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What’s Next for Merchants and Consumers After the Second Circuit’s Decision in United States v. American Express?

On September 26, 2016, the Second Circuit U.S. Court of Appeals threw out a 2015 antitrust decision against American Express Company.1 The decision is the latest development in a five-year saga between the U.S. Department of Justice and seventeen individual states against Amex for its “nondiscrimination provisions,” or NDPs, which are contractual provisions that prohibit merchants from expressing preferences for particular credit cards, offering discounts to use particular cards, or even from disclosing information regarding the relative costs of accepting particular cards. According to the DOJ, these provisions harm competition and increase costs for everyday consumers. According to Amex, the restraints help the company keep Visa and MasterCard, the two largest players in a consolidated payment industry, in check while ensuring a positive experience at the point of sale for Amex cardholders. This blog post briefly examines the issues at the heart of the case and the impact the Second Circuit’s recent decision may have on merchants and consumers.

The DOJ filed suit against Amex, Visa and MasterCard in 2010, alleging that the merchants’ NDPs were anticompetitive restraints of trade and enforcing them against merchants violated Section 1 of the Sherman Act.2 Visa and MasterCard immediately entered into consent decrees with the Government and agreed to reform their merchant agreements. Amex, however, vowed to fight. The lawsuit focused on “swipe fees” – the small percentage of each transaction merchants pay to the credit card networks. These fees generate $50 billion per year for the networks, and Amex’s business model is particularly reliant on such fees for revenue. Although Amex charges the same rate regardless of the type of Amex card used, Visa and MasterCard products have different fees. High-rewards cards generally cost merchants more to accept than more basic cards. And Amex typically – but not always – sets its merchant fees a bit higher than its competitors to bolster its perception of being a premium product with premium cardholders. (Id.)) Any merchant would prefer to minimize these processing fees, and one way to minimize such fees would be to effectively steer consumers to cheaper payment methods. But aside from practical considerations that might make steering unwise or difficult from a business perspective, the NDPs prohibit such conduct.

The DOJ’s theory of the case was that these swipe fees were artificially inflated due to the credit Amex’s NDPs, which allowed Amex to insulate itself from price competition. In other words, according to the Government, there was little incentive for Amex to provide merchants with competitive rates, because merchants couldn’t steer consumers anyway. For instance, a merchant couldn’t ask a customer who pulled out their Amex card to switch to a Visa card. The lack of competition at the point of sale pushed up the merchant fees, and these fees were ultimately passed on to consumers in the form of higher retail prices. Thus, to the Government, restoring price competition at the point of sale would lower prices to merchants, who in turn would pass along savings to consumers by lowering retail prices. Amex fought back on the DOJ’s claims of an absence of competition in the payment industry, arguing that it regularly negotiates its fees with merchants and its fees are justified because of Amex’s premium cardholders, who generally spend more per transaction than do Visa and MasterCard cardholders, and because of important cardholder and transaction data Amex provides to merchants, in addition to other services. Moreover, Amex argued that its NDPs allowed it to compete in a consolidated market defined by the dominance of Visa and MasterCard, which together control about 70% of credit card spend.

After a lengthy discovery and pre-trial process, a seven-week trial took place during summer 2014 before Judge Nicholas Garaufis in the Eastern District of New York. The main question, of course, was whether Amex’s NDPs violated Section 1 of the Sherman Act. To determine whether a business practice violates the Sherman Act, courts apply one of two rules.3 The first rule is the per se rule, where certain practices “are entitled to a conclusive presumption of unreasonableness and thus are considered per se illegal”4. An example of a practice examined under this test is a horizontal price-fixing arrangement. The second test courts use to analyze potential Sherman Act violations is the rule of reason, which is “the accepted standard for testing whether a practice restrains trade in violation of § 1.”5 Vertical restraints, which are restraints between firms at different levels of the distribution process, and are the type of restraints at issue in this case, are generally analyzed under the rule of reason test.6 Courts apply this test using a three-step framework. A plaintiff first must demonstrate that a defendant’s challenged practice “had an actual adverse effect on competition as a whole in the relevant market.”7

Another way to show anticompetitive effects is to show that the defendant has “sufficient market power to cause an adverse effect on competition.”8 Once the plaintiff makes this initial showing, the burden shifts to the defendant to show that its challenged practice has procompetitive effects.9 If the defendant can make this showing, then the burden goes back to the plaintiff to show that the procompetitive effects could be achieved through less restrictive means.10 Here, Judge Garaufis largely bought into the DOJ’s theory and issued his decision in February 2015 against Amex. Judge Garaufis defined the relevant market as the “network services market” and stated that “the NDPs short-circuit the ordinary price-setting mechanism in the network services market by removing the competitive ‘reward’ for networks offering merchants a lower price for acceptance services.”11 In essence, Judge Garaufis found that Amex’s NDPs did have actual adverse effects on interbrand competition.

