Opposition Brief — Ohio v. Am. Express Co., 138 S. Ct. 355 (2017) (No. 16-1454)

RECoR,

AND |

BRIEFS |

No. 16-1454 me

IN THE

Supreme Court of the Anited States

OHIO, ET AL.,

Petitioners,

Vv.

AMERICAN EXPRESS COMPANY, ET AL.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR AMERICAN EXPRESS

IN OPPOSITION

BENJAMIN J. HORWICH EVAN R. CHESLER

JUSTIN P. RAPHAEL Counsel of Record

MUNGER, TOLLES & OLSON LLP PETER T. BARBUR

560 Mission Street KEVIN J. ORSINI

San Francisco, CA 94105 Rory A. LERARIS

(415) 512-4000 CRAVATH, SWAINE & MOORE LLP

825 Eighth Avenue

New York, NY 10019

(212) 474-1000

echesler@cravath.com

Counsel for Respondents American Express Company and

American Express Travel Related Services Company, Inc.

August 21, 2017

QUESTION PRESENTED

Payment card networks such as respondent

American Express (“Amex”) compete for a single unit

of output—a credit card transaction processed at a

merchant. For each such transaction, there must be

one customer willing to use the network’s card, and

one merchant willing to accept it. Thus, a network

must appeal to both cardholders and merchants to

compete effectively for transactions. To do so, Amex

provides incentives to Amex cardholders (cash or re-

ward points), which are paid for by merchants in the

form of merchant fees. Nearly a third of all credit

card accepting merchants choose not to accept Amex,

but merchants that do also agree to nondiscriminato-

ry provisions (“NDPs”) by which they commit not to

discriminate against Amex cards by steering card-

holders to another card at the point of sale. At trial,

the United States, joined by Petitioners (and other

States that have abandoned their claims) contended

that these NDPs violated Section 1 of the Sherman

Act by allowing Amex to charge higher merchant

fees. Also at trial, the Government’s economic expert

admitted that merchant fees and cardholder benefits

are linked and that a reduction in merchant fees “can

harm consumers” by reducing cardholder benefits.

The question presented is whether—given the

undisputed relationship between merchant fees and

cardholder benefits—the Government failed to carry

its burden under the rule of reason when it focused

only on the effect of the NDPs on merchant fees,

without accounting for their effect on cardholders, or

on the volume of transactions.

il

CORPORATE DISCLOSURE STATEMENT

American Express Company is the parent com-

pany of American Express Travel Related Services

Company, Inc., and American Express Company is a

publicly held company. Berkshire Hathaway, Inc., a

publicly held corporation, owns more than 10 percent

of the outstanding shares of American Express Com-

pany.

nl

TABLE OF CONTENTS

Page

RS BI EE cccccccrssccsesnctsosvecsconseeteeesesers i

TABLE OF AUTHORITIEG.......... te biaiiniairscieiaipabaaeciniei Vv

TT iscernictercccecheicnabianimgueheehiinghinmennmnateny 1

BITTE itetisuicduansatadasesseeiesinnisicemnttienteaapeiulicneaias 2

I i a 2

1. Two-Sided Payment Platforms............. 2

2. Competition in the Credit Card

RECTAL RE er CEE 3

B. The Government's Case ..............ccccssseesesees 7

C. The District Court Decision....................0.0+ 8

D. The Court of Appeals’ Decision.................. 10

REASONS FOR DENYING THE PETITION.......... 13

I. The Decision Below Is Correct and

Consistent with Precedent. ................:ccccceseeeees 14

Bes) Fe I iitciiccttcinscticesneccssvniieinniis 14

iy > IID iccictiintelnciiisiinisdensitichintanqnanncdiiitin’ 20

C. Anticompetitive Effects...............cccccceceeee 22

Il. Petitioners’ Other Arguments Are

IN, criciceniseniesintsiasanicineusinssibanintiadinetiniaecneaiia 26

iv

A. Petitioners’ Call for “Guidance” Does

BGes GUNTER TRBUEIU, .cccccccceccccsccnesscesessescseses 26

B. Petitioners’ Arguments About Allocative

Efficiency Do Not Warrant Review............ 28

C. The Role of the Credit Card Industry in

the Economy Does Not Justify Review...... 29

Ill. Review Would Be Premature Because No

Relevant Body of Law—Let Alone a

Conflict—Exists in the Courts of Appeals. ....... 30

IV. Recognized Defects in the Government's

Proof Make this Case a Poor Vehicle. ............... 34

ITE dilicicannscnsiesihiaiitnonincerdiciamaiseseasininidinsacnabe 37

TABLE OF AUTHORITIES

Page(s)

Cases

Arizona v. Maricopa Cty. Med. Soc’y,

gt” ETS RS Sa 28, 29, 33

Ball Mem Hosp., Inc. v. Mut. Hosp.

Ins., Inc., 784 F.2d 1325 (7th Cir.

Si iiacdacsheenreliadiathaciadeibianiandcumdiddumisbbnapbbandiiendiiacenibingis 21

Berlyn Inc. v. Gazette Newspapers, Inc.,

73 F. App’x 576 (4th Cir. 20038) ...............0.cceee eee 18

Broad. Music, Inc. v. Columbia Broad.

8 ee 27

Brooke Grp. Ltd. v. Brown &

Williamson Tobacco Co., 509 U.S.

REESE SRS Snes KC I See ON 23, 25

Bus. Elecs. Corp. v. Sharp Elecs. Corp.,

a ER 11, 27

Cal. Dental Ass’n v. FTC, 526 U.S. 756

SU clcisiiadeaishtingdsadeiddeididensancaniailetaiatensenepiiinis 21, 27, 29

Clorox Co. v. Sterling Winthrop, Inc.,

eee f | | le ennerenren 20

Conti T.V., Inc. v. GTE Sylvania, Inc.,

a cseneeinimanii 23

Eastman Kodak Co. v. Image Tech.

Serus., Inc., 504 U.S. 451 (1992)........ 14, 17, 20, 22

vl

Page(s)

FTC v. Actavis, Inc., 133 8. Ct. 2223

a a i mena 27

FTC v. Ind. Fed’n of Dentists, 476 U.S.

isk icicckscarshsedcndnathitiadldieetambhbemdeednenesenomnbiiil 28

Geneva Pharm. Tech. Corp. v. Barr

Labs. Inc., 386 F.3d 485 (2d Cir.

I ila cece elec iliac neat 15, 36

Gordon v. Lewistown Hosp., 423 ¥.3d

184 (3d Cir. 2005), cert. denied, 547

ey UIT ncicsinnitnninbisnsadnbeesendndacorseecesenupenionll 22

Grappone, Inc. v. Subaru of New

England, Inc., 858 F.2d 792 (1st Cir.

Ts Beet aad A nen he Bs RENE Lee eee 20

K.M.B. Warehouse Distribs., Inc. v.

Walker Mfg. Co., 61 F.3d 123 (2d Cir.

RS EEE ERR RABY eee ES ee Ce Ee ye 22

Lackey v. Texas, 514 U.S. 1045 (19985)................ 32, 34

Leegin Creative Leather Prods., Inc. v.

PSKS, Inc., 551 U.S. 877 (2007)........ 25, 27, 28, 29

Lorain Journal Co. v. United States,

I a ispnciieiieaiin 18

Matsushita Elec. Indus. Co. v. Zenith

Radio Corp., 475 U.S. 574 (1986) ....................068: 31

Page(s)

Menasha Corp. v. News Am. Mktg. In-

Store, Inc., 354 F.3d 661 (7th Cir.

I it Uiledtdsnecdudsadinconianiaiciaiadicattniesk ents ctduicnnaseibioaitie 36

Mylan Pharm. Inc. v. Warner Chilcott

Pub. Ltd. Co., 838 F.3d 421 (3d Cir.

aia tihpdititachs Wea telat eas leasing caidas aict aaihcic pe daeetiaces 35

NCAA uv. Bd. of Regents of the Univ. of

ig MU IG Ss sccsctevenasnntainns 19

Photos Etc. Corp. v. Home Depot,

if Fy "ei 2 Be Be |g. | yy eure 29

State Oil Co. v. Khan, 522 U.S. 3 (1997) ..........000..08 27

Texaco Inc. v. Dagher, 547 U.S. 1 (2006).................. 27

Times-Picayune Publ’g Co. v. United

States, 345 U.S. 594 (1953)...................... 17, 18,19

Town Sound & Custom Tops, Inc. v.

