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

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No. 16-1454

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IN THE

Supreme Court of the United States

OHIO, et al.,

Petitioners,

Vv.

AMERICAN EXPRESS COMPANY, et ai.,

Respondents.

On Writ of Certiorari to the United States Court of

Appeals for the Second Circuit

BRIEF OF THE CLEARING HOUSE

ASSOCIATION L.L.C. AS AMICUS CURIAE

IN SUPPORT OF RESPONDENTS

Robert C. Hunter Richard S. Taffet

Paige E. Pidano Counsel of Record

THE CLEARING HOUSE David B. Salmons

ASSOCIATION L.L.C. Judd E. Stone

1001 Pennsylvania Ave.,. N.\W. MORGAN, Lewis & Bockius LLP

Suite 720 North Tower 101 Park Avenue

Washington, DC 20004 New York, NY 10178

(202) 649-4600 (212) 309-6000

richard.taffet@morganlewis.com

Counsel for Amicus Curiae

===

DATE: January 23, 2018

TABLE OF CONTENTS

Page

ee Ga Ge cttncecccccseccesecssecscccsesevesscccccnees i

TABLE OF AUTHORITIES ................0..00.00cccceceeeees iii

INTERESTS OF AMICUS CURIAE......................+- 1

SUMMARY OF ARGUMENT ....................c0ccccccceeeeeee 3

Fe i iecitatiincintinteriti teanetn iaiinaniaiitettiataidinbiatii 7

I. Defining the Relevant Product

Market in This Context Requires

Recognizing the Two-Sided

Nature of Payment Networks. ............ 7

A. The Rule of Reason

Requires the Factfinder to

Weigh Ail of the

Circumstances of a Case........... 7

B. The Relevant Product

Market Must Be Defined

Based on the Commercial

Realities Faced by

0 Ere 9

C. Both Interrelated Sides of

Credit Card (and Other

Payment) Networks Must

Be Taken into Account............ 10

Il. This Court Should Exercise

Justified Caution in Imposing

Antitrust Liability on Two-Sided

SPIE: ctoitescndedciniedotenenstetneesionmnnanece 14

TABLE OF CONTENTS—Continued

CONCLUSION

hhh ee TY

TABLE OF AUTHORITIES

Page

CASES

Arizona v. Maricopa Cty. ed. Soc’y,

ie ci dicisncliineinsohasshensestnintind 16

Atl. Richfield Co. vy. USA Petroleum Co.,

i iaitisininaaicnsnlal S

Broad. Music, Inc. vy. Columbia Broad.

Sys., Inc.,

I i 15, 17, 19

Cal. Dental Ass'n v. FTC,

TE TAA MORAL ROR 8, 16

Cont'l T.V., Inc. v. GTE Sylvania Inc.,

a ssdisannotnionbeuniil 8

Eastman Kodak Co. v. Image Tech.

Servs., Inc.,

I eadicadl i)

Leegin Creative Leather Prods., Inc. v.

PSKS, Inc.,

ee ee Tien ceidansicctsnresssansonsecevessinive passim

State Oil Co. v. Khan,

I Pe easel 16

United States v. Am. Express Co.,

838 F.3d 179 (2d Cir. 2016) ...........cccecceeeees 13, 14

15 U.S.C. §§ 1-7 (Sherman Act)

TABLE OF AUTHORITIES—Continued

United States vy. Cont’] Can Co.,

nn ccscncnnsnes saleede

United States v. E.I. du Pont de

Nemours & Co.,

I cs sci nehsinenueconecnioneios

United States v. E.I. du Pont de

Nemours & Co.,

a ee i ieccecninecniznsiviisowicctncesseiaets

United States v. Grinnell Corp.,

Sc ealahccniniae

United States v. Topco Assocs., Inc.,

I He i ichteotantdintcsiectatrseciccsvecsevenss

White Motor Co. v. United States,

a eestiansnl

STATUTES

OTHER AUTHORITIES

David Evans & Michael Noel, Defining

Antitrust Markets When Firms

Operate Two-Sided Platforms, 2005

Colum. Bus. L. Rev. 667 (2005)......... 22, 23,

SRR eee ee

25, 26

TABLE OF AUTHORITIES—Continued

Page

David Evans & Richard Schmalensee,

Markets with Two-Sided Platforms,

in 1 ISSUES IN COMPETITION LAW AND

RA LEIERE RES E SN NaS See ae De a 19

David Evans, Two-Sided Market

Definition, ABA Section of Antitrust

I I epinssectettiios 25

David S. Evans & Richard

Schmalensee, Matchmakers: The

New Economics of Multisided

Platforms (Harv. Bus. Rev. Press

The Durbin Amendment: A Failed

Experiment, American Bankers

Ass’n (Winter 2017), https://www.

