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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0754%3A32

## Record

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

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0754%3A32. Public record. Not legal advice.