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

No. 16-1454

IN THE

Supreme Court of the Anited States

STATES OF OHI0, CONNECTICUT, IDAHO, ILLINOIS, lou.

MARYLAND, MICHIGAN, MONTANA, RHODE ISLAND, UTAH

AND VERMONT,

Petitioners,

V.

AMERICAN EXPRESS COMPANY, AND AMERICAN EXPRESS

TRAVEL RELATED SERVICES COMPANY, INC

Respondents.

On Writ of Certiorari to the United States Court of

Appeals for the Second Circuit

BRIEF OF THE MERCHANT ADVISORY GROUP AS

AMICUS CURIAE IN SUPPORT OF PETITIONERS

JAMES A. WILSON*

*Counsel of Record

ROBERT N. WERNER

KENNETH J. RUBIN

NATHAN L. COLVIN

VorYS SATER SEYMOUR AND

PEASE, LLP

52 E. Gay Street

Columbus, OH 43215

(614) 464-5606

jawilson@vorys.com

Counsel for Amicus Curiae

The Merchant Advisory

Group

TABLE OF CONTENTS

Page

, i

TABLE OF CITED AUTHORITTIES . iii

INTEREST OF AMICUS CURIAE. . 1

SUMMARY OF ARGUMENT. 2

PRET TN RS EE, Se SEE EY 4

I. The Second Circuit's Collapse of a Two-

Sided Platform Into a Single Market

Ignores the Market Reality That

Merchants are Distinct Customers of

. oni SRSA? WSS — — 6

A. The Realities of the Payment Card

— Ü ̃⁵bUd.... — 3 6

B. The Second Circuit Ignored Market

Realities Experienced by Merchants

When it Collapsed the Two-Sided

Platform Into a Single Market 10

1. The Evidence Provided No Basis

upon which to Collapse the Two

Sides of the Platform into a Single

aE lS aos APA. ies Sea 10

2. The Second Circuit's Disregard for

the Record Led to an Erroneous

Reliance on Abstract Economic

Theory that Bears Little Similarity

to the Reality Merchants Face 14

II. The Existence of Market Power Should

Be Determined by Actual Evidence, Not

by Abstract Economic Theory ........................ 17

A. The Market for Card Acceptance

Services is Highly Concentrated and

Features Significant Barriers to Entry ....18

B. The Pernicious Effects of Amex’s

Restraints on Merchants Demonstrate

the Overwhelming Strength of Its

r SR Ah a Ae 20

1. In a Competitive Market,

Merchants Would Behave

TE — 20

2. The Realities of How Cardholders

Use Credit and Charge Cards

Leaves Merchants With Little

Choice But to Accept Ame 25

3. Amex Charges Merchants a

Premium When Compared to its

Competitors and Price Increases

Have Not Caused Loss of Merchant

e 27

4. The NDPs Further Increase

Amex’s Market Power Over

eee 29

— ——— — — — 31

“+e

TABLE OF CITED AUTHORITIES

Page(s)

CASES:

Brown Shoe Co. v. United States,

e . 16

Eastman Kodak Co. v.

Image Technical Servs., Inc.,

.. passim

Fortner Enters. u. United States Steel Corp.,

, . ̃ y 17

FTC v. Superior Court Trial Lawyers Ass'n,

, ...... 21

Jefferson Parish Hosp. Dist. No. 2 v. Hyde,

Eee FS

Maple Flooring Manufacturers Assn. v.

United States,

, . 4-5

N. Pac. Ry. Co. v. United States,

RE dx 29

Tampa Elec. Co. v. Nashville Coal Co.,

| . 5

Times-Picayune Publ’g Co. v. United States,

D conccnscenssiiiiomndtpaptatensmneniets 15

United States v.

Concentrated Phosphate Export Ass'n,

e scincennceeciennebabinensanndieenets 5

United States v. Cont’'l Can Co.,

e . iimsiebiliennamids 16

iv

United States b. E. I. DuPont de Nemours & Co.,

re, 3. 14

United States v. Topco Association, Inc.,

.... / 4. 21

STATUTES AND OTHER AUTHORITIES:

Aaron Back, Competition Over Cards Runs Too

Hot, THE WALL STREET JOURNAL Jan. 26,

Dennis W. Carlton & Ralph A. Winter, Vertical

MFN’s and the Credit Card No-surcharge

— mn — — 16

Phillip Areeda & Herbert Hovenkamp, Antitrust

. TT ————c 000 17

c —ĩ 1

The Merchant Advisory Group, Know Your

Payments: Transaction Basics.....................-.. 8, 10

ValuePenguin, Largest Credit Card Issuers:

2017 Market Share Report 11

INTEREST OF AMICUS CURIAE'

The Merchant Advisory Group (“MAG”) was

founded in 2008 by a small forward-looking group of

merchants dedicated to driving positive changes in

the payments field through multi-stakeholder

collaboration. Today, MAC represents more than 100

of the largest merchants in the United States.

MAG’s members employ nearly 11.5 million people

and account for nearly $2.6 trillion in annual sales

online and at over 430,000 brick and mortar

locations across the United States. Of those annual

sales, more than half—approximately $1.5 trillion—

are conducted via payment cards, representing more

than 41 billion individual payment card transactions.

Every year, U.S. merchants collectively pay tens

of billions of dollars in payment card transaction

fees. MAG’s mission is to create an improved and

equitable payments ecosystem. Consequently, MAG

is a key participant in industry events and ensures

that the merchant voice is a part of the dialogue

surrounding evolving payments and related matters.

MAG also regularly monitors pending cases (like this

one) that present legal issues that significantly

impact the merchant industry.