aba.com/Advocacy/Documents/

Durbin%20Repeal%20Leave%20Beh

ind%20Winter%202017.pdf (last

I Is TG Crees ccetensecscccesenssscenceves 20, 21

Frank Easterbrook, The Limits of

Antitrust, 63 TEX. L. REV. 1 (1984) ............. passim

TABLE OF AUTHORITIES—Continued

Page

Geoffrey Manne, Joshua Wright & Todd

Zywicki, Politically-Mandated Credit

Card Interchange Fees Won't Create

Jobs (But They Will Hurt

Consumers and the Economy),

TRUTH ON THE MARKET (Mar. 20,

2010), https://truthonthemarket.

com/2010/03/20/politically-

mandated-credit-card-interchange-

fees-won%e2%80%99t-create-jobs-

but-they will-hurt-consumers-and-

RE SE ee 15

Harry C. Alford, After 6 Years,

Consequence of the Durbin

Amendment Are Evident (Mar. 1,

2017 2:40 PM), https://www.forbes.

com/sites/realspin/2017/03/01/after-

6-years-consequences-of-the-durbin-

QUDSTISE RET GUUING a. ccccccccccscccscccvssccccsvscceseees 20

Jean-Charles Rochet & Jean Tirole,

1 wo-Sided Markets: A Progress

Report, 37 Rand J. Econ. 645 (2006)................... 11

vil

TABLE OF AUTHORITIES—Continued

Page

Joshua D. Wright, Antitrust, Multi-

Dimensional Competition, and

Innovation: Do We Have An

Antitrust-Relevant Theory of

Competition Now?, George Mason

Law & Economics Research Paper

No. 09-44 (Aug. 28, 2009),

https://papers.ssrn.com/sol3/papers.c

fr 7abstract_id=1463732 ..............ccccssscccssssesesssees

Julian Morris, Geoffrey Manne, Ian Lee

& Todd Zywicki, Punishing

Rewards: How clamping down on

credit card interchange fees can hurt

the middle class, Macdonald-Laurier

Institute (Nov. 2017), https://

macdonaldlaurier.ca/files/pdf/MLI-

PaymentCardRegulationPaper10-

VS SECS Rs 21, 22, 23, 25

OECD, Two-Sided Markets 11 (Dec. 17,

2009), https://www.oecd.org/daf/

competition/44445730.pdf ................0ccccceeeee passim

Phillip Areeda & Donald Turner,

Predatory Pricing and Related

Practices Under Section 2 of the

Sherman Act, 88 HARV. L. REV. 697

ae Re ie se BAC Phe cae Sea ce nar aoa

vill

TABLE OF AUTHORITIES—Continued

Page

Phillip Areeda & Donald Turner,

Scherer on Predatory Pricing: A

Reply, 89 HARV. L. REV. 891 (1976)............00000008 17

Zhu Wang, Scarlett Schwartz & Neil

Mitchell, The Impact of the Durbin

Amendment on Merchants: A

Survey Study, 100 Fed. Res. Bank of

Richmond Econ. Q. 183 (2014) ...............cc008 19, 20

INTERESTS OF AMICUS CURIAE'

The Clearing House, established in 1853, is the

oldest banking association and payments company in

the United States.

The Clearing House Association L.L.C. is a

nonpartisan advocacy organization that represents

the interests of its owner banks by developing and

promoting policies to support a safe, sound, and

competitive banking system that serves customers,

communities, and economic growth. The Clearing

House Association frequently participates as an

amicus in cases that are important to the banking

industry and financial sector.

Its affiliate, The Clearing House Payments

Company L.L.C., which is regulated as a systemically

important financial market utility, owns and operates

payments technology infrastructure that provides

safe, sound, and efficient paymeut, clearing, and

settlement services to financial institutions. It also

promotes innovation and thought leadership for the

development of future generations of payments

systems, products, and services. It presently clears

and settles transactions worth approximately $1.7

| The parties in this case have consented to the filing of this brief.

Pursuant to Supreme Court Rule 37.6, counsel for amicus

represent that this brief was not authored in whole or in part by

counsel for a party and that none of the parties or their counsel,

nor any other person or entity other than amicus, its members,

or its counsel, made a monetary contribution intended to fund

the preparation or submission of this brief.

trillion every day, providing these services over its

three traditional “industrial-strength” payment

systems: (1) The Clearing House Interbank

Payments System, a funds-transfer (wire) system: (2)

the Electronic Payments Network, an automated

clearing house network; and (3) the TCH Image

Exchange Network, a check-image clearing house. It

has also built and just launched a fourth payment

system, the RTP® system—the first new payments

system in 40 years—over which interbank

transactions can be cleared and settled within

seconds, with content-rich messaging, allowing all

depository institutions and non-banks to develop new

innovative payments products and services.

