In the biggest case for loyalty programs since Northwest v. Ginsberg, the Supreme Court has agreed to hear Ohio v. American Express, reviving an anti-trust case brought by retailers and 11 states which argued that American Express violates anti-trust rules in its merchant agreements.
At issue is whether benefits to consumers — like rewards and credit card protections — count when determining whether the market is competitive (do we look at both sides of a two-sided market, or only the merchant-network relationship)?
At issue in the case are so-called nondiscriminatory provisions that AmEx entered into with retailers prohibiting them from encouraging customers to use other credit cards.
The DOJ and 17 states sued AmEx in a New York federal court over the agreements in 2010, saying the provisions stifled competition. The district court agreed, finding the rules create an incentive for AmEx and other credit card networks to charge higher prices to merchants with no counterbalancing benefits.
The federal government had been a party to the original case, thrown out by a federal appeals court, but did not join the request to the Supreme Court to overturn that ruling.
The fundamental issue is whether the courts should look at just the relationship between merchant network and merchant or whether they should evaluate both sides of the two-sided market, merchant-network and issuer-customer? The Second Circuit Court of Appeals threw out the suit saying you had to look at the whole market, and the overall credit card market is competitive with consumers yielding benefits.
That’s American Express’ position: that consumers gain substantial benefits.
The company said that merchant fees help pay for cardholder rewards and that antitrust enforcers failed to account for those benefits.
“Amex uses the vast majority of merchant discount fee revenue to pay valuable benefits to cardholders to incentivize them to obtain and use an Amex card at that merchant rather than cards issued on other networks,” the company argued.
States and retailers argue that the Court should not consider the benefits to consumers when evaluating whether the market is competitive. Their case contends that American Express, by adopting a rule that forbids merchants from offering discounts for use of other payment methods, illegally restraints price competition.
11 states contended that the Second Circuit’s ruling that the district court neglected to account for how the rules affected the entirety of the two-sided credit card market conflicts with Supreme Court precedent. The credit card industry’s services to merchants and cardholders are not interchangeable and therefore should not be collapsed into a single market, the states said.
“Simply because the same company, by virtue of its business model, provides different services to different customers does not mean that those services are somehow in the same relevant market,” the states said.
The lawsuit originally named Visa and MasterCard as well, but they settled in 2010.
It seems relevant to me (rather than legally) that merchants voluntarily choose to accept American Express cards, under the terms offered by American Express, and indeed that American Express ought to be permitted to say that if you’re going to work with them it has to be on equal footing to the customer with other payment methods.
Legally of course you almost can’t not violate anti-trust. If your prices are higher than competitors, that’s market power. If your prices are the same, that’s collusion. And if your prices are low that’s predatory pricing. And indeed under cases decided by the “rule of reason” it’s hard to even know ex ante whether or not something is a violation.
Next summer, it seems, the Supreme Court will have its say on the matter.