Full Judgment Text & Judicial Ruling

2018 S C M R 1908 [Supreme Court of the United States] Present: John G. Roberts, C.J., Anthony M. Kennedy, Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor, Elena Kagan, Samuel Anthony Alito, Clarence Thomas and Neil Gorsuch, JJ OHIO, ET AL---Petitioner Versus AMERICAN EXPRESS COMPANY, ET AL---Respondent Decided on 25th June, 2018. (On writ of Certiorari to the United States Court of Appeals for the Second Circuit) Per Thomas, J; Roberts, C.J, Kennedy, Alito and Gorsuch, JJ; agreeing; Breyer, Ginsberg, Sotomayor and Kagan, JJ dissenting (a) Competition law--- ----Unreasonable restraint on trade---'Rule of reason'---Principles---Credit card company---'Antisteering provisions' in contracts with merchants---Credit card companies operated a "two-sided platform", providing services to two different groups (cardholders and merchants) who depended on the platform to intermediate between them---Cardholders benefited from holding a card only if that card was accepted by a wide range of merchants, and merchants benefited from accepting a card only if a sufficient number of cardholders used it---Cardholder and the merchant both, ,thus, depended on widespread acceptance of a card---Respondent-credit card company, which had a significant share of the total credit-card transaction volume in the country (United States), competed with its rivals by using a different business model, which focused on cardholder spending rather than cardholder lending---To encourage cardholder spending, respondent-company provided better rewards than the other credit-card companies, which was only possible by charging merchants higher fees than its rivals---Such higher fees caused friction between respondent-company and merchants---To avoid higher fees, merchants often attempted to dissuade cardholders from using cards of respondent-company at the point of sale - a practice known as "steering"---Respondent-company placed antisteering provisions in its contracts with merchants to combat this---Plaintiffs sued respondent-company, claiming that its antisteering provisions violated the prohibition on unreasonable restraints of trade [section 1 of the Sherman Antitrust Act, 1890]---District Court agreed, finding that the credit-card market should be treated as two separate markets-one for merchants and one for cardholders-and that respondent-company's antisteering provisions were anticompetitive because they resulted in higher merchant fees---Appellate Court reversed findings of District Court determining that the credit-card market was one market, not two, and that respondent-company's antisteering provisions did not violate the prohibition on unreasonable restraints of trade---[Per Thomas, J (Majority view): Restraints on trade [as under section 1 of the Sherman Antitrust Act, 1890] may be unreasonable in one of two ways-unreasonable per se or un-reasonable as judged under the "rule of reason"---Respondent-company's antisteering provisions should be judged under the 'rule of reason' using a three-step burden-shifting framework---Such framework required the Court to decide as a first step whether the plaintiffs had proved that respondent-company's antisteering provisions had a substantial anticompetitive effect that harmed consumers in the relevant market---Applying the rule of reason generally required an accurate definition of the relevant market---In the present case, both sides of the two-sided credit-card market-cardholders and merchants-must be considered---Only a company with both cardholders and merchants willing to use its network could sell transactions and compete in the credit-card market---Credit-card networks could not make a sale unless both sides of the platform simultaneously agreed to use their services, therefore, credit-card networks were best understood as supplying only one product-the transaction-that was jointly consumed by a cardholder and a merchant---Accordingly, the two-sided market for credit-card transactions should be analyzed as a whole---Plaintiffs had not carried their burden to show anticompetitive effects due to the antisteering provisions---Argument that respondent-company's antisteering provisions increased merchant fees wrongly focused on just one side of the market---Evidence of a price increase on one side of a two-sided transaction platform could not, by itself, demonstrate an anticompetitive exercise of market power---Instead, plaintiffs must prove that respondent-company's antisteering provisions increased the cost of credit-card transactions above a competitive level, reduced the number of credit-card transactions, or otherwise stifled competition in the two-sided credit-card market---Plaintiffs failed to prove the same---Plaintiffs offered no evidence that the price of credit-card transactions was higher than the price one would expect to find in a competitive market---Respondent-company's increased merchant fees