The Clearing House has a strong interest in this

case. Each of the payment systems operated by The

Clearing House Payments Company is a two-sided

platform that must balance the competitive interests

of participants on both sides (i.e., payors and payees,

and their respective financial institutions). The

Clearing House re »ectfully submits this amicus brief

to highlight the most important feature of the Second

Circuit’s correct analysis: it properly considered both

sides of the particular two-sided market analyzed in

this case. This economically appropriate approach

has far-reaching consequences in numerous other

two-sided payment platforms. A proper antitrust

analysis of a two-sided market requires considering

the competitive effects of both sides of that market,

taken on balance. Otherwise, as this case potentially

illustrates, one side of the platform (merchants) may

lever potentially enormous antitrust liability against

the two-sided platform to extract benefits from the

other side (cardholders). Such rent-seeking transfers

threaten great harm both to two-sided markets

themselves and to consumers. A correct antitrust

analysis must therefore require a showing of net

competitive harm, taking into account both sides of a

two-sided market, lest consumers pay the costs of

misdirected antitrust enforcement. For this reason,

in particular, the decision of the court of appeals in

this case should be affirmed.

SUMMARY OF ARGUMENT

This case asks the Court to reaffirm a

fundamental and uncontroversial principle of

antitrust law—that courts applying the rule of reason

to complex and evolving markets must develop a

practical understanding of the way firms compete in

those markets. The Second Circuit's judgment should

be affirmed because it accurately reflects the

functioning of—and financial institutions’

competition in—the payment systems, including

those that The Clearing House has facilitated for over

a century.

Specifically, this case requires the Court to apply

the Sherman Act to the two-sided platforms that

underlie the credit card and broader payment

industries. As the lower courts recognized, the credit-

card industry is of vital importance to the U.S.

economy. Credit cards have become “a principal

means by which consumers in the United States

purchase goods and services from the nation’s

millions of merchants.” Pet. App. 73a-74a. Because

of the size and convenience of these unique two-sided

platforms, which provide simultaneous, interrelated

benefits to participants on both sides—merchants and

consumers—“the credit-card industry has generated

untold efficiencies to travel, retail sales, and the

purchase of goods and services by millions of United

States consumers.” Jd. at 5a. The benefits to

consumers of these two-sided payment platforms are

undeniable and, accordingly, the number of

transactions on these platforms has continued to

grow. And, these benefits are of an even far greater

magnitude when consideration is given to the overall

payment ecosystem, which includes the multi-sided

payment platforms operated by The Clearing House

(and the Federal Reserve).

The unique characteristics of two-sided

platforms—and their implications for antitrust

policy—have attracted the attention of economists

and scholars. Nevertheless, the concept of two-sided

markets in economics is relatively new, and this case

is one of the first to explicitly address them.

Given the importance of two-sided platforms, and

their continuing evolution, this Court’s deliberations

should be grounded in competitive realities. It is

precisely in these circumstances where this Court’s

antitrust precedents mandate that the judicial

analysis under the rule of reason must consider all

facts and circumstances and reflect the commercial

realities facing consumers.

That is particularly true in regard to defining the

relevant product market. A narrow view of the rule

of reason and a one-sided definition of the relevant

market in the context of two-sided platforms would

ignore the inextricably interrelated effects from both

sides of two-sided platforms that are necessary for

such platforms to competitively succeed. Such a

narrow focus would undermine the incentives of

participants on both sides of the platform to support

the overall network, ultimately harming consumers.

An “emerging consensus” is developing

internationally that competition law should recognize

the unique benefits that two-sided platforms provide

to both consumers and merchants and make sure that

antitrust analysis accounts for the competitive

realities of both sides of two-sided platforms. As

addressed by the Organisation for Economic Co-

Operation and Development (OECD”), this

“emerging consensus” among the 35 nations that

make up its membership, is that antitrust policy

generally, and the standards for defining relevant

product markets in particular, must take into account

“the linkages between the two sides” of multi-sided

platforms, and “the complexity of the

interrelationships among customer groups.”2 OECD,

2 The OECD consists of 35 member countries representing most

of the world’s developed countries. Founded in 1961, it provides

a forum for these countries’ governments to discuss policies,

share experiences, and solve complex problems internationally,

including those arising from antitrust and competition law

problems.

Two-Sided Markets 11 (Dec. 17, 2009), https://www.

oecd.org/daf/competition/44445730.pdf. Or as the

OECD put it more bluntly: “Mechanical market

definition exercises that exclude one side usually lead

to errors.” Ibid.

This economically sound advice aligns with this

Court’s long-standing unwillingness to condemn

unfamiliar practices, much less those with tangible

consumer benefits. This Court has taken into account

the federal courts’ familiarity with a given economic

arrangement—in this case, virtually none—when

determining an appropriate antitrust liability regime

for that type of arrangement. Likewise, this Court

has recognized the importance of balancing the costs

from both under- and over-inclusive theories of

antitrust liability, along with the risks of sacrificing

immediate consumer benefits to protect against

speculative harms. Each of these economically sound

principles counsels toward requiring a showing of

competitive harm by antitrust plaintiffs claiming that

two-sided arrangements are anticompetitive. At

minimum, this showing should consider the

competitive effects of the arrangement as a whole,

including the real, tangible benefits to consumers

from these two-sided platforms. If nothing else,

economically sound antitrust analysis requires courts

not to ignore easily demonstrable consumer benefits

from a given practice. Just so here.