MAG’s members have a strong interest in the

legal standards that protect merchants from the

All parties have consented to the filing of this brief. Pursuant

to Supreme Court Rule 37.6, no counsel for a party authored

this brief in whole or in part, and no party or counsel for a party

made a monetary contribution intended to fund the preparation

or submission of this brief. No person other than amicus, its

members, or its counsel made a monetary contribution intended

to fund this brief s preparation or submission.

2

anticompetitive practices of Respondents American

Express Company and American Express Travel

Related Services Company, Inc. (collectively,

Amex). MAG submits this brief to assist the Court

in understanding how payments work in the real

world in which merchants operate, and to highlight

the Second Circuit's failure to recognize the harm

that MAG’s members and other merchants actually

experience as a result of Amex’s anticompetitive

practices. If the Second Circuit had considered these

market realities evidenced in the trial court record—

as it should have done under basic antitrust

jurisprudence—it would have affirmed the District

Court's decision. Instead, the Second Circuit relied

on abstract economic theories and papers from

outside the record to support Amex’s decision to use

non-discrimination provisions (“NDPs”) to prevent

merchants from creating a competitive payment

ecosystem. If Amex is successful in exempting its

anticompetitive practices from antitrust liability, it

will be the merchants, their employees, and

American consumers who literally pay the price.

SUMMARY OF ARGUMENT

In Eastman Kodak Co. v. Image Technical Servus.,

Inc., this Court made clear that antitrust claims

should be resolved based on actual market conditions

established by the record. See 504 U.S. 451, 466-67

(1992). The Second Circuit's decision in this case

departs from that precedent in two key respects.

First, in defining the relevant market for

antitrust purposes, the Second Circuit declined to

follow this Court's oft-expressed guidance that the

3

market must include those products or services that

are “reasonably interchangeable by consumers for

the same purposes” and that exhibit “cross-elasticity

of demand” between the product itself and

substitutes for it. United States b. E. I. DuPont de

Nemours & Co., 351 U.S. 377, 394-95 (1956).

Without citation to any precedent, the Second Circuit

instead defined the relevant market in this case to

include other non-interchangeable products and

services whose prices might be affected by the

product and services allegedly restrained. The net

result of the Second Circuit's decision is to ignore the

actual market realities that affect merchants, by

including very different sets of customers, products,

and competitors into a single market, without regard

to whether the companies or products actually

compete with one another. There is no basis in

antitrust law for defining a market in such a way.

Second, in assessing whether Amex has market

power, the Second Circuit declined to follow this

Court's guidance that market power is the power ‘to

force a purchaser to do something that he would not

do in a competitive market.” Kodak, 504 U.S. at 464

(quoting Jefferson Parish Hosp. Dist. No. 2 v. Hyde,

466 U.S. 2, 14 (1984). The District Court reviewed

the evidence presented ana identified numerous ways

in which market realities demonstrate the market

power wielded by Amex over merchants. But the

Second Circuit did not consider, much less overturn,

these factual findings. Instead, it decided that any

market power and anticompetitive behavior wielded

by Amex against merchants is justified because it

might result in a savings for Amex cardholders. This

sort of balancing of proven, anticompetitive market

4

realities in one area, with hypothesized favorable

market effects in another area, is wholly

inappropriate under the Sherman Act. See United

States v. Topco Association, Inc., 405 U.S. 596, 609-12

(1972) (If a decision is to be made to sacrifice

competition in one portion of the economy for greater

competition in another portion, this too is a decision

that must be made by Congress and not by private

forces or by the courts.’). However, even if the Court

finds such a balancing appropriate when a two-sided

platform is at issue, the traditional Rule of Reason

burden-shifting approach to weighing anti-

competitive and procompetitive effects—which the

District Court followed, and the Second Circuit

eschewed—is the appropriate framework to apply.

The Court should reverse the decision below.

ARGUMENT

The Second Circuit's decision reflects the danger

of courts relying on abstract economic theory rather

than on actual market realities established by

evidence presented at trial.

In Eastman Kodak Co. v. Image Technical Servs.,

Inc this Court made clear that antitrust claims

should be resolved based on real-world market

conditions established by the record: “Legal

presumptions that rest on formalistic distinctions

rather than actual market realities are generally

disfavored in antitrust law. This Court has preferred

to resolve antitrust claims on a case-by-case basis,

focusing on the ‘particular facts disclosed by the

record.” 504 U.S. 451, 466-67 (1992) (quoting Maple

0

Flooring Manufacturers Assn. v. United States, 268

U.S. 563, 579 (1925)) (emphasis added). See also

United States v. Concentrated Phosphate Export

Ass'n, 393 U.S. 199, 208 (1968) (“In interpreting

antitrust laws. . [w]e must look at the economic

reality of the relevant transactions.”) (emphasis

added): Tampa Elec. Co. v. Nashville Coal Co., 365

U.S. 320, 325-27 (1961) (explaining that the Court

has repeatedly explained that it must discern the

“practical effect” of contracts under antitrust law).

The District Court respected these admonitions.

It held a seven-week trial that included testimony

from more than thirty fact and four expert witnesses

(resulting in nearly 7,000 transcript pages in

testimony) and the acceptance of more than 1,000

exhibits into the record. Pet. App. 72a. The District

Court's opinion reflects its careful evaluation of the

actual evidence presented, as each of its factual

findings is supported by too many citations to the

record to count. Pet. App. 63a-293a.

