Amex showdown heads to Supreme Court as lawyers weigh in

By Kirk Victor Originally published on FTC:Watch on October 27, 2017

After the Justice Department urged the Supreme Court not to review a lower court ruling that allowed American Express to restrict merchants from steering consumers to less pricey credit cards, antitrust lawyers figured the odds were long that the high court would take the case.

So when the court recently granted certiorari that had been sought by 11 states, its decision raised questions of what prompted the court to take up a case against the wishes of the Solicitor General, who has plenty of clout in such calls.

The SG had urged the court not to review the case even though the Justice Department had thrown lots of resources into the protracted litigation and had won in the district court only to lose before the US Court of Appeals for the Second Circuit.

Of course the court doesn’t set out its rationale for taking cases, but there’s plenty of speculation about what it means.

“It’s really quite amazing to have cert granted when both DOJ and American Express were opposed,” Stephen Calkins, a Wayne State University law professor and former general counsel of the Federal Trade Commission, wrote in an e-mail. “There are so few Supreme Court antitrust cases that any Supreme Court antitrust case is important.”

“It’s a big deal any time the court takes a case, and this one has gotten a lot of attention,” Alexis Gilman of Crowell & Moring said. “It could be important for many industries — not just retail.”

Before getting to some possible takeaways from the court’s granting of certiorari, a look at the case’s background is in order.

The lawsuit initially was brought by the Justice Department and 17 states against MasterCard, Visa and American Express for their “non-discrimination provisions” that prohibited merchants from offering information or encouraging their customers to use other less expensive payment options.

MasterCard and Visa settled by agreeing to allow merchants to offer such information, but American Express pressed forward. US District Judge Nicholas G. Garaufis of the Eastern District of New York, in a 150-page opinion in 2015, ruled that American Express’ merchant restraints were anticompetitive by imposing higher costs on consumers with no offsetting benefits.

The Second Circuit disagreed, finding that the lower court, by focusing solely on merchants had failed to weigh the benefits to cardholders in the two-sided market. The government had failed to show that both merchants and cardholders were “worse off overall,” and had failed to show “net harm” to both cardholders and merchants in the two-sided market.

After the Second Circuit denied a petition for en banc review, the Justice Department opposed certiorari, leaving 11 states scrambling to press for review. (Six states decided not to join in that petition.) In a brief filed in August, the department blasted the Second Circuit’s opinion as “flawed” and as departing “from sound antitrust principles,” but then said the Supreme Court should await “further percolation in the lower courts” before considering “novel legal issues.”.

So what are the takeaways from the court’s decision to reject the SG’s position and take the case? Interviews with antitrust lawyers prompted plenty of speculation, including the following:

The high court bought the argument of the states, led by Ohio Attorney General Michael DeWine, that there is increasing need for guidance on the rule of reason, in which the court reviews the legality of restraints on a case-by-case basis to distinguish those that suppress competition and harm consumers from those that merely regulate it. The court has not had a recent opportunity to provide clarity for how the rule of reason should be applied in practice.

The case also tees up important anti-steering issues that pop up in other contexts. For example, the issues are at the heart of the Justice Department’s challenge to Carolinas Healthcare System, whose restrictions in its contracts with insurers prohibit them from providing information and incentives to encourage patients to use lower-priced, high quality competitors.  “It is a big deal because this is the kind of conduct that is fairly widespread in multiple insurance markets,” Duke University law professor Barak Richman said in an interview last year. “What we have now is a lot of highly concentrated local hospital markets.”

The Justice Department’s mixed message, blasting the Second Circuit decision, yet urging the Supreme Court not to review it, may have ended up as an invitation to the court to grant certiorari. “That is maybe one of the things that stands out the most is the majority of the [Justice Department’s] brief — it looks like 18 and a half out of the 21 pages was dedicated to arguing why the Second Circuit got it wrong, and tacked on at the very end, ‘don’t take the case,’” Gilman added in the interview.

Calkins noted that “this is an opportunity for the Court to make important rulings with respect to two-sided markets.” The Supreme Court has not addressed the application of the antitrust laws to two-sided platforms. The Second Circuit ruled that the government had failed to make the case that both merchants and cardholders were “worse off overall,” in that there was no showing of “net harm” to both cardholders and merchants in the two-sided market. That is the kind of issue that might have whetted the interest of Neil Gorsuch, the most recent justice to join the court after his confirmation earlier this year. “Who knows, it could also result in Justice Gorsuch’s first writing about antitrust,” Calkins noted. Gorsuch has taught antitrust at the University of Colorado Law School, written decisions in a number of antitrust cases as a judge on the US Circuit Court of Appeals for the Tenth Circuit, and worked on several antitrust cases while in private practice.

State antitrust enforcers are ignored at one’s peril. The perseverance of 11 states — even after the Justice Department had bowed out from seeking Supreme Court review — paid off here. “The issues in this appeal involve anti-competitive practices that hinder Ohio consumers and Ohio retailers and merchants,” DeWine said in a statement e-mailed to FTC:WATCH. “We look forward to making our arguments before the Court.” Gilman ticked off several other examples of states pursuing cases on their own. “They are keeping antitrust enforcement vigorous even when federal antitrust agencies” are not involved, he said. American Express, which had earlier said it was “very pleased” that the Justice Department did not seek Supreme Court review, e-mailed that the Second Circuit’s ruling “protects a consumer’s right to choose how they pay, prevents our Card Members from being discriminated against and promotes competition in the payments industry. We believe the government’s claims lack merit, and we will continue to vigorously defend the Second Circuit’s decision in favor of American Express.”

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