ARGUMENT

I. DEFINING THE RELEVANT PRODUCT MARKET IN

THIS CONTEXT REQUIRES RECOGNIZING THE

Two-SIDED NATURE OF PAYMENT NETWORKS.

A. The Rule of Reason Requires the

Factfinder to Weigh All of the

Circumstances of a Case.

Both courts below examined the practices at issue

in this case under the rule of reason, which “is the

accepted standard for testing whether a practice

restrains trade in violation of § 1” of the Sherman Act.

Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,

551 U.S. 877, 885 (2007). The “design and function”

of the rule of reason is to “distinguish| |] between

restraints with anticompetitive effect that are

harmful to the consumer and restraints stimulating

competition that are in the consumer’s best interest.”

Id. at 886.

This Court has long recognized that the line

between restraints that harm competition and

consumers and those that benefit them is often

difficult to discern. See Part Il, below. Courts must

therefore take great care in applying the rule of

reason, lest these restraints become the source of

market distortion and consumer harm. See United

Statesv. EI. du Pont de Nemours & Co., 366 U.S. 316,

327-28 (1961) (emphasizing that courts should

conduct antitrust analysis so as to do “as little injury

as possible to the interest of the general public”).

That is particularly true where, as here, courts are

asked to apply antitrust principles in complex

markets to practices that have received little judicial

or scholarly scrutiny. This Court’s precedents make

clear that when courts are asked to break new ground

under the Sherman Act, they should favor judicial

standards that permit the broadest consideration of

facts and circumstances. See Leegin, 551 U.S. at 886

(noting that a per se rule “is appropriate only after

courts have had considerable experience with the type

of restraint at issue”).

For these reasons, this Court has mandated that

courts applying the rule of reason must “weigh/ / all

of the circumstances of a case in deciding whether a

restrictive practice should be prohibited as imposing

an unreasonable restraint on competition.” Cont’

T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977)

(emphasis added). Consistent with this careful,

expansive analysis, a plaintiff seeking to prove a

violation of the rule of reason must show that the

restraint is “prima facie anticomptetive.” Cal. Dental

Ass’n v. FTC, 526 U.S. 756, 771 (1999). As the court

of appeals below explained, among other things, that

requires the plaintiffs to show that “defendant's

challenged behavior ‘had an actua/ adverse effect on

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

App. 27a (citation omitted). See Ati. Richfield Co. v.

USA Petroleum Co., 495 U.S. 328, 335-38 (1990)

(discussing requirement of showing “antitrust

injury”).

B. The Relevant Product Market Must Be

Defined Based on the Commercial

Realities Faced by Consumers.

Each step of the rule of reason analysis requires

consideration of all relevant facts and circumstances,

and that includes the inquiry into the relevant

product market. Indeed, this Court has emphasized

that “/t/he proper market definition * * * can be

determined only after a factual inquiry into the

‘commercial realities’ faced by consumers.” Eastman

Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451,

482 (1992) (emphasis added) (quoting United States

v. Grinnell Corp., 384 U.S. 563, 572 (1966)).

Frequently, the focus of the market-definition

inquiry is on identifying products that are reasonable

substitutes for each other. See, e.g., United States v.

E.I. du Pont de Nemours & Co., 351 U.S. 377, 404

(1956); Kodak, 504 U.S. at 482; United States v. Cont’]

Can Ce., 378 US. 441, 449 (1964). But consistent

with the “all circumstances” analysis of the rule of

reason as a whole, the inquiry into the relevant

market is not so limited or rigid. Rather, it should

include consideration of all facts relevant to the

commercial realities faced by consumers. Thus, in

Grinnell, the Court saw “no barrier to combining in a

single market a number of different products or

services where that combination reflects commercial

realities,” whether or not the products were

interchangeable. 384 U.S. at 567-68, 572.

So too here. The relevant product market in the

context of two-sided networks must be defined by

reference to the “commercial realties.”. And, central

to those realities is the unique, two-sided nature of

credit card and other payment networks.

C. Both Interrelated Sides of Credit Card

(and Other Payment) Networks Must Be

Taken into Account.