In contrast, the Second Circuit's decision ignores

the record (and the District Court's factual findings

regarding the same). Instead, the Second Circuit

relies almost entirely on academic articles that have

not been subjected to cross-examination or the rules

of evidence. Pet. App. la-54a. In fact, the Second

Circuit's decision contains just three citations to the

trial record, but more than 29 citations to academic

articles—essentially adopting the contents of those

articles as unverified and undisclosed expert

testimony. Pet. App. laa-54a. In particular, the

Second Circuit erroneously ignored the market

realities established by the record, and experienced

6

by MAG’s members on a daily basis, in favor of

abstract economic theory on two critical points

discussed below: (1) the relevant market and (2) the

existence of Amex’s market power.

I. The Second Circuit's Collapse of a Two-

Sided Platform Into a Single Market Ignores

the Market Reality That Merchants are

Distinct Customers of Amex

Amex operates in what is called a “two-sided

platform” or “two-sided market” in that it provides

distinct services to two different (but interrelated)

categories of customers. Pet. App. 70a. On one side,

Amex sells the extension of credit and issuance of

credit cards to consumers; on the other side, Amex

sells card acceptance services to merchants. Pet.

App. 70a.2 Consistent with this Court's prior

decisions, the District Court treated each side of this

platform as a separate market for purposes of

antitrust analysis. The Second Circuit, however,

improperly defined the “relevant market” in this case

by collapsing both sides of the platform into a single

market. This decision is unmoored from this Court's

jurisprudence and the everyday market realities

experienced by MAG’s members.

A. The Realities of the Payment Card

Ecosystem

Defining the relevant market in this case requires

an understanding of the payment ecosystem for

Amex abandoned any argument that debit cards and other

alternative payment types should be considered a part of the

relevant market for purposes of this case. Pet. App. 5a.

‘

credit cards in the United States, through which

trillions of dollars flow on an annual basis. Pet. App.

74a. In 2016 Amex, Visa, MasterCard, and Discover

processed more than $3 trillion in purchases. See

Nilson Rep. Issue 1103 (HSN Consultants Inc.,

Carpineria, Cal., Feb. 2017). An illustration of the

platform can be found at MAG’s website:

8

The Merchant Advisory Group, Anow Your

Payments: Transaction Basics, available at

http://www.knowyourpayments.com/transaction-

basics/.

On one side of the platform, consumers obtain

credit cards by applying for a line of credit from an

issuing bank, which in this case is Amex. Pet. App.

75a-76a, 8la-82a. (Visa and MasterCard rely on

other actors to serve as the issuing bank for cards

that utilize their networks. Pet. App. 75a-76a, 81a-

82a.) In turn, these cardholders may then access

their line of credit by using the card to make

purchases at merchants. Pet. App. 75a-76a.°

On the merchant side of the platform, however, a

cardholder's card can only be used for payment if the

merchant has agreed to accept cards from the

network associated with the card (i.e., Amex, Visa,

MasterCard or Discover). Pet. App. 75a-83a. If the

merchant has agreed to accept the card, it collects

cardholder data from the card at the point of sale

(i.e., the swipe, dip, tap, or scan of the card), and

transmits that data to the acquiring bank, which in

this case is also Amex. Pet. App. 82a.-83a.* (Unlike

Amex, Visa and MasterCard also rely on other actors

to serve as acquiring banks to facilitate transactions

within their card networks. Pet. App. 81a-82a.)

See also The Merchant Advisory up. Know Your Payments:

Transaction Basics. http://w» w.knowyourpayments.com/

transaction-basics/

4 See also The Merchant Advisory Group, Know Your Payments:

Transaction Basics, http://www.knowyourpayments.com/

transaction-basics/

At this point, the acquiring bank effectively has a

receivable (the amount owed by the cardholder), and

a payment obligation (the amount owed to the

merchant), and the acquiring bank discharges the

payment obligation by sending payment to the

merchant's bank account. Pet. App. 82a-83a. That

payment to the merchant, however, is reduced by the

fees charged to the merchant by the acquiring bank,

the issuing bank, and the network for the “privilege”

of accepting the card. This bundle of fees imposed

upon merchants is called the “merchant discount

fee.” Pet. App. 82a-83a.

Merchants pay billions of dollars every year in

such fees. In 2014, merchants paid more than $52

billion in merchant discount fees. See Nilson Rep.

Issue 1041 p. 12 (HSN Consultants Inc., Carpineria,

Cal., May 2014). Merchant discount fees represent

one of the most significant costs a merchant faces.

Pet. 221la-222a. The record in this case bears this

out. A witness from Alaska Airlines, for example,

testified that merchant discount fees cost the

company approximately twice as much as its U.S.

labor costs. Pet. App. 222a. And a witness from Ikea

testified that merchant discount fees are its fourth

highest cost after labor, advertising, and rent. Pet.

App. 222a.

Returning to the cardholder side of the platform,

the transaction culminates with the issuing bank

(again, Amex in this case) invoicing the cardholder

for purchases on a monthly basis, and the cardholder

paying the issuing bank pursuant to the terms of the

agreement between the cardholder and issuer (which

10

may include additional fees and charges assessed to

the cardholder). Pet. App. 75a.-76a.5

B. The Second Circuit Ignored Market

Realities Experienced by Merchants

When it Collapsed the Two-Sided

Platform Into a Single Market

1. The Evidence Provided No

Basis upon which to Collapse

the Two Sides of the Platform

into a Single Market

The Second Circuit's decision is detached from the

market realities experienced by MAG’s members and

other merchants as disclosed in the trial record. In

every aspect of their businesses—except for credit

card acceptance—merchants bargain for the goods

and services they acquire by seeking more favorable

pricing and/or terms. Pet. App. 216a. A merchant

might, for example, negotiate a volume discount with

a supplier. Pet. App. 216a. Or a merchant could

issue a request for proposal to obtain a broad range

of solicitations for different quality services or

solutions at different prices. Pet. App. 216a.