reflected an increase in the value of its services and the cost of its transactions, not an ability to charge above a competitive price---Respondent-company used higher merchant fees to offer its cardholders a more robust rewards program, which was necessary to maintain cardholder loyalty and encourage the level of spending that made it valuable to merchants---In addition, the evidence that did exist did not support the plaintiffs' view that respondent-company's antisteering provisions were the cause of any increases in merchant fees, since merchant fees of rival credit card companies had continued to increase, even at merchant locations where cards of respondent-company were not accepted---Plaintiffs also failed to prove that respondent-company's antisteering provisions had stifled competition among credit-card companies---To the contrary, while such provisions had been in place, the market experienced expanding output and improved quality---Nor had such antisteering provisions ended competition between credit-card networks with respect to merchant fees---Competitors of respondent-company had exploited its higher merchant fees to their advantage---Antisteering provisions actually stemmed negative externalities in the credit-card market and promoted inter- brand competition, and they did not prevent competing credit-card networks from offering lower merchant fees or promoting their broader merchant acceptance---Anti-steering provision of the respondent-company did not violate anti-competition laws---Judgment of Appellate Court was affirmed accordingly]---[Per Breyer, J (Minority view): District Court rightly found that the challenged antisteering provisions added by the respondent-company in its contracts with merchants had significant anticompetitive effects---Said provisions had limited or prevented price competition among credit-card firms for the business of merchants as they required the merchants to agree not to encourage customers to use competitors' credit cards, even cards from those competitors, that intended to charge the merchants lower prices---By doing so, the respondent-company had disrupted the normal price-setting mechanism in the market---As a result of the antisteering provisions, the District Court correctly found, that respondent-company was able to raise merchant prices repeatedly without any significant loss of business, because merchants were unable to respond to such price increases by encouraging shoppers to pay with other cards---Antisteering provisions thereby suppressed competitors' incentives to offer lower prices resulting in higher profit-maximizing prices across the network services market---Consumers throughout the economy paid higher retail prices as a result, and they were denied the opportunity to accept incentives that merchants might otherwise have offered to use less-expensive cards---Furthermore plaintiffs provided evidence that the merchant price increases that resulted from the antisteering provisions were not wholly offset by additional rewards expenditures or otherwise passed through to cardholders, and resulted in a higher net price---If respondent-company's merchant fees were so high that merchants successfully induced their customers to use other cards, respondent-company could remedy such problem by lowering those fees or by spending more on cardholder rewards so that cardholders declined such requests, but what respondent-company should not have done was to demand contractual protection from price competition---Respondent-company presented no expert testimony, financial analysis, or other direct evidence establishing that without its antisteering provisions it would, in fact, be unable to adapt its business to a more competitive market]. State Oil Co. v. Khan, 522 U.S. 3, 10 and Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 ref. (b) Competition law--- ----Anti-competitive pricing---Proof---Court would not infer competitive injury from price and output data unless there was some evidence that tended to prove that output was restricted or prices were above a competitive level. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 237 ref. Date of hearing: 26th February, 2018. JUDGMENT JUSTICE THOMAS delivered the opinion of the Court. American Express Company and American Express Travel Related Services Company (collectively, Amex) provide credit-card services to both merchants and card holders. When a cardholder buys something from a mer-chant who accepts Amex credit cards, Amex processes the transaction through its network, promptly pays the merchant, and subtracts a fee. If a merchant wants to accept Amex credit cards-and attract Amex cardholders to its business-Amex requires the merchant to agree to an antisteering contractual provision. The antisteering pro vision prohibits merchants from discouraging customers from using their Amex card after they have already en tered the store and are about to buy