Chrysler Motors Corp., No. 90-1547,

1991 WL 149249 (3d Cir. Aug. 9,

1991), aff'd en banc, 959 F.2d 468,

cert. denied, 506 U.S. 868 (1992) ...............0ccccceees 21

United States ex rel. Purcell v. MWI

a, eee eis re SN ci ciicesentsdcmisoxccosesisacce 14

United States v. Charlotte-Mecklenburg

Hosp. Auth., No. 3:16-CV-00311-

RJC-DCK, 2017 WL 1206015

oe 8 ce eee ole

vill

United States v. Grinnell Corp., 384

Be Ila iaivaniniuianitincasandsshadnes

United States v. Topco Assocs., 405 U.S.

Rs a aT

United States v. Visa U.S.A., Inc., 344

F.3d 229 (2d Cir. 2003), cert. denied,

+ Gk RR opener

Verizon Commce'ns Inc. v. Law Offices of

Curtis V. Trinko, LLP, 540 U.S. 398

Pe stesninsincsivcdnnccahsitiainiividdnienineessdenes

Virgin Atl. Airways Ltd. v. British

Airways PLC, 257 F.3d 256 (2d Cir.

TE histnsecianitensiduncetpiieanbdsiins siijeniasionnnives

Wisniewski v. United States, 353 U.S.

I a leiuawenbienanie

Statutes & Rules

Other Authorities

Antitrust Modernization Comm’n,

Report and Recommendations (2007)

Frank H. Easterbrook, Vertical

Arrangements and the Rule of

Reason, 53 Antitrust L.J. 135 (1984)

INTRODUCTION

This is a case about credit card networks, which

enable a cardholder to pay a merchant for goods and

services. Every payment transaction requires a

cardholder that wants to buy and a merchant that

wants to sell. The payment network (such as Amex)

sits in the middle of these two sides and brings them

together to complete a transaction using that net-

work’s card. Merchants and cardholders are espe-

cially interdependent because cardholders find it at-

tractive to use cards accepted by more merchants,

and vice-versa. The NDPs concern merchant conduct

at the moment a transaction takes place at the

checkout counter, when the cardholder decides to use

a card that the merchant accepts. A unanimous

panel of the Second Circuit therefore held that an

antitrust challenge to the NDPs required proof that

accounted for both cardholders and merchants.

Even the United States—the lead plaintiff be-

low—acknowledges that the Second Circuit articu-

lated the correct principles of antitrust law. None-

theless, Petitioners—a handful of the states that

joined the United States’ challenge, but had no mate-

rial role in the litigation—ask this Court to reex-

amine the application of those settled principles to

the particular facts of the credit card industry found

by the district court.

This case is an especially poor candidate for re-

view. No member of the panel dissented. No judge

expressed support for rehearing. No other appellate

court has had occasion to apply the relevant anti-

trust principles to transactions in the credit card in-

dustry, or to any industry with similar two-sided

characteristics—let alone reached a result in conflict

with the one below. As the United States urges, the

petition should be denied because “additional perco-

lation in the lower courts may assist the Court in its

application of general antitrust principles to two-

sided platforms and to agreements of the sort at is-

sue here.” U.S. Opp. 21.

STATEMENT

A. Background

1. Two-Sided Payment Platforms

Credit card networks exist to “facilitat[e] trans-

actions between merchants and their cardholding

consumers’, operating as what economists call “two-

sided platforms”. Pet. App. 77a. A two-sided plat-

form brings together “two separate yet interrelated

groups of customers who ... rely on the platform to

intermediate some type of interaction between

them.” Jd. “[U)nlike many two-sided platforms”,

such as “[njewspapers and other advertising-based

forms of media”, card networks provide transaction

services “simultaneously” to merchants and card-

holders, who make a “joint decision” to transact. Pet.

App. 77a-78a, 8la. Thus, as the district court ex-

plained, “card networks are also referred to as two-

sided ‘transaction markets’—the two sides of the

platform are brought together to consummate a sin-

gle, simultaneous transaction, and the products pro-

vided by the platform are consumed in fixed propor-

tions by the consumer and merchant.” Pet. App. 78a.

To compete effectively for transactions, a credit

card network must account for both merchant and

cardholder demand. Pet. App. 69a. Importantly, the

market is characterized by “network effects”, mean-

ing that “cardholders benefit from holding a card on-

ly if that card is accepted by a wide range of mer-

chants, and merchants benefit from accepting a card

only if a sufficient number of cardholders use it.”

Pet. App. 8a, 79a. Thus, a network must “balance

the two sides of its platform” by allocating the costs

of the transaction between the merchant on the one

side and the cardholder on the other. Pet. App. 9a.

Amex strikes this balance by charging a mer-

chant that chooses to accept Amex a “merchant dis-

count fee”, typically calculated as a percentage of the

purchase amount. Pet. App. 83a, 86a. 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 mer-

chant rather than cards issued on other networks.

Pet. App. 9a-10a, 14a-15a. These benefits, funded by

the merchant discount fee, operate as a “negative”

price on the cardholder side. Pet. App. 182a n.36.

The sum of the cardholder benefits and the merchant

fees is referred to as the “two-sided net price”, be-

cause it is the total price paid by the two sides to

compensate the network for completing a single

transaction. Pet. App. 49a.

2. Competition in the Credit Card In-

dustry

The credit card industry today is marked by vig-

orous interbrand competition, with the networks of-

fering cardholder benefits to compete for transac-

tions. It was not always so.

The industry has long been dominated by Visa

and MasterCard, which historically were owned by

consortia of member banks that issued branded

cards to retail banking customers. Pet. App. 12a.

Although no longer owned by their member banks,

Visa and MasterCard continue to operate as “open-

loop” systems involving “issuer” banks that issue Vi-

sa and MasterCard cards to consumers, and “acquir-

er” banks that are responsible for signing up mer-

chants to accept Visa and MasterCard. Pet. App.

13a. By contrast, Amex operates a “closed-loop” net-

work, meaning that it runs the network and typically

has direct relationships with Amex cardholders and

Amex-accepting merchants. Pet. App. 14a-15a.

Visa and MasterCard command a combined

share of 68.3% of credit card transactions. Pet.

App. 13a. Amex has a 26.4% share, while Discover

has a 5.3% share. Jd. Visa and MasterCard are also

accepted by virtually every card-accepting merchant,

but “{a]pproximately three million of the total nine

million U.S. merchant locations that accept credit

cards—that is, roughly one out of every three—do

not accept Amex cards.” Pet. App. 17a. As of 2013,

there were 432.4 million Visa and MasterCard cards

in circulation in the United States, as compared to

only 53.1 million Amex cards, E.D.N.Y. Dkt. 447-1

418. The vast majority of Amex cardholders also

carry a Visa or MasterCard, while a relatively small

number of Visa and MasterCard cardholders also

carry an Amex card. Tr. 3686:6-20. Thus, “[Amex]

may be fairly characterized as a discretionary card

for consumers when compared to the ubiquity en-

joyed by Visa and MasterCard”. Pet. App. 159a.

In its early years, Amex operated as a niche

platform used primarily at “travel and entertain-

ment” merchants. Pet. App. lla. With a limited

network, Amex had difficulty competing against Vi-

sa, MasterCard and their issuing banks for transac-

tions. See Pet. App. 12a. Thus, Amex set out to ex-

pand its network by investing billions of dollars into

cardholder benefits to incentivize cardholders to use

Amex cards over other networks’ cards. See Pet.

App. 16a, 18a. Because higher cardholder demand

drives higher spending at merchants, the value

Amex delivered to its cardholders, funded by mer-

chant fees, in turn has made Amex’s platform more

attractive for merchants. See Pet. App. 39a-40a.

