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SCOTUS Rules Credit Card Company’s Anti-Steering Rules Did Not Violate Antitrust Law

In a 5-4 ruling, the Supreme Court of the United States held that anti-steering provisions in agreements between a credit card company and merchants wishing to accept the card do not violate federal antitrust law.

A copy of the opinion in Ohio v. American Express Co. is available at:  Link to Opinion.

The defendant credit card company required merchants who wanted to accept the company’s credit cards to agree to an anti-steering contractual provision.

Under the company’s business model, and unlike other credit card companies, it earned most of its revenues not from collecting interest from cardholders but from merchant fees.  Focusing on cardholder spending, the company offered more generous rewards to its customers than its competitors.  However, to fund these rewards programs, the company charged merchants higher fees than its rivals.

Merchants wanting to avoid these higher fees, while still enticing the company’s cardholders to shop at their stores, would sometimes attempt to dissuade cardholders from using the company’s card at the point of sale, in a practice known as “steering.”

The anti-steering provisions prohibited merchants from implying a preference for non-company cards, dissuading customers from using company cards, imposing special restrictions or fees on the use of cards, or promoting other cards more than the company’s.  The anti-steering provisions did not prevent merchants from steering customers toward debit cards, checks, or cash.

The United States and several states (“plaintiffs”) sued the company claiming its anti-steering provisions violated section 1 of the Sherman Act, which prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.”  15 U.S.C. § 1.

After a seven-week trial, the trial court found that the anti-steering provision violated section 1.  In reaching its ruling, the trial court found that the credit card market should be treated as two separate markets – one for merchants and one for cardholders.  Evaluating the effects on the merchant side of the market, the trial court found that the company’s anti-steering provisions were anticompetitive in violation of the Sherman Act.

On appeal, the Second Circuit reversed, concluding that the credit card market is one market, not two.  Evaluating the credit card market as a whole, the Second Circuit concluded that the company’s anti-steering provisions were not anticompetitive and did not violate section 1.

The matter was then appealed to the Supreme Court of the United States.

Initially, the Supreme Court noted that the phrase “restraint of trade” in the Sherman Act “is best read to mean ‘undue restraint.’”  Thus, section 1 outlaws “only unreasonable restraints.”

Restraints may be unreasonable in one of two ways.  Restraints are unreasonable per se if they “always or almost always tend to restrict competition and decrease output.”  Typically, only “horizontal” restraints imposed by an agreement between competitors qualify as unreasonable per se.

“Restraints that are not unreasonable per se are judged under the ‘rule of reason,’” which “requires courts to conduct a fact-specific assessment of ‘market power and market structure . . . to access the [restraint]’s actual effect’ on competition.”

Because both sides agreed that the anti-steering provision was a vertical restraint “imposed by agreement between firms at different levels of distribution,” the provisions were assessed under the “rule of reason” standard.

“To determine whether a restraint violates the rule of reason . . . a three-step, burden-shifting framework applies.”  First, “the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market.”  Second, “[i]f the plaintiff carries its burden, then the burden shifts to the defendant to show a precompetitive rationale for restraint.”  Third, “[i]f the defendant makes this showing, then the burden shifts back to the plaintiff to demonstrate that the precompetitive efficiencies could be reasonably achieved through less anticompetitive means.”

At issue was whether the plaintiffs had carried their initial burden of proving that the company’s anti-steering provisions had an anticompetitive effect.

To meet their burden, the plaintiffs relied “exclusively on direct evidence to prove that [the company’s] anti-steering provisions have caused anticompetitive effects in the credit-card market.”  To assess the evidence, the Court determined that it “must first define the relevant market.”

Credit card companies operate in what economists call a two-sided platform, because they provide separate but interrelated services to both cardholders and merchants.  For the cardholders, the network extends them credit, which allows them to make purchases without cash and to defer payment until later.  They can also receive rewards based on the amount they spend.  For merchants, the network allows them to avoid the cost of processing transactions and offers them quick, guaranteed payment.  This saves them the trouble and risk of extending credit to customers, and increases the number and value of sales that they can make.

Due to indirect network effects, two-sided platforms cannot raise prices on one side without risking a feedback loop of declining demand.  Thus, two-sided transaction platforms, like the credit card market, “facilitate a single, simultaneous transaction between participants,” as “the network can only sell its services . . . if a merchant and cardholder both simultaneously choose to use the network.”

The Supreme Court determined that “competition cannot be accurately assessed by looking at only one side of the platform in isolation,” and therefore, “[i]n two-sided transaction markets, only one market should be defined.”

As a result, the Court “analyze[d] the two-sided market for credit-card transactions as a whole to determine whether the plaintiffs have shown that [the company’s] anti-steering provisions have anticompetitive effects.”

The Supreme Court held that the plaintiffs did not meet their burden to prove anti-competitive effects in the relevant market.  In so ruling, the Court noted that the plaintiffs “stake their entire case on proving that [the company’s] agreement increase[d] merchant fees,” which the Court found “unpersuasive.”

In fact, the Court determined that the company’s “business model has spurred robust Interbrand competition and has increased the quality and quantity of credit-card transactions,” and “[t]he promotion of Interbrand competition . . . is . . . ‘the primary purpose of the antitrust laws.’”

Because the Supreme Court held that the company’s anti-steering provisions did not unreasonably restrain trade, it affirmed the ruling of the Second Circuit.

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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