something, thereby avoiding Amex's fee. In this case, we must decide whether Amex's antisteering provisions violate federal antitrust law. We conclude they do not. I A Credit cards have become a primary way that consum ers in the United States purchase goods and services. When a cardholder uses a credit card to buy something from a merchant, the transaction is facilitated by a credit-card network. The network provides separate but inter related services to both cardholders and merchants. For cardholders, the network extends them credit, which allows them to make purchases without cash and to defer payment until later. Cardholders also can receive rewards based on the amount of money they spend, such as airline miles, points for travel, or cash back. For merchants, the network allows them to avoid the cost of processing trans actions and offers them quick, guaranteed payment. This saves merchants the trouble and risk of extending credit to customers, and it increases the number and value of sales that they can make. By providing these services to cardholders and mer chants, credit-card companies bring these parties together, and therefore operate what economists call a "two-sided platform." As the name implies, a two-sided platform offers different products or services to two different groups who both depend on the platform to intermediate between them. See Evans & Schmalensee, Markets With Two-Sided Platforms, 1 Issues in Competition L. & Pol'y 667 (2008) (Evans & Schmalensee); Evans & Noel, Defining Antitrust Markets When Firms Operate Two-Sided Plat forms, 2005 Colum. Bus. L. Rev. 667, 668 (Evans & Noel); Filistrucchi, Geradin, Van Damme, & Affeldt, Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293, 296 (2014) (Filistrucchi). For credit cards, that interaction is a transaction. Thus, credit-card networks are a special type of two-sided plat form known as a "transaction" platform. See id., at 301, 304, 307; Evans & Noel 676-678. The key feature of transaction platforms is that they cannot make a sale to one side of the platform without simultaneously making a sale to the other. See Klein, Lerner, Murphy, & Plache, Competition in Two-Sided Markets: The Antitrust Eco nomics of Payment Card Interchange Fees, 73 Antitrust L. J. 571, 580, 583 (2006) (Klein). For example, no credit-card transaction can occur unless both the merchant and the cardholder simultaneously agree to use the samecredit-card network. See Filistrucchi 301. Two-sided platforms differ from traditional markets in-important ways. Most relevant here, two-sided platforms often exhibit what economists call "indirect network ef fects." Evans & Schmalensee 667. Indirect network ef fects exist where the value of the two-sided platform to one group of participants depends on how many members of a different group participate. D. Evans & R. Schmalensee, Matchmakers: The New Economics of Multisided Plat forms 25 (2016). In other words, the value of the services that a two-sided platform provides increases as the num ber of participants on both sides of the platform increases. A credit card, for example, is more valuable to cardholders when more merchants accept it, and is more valuable tomerchants when more cardholders use it. See Evans & Noel 686-687; Klein 580, 584. To ensure sufficient partic ipation, two-sided platforms must be sensitive to the prices that they charge each side. See Evans & Schma lensee 675; Evans & Noel 680; Muris, Payment Card Regulation and the (Mis) Application of the Economics of Two-Sided Markets, 2005 Colum. Bus. L. Rev. 515, 532- 533 (Muris); Rochet & Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Assn. 990, 1013 (2003). Raising the price on side A risks losing participa tion on that side, which decreases the value of the plat form to side B. If participants on side B leave due to this loss in value, then the platform has even less value to side A-risking a feedback loop of declining demand. See Evans & Schmalensee 675; Evans & Noel 680-681. Two-sided platforms therefore must take these indirect net work effects into account before making a change in price on either side. See Evans & Schmalensee 675; Evans & Noel 680-681. Sometimes indirect network effects require two-sided platforms to charge one side much more than the other. See Evans & Schmalensee 667, 675, 681, 690-691; Evans & Noel 668, 691; Klein 585; Filistrucchi 300. For two-sided platforms, "'the [relative] price structure matters, and platforms must design it so as to bring both sides onboard.'" Evans & Schmalensee 669 (quoting Rochet & Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. Econ. 645, 646 (2006)). The optimal price might require charging the side with more elastic demand a below-cost (or even negative) price. See Muris 519, 550; Klein 579; Evans & Schmalensee 675; Evans & Noel 681. With credit cards, for example, networks often charge cardholders a lower fee than merchants because cardholders are