Recognizing the advantages of Amex’s differen-

tiated model, Visa and MasterCard initially respond-

ed in two ways. First, they enacted “exclusionary

rules” prohibiting member banks from issuing Amex

cards. Pet. App. 18a-19a. These rules were invali-

dated as anticompetitive horizontal agreements

among the member banks in United States v. Visa

U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003), cert. denied,

543 U.S. 811 (2004). Second, rather than compete

with Amex on the basis of premium rewards, Visa

and MasterCard attacked Amex’s model with cam-

paigns designed to sow doubts in the minds of card-

holders about whether merchants would process

Amex transactions. Pet. App. 19a. The express pur-

pose of the campaigns, as described in a contempora-

neous presentation to the Visa board of directors,

was to “keep Amex as a niche product” by

“break[ing]” the premium “success cycle”, i.e., Amex’s

strategy of using the revenue from merchant fees to

deliver value to cardholders in the form of cardholder

benefits, thereby enhancing the value of Amex’s net-

work to both sides. PX0132 at ‘930.

Although the Amex model delivered a superior

value proposition, the campaigns targeting Amex

were “remarkably effective”. Pet. App. 19a. By in-

creasing cardholder uncertainty about whether

Amex cards would “be accepted and on what terms”,

fewer cardholders used Amex, which reduced the

value to merchants of accepting Amex. Pet. App.

19a-21a.

Amex responded in part by enhancing and en-

forcing its NDPs, which had existed in Amex’s mer-

chant agreements in some form since the 1950s. Pet.

App. 19a. The purpose of the NDPs is to encourage

welcome acces*+ance, which means that merchants

that choose to accept Amex—-and thus enjoy the pat-

ronage of Amex cardholders incentivized to spend by

the benefits Amex provides—commit to not under-

mine Amex at the point of sale. Pet. App. 21a. The

NDPs govern the precise moment in time at which

the two sides of the market interact to jointly con-

sume Amex’s services. Amex is not present at that

critical moment, and the commitment to welcome ac-

ceptance by Amex-accepting merchants is a corner-

stone of Amex’s differentiated model. Jd. It mini-

mizes interference with the incentives created by the

value Amex delivers to cardholders, builds cardhold-

er confidence in Amex’s network, and in turn makes

the network more valuable for both merchants and

cardholders. Id.

Today, with Amex’s NDPs in place, the industry

is highly competitive and dynamic. Amex’s ability to

deliver valuable benefits to Amex cardholders has

led its rivals to enhance their own cardholder offer-

ings. Pet. App. 52a. The result has been robust

competition for transaction volume, and a substan-

tial increase in output. Jd. Indeed, “[o]ne of the iro-

nies of this case,” as the Second Circuit pointed out,

“is that the government, which usually worries about

oligopolists engaging in indirect collusion leading to

pricing similarities, seeks relief in this case that

might drive the three cards to greater similarities”,

which “could even increase market concentration by

reducing Amex’s share to Visa’s and MasterCard’s

benefit.” Pet. App. 48a-49a n.51.

B. The Government’s Case

On October 4, 2010, the United States, eventual-

ly joined by seventeen Plaintiff States (collectively,

the “Government”’), sued Amex, Visa and Master-

Card, alleging that the anti-steering provisions in

each network’s merchant agreements unreasonably

restrained trade in violation of Section 1 of the

Sherman Act, 15 U.S.C. §1. Visa and MasterCard

entered into consent judgments in 2011 and rescind-

ed their anti-steering provisions, while Amex pro-

ceeded to trial.

The crux of the Government’s case is that, but-

for the NDPs, card networks would lower merchant

fees to induce merchants to steer cardholders toward

whatever network is least expensive for the mer-

chant. The Government contended that proof of such

effects on merchant fees would be sufficient to show

that the NDPs harm competition, even if, as a result,

card networks were forced to decrease cardholder

benefits. See Pet. App. 49a. Indeed, because mer-

chant fees fund cardholder benefits (Pet. Arn. 9a),

and the Government had no proof that Amex’s mar-

gins (and therefore prices) were supracompetitive

(Pet. App. 53a), a significant reduction in merchant

fees necessarily would reduce cardholder benefits,

and, by extension, the competition for cardholders

that those benefits drive. The Government’s expert

conceded this dynamic (Tr. 4177:9-13), but the Gov-

ernment’s merchant-centric case ignored it.

C. The District Court Decision

Following a bench trial, the district court held

that the NDPs violate Section 1. The court recog-

nized that the NDPs are vertical non-price re-

straints, to which the rule of reason applied. Pet.

App. 105a-06a. And the court acknowledged the

fundamental two-sided attributes of the industry, the

joint and simultaneous demand of merchants and

cardholders for transactions, and the “inextricably

linked” and “intertwined” nature of both sides. Pet.

App. 118a, 185a. These findings were compelled by

the trial testimony of the Government’s economic ex-

pert, Professor Katz, who described these attributes

at length, and admitted that, because merchant fees

fund cardholder benefits, a reduction in merchant

fees “can harm consumers” by reducing cardholder

benefits. Tr. 4177:9-13. Professor Katz also ex-

plained that “an[y] assessment of market definition,

market power and competitive effects should account

for the two-sided nature of the market”, and that “ijt

is critical not to draw unwarranted and misleading

conclusions by focusing solely on one side of a two-

sided market.” Tr. 4018:13-19, 4037:15-20.

9

Nonetheless, in holding for the Government, the

district court focused on the impact of the NDPs on

merchants alone.

First, the district court defined a relevant mar-

ket comprising “network services”, to the exclusion of

cardholders, because including cardholders would go

“too far” and “frustrate” the analysis. Pet. App.

116a-18a, 122a.

Second, reversing course on the relevance of

cardholders, the district court found that Amex has

market power as a result of “cardholder insistence’”—

meaning some portion of Amex cardholders would

not shop, or would spend less, at a merchant that

chose not to accept Amex. According to the court,

cardholder insistence allowed Amex to increase mer-

chant fees without fear of merchants dropping ac-

ceptance of Amex. Pet. App. 7la. The court

acknowledged that insistence would disappear the

moment Amex stopped paying cardholders benefits,

but ruled that this fragility of cardholder demand

was irrelevant to assessing market power over mer-

chants. Pet. App. 164a-65a.

Third, the district court held that the Govern-

ment had demonstrated anticompetitive effects

based solely on one-sided proof. The court conceded

there was no “empirical evidence that the NDPs have

resulted in a higher two-sided price—i.e., that the

price charged across Amex’s entire platform, ac-

counting for both discount revenue and the expense

of providing cardholder rewards, increased as a re-

sult of the network’s anti-steering rules.” Pet.

App. 209a. The court nonetheless held that “[p]roof

of anticompetitive harm to merchants, the primary

10

consumers of American Express’s network services,

is sufficient to discharge [the Government’s] burden”.

Pet. App. 192a. The court also found no reliable evi-

dence of Amex’s profit margins, but concluded that

Amex’s merchant fees were “supracompetitive”. Pet.

App. 172a-73a, 207a-12a. Moreover, while recogniz-

ing that “charge volume is the most direct measure

of output in this particular market” (Pet. App. 151a-

52a), the court placed no weight on the fact that

transaction output has surged, fueled by “ever more

robust suites of rewards and other ancillary [card-

holder] benefits” (Pet. App. 238a).

D. The Court of Appeals’ Decision

In a unanimous panel decision, the Second Cir-

cuit reversed. The court of appeals accepted the dis-

trict court’s factual findings, including that the mar-

ket is two-sided, that cardholder and merchant de-

mand is joint, simultaneous and interdependent,

and that the Government failed to prove harm to

competition among credit card networks when con-

sidering the two-sided nature of the service they pro-

vide.! It agreed with the district court that the

NDPs are vertical non-price restraints, and thus sub-

' An amicus brief filed by supermarket and drugstore

chains (which are suing Amex based on the NDPs) charges that

the court of appeals replaced the district court’s findings with

“extra-record materials”. Merchants Br. 4-9. In fact, the court

of appeals expressly accepted and relied on the district court’s

findings and the undisputed evidence at trial, which support

the purported “extra-record” facts to which amici point. Com-

pare Merchants Br. 6-8, with, e.g., Pet. App. 50a, 68a, 80a-81a,

125a, 128a, 157a, 160a-61a.

