United States District Court For The Eastern District of New York Rejects One-Sided Market And Single-Brand Market Definitions In Credit Card Antitrust Litigation
01/23/2019On January 14, 2019, Judge Nicholas G. Garaufis of the U.S. District Court for the Eastern District of New York granted defendant American Express’ motion for summary judgment as to three of the four relevant markets proposed by the plaintiffs in their antitrust challenge to the “anti-steering” provisions in American Express’s merchant contracts. In re American Express Anti-Steering Rules Antitrust Litigation, No. 11-MD-2221 (NGG) (RER) (E.D.N.Y. Jan. 15, 2019). Following the U.S. Supreme Court’s 2018 decision in a parallel challenge to the same contractual provisions by the U.S. Department of Justice (“DOJ”) and several states, Ohio v. American Express Company, 138 S. Ct. 2274 (2018), Judge Garaufis rejected the retail merchant plaintiffs’ proposed product market definitions that were limited to the merchant side of card transactions, i.e., the “one-sided” markets, finding that the Supreme Court’s decision required an examination of competition on both sides of the credit card platform – the cardholder side and the merchant side – i.e., the “two-sided” market. The court also rejected the plaintiffs’ attempt to limit the relevant product market to American Express card transactions (the “Amex-only market”) because other general purpose credit and charge cards are reasonably interchangeable with American Express cards and therefore in the same relevant product market. American Express did not move for summary judgment on the plaintiffs’ two-sided, all general purpose credit card market definition, and the case will proceed to trial on that theory.
The merchant plaintiffs filed their first antitrust challenge to the anti-steering or non-discrimination provisions (“NDPs”) in American Express’ merchant contracts in 2008. Specifically, plaintiffs alleged that, by prohibiting merchants from promoting consumers’ use of lower cost payment methods, such as by stating a preference for a particular form of payment or by differentially pricing the use of payment cards, the NDPs unreasonably restricted competition and artificially inflated the fees merchants paid for card acceptance. The merchant case was stayed, however, after the DOJ and certain states filed their own challenge to the NDPs (the “DOJ case”), which resulted in a lengthy bench trial in 2014. In that trial, although the plaintiffs discussed the concept of two-sidedness, they defined the relevant product market as “network services” to merchants, a definition that the trial court adopted in ruling for the plaintiffs. United States v. American Express Co., 88 F. Supp. 3d 143, 234-36 (E.D.N.Y. 2015). On appeal, the Second Circuit disagreed, finding the District Court erred in adopting this one-sided market definition and not properly considering competition on the cardholder side of the marketplace, and ordered judgment for American Express. United States v. American Express Co., 838 F.3d 179, 197 (2d Cir. 2016). The Supreme Court affirmed.
After the Supreme Court’s decision in the DOJ case, the stay in the merchant case was lifted and the plaintiffs filed an amended complaint, taking into account the Supreme Court’s ruling in the DOJ case. In their amended complaint, the merchant plaintiffs proposed four relevant product markets: (1) a one-sided, all-general purpose credit card market; (2) a one-sided, Amex-only market; (3) a two-sided, Amex-only market; (4) and a two-sided, all-general purpose credit card market. American Express moved for summary judgment on the first three.
Notwithstanding the Supreme Court’s ruling in the DOJ case, plaintiffs attempted to defend their proposed one-sided markets by distinguishing the two cases based on purportedly different market facts. Judge Garaufis rejected these purported distinctions, finding they “strain[ed] credulity” because the economic realities of the credit card market and the basic facts of how American Express operates are the same. Thus, he held that he was bound by the Supreme Court’s decision and granted American Express’ summary judgment motion as to plaintiffs’ one-sided market definitions.
Judge Garaufis then turned to plaintiffs’ Amex-only market allegations, which defined a relevant submarket limited to American Express card transactions. This was a new issue because DOJ in its case had conceded that the relevant market included all general purpose credit and charge cards (e.g., Visa, MasterCard, Discover), and therefore none of the opinions in the DOJ case had addressed the single-brand market theory. Judge Garaufis began by pointing out that claims based on single-brand market theories are widely “disfavored.” Plaintiffs, he held, had not shown the “exceptional market conditions” necessary to support a finding that American Express credit card transactions were not reasonably interchangeable with those of other general purpose credit and charge cards.
First, he rejected arguments that an Amex-only market could be defined based on the restrictions in the contracts themselves because the proper analysis focuses on the choices in the marketplace before the allegedly anticompetitive contract is signed. Second, Judge Garaufis rejected plaintiffs’ argument that American Express’ pre-contract market power forced merchants to contract with American Express. Plaintiffs purported to establish a separate market through a “critical loss analysis” that demonstrated they could not profitably drop Amex because the loss of profits from the resulting lost sales would outweigh any savings in lower card acceptance costs. As a result, plaintiffs claimed, they were left with no choice but to contract with Amex, resulting in an Amex-only product market. Judge Garaufis found this argument essentially identical to the “cardholder insistence” argument that was rejected by the Second Circuit in the DOJ case. The “cardholder insistence” theory that the DOJ relied on posits that brand loyal American Express cardholders would shop elsewhere or spend less if they could not use their American Express cards and, as a result, American Express “possessed sufficient market power to cause an adverse effect on competition.” But, as the Second Circuit pointed out, the reason that cardholders insist on using American Express cards is competition among the issuers and networks to provide cardholder benefits. This is not market power. The merchants’ critical loss analysis was just a different way of articulating the insistence theory and could not support an Amex-only antitrust market. Thus, Judge Garaufis granted Amex’s summary judgment motion as to plaintiffs’ Amex-only market allegations.
The result here is not particularly surprising in light of the Supreme Court’s clear holding on the importance of two-sided analysis in Ohio v. American Express and the courts’ long-established and well-justified antipathy to single-brand markets in all but exceptional circumstances. Plaintiffs who voluntarily enter a contract that restricts their ability to deal with competitors cannot then claim that the restrictions in the contract define the market. Similarly, a “critical loss analysis” that shows no more than it is more profitable to accept a product than to not accept it does not, without more, show meaningful market power, much less a separate, single-brand market product market. In any event, as noted above, the two-sided, all general-purpose credit card market definition survives and the merchants’ case will proceed on that basis.