As demonstrated by the record, however, the

competition for merchant payment card acceptance

differs from every other segment of a merchant's

business—because there is no competition. The lack

of competition, in turn, eliminates any bargaining

power merchants might otherwise have with Amex.

See also The Merchant Advisory Group, Know Your Payments:

Transaction Basics, http://www. knaowyourpayments.com/

transaction-basics/

11

As the evidence presented at trial demonstrated,

the card acceptance services side of the platform is

highly concentrated. There are just four companies

offering such services: Visa has 45% market share,

followed by Amex with 26.4%, MasterCard with

23.3%, and Discover with 5.3%. Pet. App. 15la.

Further, as acknowledged by the Second Circuit, this

independent side of the platform is “characterized by

formidable barriers to entry.” Pet. App. 17a. And

with respect to Amex in particular, its cardholders

are highly loyal and insist that merchants accept

Amex cards. Pet. App. 156a-165a. Consequently,

and as discussed in further detail in the following

section, the record in this case establishes that

merchants have little choice but to engage Amex’s

card acceptance services on Amex’s terms.

In contrast to the inert and highly concentrated

merchant-facing side of the platform—as Amex

admitted, the District Court found, and the Second

Circuit declined to disturb—the card issuance side of

the platform is fragmented and “fiercely” competitive.

Pet. App. 233a, 238a. On this side of the platform,

Amex’s competition is not with Visa and MasterCard,

but rather with thousands of other issuing banks,

which include JPMorgan Chase, Bank of America,

Citibank, Wells Fargo, HSBC, Discover, Barclays,

U.S. Bank, and Capital One among many others. Pet.

App. 70a, 84a; see also ValuePenguin, Largest Credit

Card Issuers: 2017 Market Share Report, available at

https://www.valuepenguin.com/largest-credit-card-

issuers.

12

The trial record reflects the many ways in which

Amex and its thousands of competitors battle for

cardholders by attempting to differentiate

themselves. For example, the issuing banks offer

different incentives to cardholders that can take the

form of rewards (e.g., cash back, “points” that can be

redeemed for value, frequent flyer miles, statement

credits, gift cards, etc.), airport lounge access,

purchase protection, rental car insurance, statement

credits, and other items. Pet. App. 8la-82a, 89a.

Similarly, Amex and its competitors also co-brand

their cards with certain merchants (e.g., the Delta

SkyMiles Credit Card issued by Amex, or the

Marriot Rewards Premier Credit Card issued by

Chase Bank) to entice customers with the possibilit”

of earning rewards and benefits from the merchant.

Pet. App. 76a, 238a. Card issuers constantly

compete to offer the most attractive or innovative

rewards package to their customers. See Aaron

Back, Competition Over Cards Runs Too Hot, THE

WALL STREET JOURNAL Jan. 26, 2017, at B12

(“Rewards costs are climbing as card issuers

scramble to keep up with each other’s cash back and

travel point offers.”). And at a more fundamental

level, Amex and its fellow issuing banks must also

compete with one another on the prices they charge

cardholders for the extension of credit, i.e., the

interest rate, annual fees, and float periods charged

to cardholders. Pet. App. &1la-82a.

That Amex and its competitor issuing banks

fiercely compete is perhaps illustrated no better than

by their ubiquitous advertising campaigns for

cardholders. Pet. App. 92a. Consider, for example,

the card issuers’ steady stream of television

13

commercials or the constant credit card offers that

the public encounters on a daily basis through the

mail, online, or in print. Potential cardholders are

inundated with these advertising campaigns because

competition for their business is so fierce.

The sharp contrast between the merchant-facing

side of the platform and the cardholder-facing side of

the platform—all of which was shown by evidence

presented at trial—establishes that the Second

Circuit had no basis in the record upon which to

collapse the two sides of the platform into a single

market. The services offered by Amex on each side of

the platform are not interchangeable (and the

Second Circuit did not conclude otherwise). And the

“commercial realities faced by consumers” on the

card issuance side of the platform are wholly

different from those faced by merchants on the card

acceptance side of the platform. Kodak, 504 U.S. at

482. On one side cardholders have thousands of

choices and benefit from fierce competition, while on

the other side merchants have few to no choices and

face escalating costs instead of competition for their

business. The mere fact that cardholders and

merchants are both customers of Amex does not

make them part of the same market for purposes of

antitrust analysis.

In short, the Second Circuit’s decision to define

the relevant market in this case, in contravention to

th.s Court’s guidance and the undisturbed factual

findings of the District Court, should be reversed. By

conflating two different markets, the decision of the

Second Circuit protects Amex from having to

compete for merchant acceptance—as it should, and

14

just as it competes vigorously with other card issuers

for cardholders. The Second Circuit’s decision also

strips merchants of the ability to use the tools of

competition to reduce their cost of acceptance—tools

that merchants successfully use to promote

competition, and hold down costs, in every other

facet of their businesses. That real-world result is

not only unfair to merchants; it is at odds with the

basic premise of the Sherman Act.

2. The Second Circuit's

Disregard for the Record Led

to an Erroneous Reliance on

Abstract Economic Theory

that Bears Little Similarity to

the Reality Merchants Face

This Court has explained that the relevant

market for purposes of antitrust analysis must

include those products or services that are

“reasonably interchangeable by consumers for the

same purposes” and that exhibit “cross-elasticity of

demand” between the product itself and substitutes

for it. E. I. DuPont, 351 U.S. at 394-95. Importantly,

“market definition can be determined only after

a factual inquiry into the ‘commercial realities’ faced

by consumers.” Kodak, 504 U.S. at 482 (emphasis

added).