11

ject to full rule of reason review.? But it held that

the district court erred in applying the rule of reason

to the facts of the case.

First, the court of appeals held that the district

court erred by excluding cardholders from the rele-

vant market because doing so failed to take into ac-

count “commercial realities”, including the joint,

simultaneous and interdependent nature of card-

holder and merchant demand, and feedback effects.

Pet. App. 31la-40a.

Second, the court of appeals held that cardhold-

er insistence is not a cognizable source of market

power because, as the district court’s findings made

clear, this cardholder loyalty is not durable and

Amex must constantly compete for it with cardholder

benefits that other networks can and do attempt to

replicate. Pet. App. 40a-48a.

Third, the court of appeals held that the district

court “erroneously elevated the interests of mer-

chants above those of cardholders” by allowing the

Government to carry its burden without proving the

impact of the NDPs on the “the two-sided net price

2 The court of appeals noted that “[bjoth the [Government]

and the District Court flagged alleged distinctions between the

NDPs and other vertical restraints ... in apparent attempts to

recast the vertical restraints as horizontal”, but explained that

it had “never drawn this type of distinction between any varie-

ties of vertical restraints”. Pet. App. 30a n.42. Petitioners do

not challenge tht correct determination. Pet. i; see Bus. Elecs.

Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730-31 n.4 (1988)

(“[A] restraint is horizontal not because it has horizontal effects,

but because it is the product of a horizontal agreement.”).

12

accounting for the effects of the NDPs on both mer-

chants and cardholders.” Pet. App. 49a. The court

concluded that, applying the correct legal standard to

the record, the Government’s proof failed as a matter

of law to establish that the NDPs adversely affect

competition among credit card networks—

particularly given the lack of evidence of Amex’s two-

sided price or profit margins, and the undisputed ev-

idence of increasing output and higher-quality card-

holder benefits. Pet. App. 49a-53a. Accordingly, the

Second Circuit reversed.

The Government sought rehearing and rehear-

ing en banc, with the support of eight amicus briefs.

The panel denied the request for rehearing. The

Second Circuit denied the petition for rehearing en

banc without requesting a response from Amex or

noting any dissent.? Pet. App. 326a.

3 Many of the same amici filed similar briefs in support of

the petition. Two briefs were submitted by individual mer-

chants and a merchant trade group. The merchants also have

challenged the NDPs in separate litigation and have said their

claims are identical to the Government’s. Briefs also were

submitted by Southwest Airlines and Discover, both of which

claim a direct financial interest in the outcome here. Two briefs

come from economists and law professors who submitted very

similar briefs in support of rehearing by the panel or en banc.

Another brief comes from an interest group. A final brief, from

new amici calling themselves “former federal antitrust offi-

cials”, was submitted by attorneys who predominantly repre-

sent antitrust plaintiffs. They attribute the United States’ de-

cision not to seek certiorari to government vacancies, but the

United States’ opposition brief shows that the Acting Solicitor

General’s decision is characteristically well-considered. As

13

REASONS FOR DENYING THE PETITION

The Second Circuit’s unanimous decision is cor-

rect, follows precedent and implicates no lower court

conflict. And even if the merits of the Second Cir-

cuit’s analysis were reasonably debatable among pro-

fessors and lower-court litigants, this Court’s review

would be extremely premature. As the United States

emphasizes, the implications of the Second Circuit’s

decision beyond the facts of this case are unclear,

“percolation in the lower courts may be especially

useful”, and not one appellate jurist (save those be-

low) has “considered the application of the Sherman

Act to two-sided platforms”. U.S. Opp. 19-20.

For those reasons, the United States—the lead

plaintiff below—properly concedes that its own case

does not warrant further review. Petitioners, by con-

trast, seek this Court’s intervention after being pas-

sive participants from the moment they joined the

case through the Second Circuit’s denial of the en

banc petition.4 Amex knows of no instance in which

the United States as a plaintiff abandoned its en-

forcement action and this Court nonetheless granted

review at the behest of another party. To the contra-

demonstrated below, amici add nothing to cure the insufficiency

of the petition.

4 Of the more than 100 depositions taken by the Govern-

ment, Petitioners took the lead for none, and asked questions at

only three. At trial, the United States handled every witness.

Petitioners’ appearance at trial was limited to a three-minute

summation. On appeal, the United States was lead counsel on

all briefs (merits and rehearing petition), and delivered oral

argument.

14

ry, the Court recently denied such a petition. See

United States ex rel. Purcell v. MWI Corp., No. 16-

361, 137 S. Ct. 625 (2017) (denying certiorari petition

filed by a False Claims Act relator when the United

States, the lead party below, argued the lower court’s

decision was erroneous but opposed review). The

Court should deny the petition here.

I. The Decision Below Is Correct and Con-

sistent with Precedent.

A. Market Definition

The Second Circuit applied well-settled market

definition principles in holding that the district court

erred by “excluding the market for cardholders from

its relevant market definition”. Pet. App. 32a.

The Second Circuit correctly concluded that the

district court improperly failed to “consider the feed-

back effects inherent on the platform by accounting

for the reduction in cardholders’ demand for cards (or

card transactions) that would accompany any degree

of merchant attrition” in response to a price increase.

Pet. App. 39a.

The court of appeals also followed settled prece-

dent in holding that a relevant market must reflect

the “commercial realities” facing consumers. See

Eastman Kodak Co. v. Image Tech. Servs., Inc., 504

U.S. 451, 482 (1992). Applying this rule, the court of

appeals correctly held that the market here must

“encompass the entire multi-sided platform”, includ-

ing the cardholders whom the district court had ex-

cluded. Pet. App. 39a. This holding was premised on

the very nature of the service that Amex and its

15

competitors offer—as Petitioners themselves put it,

“bring[ing] cardholder customers together with mer-

chant customers for ordinary transactions”. Pet. i.

The Government’s own expert economist similarly

testified that “[i]t is critical not to draw unwarranted

and misleading conclusions by focusing solely on one

side of a two-sided market.” Tr. 4037:15-20.

The district court’s decision to define the market

in terms of merchants alone failed to account for the

nature of the service that Amex competes to provide,

and was therefore inconsistent with the purpose of

market definition—‘“to identify the market partici-

pants and competitive pressures that restrain an in-

dividual firm’s ability to raise prices or restrict out-

put”. Pet. App. 32a (quoting Geneva Pharm. Tech.

Corp. v. Barr Labs. Inc., 386 F.3d 485, 496 (2d Cir.

2004)). And the argument that the NDPs have

“thwarted” price competition fails for the same rea-

son: it ignores the vigorous competition on the card-

holder side of the market driven by cardholder bene-

fits and services that are funded by merchant fee

revenue. Given this uncontested interdependence

between the two halves of the single product at issue,

it is impossible to account for the nature of competi-

tion by looking at only half of the equation.

Contrary to Petitioners’ claims, the Second Cir-

cuit’s conclusion that the defined market in this case

must include both sides is fully consistent with this

Court’s precedent.

First, no conflict exists with this Court’s precept

that a relevant market should comprise “reasonably

interchangeable” products. Pet. 19 (quoting United

States v. Grinnell Corp., 384 U.S. 563, 571 (1966)). As

16

the United States has recognized, “[t}he court of ap-

peals articulated the correct legal standard”. U.S.

Opp. 11. The governing antitrust principles are un-

disputed, and Petitioners simply ask the Court to re-

view the application of settled law to the unique facts

of this case.

The reasonable interchangeability test is used to

determine whether two or more separate products

compete with each other in the same relevant market.

