United States v. American Express Co.
838 F.3d 179
2d Cir.2016Background
- Plaintiffs (U.S. and 17 states) sued American Express (Amex) under § 1 of the Sherman Act, challenging Amex’s merchant agreements that contain nondiscriminatory provisions (NDPs) forbidding merchants from steering customers to cheaper card networks or disclosing relative card costs. The District Court held the NDPs unlawful and entered a permanent injunction. Amex appealed.
- The credit-card industry is a two-sided market: cardholders and merchants are interdependent; networks set prices/benefits on both sides (issuers/acquirers for Visa/MasterCard open-loop; Amex operates a closed-loop model acting as issuer, acquirer, and network). Amex funds large cardholder rewards largely via merchant-discount fees.
- Amex’s NDPs prohibit merchants from steering, advising customers to use other cards, or imposing card-specific surcharges; Amex enforces these provisions and says they protect the cardholder experience and the card’s value proposition.
- The District Court defined the relevant market as the market for network services (excluding cardholder-side market), found Amex had market power (26.4% volume, barriers to entry, and “cardholder insistence”), and concluded NDPs caused anticompetitive effects by blocking merchant steering and reducing price competition.
- The Second Circuit reversed: it held the District Court erred by excluding the cardholder side from the relevant market (misapplying the hypothetical monopolist/SSNIP test for a two-sided platform), misattributing procompetitive cardholder-side benefits (cardholder insistence) as market power, and failing to show actual adverse effects on competition "as a whole" across both sides of the platform.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Amex’s NDPs unlawfully restrain trade under §1 (rule of reason for vertical restraint) | NDPs prevent merchants from steering to cheaper networks, short-circuit price competition among networks and cause anticompetitive effects in the network services market. | NDPs are vertical restraints that protect the two-sided platform’s ability to fund cardholder benefits and preserve consumer-facing acceptance certainty; they yield procompetitive effects. | Reversed: Court applied rule of reason but held Plaintiffs failed to prove anticompetitive harm to the market as a whole. |
| Proper relevant market definition (whether to include both merchant and cardholder sides) | Focus on network services market (merchants and issuers as buyers) — cardholder side can be separated; harms to merchants suffice. | The market must be the two-sided platform (merchants + cardholders) because prices/benefits on one side affect demand on the other; HMT/SSNIP must account for feedback. | Held for Amex: District Court erred by excluding cardholder side; two-sided market must be used for HMT. |
| Whether Amex possesses market power sufficient to infer adverse effects | Amex’s ~26% share, high barriers to entry, limited merchant attrition during Value Recapture (VR) show market power amplified by cardholder insistence. | Market share below 30% and cardholder insistence derive from procompetitive rewards, not unilateral pricing power; VR increases reflect investment in cardholder value, not dominance. | Held for Amex: District Court mischaracterized cardholder insistence as market power; evidence didn’t show ability to impose supracompetitive two-sided price. |
| Whether Plaintiffs proved actual anticompetitive effects on competition "as a whole" | Harm to merchants (higher swipe fees; blocked steering) implies net harm to competition; circumstantial evidence suffices. | Plaintiffs failed to show decreased output, lower quality, or supracompetitive two-sided pricing; industry output and cardholder benefits increased. | Held for Amex: Plaintiffs failed their initial burden to prove net adverse effects across both sides; no reliable two-sided price/margin evidence. |
Key Cases Cited
- United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003) (analyzing exclusionary rules among competing card networks and defining network services market)
- Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (rule of reason governs most vertical restraints)
- National Collegiate Athletic Ass’n v. Bd. of Regents, 468 U.S. 85 (1984) (Sherman Act targets unreasonable restraints; protects competition overall)
- Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992) (market definition requires factual inquiry into commercial realities)
- Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) (cannot infer competitive injury from price/output without evidence of restricted output or supracompetitive pricing)
- Geneva Pharms. Tech. Corp. v. Barr Labs., Inc., 386 F.3d 485 (2d Cir. 2004) (rule-of-reason framework and plaintiff’s initial burden to show adverse effect on competition)
- K.M.B. Warehouse Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123 (2d Cir. 1995) (market power as proxy for adverse effects when direct proof is lacking)