Remarkably, the Second Circuit tossed this

inquiry aside. It (incorrectly) held instead that the

two sides of the platform should be collapsed into one

simply because they are interrelated, in that prices

or restraints implemented on one side of the platform

can affect price and demand on the other side (and

vice versa). Pet. App. 39a-40 a. Even if this finding

15

were true and supported by the record.

interrelatedness is inherent in every two-sided

platform. Pet. App. 77a (“In a two-sided platform, a

single firm or collection of firms sells different

products or services for two separate but interrelated

groups of customers who, in turn, rely on the

platform to intermediate some sort of interaction

between them.”). And prior decisions of this Court

dealing with such two-sided platforms nevertheless

treated each side of the platform as a distinct market

for antitrust purposes. See, e.g. Times-Picayune

Publ’g Co. v. United States, 345 U.S. 594, 610-13

(1953) (distinguishing the market for newspaper

advertisers from the market for newspaper readers).

The mere interrelatedness of the two sides of the

platform is thus no reason to depart from the

traditional treatment of two-sided platforms as two

distinct markets, and the Second Circuit offered no

rationale for why it should.

Indeed, two leading economists have recently

explained that there is no economic or legal reason to

treat two-sided platforms any differently:

The two-sidedness of credit card

markets does not require a new set of

economic principles for assessing

competition policy because the

difference between the credit card

setting and a conventional one-sided

market is essentially a matter of

labeling. We show that many of the

claims about two-sided markets, such as

the claim that interchange fees

maximize output, are in fact exactly the

16

same as the features of one-sided

markets with promotion. The reasoning

used in Amex to exonerate Amex’s use

of a no-steering rule and to justify a

departure from the usual litigation

procedure for evaluation of vertical

restrictions in one-sided markets lacks

economic foundation. Creating different

legal rules for the same economic

conduct depending on whether the

market can be described as one-sided or

two-sided is a mistake that could lead to

widespread confusion in the evaluation

of vertical restrictions.

Dennis W. Carlton & Ralph A. Winter, Vertical

MEFN’s and the Credit Card No-surcharge Rule, at 40

(working paper available at https://papers.ssrn.com/

sol3/papers.cfm?abstract_id=2982115). (Of course,

these are not among the economists the Second

Circuit decided to credit in lieu of the evidence that

was actually presented to the district court at trial.)

What is more, the Second Circuit's decision to

collapse the two markets into a single market

departs from this Court’s guidance on measuring the

relevant market. For decades, this Court has made

clear that the goal of defining a market is to include

those products and services that compete with one

another: Interchangeability of use and cross-

elasticity of demand are not to be used to obscure

competition but to ‘recognize competition where, in

fact, competition exists.” United States v. Cont'l Can

Co., 378 U.S. 441, 453 (1964) (quoting Brown Shoe

Co. v. United States, 370 U.S. 294, 326 (1962))

17

(emphasis added). The Second Circuit, however,

undertook no analysis of whether the products on the

two sides of the platform are interchangeable and

actually compete.

From the perspective of MAG and its members,

card issuing services and card acceptance services

plainly are not interchangeable. There is simply no

set of circumstances under which card issuance

services compete with card acceptance services.

These two services are directed at different potential

customers, involve different services, and have

different purposes. See Phillip Areeda & Herbert

Hovenkamp, Antitrust Law, (2017 Supp.), § 565, p.

104 (The Second Circuit “incorrectly concludſed] that

the relevant market was not limited to the

market for [card acceptance] services but also

included consumers... . [T]hose two groupings are

not substitutes for one another but rather behave

more as complements.”).

II. The Existence of Market Power Should Be

Determined by Actual Evidence, Not by

Abstract Economic Theory

Market power “is the power ‘to force a purchaser

to do something that he would not do in a

competitive market.” Kodak, 504 U.S. at 464

(quoting Jefferson Parish, 466 U.S. at 14. Market

power can be evidenced by the ability of the

defendant to control prices or exclude competition.

Fortner Enters. v. United States Steel Corp., 394 U.S.

495, 503 (1969). Alternatively, the existence of such

power can be inferred from the possession of a

predominant share of the market. See Jefferson

18

Parish, 466 U.S. at 17. In this area, too, the Second

Circuit eschewed this Court’s precedent and favored

ivory tower ruminations over the brick and mortar

realities confronted by merchants.

A. The Market for Card Acceptance Services

is Highly Concentrated and Features

Significant Barriers to Entry

The District Court quite properly found that the

market for card acceptance services is highly

concentrated and “remarkably static.” Pet. App.

154a. As discussed above, there are just four

companies in the market. Three of those companies

(Visa, Amex, and MasterCard) have collectively

captured 94.7% market share, and each has in excess

of 23% market share. Pet. App. 151a.

The record in this case regarding the fourth

company’s efforts to enter the market illustrates the

significant barriers to entry that exist. Discover

launched in 1985 and, in an attempt to break into

the market, offered a number of features that were

novel at the time. Pet. App. 154a, 203a-204a. These

features included a card featuring no annual fee, the

very first rewards component, and pricing network

services “very aggressively for merchants.” Pet. App.

154a, 203a-204a. Notwithstanding these

innovations, in more than three decades Discover

has obtained just 5.3% market share on the

merchant acceptance side of the market. Pet. App.

15la.

What is more, no other company has made a

meaningful attempt to enter the market since

19

Discover did so in 1985. Pet. App. 165a. This is

because there are significant setup costs associated

with developing a card network infrastructure and

branding to attract customers. Pet. App. 153a-154a.

