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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2017

## Text

No. 16-1454
————————————————————————EEEE
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

il

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)

iv

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

v

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

vi
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.

6

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.

10

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

11

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

12

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

13

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

14

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

15

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.

16

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

17

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,

18

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.

19

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

20

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.

21

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).

22

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

23

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

24

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
similar free-riding problems.

25

n.4, 69. These are hallmarks of a competitive
market.

That a particular two-sided market may
benefit one constituency more than the other in a
particular way—even that it involves a cross-subsidy
from one side (merchants) to the other (cardholders)—
should be of no special economic significance, and
should not be the basis for antitrust liability. Such
cross-subsidies occur in many contexts and often
benefit consumers and competition. See Evans &
Noel, supra, at 684. Nor, for that matter, would any
serious antitrust analysis aimed at maximizing total
consumer welfare ignore the consumer side of any
purported cross-subsidy. See, e.g., David Evans, Two-
Sided Market Definition, ABA Section of Antitrust
Law, 6 (Nov. 11, 2009).!! Such a limited view would
ignore the growing experience that courts have with
these products and deliberately cast it aside. An
economically sophisticated antitrust analysis is
superior to a doctrinally simple one. Easterbrook,
supra, at 39-40.

These common and tangible benefits to both
sides of the two-sided market suggest that this Court
should, at a minimum, require plaintiffs pressing
antitrust claims against two-sided networks—
particularly those with significant consumer
benefits—to show that the arrangement causes
competitive harm when taken as a whole. See Pet.
App. 49a-50a. Undoubtedly, most participants in

'! Available at SSRN: https://ssrn.com/abstract= 1396751.

26

two-sided markets desire a greater share of the
surplus generated from these arrangements at the
expense of the other constituencies. But an economic
harm to competitors—or between parties to the same
product—does not amount to a harm to competition.
See generally Evans & Noel, supra. If petitioners
raise a cognizable antitrust claim at all, courts should
require an up-front showing of net competitive harm
when considering the transaction as a whole before
shifting the burden under the rule of reason and
requiring an antitrust defendant to show that its
conduct is justified by affording procompetitive
benefits that outweigh any competitive restraints.
Stated differently, the costs and burdens of defending
against an antitrust claim premised on an incorrect
analysis of commercial and competitive realities in
the first instance, would itself impose social costs that
the antitrust laws, and this Court’s precedents, do not

support.
CONCLUSION

The judgment of the Court of Appeals should be
affirmed.

27

January 23, 2018 Respectfully submitted,
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

1101 Pennsylvania Ave., MORGAN, LEWIS &
N.W. Bocktus LLP

Suite 720 North Tower 101 Park Avenue

Washington, DC 20004 New York, NY 10178

Counsel for Amicus Curiae

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0754%3A26. Public record. Not legal advice.