Amex timely appealed the District Court’s decision, oral arguments were heard in December 2015, and the Second Circuit issued a unanimous panel ruling in September 2016 in which it overruled the District Court. The panel remanded the case back to the lower court, directing it to enter judgment in favor of Amex. According to the Second Circuit, fatal to the District Court’s decision was its own “explicit finding that neither party provided reliable evidence of Amex’s costs or profit margins accounting for consumers on both sides of the platform, and given evidence showing that the quality and output of credit cards across the entire industry continues to increase.”12 The legal and economic analysis in the case was very complex, but essentially the District Court erred by concluding the relevant market for antitrust analysis was the “network services market,” which are the services merchants seek to accept and process credit card transactions. Analyzing the market for credit card network services focused too much on the merchant side of the “two-sided platform,” an economics concept, that involves merchants on one side and cardholders on the other. The networks sit in the middle of the two sides, and each side influences the other. As the Second Circuit stated, “the price charged to merchants necessarily affects cardholder demand, which in turn has a feedback effect on merchant demand (and thus influences the price charged to merchants). In order to retain cardholders, a network may need to increase cardholder benefits,” which may call for an increase in merchant fees.13 The price charged to merchants, therefore, only focuses on one aspect of competition in the payment industry. By failing to adequately consider the cardholder side of the two-sided market, the DOJ was unable to carry its burden.

As a result of the Second Circuit’s decision, Amex is entitled to continue to enforce its NDPs as they existed prior to the District Court’s ruling in February 2015. Obviously the decision is good for Amex, but how does the decision impact merchants and consumers? As mentioned above, central to the DOJ’s argument was that the alleged lack of price competition at the point of sale hurt merchants in the form of artificially high merchant fees and hurt consumers because the merchants passed these costs on to them in the form of higher retail prices. The District Court agreed with this argument, believing that eliminating the NDPs would increase price competition among the credit card networks.

At the time, the court stated that it “expects that merchants will pass along some amount of the savings associated with declining swipe fees to their customers in the form of lower retail prices.” But some commentators questioned this thinking. For instance, Andrew Ross Sorkin, a prominent New York Times’ financial columnist, wrote shortly after the decision that a more likely scenario would be for merchant fees to decline with merchants pocketing the difference in profits rather than passing any savings along to consumers.14 As evidence of his grim prognosis, Sorkin pointed to the 2010 Durbin Amendment, which was a part of the Dodd-Frank Act. The purpose of the amendment was to lower merchant fees for processing debit cards. Numerous studies on the impact of the amendment found little evidence that cost savings by merchants had been passed on to consumers. Sorkin also pointed out a paragraph in Judge Garaufis’s 150-page decision acknowledging that prices have not come down in the three million retailers that do not accept Amex and that price competition has not increased in the four years since Visa and MasterCard had agreed with the DOJ to abandon their own anti-steering rules.15 Ultimately, it will be interesting to see what other measures the Government or merchants themselves may take after the Second Circuit’s important ruling that Amex’s NDPs do not unlawfully restrain competition in violation of the Sherman Act.

  1. Robin Sidel & Christopher M. Matthews, Appeals Court Tosses Judgment Against American Express, WALL ST. J. (Sept. 26, 2016), 

  2. Thomas Catan & Robin Sidel, U.S., AmEx in Antitrust Suit, WALL ST. J. (Oct. 5, 2010), 

  3. See U.S. v. Am. Express Co., No. 15-1672, 2016 WL 5349734, at *9 (2d Cir. Sept. 26, 2016). 

  4. Id. 

  5. Id. (citing Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 at 885 (2007). 

  6. Id. at *10. 

  7. Id. (citing Capital Imaging Assosc., P.C. v. Mohawk Valley Med. Assosc., Inc., 996 F.2d 537, 543 (2d Cir. 1993). 

  8. Id. (citing Tops Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d 90, 96 (2d Cir. 1998). 

  9. Id. (citing Geneva Pharms. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485, 507 (2d Cir. 2004). 

  10. Id. (citing Capital Imaging, 996 F.2d at 543. 

  11. Id. at *8. 

  12. Id. at *20. 

  13. Id. at *14. 

  14. Andrew Ross Sorkin, Amex’s Loss in Court May Not Help Consumers, N.Y. TIMES (Feb. 23, 2015), 

  15. Id.