Credit card and other payment networks, like

those operated by The Clearing House, are all

paradigmatic examples of what economists refer to as

“two-sided platforms.” Payment networks bring

together “two separate yet interrelated groups of

customers who * * * rely on the platform to

intermediate some type of interaction between them,”

Pet. App. 77a, allowing those on one side to pay for

goods, and allowing those on the other side to sell

goods and services with significantly mitigated

default risk. The unique characteristics of payment

two-sided markets, thus include:

e that there are two distinct groups of consumers

who need each other in some way and who rely

on the platform to intermediate transactions

between them: the two-sided platform provides

goods or services simultaneously to these two

groups;

e chat there are externalities across the groups of

consumers, such that the value that customers

on one side realize from the platform increases

with the number of customers on the other

side—e.g., the value to credit cardholders

increases as more merchants join the network

and the value to merchants increases as more

cardholders join the network; and

e that the platform must design the price

structure so as to induce both sides to join the

platform and can affect the volume of

transactions by charging more to one side of the

market and reducing the price paid by the

other side.

See Jean-Charles Rochet & Jean Tirole, 7'wo-Sided

Markets: A Progress Keport, 37 Rand J. Econ. 645,

664-65 (2006) (“[A] market is two-sided if the platform

can affect the volume of transactions by charging

more to one side of the market and reducing the price

paid by the other side by an equal amount; in other

words, the price structure matters, and platforms

must design it so as to bring both sides on board.”);

OECD, Two-Sided Markets 11 (describing elements of

two-sided networks); David S. Evans & Richard

Schmalensee, Matchmakers: The New Economics of

Multisided Platforms 1-4, 8-9, 14-19 (Harv. Bus. Rev.

Press 2016) (discussing essential characteristics of

multisided platforms).

And as with two-sided markets more generally,

the OECD's 2009 report provides important guidance

for antitrust analysis of payment networks. There,

the OECD explained—consistent with this Court’s

approach in defining relevant markets—that the need

to ensure that antitrust policies reflect the economic

and commercial realities of such markets in order to

avoid unintentionally harming pro-competitive and

pro-consumer practices. See OECD, Two-Sided

Markets 11, 23-25.

In particular, the OECD addressed the question of

defining antitrust-relevant markets for two-sided

products: “Given that two-sided markets involve two

different sets of customers, a question arises as to how

to treat the two sides when defining the relevant

product market. Or to put it differently, there is the

question of whether the two-sided market should be

analyzed jointly or separately.” /d. at 11. In

answering that question, the OECD explained:

There seems to be an emerging consensus

that a precise relevant product market

definition is less important than making sure

the linkages between the two sides, and the

complexity of the interrelationships among

customer groups, are taken into account.

Mechanical market definition exercises that

exclude one side usually lead to errors.

Ibid. (emphasis added).

Indeed, the OECD’s analysis tracks closely with

that of the court of appeals in this case. “Typically,”

the OECD explained, “the analysis of market

definition focuses on the effect of a price change on

demand in a narrowly defined market.” Jd. at 24. But

because “two-sided platforms have to coordinate

demand among two interdependent customer groups,

a price change on one side of the market has positive

feedback effects on the other sides of the market.”

Ibid. “Thus, the analysis must consider these

feedback effects to determine the overall effect of a

price change on profits.” Ibid.; see also id. at 12 (“The

price level, i.e., the sum of all prices, rather than

individual prices or the price structure, is the

appropriate means of measuring the competitiveness

of a [two-sided] market and should be the focus of

policy analysis.”). Ignoring one side of a two-sided

market may ultimately result in consumer harm by

throwing off the delicate balance naturally achieved

by platforms considering both sides.

The Second Circuit’s analysis comported with the

OECD’s economically sound recommendations. That

court cautioned that “[sleparating the two markets

here”’—the two sides of a payment platform's

market—“ignores the two markets’ interdependence.”

United States v. Am. Express Co., 838 F.3d 179, 198

(2d Cir. 2016). That separation would “allow[)

legitimate competitive activities in the market for

general purpose [card]s to be penalized no matter how

output-expanding such activities may be.” Jbid. It

properly recognized the relationship between both

sides of this two-sided market, noting that “the price

charged to merchants necessarily affects cardholder

demand.” Jd. at 200. Having properly articulated

these cautions, the court properly cited the

relationship between merchant charges, cardholder

benefits, and increased quality and output in this

particular two-sided market—and how these

increases are consistent with robust competition,

rather than an anticompetitive practice. /d. at 205-

06.

A similar analysis should apply to two-sided

payment platforms outside of the credit-card context.

While fundamentally different in rights and

responsibilities of the parties and payment attributes,

each of the payment systems operated by The

Clearing House—i.e., for wire, check, ACH and real

time transactions—are two-sided markets in which

the competitive relationships between participants on

both sides of the platforms are inextricably related,

and the success of the platforms are dependent on

properly aligning the incentives of all such

participants. Otherwise, the volume of transactions

over a specific platform could be insufficient to

support the platform, and without both sets of

participants, no transactions could be completed. As

discussed next, these characteristics and incentives

are driven by the economics of two-sided platforms.