Here, however, the question is not whether the two

sides of a card platform compete with each other

(they clearly do not) but the threshold question of

whether they are each part of the same product. A

merchant and a cardholder cannot complete a trans-

action unless they use the same card network. Only

the combination of Amex’s services to merchants and

cardholders together competes with Visa’s similar of-

fering. Asking about a merchant’s consumption in

isolation is like asking about the sound of one hand

clapping. This is, moreover, the unavoidable impli-

cation of the district court’s findings that transaction

volume “is the most direct measure of output in this

particular market”, and the proper benchmark for

calculating market shares. Pet. App. 151a-52a.

Thus, the fact that a merchant cannot substitute

its role (card acceptance) for the cardholder’s (card

usage) is of no moment. Matching left and right

shoes are in a single r arket not because they are

substitutes, but because it is appropriate “to

combin[e] in a single market a number of different

products or services where that combination reflects

commercial realities”. Grinnell, 384 U.S. at 572. Be-

cause, as Petitioners themselves explain, card net-

works’ function is “uniting cardholders and mer-

17

chants” (Pet. 2), dividing cardholders from mer-

chants for analyzing competition among card net-

works makes no sense.

Second, Petitioners misconstrue the Second Cir-

cuit’s ruling to argue that it conflicts with Kodak,

504 U.S. 451. The unanimous court of appeals did

not adopt a new rule requiring that separate mar-

kets be consolidated whenever the price in one af-

fects the price in the other. Pet. 20. Rather, the rul-

ing correctly took account of the interdependency of

merchant and cardholder demand, on the particular

facts as found by the district court. Pet. App. 3la-

40a. Kodak did not concern two interdependent

halves of a single product; it considered copier parts

and service of those parts—two products that can be,

and often are, sold separately and at different times.

See 504 U.S. at 475-76 (“[I]t makes little sense to as-

sume, in the absence of any evidentiary support, that

equipment-purchasing decisions are based on an ac-

curate assessment of the total cost of equipment,

service, and parts over the lifetime of the machine.”).

For the same reason, Petitioners’ analogy to vertical-

ly related markets of components and final goods

(Pet. 21) is inapposite.

Third, no conflict exists with Times-Picayune

Publishing Co. v. United States, 345 U.S. 594 (1953).

As the United States has recognized, this Court “has

not squarely considered questions of market defini-

tion or proof of anticompetitive effects in cases in-

volving two-sided platforms”. U.S. Opp. 19. In

Times-Picayune, this Court simply held that the de-

fendant lacked market power over advertising. 345

U.S. at 610-13. The Court did not examine competi-

tive effects at all, much less decide whether the

18

plaintiff had to prove adverse effects across interde-

pendent markets.

More fundamentally, Petitioners’ analogy to

newspapers underscores their misconception about

the nature of credit card networks and the chal-

lenged restraints. A reader’s decision to purchase a

newspaper is not necessarily dependent on any ad-

vertiser buying advertising space because many

readers buy newspapers to read the news. By con-

trast, a merchant and cardholder simultaneously use

a single network because they want to complete a

transaction together. As a result, the “products pro-

vided by the [credit card] platform are consumed in

fixed proportions” by each side as part of one, simul-

taneous transaction. Pet. App. 78a. Moreover, be-

cause sales to readers in Times-Picayune were unre-

strained, this Court understood the challenged re-

straint to “concern[] solely one of these markets”’—

the market for the sale of advertising to advertisers.

345 U.S. at 610. By contrast, the restraints here

govern the precise moment of interaction between

the two sides at the point of sale.5

Regardless, Times-Picayune at most stands for

the proposition that a restraint excluding competi-

tors from one side of a two-sided platform can be an-

alyzed without considering the other side. The de-

fendants there were accused of tying sales of adver-

5 Berlyn Inc. v. Gazette Newspapers, Inc., 73 F. App’x 576

(4th Cir. 2003), an unpublished decision, is distinguishable for

the same reasons. Lorain Journal Co. v. United States, 342

U.S. 143 (1951), would be as well if it had discussed the rele-

vant market, which it did not.

19

tising that “effectively excluded” other papers from

doing business with advertisers. 345 U.S. at 605.

The NDPs do not exclude competing networks from

merchants’ registers or cardholders’ wallets; they af-

fect only the joint decision of a merchant and a card-

holder about which network they will use to complete

a given transaction. Times-Picayune does not speak

to the relevant market for analyzing competition for

such joint transactions.

Fourth, no conflict exists with NCAA v. Board of

Regents of the University of Oklahoma, 468 U.S. 85

(1984), which analyzed a rule limiting the number of

football games colleges could license for television

broadcast. NCAA is not on point—neither the

NCAA, which imposed the rule, nor the product at

issue (intercollegiate football games) is two-sided.

Rather, the case involved conventional one-sided ver-

tical distribution—the colleges (upstream) selling

rights to broadcast football games to the television

networks (downstream), which broadcast those

games to viewers (the end-consumer). Jd. at 94-95.

And contrary to Petitioners’ suggestion, the NCAA

dissent did not advocate for a two-sided analysis; it

merely disagreed about how output should be meas-

ured (number of games televised versus number of

viewers). Here, no one disputes that the proper

measure of output is transaction volume, that a

transaction cannot be completed without having one

merchant interact with one cardholder both using

the same network’s services, or that output has been

surging in the years since Amex reinforced its NDPs

in response to Visa’s and MasterCard’s attacks. Pet.

App. 41a, 52a.

20

B. Market Power

The Second Circuit correctly held that the Gov-

ernment failed to prove that Amex has market pow-

er. “Market power is the power to force a purchaser

to do something that he would not do in a competi-

tive market.” Kodak, 504 U.S. at 464 (internal quo-

tation marks omitted). Amex’s lack of market power

is unsurprising, given that Amex’s competitors have

long advertised that millions of merchants do not ac-

cept Amex.

The Second Circuit properly held that cardhold-

er “insistence” did not give Amex market power,

based on the district court’s own finding that Amex

must compete fiercely for cardholder loyalty, which

would rapidly “dissipate” if Amex were to offer lower

value to cardholders than did Amex’s rivals. Pet.

App. 46a. As the unanimous panel explained, “evi-

dence showing that Amex must compete on price in

order to attract consumers does not show that Amex

has the power to increase prices to supracompetitive

levels.” Id.

The courts of appeals are in accord on this prop-

osition, and Petitioners do not contend otherwise.

See, e.g., Clorox Co. v. Sterling Winthrop, Inc., 117

F.3d 50, 58 (2d Cir. 1997) (explaining that estab-

lished buyer preferences are not a serious entry bar-

rier); Grappone, Inc. v. Subaru of New England, Inc.,

858 F.2d 792, 797 (ist Cir. 1988) (Breyer, J.)

(“(Vjirtually every seller of a branded product has

some customers who especially prefer its product.

But to permit that fact alone to show market power

is to condemn [vertical restraints] that are bound to

be harmless, including some that may serve some

21

useful social purpose.”); Town Sound & Custom

Tops, Inc. v. Chrysler Motors Corp., No. 90-1547,

1991 WL 149249, at *6 (3d Cir. Aug. 9, 1991) (“Nor is

intense brand loyalty sufficient to presume market

power.”), affd en banc, 959 F.2d 468, cert. denied,

506 U.S. 868 (1992).

Notably, Petitioners do not challenge the Second

Circuit’s market power holding. U.S. Opp. 10 n.2.

But market power is a necessary predicate to a firm’s

ability to harm competition. See Cal. De..tal Ass’n v.

FTC, 526 U.S. 756, 782 (1999) (Breyer, J., concurring

in part and dissenting in part) (explaining that un-

der the rule of reason a violation cannot exist unless

“the parties have sufficient market power to make a

difference”); Ball Mem’ Hosp., Inc. v. Mut. Hosp.

Ins., Inc., 784 F.2d 1325, 1335 (7th Cir. 1986)

(Easterbrook, J.) (“Firms without power bear no bur-

den of justification.”). And there is no question tha’

the theory of harm espoused here turns upon the

now legally unsupportable assertion that merchants

have no choice but to accept the NDPs (see Pet. 33),

and that Amex has “forced the entire credit-card in-

dustry to channel competition away from merchant

fees and into cardholder rewards” (U.S. Opp. 19).