more price sensitive. See Muris 522; Klein 573-574, 585, 595. In fact, the network might well lose money on the card-holder side by offering rewards such as cash back, airline miles, or gift cards. See Klein 587; Evans & Schmalensee 672. The network can do this because increasing the number of cardholders increases the value of accepting thecard to merchants and, thus, increases the number of merchants who accept it. Muris 522; Evans & Schma lensee 692. Networks can then charge those merchants a fee for every transaction (typically a percentage of the purchase price). Striking the optimal balance of the prices charged on each side of the platform is essential for two-sided platforms to maximize the value of their services and to compete with their rivals. B Amex, Visa, MasterCard, and Discover are the four dominant participants in the credit-card market. Visa, which is by far the largest, has 45% of the market as measured by transaction volume. Amex and MasterCard trail with 26.4% and 23.3%, respectively, while Discover has just 5.3% of the market. Visa and MasterCard have significant structural advantages over Amex. Visa and MasterCard began as bank cooperatives and thus almost every bank that offers credit cards is in the Visa or MasterCard network. This makes it very likely that the average consumer carries, and the average merchant accepts, Visa or MasterCard. As a result, the vast majority of Amex cardholders have a Visa or MasterCard, but only a small number of Visa and Master-Card cardholders have an Amex. Indeed, Visa and MasterCard account for more than 432 million cards in circulation in the United States, while Amex has only 53million. And while 3.4 million merchants at 6.4 million locations accept Amex, nearly three million more locations accept Visa, MasterCard, and Discover. Amex competes with Visa and MasterCard by using a different business model. While Visa and MasterCard earn half of their revenue by collecting interest from their cardholders, Amex does not. Amex instead earns most of its revenue from merchant fees. Amex's business model thus focuses on cardholder spending rather than card- holder lending. To encourage cardholder spending, Amex provides better rewards than other networks. Due to its superior rewards, Amex tends to attract cardholders who are wealthier and spend more money. Merchants place a higher value on these cardholders, and Amex uses this advantage to recruit merchants. Amex's business model has significantly influenced the credit-card market. To compete for the valuable cardhold ers that Amex attracts, both Visa and MasterCard have introduced premium cards that, like Amex, charge mer chants higher fees and offer cardholders better rewards. To maintain their lower merchant fees, Visa and Master-Card have created a sliding scale for their various cards-charging merchants less for low-reward cards and more for high-reward cards. This differs from Amex's strategy, which is to charge merchants the same fee no matter there wards that its card offers. Another way that Amex has influenced the credit-card market is by making banking and card-payment services available to low-income indi viduals, who otherwise could not qualify for a credit card and could not afford the fees that traditional banks charge. See 2 Record 3835-3837, 4527-4529. In sum, Amex's business model has stimulated competitive inno vations in the credit-card market, increasing the volume of transactions and improving the quality of the services. Despite these improvements, Amex's business model sometimes causes friction with merchants. To maintain the loyalty of its cardholders, Amex must continually invest in its rewards program. But, to fund those invest ments, Amex must charge merchants higher fees than its rivals. Even though Amex's investments benefit mer chants by encouraging cardholders to spend more money, merchants would prefer not to pay the higher fees. One way that merchants try to avoid them, while still enticing Amex's cardholders to shop at their stores, is by dissuad ing cardholders from using Amex at the point of sale. This practice is known as "steering." Amex has prohibited steering since the 1950s by placing antisteering provisions in its contracts with merchants. These antisteering provisions prohibit merchants from implying a preference for non-Amex cards; dissuading customers from using Amex cards; persuading customers to use other cards; imposing any special restrictions, conditions, disadvantages, or fees on Amex cards; or pro moting other cards more than Amex. The antisteering provisions do not, however, prevent merchants from steer ing customers toward debit cards, checks, or cash. C In October 2010, the United States and several States (collectively, plaintiffs) sued Amex, claiming that its an tisteering provisions violate 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U. S. C. 1. After a 7-week trial, the District Court agreed