Il. THIS COURT SHOULD EXERCISE JUSTIFIED

CAUTION IN IMPOSING ANTITRUST LIABILITY ON

Two-SIDED PRODUCTS.

Accounting for commercial and competitive

realities is also consistent with this Court’s approach

in recent decades to focus on both the potential

benefits and costs to consumer welfare arising from

antitrust liability. This cost/benefit analysis is borne

out in the Court’s tailoring of antitrust analysis to

specific arrangements that reflect both the federal

courts’ familiarity with a _ given economic

arrangement, Broad. Music, Inc. v. Columbia Broad.

Sys., Inc., 441 U.S. 1, 9-10 (1979), as well as the

likelihood that the arrangement, on balance, harms

competition. Leegin, 551 U.S. at 894-98. These

concerns necessarily counsel great caution in

applying antitrust law in the context of two-sided

markets with which the federal courts are only now

developing experience, especially in connection with

financial and payment platforms, which benefit

consumers greatly. See Geoffrey Manne, Joshua

Wright & Todd Zywicki, Politically-Mandated Credit

Card Interchange Fees Won't Create Jobs (But They

Will Hurt Consumers and the Economy), TRUTH ON

THE MARKET (Mar. 20, 2010).%

This Court should hew to these time-tested

principles in its guidance to lower courts in this case,

and rigorously consider the error and transaction

costs attendant to antitrust enforcement in generally

benign contexts, as consumers—not merely

litigants—ultimately bear these costs. See Frank

Easterbrook, The Limits of Antitrust, 63 TEX. L. REV.

1, 21 (1984). Such an approach would be entirely

consistent with the way this Court has proceeded over

time in assessing the proper application of the

antitrust laws and the need to account for competitive

realities and the familiarity of the federal courts with

such matters, most particularly how likely a given

5 Available at https://truthonthemarket.com/2010/03/20/politically-

mandated-credit-card -interchange-fees-won %e2%80%99t-create-

jobs-but-they-will-hurt-consumers-and-the-economy.

arrangement is to harm consumers after the benefits

of antitrust liability and the costs, including error and

litigation costs, are taken into account. See State Oil

Co. v. Khan, 522 U.S. 3, 10 (1997).

Thus, at one end, this Court treats outright

price-fixing and similarly obvious anticompetitive

arrangements as per se illegal—illegal without

requiring any empirical proof of competitive harm

from the specific practice challenged. Leegin, 551

U.S. at 886. The federal courts have ample experience

with the consequences of price-fixing, and both

economic and empirical evidence confirms that price-

fixing cartels lead to higher prices, slower innovation,

and significant consumer harm both immediately and

in the long run. See, e.g., Arizona v. Maricopa Cty.

Med. Soc’y, 457 U.S. 332, 348 (1982); White Motor Co.

v. United States, 372 U.S. 253, 263 (1963);

Easterbrook, supra, at 3 & n.2.

At the other, this Court requires an antitrust

plaintiff to make a specific threshold showing of a

strong likelihood of consumer harm for arrangements

that are theoretically capable of hurting consumers

on balance, but practically unlikely to do so. Cail.

Dental Ass'n, 526 U.S. at 771-78. “Predatory pricing”

claims are a good example. See generally Phillip

Areeda & Donald Turner, Predatory Pricing and

Related Practices Under Section 2 of the Sherman

Act, 88 HARV. L. REV. 697 (1975). Theoretical harm

from price predation is certainly possible: it is

possible that a hypothetical monopolist might lower

its prices to drive rivals out of a market with high

barriers to entry, enabling that monopolist to extract

monopoly rents afterward. But while this harm is

theoretically possible, it proves deeply implausible in

practice. Easterbrook, supra, at 26-28. Even when

entered into in an attempt to drive rivals out of a

market, most predatory pricing schemes fail in the

long run, and immediate price cuts, whether as part

of a predatory plan or otherwise, significantly benefit

consumers in the short run. See Phillip Areeda &

Donald Turner, Scherer on Predatory Pricing: A

Reply, 89 Harv. L. REV. 891, 896-97 (1976). This

Court and lower courts are therefore appropriately

hesitant to sacrifice immediate consumer benefits »

prevent speculative, far-off consumer harms.

This dual reliance on judicial familiarity with

an arrangement as well as the typical consequences

to consumers from such an arrangement reflect an

appropriate consideration of the error costs of

antitrust enforcement. Broadcast Music, 441 U.S. at

9 (judicial familiarity); id. at 22 & n.40 (consequences

to consumers). See generally Easterbrook, supra.

