DOJ drops Amex case after protracted battle, 11 states pick up baton

19 June 2017 10:36am

By Kirk Victor. Originally published on FTC:Watch on June 16, 2017

After the Justice Department poured huge resources into opposing American Express for restricting merchants from steering consumers to less expensive credit cards, its decision against seeking Supreme Court review of its appellate court loss left 11 states scrambling to keep the case alive.

The agency will set out its reasoning soon, as a source confirmed that it will respond to the states' certiorari petition in a filing due on July 6, though extensions are often sought.

Meanwhile those 11 states — down from 17 states that had initially joined the lawsuit in 2010 — petitioned the high court for review in a filing written on short notice after they learned at the last minute the agency would punt.

The states argued that the opinion by the Second Circuit Court of Appeals had disregarded Supreme Court precedent by requiring the government to show that the anticompetitive effects of the non-steering provisions on merchants weren't offset by benefits to Amex cardholders.

The states also argued that by taking the case, the justices could provide much-needed guidance on the vague but crucial rule-of-reason analysis that courts rely on to examine charges of anticompetitive behavior on a case-by-case basis.

Seventeen states had joined the Justice Department seven years ago in the labor-intensive litigation that challenged MasterCard, Visa and American Express' "non-discrimination provisions," arguing the companies charged jacked-up rates for merchants who passed costs to customers.

In settling the case, MasterCard and Visa agreed to allow merchants to offer consumers information about cheaper payment options, discounts and other benefits.

But American Express didn't fold, and the agency, joined by the 17 states, threw massive resources into the case. More than 30 Justice lawyers worked on the case that involved more than two years of discovery. After defeating a summary judgment motion, they battled in a seven-week trial that featured testimony of four experts and more than 30 fact witnesses, including merchants who said they were hit with substantial costs because of the anti-steering provisions.

At the end of the trial, federal judge Nicholas G. Garaufis of the Eastern District of New York called it "one of the best-litigated trials the court had witnessed in 14 years on the bench," according to an agency press release in 2015.

"The antitrust division's investment in the case was extraordinary," said one attorney who worked on the case but declined to speak for attribution. "The division's decision to push it forward in the first place was a very important one and a very considered one."

Initially that effort paid off, as Garaufis, in a 150-page opinion in 2015, concluded that American Express' merchant restraints were anticompetitive, hitting consumers with higher costs with no offsetting benefits.

The Second Circuit disagreed, finding that the district court ruling, in focusing on merchants, had failed to weigh benefits to cardholders in the two-sided market. The government didn't make the case that both merchants and cardholders were "worse off overall," the appellate court said, elaborating that there was no showing of "net harm" to both cardholders and merchants in the two-sided market.

The Justice Department sought an en banc review by the Second Circuit, but that petition was denied — not surprising in a circuit that rarely hears cases en banc.

Then, after gaining two extensions of the deadline to file for certiorari, the agency pulled the plug. While the Justice Department doesn't comment on its rationale for not seeking certiorari, it's noteworthy that its key leadership posts are vacant.

President Donald Trump's nominee for solicitor general, Noel Francisco, and his pick to lead the antitrust division, Makan Delrahim, are both awaiting Senate confirmation votes. Andrew Finch, the acting head of the division, is recused from the case since he represented MasterCard, which had been sued and settled.

Those vacancies left a void as the Justice Department grappled with whether to seek certiorari.

"The entire process was extremely disorganized," the lawyer who worked on the case said. That's why some states felt blindsided when they learned the department wasn't pursuing certiorari, he explained.

Putting those organizational issues to the side, the decision not to seek review may be chalked up to simple politics: the change from the Democratic Barack Obama administration to the Republican Donald Trump administration.

"Republican enforcers tends to be more conservative than Democratic enforcers, and that makes a difference," Stephen Calkins, a Wayne State University law professor, wrote in an e-mail to FTC:WATCH. "It is not surprising that a more conservative antitrust division might decide not to pursue a case on which reasonable people can disagree."

Others aren't so sure. "I don't think there is an ideological reason," said Mark Ryan, who served as director of litigation in the antitrust division in the Obama administration. "It is very heavily factual. It is a terrible decision by the Second Circuit, but that is not the point of Supreme Court review. It is not just to correct mistakes."

There's the possibility that in weighing prospects for certiorari, Justice officials decided that since there is no circuit split on this issue the high court would be disinclined to review it. Why fight a losing battle?

Still, whatever the rationale, the decision forced the states to make a quick judgment about whether to continue the fight, with little time to craft a brief.

Eleven states decided to seek review, while six others peeled off. But the decision to drop out had more to do with logistical issues for some of them, given the tight time constraints for filing once the Justice Department dropped out.

Ohio's attorney general, Michael DeWine, a Republican, took the lead, but his office had no comment about the filing.

Ann M. Rice, New Hampshire's deputy attorney general, explained in an e-mail to FTC:WATCH that "the fact that we did not join the other states does not reflect any change on our position on the issue."

"[T]here are often logistical issues that lead us not to sign on to petitions — for example, insufficient time to go through the internal review process and/or make editorial recommendations," Rice wrote. "A number of those factors played a part in this case."

Tennessee, by contrast, which also decided not to continue on the case, was influenced by the DOJ's decision. Vic Domen, Tennessee's chief counsel for state and multistate antitrust litigation, noted the Justice Department's decision was "important," as the state decided to "put our resources into a different direction rather than getting involved with a potentially protracted appeal to the Supreme Court."

So what are the prospects for certiorari? The 11 states "face a much more difficult path," Calkins wrote in the e-mail. "It is always hard to win certiorari, especially when the solicitor general is opposed."

"Wholly apart from the challenge of proceeding without the support of DOJ, the states now need to proceed without the litigating assistance of DOJ," Calkins wrote. "Obviously the states have crafted a cert petition, but, again, were certiorari to be granted, the states would have to write the merits brief and reply on their own."

Calkins commends them for taking on that challenge. "My hat is off to the states for carrying on even after DOJ walked away," he wrote.

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