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United States v. American Express Co.

Court of Appeals for the Second Circuit
2016 U.S. App. LEXIS 17502, 2016 WL 5349734, 838 F.3d 179 (2016)
ELI5:

Rule of Law:

In an antitrust case involving a two-sided transaction platform, an analysis of a vertical restraint under the rule of reason must consider the net effect of the restraint on both sides of the market (e.g., cardholders and merchants) as a whole, rather than focusing on anticompetitive harm to just one side.


Facts:

  • The credit card industry operates as a two-sided market, connecting cardholders on one side and merchants on the other, with demand on each side being interdependent.
  • American Express (Amex) operates a 'closed-loop' system, maintaining direct relationships with both merchants and cardholders.
  • Amex's business model is 'spend-centric,' relying heavily on merchant discount fees to fund a robust rewards program for cardholders, which in turn attracts high-spending customers that merchants value.
  • Amex includes non-discriminatory provisions (NDPs) in its merchant agreements.
  • These NDPs prohibit merchants from indicating a preference for other cards, offering discounts for using other cards, or otherwise 'steering' customers away from using their Amex card at the point of sale.
  • Visa and MasterCard, Amex's main competitors, operate on a different 'lend-centric' model and historically have charged lower merchant fees.
  • Approximately one-third of U.S. merchants that accept credit cards do not accept American Express, often due to its higher merchant fees.

Procedural Posture:

  • The United States and seventeen states sued American Express, Visa, and MasterCard in the U.S. District Court for the Eastern District of New York, alleging violations of § 1 of the Sherman Act.
  • Visa and MasterCard entered into consent judgments with the government, agreeing to rescind their anti-steering provisions.
  • American Express proceeded to a seven-week bench trial.
  • The District Court found that American Express's non-discriminatory provisions (NDPs) constituted an unreasonable restraint of trade and violated § 1 of the Sherman Act.
  • The District Court entered a permanent injunction prohibiting American Express from enforcing its NDPs.
  • American Express, as Defendant-Appellant, appealed the judgment and injunction to the U.S. Court of Appeals for the Second Circuit.

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Issue:

Do American Express's non-discriminatory provisions, which contractually prohibit merchants from steering customers to other payment methods, constitute an unreasonable restraint of trade in violation of Section 1 of the Sherman Act?


Opinions:

Majority - Wesley, Circuit Judge

No, American Express's non-discriminatory provisions do not constitute an unreasonable restraint of trade. The district court erred by incorrectly defining the relevant market to include only the merchant side of the two-sided platform. A proper rule-of-reason analysis for a two-sided market requires an evaluation of the net competitive effect on the platform as a whole, accounting for both cardholders and merchants. The plaintiffs failed to carry their burden to show that the NDPs caused an actual adverse effect on competition overall, as they did not prove that the restraints led to reduced output, decreased quality, or supracompetitive pricing across the entire platform. The NDPs, while imposing costs on merchants, are essential to Amex's business model of funding valuable cardholder rewards, which drives competition and creates value for both sides of the platform.



Analysis:

This decision establishes a significant precedent for applying antitrust law to two-sided markets, a model increasingly common in the digital economy. It mandates that courts must analyze the entire platform, balancing harms on one side with benefits on the other, rather than viewing each side in isolation. This 'whole platform' approach makes it substantially more difficult for plaintiffs to prove antitrust violations against platform-based businesses by simply demonstrating harm to one group of users, such as merchants or developers. The ruling reinforces the principle that antitrust law protects overall competition and consumer welfare, not individual competitors or one segment of a multi-sided market.

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