Indeed, as the Second Circuit recognized (and Amex

admitted), a potential market entrant would face a

classic “chicken and egg problem” wherein “a firm

attempting entry into the [payment-card] network

market would struggle to convince merchants to join

a network without a significant population of

cardholders and, in turn, would also struggle to

convince cardholders to carry a card associated with

a network that is accepted at few merchants.” Pet.

App. 17a-18a, 154a. Discover was able to survive in

large part because it had an advantage not available

to other potential market entrants: Discover initially

was owned by Sears Roebuck and Company, which

marketed Discover cards to its already significant

population of private label cardholders. Pet. App.

154a-155a.

And finally, the strength of Amex’s market power

is exhibited by the fact that Amex admitted that it

does not view newer digital payment options (e.g.,

PayPal or Google Wallet) as a threat to its card

acceptance services. Pet. App. 155a. The absence of

any competitive threat from these participants in the

payments ecosystem only serves to strengthen

Amex’s market power.

In light of these realities, the District Court was

correct to find that Amex’s “26.4% share of a highly

concentrated market with significant barriers to

entry suggests that the firm possesses market

power.” Pet. App. 155a-156a.

20

B. The Pernicious Effects of Amex’s

Restraints on Merchants Demonstrate

the Overwhelming Strength of Its Market

Power

From the merchant's perspective, the Second

Circuit's market power decision also erred in

disregarding evidence establishing a multitude of

pernicious ways in which Amex’s market power

affects merchants.

1. In a Competitive Market, Merchants

Would Behave Differently

Although the Second Circuit acknowledged

Amex’s relatively large share of the market, it

discounted the strength of Amex’s market power by

attributing it to cardholder satisfaction. Pet. App.

48a. Put another way, the Second Circuit concluded

that Amex’s market power is justified because it is

derived from cardholders’ insistence on utilizing

Amex cards to obtain its rewards, even if Amex

generates cardholder loyalty by utilizing NDPs that

quash competition and inflate prices charged to

merchants. Pet. App. 48a. The Second Circuit's

analysis is fundamentally wrongheaded, because the

notion that a company is permitted to behave anti-

competitively in one area, in order to incentivize

customers in another area, has been long rejected

under antitrust law.

The Sherman Act does not authorize courts to

make distinctions between good forms of competition

and bad forms of competition, but rather reflects the

judgment “that ultimately [all forms of] competition

21

will produce not only lower prices, but also better

goods and services.“ FTC v. Superior Court Trial

Lawyers Ass’n, 493 U.S. 411, 423 (1990). The Second

Circuit is not authorized to approve. of

anticompetitive behavior on the merchant side of the

platform in exchange for competition on the

cardholder side of the platform and thereby

substitute its judgment for the results that actual

competition would achieve. See United States v.

Topco Association, Inc., 405 U.S. 596, 609-12 (1972)

(“If a decision is to be made to sacrifice competition

in one portion of the economy for greater competition

in another portion, this too is a decision that must be

made by Congress and not by private forces or by the

courts.”).

Even if the Court were to find that Amex could

use the interrelatedness of the two markets to

attempt to justify its anticompetitive restraints, the

District Court was correct in finding that the

traditional Rule of Reason approach is the best

course by which to evaluate the market realities of

the two markets.

Merchants know, and can be expected to prove,

the harm merchants suffer from the types of rules

Amex has imposed. However, to conflate the

markets on the two sides of the platform as the

Second Circuit did, and thereby to require merchants

to prove not only the harm to themselves, but to

engage in balancing that harm with a purported

“benefit” only Amex claims, impermissibly imposes

upon merchants the burden of disproving a

speculative argument without having the

information possessed only by the party engaging in

22

the anticompetitive conduct. The traditional Rule of

Reason framework applied by the District Court

requires the party with the best information

regarding real market realities to seek to prove the

claim or defense. The Second Circuit's novel

approach forces merchants to fight unproven

speculation as to market power and claimed

competitive benefits without even requiring an

explanation from the defendant as to those

speculative benefits. As the Second Circuit's decision

illustrates, such a departure from the well

established Rule of Reason framework is a sure

recipe for substituting theoretical economic opinions

for actual proof regarding the impact of

anticompetitive practices on the real world

marketplace.

Moreover, the Second Circuit's focus on whether

cardholders benefit from merchants’ payment of

higher prices—which is a dubious proposition at

best, since merchants necessarily must price their

goods and services to account for such costs, Pet.

App. 220a-22la—ignores the proper measure of

market power, which in this case is the ability of

Amex to force a merchant to do something “that he

would not do in a competitive market.” Kodak, 504

U.S. at 464. The record reflects that Amex’s market

power does just that, by forcing merchants like

MAG’s members to accept Amex when they would

otherwise prefer to accept other, much less expensive

methods of payment.

Amex’s market power is evidenced by its ability to

prevent merchants from steering their customers to

less expensive forms of payment by forcing

23

merchants to accept its NDPs. Merchants like

MAG’s members routinely engage in what is called

“steering” in order to influence their customers’

purchasing decisions. Pet. App. 67a. For example,

merchants might alter the way certain products are

placed on a shelf, offer discounts on inventory, or

offer “buy one get one free” promotions. Pet. App.

67a. In the credit card space, however, merchants

are prohibited from steering customers to a preferred

and less expensive card network due to Amex’s

NDPs. Pet. App. 67a. These NDPs prohibit

merchants from doing things like indicating a

preference for other payment products or attempting

to persuade customers to use a different payment

product. Pet. App. 94a-95a.