The error-cost framework, relied on in American

antitrust law for decades—although apparently

ignored by petitioners—rests on three common-sense

(and economically sound) premises. First, there are

two possible mistakes in antitrust enforcement, both

carrying an attendant cost: the costs of failing to

sanction a practice causing competitive harm (or a

false negative), and the costs of sanctioning a pro-

competitive practice that benefits consumers (or a

false positive). Jd. at 2. Second, false positives are

more likely to harm consumers than false negatives,

because while both markets and courts can correct

false negatives, only courts can correct false

positives. Jd. at 2-3, 6-7; Joshua D. Wright,

Antitrust, Multi-Dimensional Competition, and

Innovation: Do We Have An Antitrust-Relevant

Theory of Competition Now?, George Mason Law &

Economics Research Paper No. 09-44, at 4 (Aug. 28,

2009).5 Third, it is impossible to eliminate both types

of errors because it is often difficult to distinguish

between practices that promote competition and those

that harm it. Easterbrook, supra, at 6.

Each of these premises underscores the

importance of exercising significant caution when

considering antitrust liability in two-sided markets.

* This is due to both market forces as well as the nature of

judicial review in the antitrust context. Easterbrook, supra, at

15. Market participants can, and often do, ade, « to punish or

weaken an anticompetitive arrangement that harms

familiarity with the likelihood of harm from a practice and, if

given sufficient experience, often identify anticompetitive

practices as such. United States v. Topco Assocs., Inc., 405 U.S.

596, 607-08 (1972). Yet antitrust enforcement against a

harmless practice typically drives that practice from the market

altogether. Easterbrook, supra, at 15-16. Market forces

therefore cannot vindicate such a practice, and the

comparatively limited use of taat practice—partially a function

of the steep penalties for violating the antitrust laws—

coordinately reduces judicis| exposure to it. Jd. at 6-7. False

positives therefore prove significantly more harmful to

5 Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_

id=1463732.

Id. at 7-9. Judicial experience with these

arrangements is cnly now emerging: indeed, the term

“two-sided market” was coined only in 2000, David

Evans & Richard Schmalensee, Markets with Two-

Sided Platforms, in 1 ISSUES IN COMPETITION LAW AND

POLICY 667, 668 (ABA Section of Antitrust Law 2008),

and compared with most arrangements in antitrust,

there is virtually no judicial analysis of the antitrust

implications of economic arrangements involving

these complex products. Moreover, the available

scholarly analysis suggests that interventions into

two-sided markets can lead to significant unexpected

consequences for consumers and merchants alike.

See Zhu Wang, Scarlett Schwartz & Neil Mitchell,

The Impact of the Durbin Amendment on Merchants:

A Survey Study, 100 Fed. Res. Bank of Richmond

Econ. Q. 183, 186 (2014).

The little experience that American policy has

with intervening in two-sided payment markets

suggests that caution is especially appropriate here.

Debit cards, like credit cards, are two-sided payment

markets; like credit cards, their interchange fees and

corresponding rules seek to balance both sides of that

market—merchants and consumers—through a

product attractive to both. Jd. at 185. In response to

claims that these payment products raised prices on

merchants excessively, the Durbin Amendment to the

Dodd-Frank Act authorized the Federal Reserve to

regulate these fees. Jd. at 183-85. Advocates for the

Durbin Amendment claimed that these price caps

would ultimately benefit consumers through lower

prices from merchants, id. at 185, even in the face of

evidence that interchange fees typically paid for

benefits that consumers found highly desirable, such

as free checking. See ibid.

The Durbin Amendment has not worked as

expected. In 2011, the Federal Reserve capped debit

interchange fees at roughly half of their average

previous amounts. /d. at 184. Consumers soon lost

many of the benefits that the previous interchange fee

subsidized, such as free checking accounts, free debit

cards, and debit cards reward programs. See, e.g.,

Harry C. Alford, After 6 Years, Consequence of the

Durbin Amendment Are Evident, Forbes.com (Mar. 1,

2017 2:40 PM). But the promised lower prices never

materialized: as both economic analyses and

consumer surveys reflect, most merchants did not

lower prices and kept the benefits promised to

consumers for themselves. Wang, Schwartz &

Mitchell, supra, at 194-95, 197. Nor were the Durbin

Amendment’s price controls even uniformly beneficial

to merchants—smaller merchants ultimately paid

more in interchange fees, squeezing their narrow

margins ever further. Jd. at 184, 200-02, 205. The

only apparent beneficiaries of this intervention were

large-scale retailers, which received this legislative

transfer at both consumers’ and payment products’

expense. /d. at 193-94; see also The Durbin

Amendment: A _ Failed Experiment, American

® Available at: https://www.forbes.com/sites/realspin/2017/03/01/

after-6-years-consequences-of-the-durbin-amendment-are-evident.

Bankers Ass’n (Winter 2017).? This unfortunate

experience is hardly one to emulate.