that Amex's antisteering provisions violate 1. United States v. American Express Co., 88 F. Supp. 3d 143, 151-152 (EDNY 2015). It found that the credit-card market should be treated as two separate markets-one for merchants and one for card holders. See id., at 171-175. Evaluating the effects on the merchant side of the market, the District Court found that Amex's antisteering provisions are anticompetitive because they result in higher merchant fees. See id., at 195-224. The Court of Appeals for the Second Circuit reversed. United States v. American Express Co., 838 F. 3d 179, 184 (2016). It concluded that the credit-card market is one market, not two. Id., at 196-200. Evaluating the credit-card market as a whole, the Second Circuit concluded that Amex's antisteering provisions were not anticompetitive and did not violate 1. See id., at 200-206. We granted certiorari, 583 U. S. ___ (2017), and now affirm. II Section 1 of the Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States." 15 U.S.C. 1. This Court has long recognized that, "[i]n view of the common law and the law in this country" when the Sherman Act was passed, the phrase "restraint of trade" is best read to mean "undue restraint." Standard Oil Co. of N. J. v. United States, 221 U.S. 1, 59- 60 (1911). This Court's precedents have thus understood 1 "to outlaw only unreasonable restraints." State Oil Co. v. Khan, 522 U. S. 3, 10 (1997) (emphasis added). Restraints can be unreasonable in one of two ways. A small group of restraints are unreasonable per se because they "'"always or almost always tend to restrict competi tion and decrease output."'" Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 723 (1988). Typi cally only "horizontal" restraints-restraints "imposed by agreement between competitors"-qualify as unreasonable per se. Id., at 730. Restraints that are not unreasonable per se are judged under the "rule of reason." Id., at 723. The rule of reason requires courts to conduct a fact-specific assessment of "market power and market structure . . . to assess the [restraint]'s actual effect" on competition. Copperweld Corp. v. Independence Tube Corp., 467 U. S. 752, 768 (1984). The goal is to "distinguis[h] between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition thatare in the consumer's best interest." Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 886 (2007). In this case, both sides correctly acknowledge that Amex's antisteering provisions are vertical restraints- i.e., restraints "imposed by agreement between firms at different levels of distribution." Business Electronics, supra, at 730. The parties also correctly acknowledge that, like nearly every other vertical restraint, the anti-steering provisions should be assessed under the rule of reason. See Leegin, supra, at 882; State Oil, supra, at 19; Business Electronics, supra, at 726; Continental T. V., Inc. v. GTE Sylvania Inc., 433 U. S. 36, 57 (1977). To determine whether a restraint violates the rule of reason, the parties agree that a three-step, burden-shifting framework applies. Under this framework, the plaintiff has the initial burden to prove that the chal lenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market. See 1 J. Kalinowski, Antitrust Laws and Trade Regulation 12.02[1] (2d ed. 2017) (Kalinowski); P. Areeda & H. Hovenkamp, Fundamentals of Antitrust Law 15.02[B] (4th ed. 2017) (Areeda & Hovenkamp); Capital Imaging Assoc., P. C. v. Mohawk Valley Medical Associates, Inc., 996 F. 2d 537, 543 (CA2 1993). If the plaintiff carries its burden, then the burden shifts to the defendant to show a pro-competitive rationale for the restraint. See 1 Kalinow ski 12.02[1]; Areeda & Hovenkamp 15.02[B]; Capital Imaging Assoc., supra, at 543. If the defendant makes this showing, then the burden shifts back to the plaintiff to demonstrate that the procompetitive efficiencies could be reasonably achieved through less anticompetitive means. See 1 Kalinowski 12.02[1]; Capital Imaging Assoc., supra, at 543. Here, the parties ask us to decide whether the plaintiffs have carried their initial burden of proving that Amex's antisteering provisions have an anticompetitive effect. The plaintiffs can make this showing directly or indirectly. Direct evidence of anticompetitive effects would be "'proof of actual detrimental effects [on competition],'" FTC v. Indiana Federation of Dentists, 476 U. S. 447, 460 (1986), such as reduced output, increased prices, or decreased quality in the relevant market, see 1 Kalinowski 12.02[2]; Craftsman Limousine, Inc. v. Ford Motor Co., 491 F. 3d 381, 390 (CA8 2007); Virginia Atlantic Airways Ltd. v. British Airways PLC, 257 F. 3d 256, 264 (CA2 2001). Indirect evidence would be proof of market power plus some evidence that the challenged restraint harms compe tition. See 1 Kalinowski 12.02[2]; Tops Markets, Inc. v. Quality Markets, Inc., 142 F. 3d…

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