The record shows that in a competitive market

merchants would eliminate or limit the NDPs

through negotiation and other competitive tools, like

the threat of declining to accept Amex credit cards.

Pet. App. 217a-218a. The evidence presented at trial

showed, however, that such efforts routinely fail due

to Amex’s market power. For example, an Amex

email explained that United Airlines “insists on [the]

right to preference Amex competitors that have

lower discount rates and this of course is

unacceptable to us.“ Pet. App. 218a. In fact, out of

Amex’s nearly 6.4 million merchant customers, only

139 (very large) merchants have successfully

negotiated a non-standard NDP that permits any

steering. Pet. App. 94a-97a. And the nature of the

steering permitted by the non-standard NDPs is

quite limited—the merchants are only permitted to

steer toward co-branded cards (e.g. Southwest

Airlines can steer customers to the Southwest

24

Airlines Rapid Rewards Visa) or in one-off

promotions, such as a statement credit for using a

certain card. Pet. App. 97a-99a.

If merchants were not forced to accept the NDPs,

the record shows that they would engage in steering

and other tactics to discourage Amex use unless and

until Amex reduced its cost of acceptance. Pet. App.

222a. Such steering could take multiple forms. A

merchant could, for example, charge customers the

actual cost associated with the form of payment they

choose (i.e., the merchant could charge a customer

one price for cash, a slightly higher price for debit, a

higher price for using Visa or MasterCard, and the

highest price for using Amex). Pet. App. 101la-102a,

219a. Merchants could also offer other discounts or

perks such as free shipping or additional “rewards

points” on the purchases made with a credit card

that the merchant agreed to favor. Pet. App. 219a.

Or a merchant could simply inform its customers

about the costs associated with using one form of

payment over another. Pet. App. 101la-102a, 219a.

Or, simply, a merchant could put a sign up saying

“we prefer that you do not use American Express.”

Pet. App. 101a-102a. But as things stand, merchants

are prohibited from even educating their customers,

much less in engaging in any steering, because

Amex’s market power forces them to accept the

NDPs.

25

2. The Realities of How Cardholders Use

Credit and Charge Cards Leaves

Merchants With Little Choice But to

Accept Amex

The evidence presented at trial correctly showed

that merchants like MAG’s members have no

practical choice in deciding whether to accept Amex,

largely due to Amex’s highly insistent cardholder

base.

The trial record established that Amex’s

cardholder insistence is largely driven by its lavish

rewards programs. Pet. App. 157a-158a. For

example, an Amex presentation noted that

cardholder loyalty is “[d]riven by [the] ability to earn

points, miles, or cash rebates” and that many

cardholders “use American Express exclusively to

consolidate rewards.” Pet. App. 157a. Indeed, some

of Amex’s card offerings encourage centralized

spending or “single-homing” by offering bonuses

when a cardholder achieves a given level of spending.

For example, a holder of Amex’s Platinum Delta

SkyMiles Card will achieve bonus frequent flyer

miles upon surpassing spending thresholds of

$25,000 and 850,000.“

Amex has also been able to secure significant

cardholder loyalty in the space of company cards

issued by corporations to employees for travel and

other spending purposes. Pet. App. 157a-158a. In

See https://www.americanexpress.com/us/credit-

cards/card/platinum-delta-skymiles/?eep=25330&linknav=US-

Acq-CCSG-Cardmember-Side BySideDelta-DeltaPlatinum-

ViewCardDetails-Top.

26

2013, Amex captured 64.3% of this market, and

approximately 70% of Amex’s corporate card

customers mandate their employees to use Amex

cards for business expenses. 158a.

Because cardholder insistence dramatically

amplifies Amex’s existing market power, the reality

is that merchants are practically forced by business

considerations to accept Amex and its significant

price premiums or risk losing sales they otherwise

would make to Amex cardholders. Pet. App. 158a-

159a. The trial record amply supports the District

Court finding in that regard. A witness from Hilton

testified, for example, that it would likely lose

approximately two-third of its Amex charge volume if

it rejected Amex. Pet. App. 158a-159a. A witness

from Ikea testified that it explored dropping Amex,

but that surveys of its customers indicated that

doing so would result in “suffering a loss in sales.”

Pet. App. 159a And witnesses from Enterprise Rent-

A-Car and Sprint Corporation testified that their

companies concluded that they could not drop Amex

because they would lose too many sales to insistent

Amex cardholders, and Amex corporate card holders

in particular. Pet. App. 159a.

There are still other concrete, real-world

examples of the effect of cardholder loyalty on

Amex’s market power. In 2004, The Walgreen

Company—which was the ninth largest retailer in

the country at the time—decided to terminate

acceptance of Amex cards due to the costs associated

with Amex’s 50-basis point premium over Visa and

MasterCard acceptance costs. Pet. App. 162a-164a.

After doing so, however, Walgreen had to ultimately

27

reverse course in the face of widespread public outcry

from its customers. Id. More recently, in 2008,

Murphy Oil—a chain of gas stations ceased

accepting Amex cards. Pet. App. 162a-163a. Amex

tracked the effects of this decision, and concluded

that Murphy Oil’s decision was “irrational” because

the rate of Amex card insistence among its customers

was twice as strong as expected—and in fact Murphy

Oil later resumed accepting Amex cards. /d.

