of a two-sided market by definition
impact the other, but neither side of the market is reasonably interchangeable with the other. In other
words, with respect to the credit card market, the actions of the merchants and cardholders implicate
supply and demand for a given card, but the services provided to merchants are distinct from those
provided to cardholders. The states challenging American Express’s anti-steering provisions argue that
collapsing both the merchant and customer sides into a single market is inappropriate because it could
force the plaintiff, in the first step of the analysis, to take into account both anticompetitive effects on one
side of the market as well as procompetitive benefits on the other side of the market in order to arrive at a
net anticompetitive effect in the market. This is in contrast to a traditional rule of reason case, where the
plaintiff is only concerned with showing anticompetitive effects and then lets the burden of showing
procompetitive benefits fall to the defendant. American Express, on the other hand, argues that not
considering both sides of the market together makes the procompetitive benefits of its restraint irrelevant

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because they are manifest on the cardholder side of the market and thus would not come into play in the
rule of reason analysis if the market is limited to the merchant side.
The district court at trial found that only the merchant side of the credit card platform was the relevant
market for antitrust purposes, reasoning that a merchant could not substitute American Express’s network
services with cardholder services, and that the two were, accordingly, not reasonably interchangeable.
Further, the trial court applied the rule of reason and found that the anti-steering provisions had
contributed to increased merchant fees from all credit card companies—a clear anticompetitive effect. On
appeal, the Second Circuit reversed the district court, holding that both the merchant and customer sides
had to be analyzed together as a single market because they were so interdependent. In addition to finding
that the district court had used the wrong market for antitrust analysis, the Second Circuit went further
and held that the government had failed to demonstrate that the anti-steering rules had net anticompetitive
effects taking into account both sides of the platform. The Second Circuit thus did not simply send the
case back for a new trial using the different framework, but rather directed that American Express should
win outright based on the evidence already adduced.
Importance of the Case. The importance of the American Express case is underscored by the fact that
the case is even being heard by the Supreme Court in the first place. The Court does not often take
antitrust cases, and it is also unusual for the Supreme Court to hear cases, such as this one, where there is
not a “circuit split”—a disagreement among courts of appeals about how to apply a law. In fact, the
federal government, which had been a party to the case in the lower court, urged the Court not to take this
case for this very reason, arguing that “[f]urther percolation” in the circuit courts on the underlying legal
issues was necessary. The Supreme Court’s general standard for hearing cases in the absence of a circuit
split is that a case must present “an important question of federal law that has not been, but should be,
settled by this Court,” suggesting that the Supreme Court thinks American Express is of particular import.
More specifically, American Express may implicate several issues of interest to Congress. While the
legislative branch has for the most part left to the judiciary the job of giving content to broadly worded
antitrust statutes passed decades ago, Congress has crafted exceptions to the antitrust laws from time to
time, and the legislature possesses oversight responsibilities regarding how the Department of Justice’s
Antitrust Division and the Federal Trade Commission pursue antitrust enforcement actions. With respect
to the financial services industry, Congress has been active in regulating the payment cards industry. The
Durbin Amendment, for example, limited fees that banks could charge for debit card processing and has
been the subject of legislative debate since its passage in 2010. As a result, American Express, which has
not yet been scheduled for argument at the Court, may have major effects for Congress’s work on both
antitrust matters generally and the financial services industry.

Author Information

Austin D. Smith

Legislative Attorney

Congressional Research Service
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