The absence of any challenge to the court of ap-

peais’ market power holding causes Petitioners’ theo-

ry of harm to fall apart. On the unchallenged record,

if competition orbits around cardholder rewards, that

is only because cardholders find those rewards at-

tractive enough that some merchants, in turn, find it

beneficial to accept Amex. Other merchants do not

find it beneficial to accept Amex, and so they do not.

Merchants are not “forced ... to do something that

22

[they] would not do in a competitive market.” Kodak,

504 U.S. at 464 (citation omitted).

C. Anticompetitive Effects

The Second Circuit also applied well-settled

rules for analyzing anticompetitive effects, holding

that the Government “bore the initial burden to show

that Amex’s NDPs have ‘an actual adverse effect on

competition as a whole in the relevant market.” Pet.

App. 49a-50a (quoting K.M.B. Warehouse Distribs.,

Inc. v. Walker Mfg. Co., 61 F.3d 123, 127 (2d Cir.

1995)).

The court of appeals explained that the Gov-

ernment could have met its initial burden under the

rule of reason by showing “that cardholders engaged

in fewer credit-card transactions (i.e., reduced out-

put), that card services were worse than they might

otherwise have been (i.e., decreased quality), or that

Amex’s pricing was set above competitive levels with-

in the credit-card industry (i.e., supracompetitive

pricing).” Pet. App. 52a. Petitioners cited this same

menu—reduced output, reduced quality and su-

pracompetitive pricing—long offered by the courts of

appeals. See, e.g., Virgin Atl. Airways Lid. v. British

Airways PLC, 257 F.3d 256, 264 (2d Cir. 2001)

(“[W]hether an actual adverse effect has occurred is

determined by examining factors like reduced out-

put, increased prices and decreased quality.”) (cited

at Gov't C.A. Br. 65); Gordon v. Lewistown Hosp.,

423 F.3d 184, 210 (3d Cir. 2005) (anticompetitive ef-

fects include “reduced output, raised prices or re-

duced quality”) (cited at Gov't C.A. Br. 65), cert. de-

nied, 547 U.S. 1092 (2006).

23

Applying this standard to the undisputed record,

the Second Circuit correctly held that the Govern-

ment had not met its burden of proving adverse ef-

fects. That record showed that “industry-wide trans-

action volume”—the undisputed measure of output

in this market—‘“has substantially increased and

card services have significantly improved in quality”

with the NDPs in place. Pet. App. 52a. On that rec-

ord, the Second Circuit correctly concluded the Gov-

ernment had not carried its burden. See Brooke Grp.

Ltd. v. Brown & Williamson Tobacco Co., 509 U.S.

209, 237 (1993) (“Where, as here, output is expand-

ing at the same time prices are increasing ... a jury

may not infer competitive injury from price and out-

put data absent some evidence that tends to prove

that output was restricted or prices were above a

competitive level.”).

Moreover, both courts below agreed that the rec-

ord could not support a finding that Amex’s prices

were supracompetitive, when accounting for both

sides. See Pet. App. 209a (district court’s finding

that the record did not provide “a reliable measure of

[Amex’s] two-sided price that appropriately accounts

for the value or cost of the rewards paid to cardhold-

ers”, or of Amex’s margins); Pet. App. 53a (similar

conclusion from court of appeals).

Petitioners suggest that the court of appeals

contradicted precedent by “shift{ing] to the Govern-

ment the burden of disproving any procompetitive

benefits”. Pet. 24. The supposed conflict is illusory.

Under the rule of reason, a plaintiff always bears the

burden to demonstrate competitive harm in “the

product market as a whole”. Cont T.V., Inc. v. GTE

Sylvania, Inc., 433 U.S. 36, 45 (1977) (citation omit-

24

ted). The service that Amex competes to provide is

completing payment transactions between a card-

holder and a merchant—a service for which neither

has any use unless the other does. Thus, Petitioners’

argument that a court need not account for cardhold-

ers is an invitation to misdefine the competition at

issue. Petitioners rely on United States v. Topco As-

sociates, 405 U.S. 596 (1972), for the proposition that

restraining competition in “one sector of the econo-

my” cannot be justified by “promot[ing] greater com-

petition in a more important sector”. Pet. 25 (quot-

ing 405 U.S. at 610). But cardholders do not exist in

a separate “sector” of the economy from merchants

for purposes of transacting through card networks,

whose purpose is to bring them together. Supra at 2-

3.

Indeed, under this Court’s precedent, the inter-

dependence of merchant and cardholder demand re-

quires assigning burdens as the court of appeals did.

As the Government’s expert testified: “[A]n assess-

ment of market definition, market power and com-

petitive effects should account for the two-sided na-

ture of the market”. Tr. 4018:13-19. Evidence about

the NDPs’ effect on merchant fees does not support a

confident inference of harm to competition overall,

6 Despite marginalizing cardholding consumers, Petition-

ers and amici suggest the district court found two-sided adverse

effects by concluding that the NDPs result in higher retail pric-

es to consumers who do not use credit cards. Pet. 18. A focus

on retail prices is both inconsistent with Petitioners’ determina-

tion to ignore cardholders, and “erroneous, as it fails to take

inte account offsetting benefits to cardholders in the form of

rewards and other services”. Pet. App. 49a n.62.

25

because such effects necessarily will effect cardhold-

ers. Thus, the evidence on which Petitioners would

stake their case is at least as consistent with healthy

competition as anticompetitive effects. See Tr.

4037:15-20 (Government expert testifying: “It is crit-

ical not to draw unwarranted and misleading conclu-

sions by focusing solely on one side of a two-sided

market.”); cf. Brooke Group, 509 U.S. at 237 (refusing

to recognize anticompetitive effects where “rising

prices are equally consistent with growing product

demand”).

Condemning a restraint on such an ambiguous

showing creates an unacceptable risk of false posi-

tives that “increase the total cost of the antitrust sys-

tem by prohibiting procompetitive conduct the anti-

trust laws should encourage”. Leegin Creative

Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 894-

95 (2007); see also Verizon Commce'ns Inc. v. Law Of-

fices of Curtis V. Trinko, LLP, 540 U.S. 398, 414

(2004) (“The cost of false positives counsels against

an undue expansion of [antitrust] liability.”). The

Second Circuit correctly refused the Government’s

invitation.’

7 This concern for avoiding erroneous condemnation of

competition also answers Petitioners’ complaint (Pet. 16) that

proving a case under the rule of reason is too hard. See, e.g.,

Leegin, 551 U.S. at 895 (“Per se rules may decrease administra-

tive costs, but that is only part of the equation. Those rules can

be counterproductive.”); Frank H. Easterbrook, Vertical Ar-

rangements and the Rule of Reason, 53 Antitrust L.J. 135, 155

(1984) (cited at Pet. 17) (“[T]he rule of reason’s application to

vertical arrangements should err on the side of tolerance” be-

cause “[m]ost vertical arrangements are procompetitive.”).

26

If. Petitioners’ Other Arguments Are Unper-

suasive.

A. Petitioners’ Call for “Guidance” Does

Not Justify Review.

Petitioners suggest that this case is an oppor-

tunity to inject “concrete guidance” into the rule of

reason analysis for vertical restraints. That proposal

is unsound.

An answer to Petitioners’ fact-bound question

presented is unlikely to provide definitive guidance

beyond this case. Indeed, the only way the Court

could reach a legal issue of broad significance would

be to set a rule for highly dynamic two-sided plat-

forms without the benefit of judicial experience. Jn-

fra at 30-34 (explaining that, to the extent Petition-

ers urge the adoption of principles that would apply

to other dynamic industries, this Court’s decisional

process would be greatly aided by percolation). Peti-

tioners identify no case that would have been aided

by a decision on the question presented, nor any spe-

cific question of law on which they believe concrete

guidance is lacking. Indeed, the petition elsewhere

contends that the framework applicable to the Gov-

ernment’s claims is well established. Pet. 18-25. Pe-

titioners merely disagree with the Second Circuit’s

application of that framework to the facts, which is

no basis for review. See Sup. Ct. R. 10.