3. Amex Charges Merchants a Premium

When Compared to its Competitors

and Price Increases Have Not Caused

Loss of Merchant Customers

As the trial record established, Amex carefully

tracks cardholder insistence and estimates the

incremental volume that brings to merchants who

accept Amex. Pet. App. 160a-162a. Because

cardholder insistence leaves merchants with little

choice but to accept Amex cards, Amex has

determined that it can charge merchants a premium

price. Id. The data in the record shows that, on

average, Amex charges merchants significantly more

than Visa and MasterCard. In 2013, Amex charged

merchants 8 basis points more than Visa, and 3 basis

points more than MasterCard. Pet. App. 175a. In

certain industries, like travel, that premium is even

higher. Pet. App. 176a. While there was some

testimony at trial that the difference in cost between

Amex and other card brands has eroded over time,

the evidence in the record reveals that such erosion

is largely attributable to Visa and MasterCard

“catching up” to Amex by adopting specific credit

card products that carry higher rates that are

charged to merchants — higher rates that are

28

comparable to those charged by Amex. Pet. App.

178a-180a.

Amex’s market power is further illustrated by

merchant response to Amex’s price increases. As the

District Court found, Amex enacted at least twenty

separate and significant price increases that affected

millions of merchants between 2005 and 2010, as

part of what Amex euphemistically called “Value

Recapture initiatives.” Pet. App. 166a-172a.

Merchants in certain industries with especially high

rates of cardholder insistence bore the brunt of these

prices hikes. Airline merchants, for example,

experienced a 7%-15% increase in prices between

2007 and 2010, which brought in an additional $90

million in revenue for Amex. Pet. App. 167a.

Similarly, Amex targeted hundreds of thousands of

merchants in the restaurant industry with a 5-15

basis point increase in the discount rate. Pet. App.

168a.

As the District Court found, these significant

price increases resulted in little to no attrition of

merchants accepting Amex cards. Pet. App. 168a-

169a. In fact, Amex witnesses testified that Amex

experienced 100% retention among its largest global

merchants, and 99.9% retention among its

merchants with annual Amex volume of $3-$100

million. Pet. App. 169a. The net result was an

additional $1.3 billion in incremental revenue for

Amex between 2006 and 2010. Pet. App. 170a.

While not dispositive on its own, the District Court's

undisturbed conclusion that Amex can control prices

that were already at a premium in this manner

29

strongly weighs in favor of finding that Amex wields

market power. See Fortner, 394 U.S. at 503.

4. The NDPs Further Increase Amex’s

Market Power Over Merchants

The entire premise of the Sherman Act is that

competition will yield improvements in allocation of

resources, lower prices, and quality. See N. Pac. Ry.

Co. v. United States, 356 U.S. 1, 4 (1958). As the

trial record in this case shows, the NDPs only serve

to increase Ames already significant market power

by reducing interbrand competition and preventing

merchants from injecting any downward price

pressure into the market.

This real-world consequence of the NDPs is best

illustrated by Discover's attempts to gain market

share by pricing its services “very aggressively for

merchants.” Pet. App. 203a-204a. Discover

ultimately abandoned its competitive pricing model

because the NDPs_ prevented merchants from

steering consumers to Discover. Pet. App. 196a-

197a. Without steering by merchants, cardholders

had no incentive to switch cards, because they could

not see or feel the effects of Discover's lower

merchant pricing. /d. Thwarted in its attempt to

compete for market share via increased volume,

Discover took a different course and decided to

increase its revenue by raising its prices to

merchants. Pet. App. 206a (“Recognizing that its

lower prices would not drive incremental volume to

its network in a market subject to limitations on

merchant steering, Discovery abandoned its low-

price business model in 2000 and began raising

30

discount rates in order to more closely align its

merchant pricing with that of Visa and

MasterCard.”).

In fact, Discover's President and CHO testified

that the elimination of Amex’s anticompetitive NDPs

would cause it to once again “aggressively pursue a

strategy of lowering [its] prices” for merchants /

merchants were permitted to steer. Pet. App. 219a.

But as things stand, it is Amex’s position that there

is no reason for it to compete on price. Pet. App.

118a. As one Amex document stated: “We should

not compete on costs with [Visa and MasterCard].”

Id. And the record demonstrates that Amex views

the rates charged by Visa and MasterCard as a floor

when considering its own merchant discount pricing.

Id.

As the District Court found (and the Second

Circuit did not disturb), Amex and its competitors in

the market for merchant acceptance are “largely

insulated from the downward pricing pressure

ordinarily present in competitive markets” and “the

NDPs create a competitive environment in which

there is virtually no check on the networks’

incentives or ability to charge higher prices to

merchants.” Pet. App. 197a. In reality, the market

for merchant acceptance is not at all true market in

which competitors vie for market share by offering

lower costs or better services.

A * *

Remarkably, the Second Circuit's analysis of

Amex’s market power disregarded all of these

31

findings by the District Court — all of which are fully

supported by evidence largely offered by merchants,

who must bear the brunt of Amex’s anticompetitive

depredations. These market realities increase prices,

decrease competition, and force merchants to engage

in behavior and swallow outlandish costs that they

would otherwise avoid in a competitive market.

Kodak, 504 U.S. at 464. The Second Circuit's

decision to disregard these factual findings, and the

concrete evidence supporting them, because

academics postulate that cardholders might reap

some benefits from this non-competitive market is

without basis and should be reversed.

CONCLUSION

For the foregoing reasons, the Court should

reverse the Second Circuit’s decision and reinstate

the injunction issued by the District Court in order to

level the playing field in the credit card industry.

Respectfully submitted,

JAMES A. WILSON*

*Counsel of Record

ROBERT N. WEBNER

KENNETH J. RUBIN

NATHAN L. COLVIN

VORYS SATER SEYMOUR AND

PEASE, LLP

52 E. Gay Street

Columbus, OH 43215

(614) 464-5606

jawilson@vorys.com

Counsel for Amicus Curiae

The Merchant Advisory

Group