Indeed, as respondents highlighted during the

certiorari stage, there has been no appellate analysis

examining the Section 1 enforcement implications for

two-sided credit card markets anywhere before the

decision below. Br. for American Express in

Opposition, at 13 (citing Br. for the United States in

Opposition, at 19-20). Given this relative

unfamiliarity, this Court ought err on the side of more

circumspect antitrust enforceement—especially given

that it can revisit that determination as judicial

experience with these products grows. Easterbrook,

supra, at 4-9.

Such an approach is also consistent with this

Court’s sensitivity to consumer benefits from

economic arrangements when determining

appropriate antitrust analyses. Leegin, 551 U.S. at

886. Here, that inquiry is _ particularly

straightforward: both sides of a two-sided platform

such as that at issue here significantly benefit

consumers through fees from merchants that support

points programs, cash rebates, and other desirable

perks for consumers. See also Julian Morris, Geoffrey

Manne, Ian Lee & Todd Zywicki, Punishing Rewards:

How clamping down on credit card interchange fees

’ Available at: https://www.aba.com/Advocacy/Documents/

Durbin%20Repeal%20Leave%20 Behind%20W inter%2020 1 7.pdf

(last visited, Jan. 18, 2018).

can hurt the middle class, Macdonald-Laurier

Institute (Nov. 2017) (demonstrating mutual benefits

of credit card markets).® Under this Court's

longstanding precedent, an arrangement as the one

here, which undisputedly benefits such consumers,

immediately warrants a corresponding presumption

that antitrust liability for that arrangement must be

rigorously justified in the light of the net beneficial

effects to consumers. Any antitrust analysis that

deliberately excludes the acknowledged and

demonstrable effects on consumers from a given

arrangement merely heightens the costs of a false

positive, and ultimately sacrifices immediate

consumer benefits for speculative consumer harms.

Moreover, there is special reason to be cautious

in assigning antitrust liability in the context of two-

sided markets based on one side’s purported economic

harm. Two-sided markets by definition require the

participation of both sides for the product to exist in

the first place. That is what makes them twovsided.

David Evans & Michael Noel, Defining Antitrust

Markets When Firms Operate Two-Sided Platforms,

2005 Colum. Bus. L. Rev. 667, 668 (2005). Unlike a

traditional market, a two-sided market brings two

economic constituencies together to create a product

that both sides will use. This contrasts with normal

markets, such as retail stores, which purchase their

* Available at https://macdonaldlaurier.ca/files/pdf/MLI-Payment

CardRegulationPaper10-17web.pdf

inventory from an upstream wholesaler and resell it

to end consumers.

Accordingly, a two-sided platform must

necessarily satisfy these two constituencies with

economic interests that are frequently opposed.

Evans & Noel, supra, at 682-84 (discussing

examples). In the credit-card context, for example,

merchants and consumers may have opposite short-

term, individualized incentives regarding

interchange fees: merchants directly or indirectly

bear these fees, and thus may want to keep them as

low as possible; cardholding consumers neither see

nor bear them, but they consum. the perks funded in

part from these fees. Jd. at 682. But merchants and

cardholders alike enjoy robust, easily perceived

benefits from two-sided credit markets. Morris,

Manne, Lee & Zywicki, supra, at 7. Merchants need

not bear the risks of default for purchases made on

credit (which are borne by the card company vis-a-vis

the merchants), and they can induce consumers who

happen not to carry sufficient cash for a purchase to

nonetheless buy an item immediately. See ibid.

Conversely, along with the perks that many credit

cards offer, these two-sided products offer consumers

greater liquidity and enable them to smooth their

consumption patterns over time—all precisely

because these cards are two-sided products. TIbid.9

® Similar mutual benefits arise from other two-sided payment

platforms. For example, billers (payees) benefit when debtors

(payors) timely pay for services, and incentives supported by

These benefits have accordingly driven significant

growth in payment-card transactions—and this

increased volume itself suggests a robust, competitive

marketplace. Id. at 30.

These consumer benefits promote competition

precisely because they are a cornerstone of payment-

card competition in this two-sided market. Payment

card networks compete for cardholders at numerous

stages, both in seeking new cardholders and

encouraging them to use their particular payment

card.'° Evans, Two-Sided Market Definition, supra,

at 16. Each consumer purchase gives cardholders a

new opportunity to pick among competing features

and perks, including highly desired rewards and

travel programs and cash back to the consumer. Id.

at 9. And like all competition, this repeated

competition for consumers drives down prices and

encourages new, innovative products—leading to

greater quantities of higher quality goods. Jd. at 3,

payees to incentivize prompt and accurate payments benefit

payors by, for example, enhanced user experiences, diminished

risks of fraud or misapplication of funds, or the incurring of late

fees.

‘0 Payment-card networks likewise compete in attracting

merchants to their networks. This competition in part relies on

the significant additional business that a payment card's

customers can bring to a retailer. Merchants therefore have an

incentive to free ride: count on a payment network to bring

customers in, but discourage them from using a network's

products at the point of sale. The continued operation of a two-

sided market depends on the effective prevention of these and