In cases where, as here, this Court has deter-

mined that a particular practice must be analyzed

under the rule of reason, it has left the particulars of

that case-specific analysis to the lower courts to ap-

ply in the varying contexts presented to them. E.g.,

27

FTC v. Actavis, Inc., 1383 S. Ct. 2223, 2238 (2013)

(“We therefore leave to the lower courts the structur-

ing of the present rule-of-reason antitrust litiga-

tion.”). It has not tried to take on fine-grained and

fact-bound questions about what information is rele-

vant to the analysis of a particular market. See, e.g.,

Leegin, 551 U.S. at 898-99 (“As courts gain experi-

ence considering the effects of these restraints by

applying the rule of reason over the course of deci-

sions, they can establish the litigation structure to

ensure the rule operates to eliminate anticompetitive

restraints from the market and to provide more

guidance to businesses.”); Broad. Music, Inc. v. Co-

lumbia Broad. Sys., Inc., 441 U.S. 1, 24 (1979) (con-

cluding that challenged restraint “should be subject-

ed to a more discriminating examination under the

rule of reason. It may not ultimately survive that

attack, but that is not the issue before us today.”).

As Petitioners’ own authorities reveal, this

Court has generally granted certiorari in antitrust

cases to instruct courts on which mode of analysis to

apply—1.e., per se, “quick look” or rule of reason—and

not to superintend the particulars of the analysis as

applied to specific facts. See, e.g., Actavis, 133 S. Ct.

2223 (addressing mode of analysis for pharmaceuti-

cal reverse payment settlement agreements); Leegin,

551 U.S. 877 (same for resale price maintenance);

Texaco Inc. v. Dagher, 547 U.S. 1 (2006) (same for

joint ventures); Cal. Dental, 526 U.S. 756 (same for

advertising restrictions by a professional organiza-

tion); State Oil Co. v. Khan, 522 U.S. 3 (1997) (same

for vertical maximum price restraints); Bus. Elecs.

Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988)

(same for vertical non-price restraints).

28

The Court has long held that the rule of reason

governs a challenge to a vertical non-price restraint,

and further review is unnecessary.

B. Petitioners’ Arguments About Alloca-

tive Efficiency Do Not Warrant Review.

In the guise of discussing “allocative efficiency”,

Petitioners argue that a rule of reason plaintiff

should be able to satisfy its burden by pointing to a

structural effect on “the proper functioning of the

price-setting mechanism of the market”. Pet. 34

(quoting FTC v. Ind. Fed’n of Dentists, 476 U.S. 447,

462 (1986)). But where a vertical restraint is con-

cerned, such proof merely establishes that the re-

straint restrains competition (as all vertical re-

straints do), not that it harms competition.

No reason exists for this Court to grant review

to pioneer such an approach. The Court has permit-

ted abbreviated proof only in cases involving horizon-

tal restraints that portend the loss of “independent

competing entrepreneurs”. Arizona v. Maricopa Cty.

Med. Soc’y, 457 U.S. 332, 357 (1982). In fact, the on-

ly authority cited by Petitioners (Pet. 34) and their

amici (e.g., Professors Br. 10-12) for their proposed

standard are cases applying quick look analysis to

horizontal restraints. But “horizontal restraints are

generally less defensible than vertical restraints”.

Maricopa Cty., 457 U.S. at 348 n.18. Accordingly,

this Court has “rejected the approach of reliance on

rules governing horizontal restraints when defining

rules applicable to vertical ones.” Leegin, 551 U.S. at

888.

29

Even putting aside “the appreciated differences

in economic effect between vertical and horizontal

agreements’, id., “quick look” presumptions are re-

served for restraints for which “the experience of the

market has been so clear, or necessarily will be, that

a confident conclusion about the principal tendency

of [the] restriction ... follow[s] from a quick (or at

least quicker) look”. Cal. Dental, 526 U.S. at 781.

Here, Petitioners point to no relevant judicial experi-

ence—let alone enough to justify “a confident conclu-

sion”. In fact, the United States analogizes the

NDPs to most-favored-nation provisions as restraints

that are vertical in nature but might have some im-

pact on horizontal competition and appropriately

notes that “there is no meaningful body of precedent

addressing the antitrust status of agreements of that

character’. U.S. Opp. 21. To avoid condemnation of

healthy competition, proper application of the rule of

reason depends on an evaluation of “all the circum-

stances of the case”. Maricopa Cty., 457 U.S. at 343.

C. The Role of the Credit Card Industry

in the Economy Does Not Justify Re-

view.

Petitioners’ discussion of the role and scale of

the credit card industry does not justify review. Pet.

26-30. Earlier this Term, the Court declined to re-

view a case involving this industry—a settlement be-

tween merchants, Visa and MasterCard, that the pe-

titioners there claimed would “mark[] a sea-change

in the payment industry” and “may save merchants

between $26.4 and $62.8 billion in acceptance costs

over the next decade”. Petition, Photos Etc. Corp. v.

Home Depot, U.S.A., Inc., No. 16-710, 2016 WL

6994898, at *35-36, cert. denied, 137 S.Ct. 1374

30

(2017). Denial is appropriate here too. Many cases

in which this Court’s review is sought involve indus-

tries of economic significance. But the Court seeks to

hear matters of recurring legal importance. Peti-

tioners have not raised any question of widespread

legal importance.

III. Review Would Be Premature Because No

Relevant Body of Law—Let Alone a Con-

flict—Exists in the Courts of Appeals.

As the United States highlights, the “decision

does not directly conflict with any decision of this

Court or another court of appeals”. U.S. Opp. 19.

Indeed, the decision below is the only federal appel-

late authority analyzing a vertical restraint in a two-

sided market as such, and it is unanimous, Thus,

not one appellate jurist has endorsed anything like

the arguments Petitioners advance. Petitioners do

not contend otherwise.

Yet lower courts will undoubtedly have the op-

portunity to address such restraints, and in a variety

of contexts. Indeed, as amici concede, “[t]wo-sided

platforms are increasingly common” as “modern

technologies have led to rapid growth in the number,

8 Petitioners suggest a conflict with the Second Circuit’s

decision in Visa, 344 F.3d 229. Pet. 17. Even if such an in-

tracircuit conflict existed, it would not warrant review.

Wisniewski v. United States, 353 U.S. 901, 902 (1957) (per curi-

am). And the Second Circuit itself found no conflict when the

Government made the same argument in its rehearing petition:

Visa is inapposite because it involved “horizontal restraints”

affecting “one particular level of competition contained within a

two-sided platform”. Pet. App. 36a.

31

size and importance of such firms”. Professors Br.

22. Today, some of the most innovative firms and

industries now consist of platforms that have some

two-sided characteristics—including search engines,

ride-sharing, e-commerce, rental exchanges and elec-

tronic payments. At the same time, “[t]he economic

literature analyzing two-sided platforms is new,

complex, and evolving”, and has only recently “con-

sidered the impact of restraints” in two-sided mar-

kets. Economists Br. 7-8. Scholars, the government

and the antitrust bar continue to study two-sided

markets and their potential for competition concerns.

Petitioners’ premature invitation to establish de-

finitive antitrust principles for two-sided platforms

now—if any such principles of broad application ex-

ist--portends errors that could “chill the very con-

duct the antitrust laws are designed to protect”. Ver-

izon Commce’ns, 540 U.S. at 414 (quoting Matsushita

Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

594 (1986)). Cf. Antitrust Modernization Comm’n,

Report and Recommendations 39 (2007) (“It is im-

portant that antitrust develops through mechanisms,

such as case law development in the courts and

agency guidelines, that allow ongoing reassessments

of existing law and economic principles relevant to

antitrust analysis.”).

