To ensure that
merchants do not dissuade card holders from using Amex instead of other credit
cards, American Express has had anti-steering provisions in their contracts
with merchants since the 1950’s
In June 2018, the United States Supreme Court issued a 5-4 decision
in Ohio v. American Express, which stemmed from a group of states’ challenges to
American Express’ anti-steering provision in its contracts with Amex
merchants. The anti-steering provision
prohibits merchants from discouraging customers from using their Amex card
after they have already entered the store and are prepared to buy something,
thereby avoiding Amex’s fee.
Antitrust Attorney K. Todd Wallace explains that the underlying
issue is one of the fundamental ways that American Express’ business model
differs from other credit card issuers such as Visa or Mastercard.
The Court noted that “[w]hile 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 focuses on cardholder spending rather than cardholder 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.” To ensure that merchants do not dissuade card
holders from using Amex instead of other credit cards, American Express has implemented
anti-steering provisions into their contracts with merchants since the
1950’s.
Several states sued American Express, asserting that the
anti-steering provision violated antitrust laws. After a 7-week trial, the district court
ruled in the states’ favor, finding that “that the credit-card market should be
treated as two separate markets—one for merchants and one for
cardholders.” Thus, “[e]valuating the
effects on the merchant side of the market, the District Court found that
Amex’s anti-steering provisions are anticompetitive because they result in
higher merchant fees.”
The Supreme Court, however, explained that credit card
transactions should be evaluated as a two-sided transaction market. “With credit cards, for example, networks
often charge cardholders a lower fee than merchants because cardholders are
more price sensitive. In fact, the
network might well lose money on the cardholder side by offering rewards such
as cash back, airline miles, or gift cards.
The network can do this because increasing the number of cardholders
increases the value of accepting the card to merchants and, thus, increases the
number of merchants who accept it.
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.” Therefore, the Court explained
that the two-sided transaction market must be evaluated as a whole. Going on to review the anti-steering
practice, the Court concluded that American Express’ practice does not violate
antitrust laws when both merchant and consumer transactions are viewed in
conjunction.
Mr. Wallace notes that the case may have far reaching
consequences for other multi-party transactions, including those in health
care, where patients, insurance companies, and healthcare providers could
certainly be viewed as forming a two-sided transaction like the American
Express case. Indeed, Justice Breyer’s
dissenting opinion, joined by Justices Ginsburg, Sotomayor, and Kagan, notes
that such multi-party transactions are rather common. The dissenting opinion argues that “[n]othing
in antitrust law, to [Justice Breyer’s] knowledge, suggests that a court, when
presented with an agreement that restricts competition in any one of the
markets my examples suggest, should abandon traditional market-definition
approaches and include in the relevant market services that are complements,
not substitutes, of the restrained good.”
Mr. Wallace notes that “how widely the Court will apply the multi-party
transaction approach to antitrust cases remains to be seen. It is something on which attorneys and
businesses in certain industries should keep a careful watch.”
The case is Ohio v. American Express, available at https://www.supremecourt.gov/opinions/17pdf/16-1454_5h26.pdf
Kenneth Todd Wallace is
an attorney and founding partner of the law firm Wallace Meyaski LLC. He has
nearly 20 years of experience in the legal and business professions with
established excellence in trial advocacy, negotiation, strategic and initiative
planning, employment law compliance, government relations, mergers and
acquisitions, and team building.
Facebook page of Kenneth Todd Wallace, Attorney
at Law:
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*** K. Todd Wallace is an attorney at Wallace Meyaski in New Orleans. He has nearly 20 years of experience in the legal and business professions with established excellence in trial advocacy, negotiation, strategic and initiative planning, government relations, mergers and acquisitions, and team building. See http://www.walmey.com/our-attorneys/k-todd-wallace/