As the United States observes, “the Court ordi-

narily awaits the development of a conflict among

the lower courts before exercising its certiorari juris-

diction.” U.S. Opp. 21. With no conflict here, the

Court should deny review, allow further considera-

tion and experimentation in the lower courts, and

avoid putting itself in the position of prematurely

and improvidently establishing rules for the Googles

32

and Ubers of today and tomorrow. See, e.g., Lack-

ey uv. Texas, 514 U.S. 1045, 1047 (1995) (Stevens, J.,

respecting denial of certiorari) (“Petitioner's claim,

with its legal complexity and its potential for far-

reaching consequences, seems an ideal example of

one which would benefit from {other courts’] further

study.”).

The prudence of allowing percolation here is un-

derscored by the variety of views among Petitioners

and their amici on what questions this Court should

address and how they should be resolved. To cite

just a few examples: Whereas some amici contend

that the court uf appeals’ ruling on market power

“has grave antitrust implications” (RLC Br. 20), Peti-

tioners do not address market power at all in the

question presented (Pet. i). Whereas some amici

contend that the evolving economic literature on two-

sided platforms should be given little weight (Mer-

chants Br. 16-25), others argue that courts should

pay close heed to that literature (Economists Br. 7-

8).2 Whereas some amici argue that the ruling below

“provide[s] no guidance for future cases involving

two-sided platforms” such as newspapers “that may

differ from ... credit card platforms” (Economists Br.

8 n.7), others contend the ruling would apply in any

®° In arguing against reliance by courts on economic litera-

ture and amicus briefs, with more than some irony, the Mer-

chant amici chide Professor Willig for not disclosing in his ami-

cus brief below that. he previously has served as a paid expert

for Amex. Those same amici neglect to mention that Joseph

Stiglitz, their highly-paid expert in their damages case against

Amex, filed an amicua brief below in which he failed to note his

extensive current financial ties to parties whose interests are al

stake in this case.

33

case of a two-sided platform (Professors Br. 22-23).

Here, percolation would help clarify the issues that

matter to the analysis, illuminate which economic

principles are relevant to it and sharpen the points of

disagreement for the Court to resolve.

Finally, percolation is particularly appropriate

given the fact-bound nature of the rule of reason and

the wide range of industries that exhibit two-sided

attributes. Amici speculate that the Second Circuit’s

holding could affect theoretical challenges to unspeci-

fied conduct in these industries. E.g., Professors Br.

22. But no other appellate court has yet analyzed

the competitive attributes of two-sided platforms un-

der the rule of reason. Indeed, as Petitioners con-

cede, it is inherent in the rule of reason that “the re-

sult of the process in any given case may provide lit-

tle certainty or guidance about the legality of a prac-

tice in another context.” Pet. 16 (quoting Maricopa

Cty., 457 U.S. at 343). For example, the United

States concedes the “idiosyncratic character” of the

NDPs (U.S. Opp. 20), and it has successfully argued

against the application of the decision below in other

contexts. See United States v. Charlotte-Mecklenburg

Hosp. Auth., No. 3:16-CV-00311-RJC-DCK, 2017 WL

1206015, at *9 (W.D.N.C. Mar. 30, 2017) (declining

to grant defendants judgment based on the decision

below because “the Second Circuit’s analysis is deep-

ly rooted in the details and dynamics of the credit-

card industry’).

This Court should articulate antitrust principles

with the benefit of concrete judicial experience. Dif-

ferent courts assessing restraints in different two-

sided markets should “serve as laboratories in which

the issue receives further study” before this Court

34

settles the question. Lackey, 514 U.S. at 1047 (Ste-

vens, J., respecting denial of certiorari) (citation

omitted).

IV. Recognized Defects in the Government’s

Proof Make this Case a Poor Vehicle.

In the long term, if the antitrust issues arising

from two-sided markets prove controversial and re-

curring, this Court will have future opportunities to

review them. But in the short term, this case pre-

sents a particularly poor vehicle because the Gov-

ernment’s proof was insufficient to carry even the

burden it proposed.

First, the district court defined a relevant mar-

ket limited to the provision of “network services”, i.e.,

the service of facilitating the transaction for the mer-

chant over the network. But this is only one compo-

nent of what Amex and other credit card platforms

do. They also process transactions for cardholders,

provide other services such as rewards, and acquire

merchants for the network. The cost of these ser-

vices is covered by the merchant discount fee. In-

deed, the vast majority of Amex’s merchant discount

fee is used to pay for cardholder services (mainly re-

wards), while much smaller components cover ac-

quiring and network services.

On this score, the district court’s decision is at

war with itself, and the record lacks evidence that

could support Petitioners’ burden. In a market for

processing transactions for merchants alone, the rel-

evant “price” for purposes of analyzing competition

is the fee for that service, i.e., the network services

component of the merchant discount fee. But that is

35

not the price the district court used to analyze mar-

ket power and competitive effects. As the court of

appeals noted, the district court looked at “the full

merchant-discount rate, not simply the fees associat-

ed with ‘network services”. Pet. App. 37a-38a n.45.

The court defined a market for one service, but used

prices for a larger bundle of services.

The court of appeals concluded that it “need not

decide here whether this inconsistency constitutes

error because, in any event, the District Court de-

fined the relevant market incorrectly.” Jd. But it is

irreparable error: The Government advocated a

market for network services to merchants, and there

is no record evidence of an Amex “network service

price”. Amex does not charge merchants separately

for network services. Nor is it possible to derive the

network service component of Amex’s merchant fee

from the record; that would, at a minimum, require

subtracting the cost of rewards, of which the district

court found there was no reliable evidence. Pet. App.

209. Thus, resolving the question presented regard-

ing the relevant market in Petitioners’ favor would

lead to the conclusion that Petitioners adduced no

proof of harm to competition in that market.

Second, even looking at the wrong price (the

merchant fee), the record lacks another piece of evi-

dence necessary to establish a price-based case of

harm.

A “claim that a defendant set supracompetitive

prices [established] through direct evidence” requires

“an analysis of the defendant’s costs,” including “that

the defendant had an ‘abnormally high price-cost

margin”. Mylan Pharm. Inc. v. Warner Chilcott Pub.

36

Ltd. Co., 838 F.3d 421, 434 (3d Cir. 2016) (quoting

Geneva Pharm., 386 F.3d at 500); accord Menasha

Corp. v. News Am. Mktg. In-Store, Inc., 354 F.3d 661,

666 (7th Cir. 2004) (Easterbrook, J.).

The district court found there was no reliable ev-

idence of Amex’s costs, and thus no “reliable measure

of American Express’s per transaction margins

across its industry groups”. Pet. App. 172a-73a.!°

Accordingly, whatever price is used, it would be im-

possible to conclude on this record that that price is

supracompetitive and thus indicates that the NDPs

harm competition.

10 The United States suggests that it proved Amex’s prices

are supracompetitive because when Amex increased its fees for

certain merchants as part of its “value recapture” program,

those increases “were not wholly offset by additional rewards

expenditures or otherwise passed through to cardholders”. U.S.

Opp. 18 n.4; Pet. App. 209a. However, “the fact remains that

‘the evidentiary record does not include a reliable measure of

the two-sided price charged by American Express that correctly

or appropriately accounts for the network’s expenses on the

cardholder side of the platform”, and “[a] finding that not every

dime of merchant fees is passed along to cardholders says noth-

ing about other expenses that Amex faces, let alone whether its

profit margin is abnormally high.” Pet App. 51a.

37

CONCLUSION

The petition for a writ of certiorari should be

denied.

August 21, 2017

Respectfully submitted,

BENJAMIN J. HORWICH EVAN R. CHESLER

JUSTIN P. RAPHAEL Counsel of Record

MUNGER, TOLLES & PETER T. BARBUR

OLSON LLP KEVIN J. ORSINI

560 Mission Street Rory A. LERARIS

San Francisco, CA CRAVATH, SWAINE &

94105 Moore LLP

(415) 512-4000 825 Eighth Avenue

New York, NY 10019

(212) 474-1000

echesler@cravath.com

Counsel for Respondents American Express Company

and American Express Travel Related Services

Company, Inc.