Supreme Court justices split on American Express anti-steering rules

27 February 2018 9:02pm
Supreme Court

26 February 2018. By Leah Nylen.

The US's highest court appeared divided Monday on whether American Express's merchant rules violate antitrust law, with the Supreme Court's newest justice siding with the credit card company and a trio from the court's liberal wing offering views more in line with the Department of Justice and state attorneys general who sued over the rules.

The Supreme Court’s decision, which Amex has portrayed as “life or death” for the company, is likely to have wide-reaching implications into e-commerce companies like Amazon and eBay, online advertising giants like Google and Facebook and other industries.

Eric Murphy, Ohio’s State Solicitor, told the justices that Amex’s non-discrimination or anti-steering rules  — which prohibit merchants from asking customers to use cards with lower fees — insulate the company from competition.

“We have no problem with Amex's approach of having a high reward/high cost card,” Murphy said. “The problem is that they're trying to insulate that product because they think under the full spectrum of competition it could not survive from a competing argument, such as low cost/low reward cards.”

The states and DOJ sued American Express in 2010, alleging that the company’s anti-steering rules were anti-competitive. After a seven-week trial, a federal judge found in 2015 that the rules violate the antitrust law.

A year later, an appeals court overturned that decision, saying that prosecutors focused too heavily on the merchant-side of the credit card market and didn’t take into account the effect those rules have had on customers who use the cards.

A group of state attorneys general appealed and the high court agreed to hear the case — its first ever to consider the application of US antitrust law to “two-sided” markets or platforms.

Justice Neil Gorsuch, a Republican who joined the court last year, questioned whether Amex’s rules led to price increases for consumers given that they receive rewards or premiums.

The rules “restricted competition on that side of the [customer] market in the sense of they have less options,” Murphy said. “An Amex cardholder who would prefer to have a 1 percent discount, if the Amex cardholder uses a Discover card, merchants aren't allowed to offer that option. So all consumers, including cardholder consumers, have less options than they would if these anti-steering rules were not in place.”

Gorsuch didn’t seem persuaded. He likened using an American Express to buying a Cadillac, and Visa, MasterCard or Discover to buying a Kia.

“People can choose. Do they want a high cost, high reward, a low cost, cheaper alternative? And the two sides can compete with one another,” Gorsuch said.

Deputy Solicitor General Malcolm Stewart, arguing on behalf of the DOJ, said that American Express’s rules effectively don’t allow for that form of competition because merchants can’t notify and reward customers for using cheaper Visa, MasterCard or Discover cards.

“Yes, Visa and MasterCard can cut their own merchant rates unilaterally, but if the merchants can't give their own customers any advantage for using a card that has that effect, then it's a shot in the dark,” he said. “It's unlikely to be a successful competitive strategy.”

Twice during the argument, Gorsuch noted the high court’s “long and painful experience with vertical restraints,” and questioned whether ruling against Amex’s rules could have a negative effect on the market.

“Judicial errors are a lot harder to correct than an occasional monopoly where you can hope and assume that the market will eventually correct it,” Gorsuch said.

Stewart, for his part, agreed and urged the justices to take a cautious approach.

“The Court should not speak more broadly than is necessary,” Stewart said. “It shouldn't attempt to articulate a sort of unified field theorem that would cover all two-sided markets. It should approach the case cautiously.”

Amex’s attorney Evan Chesler noted that the district court said competition was “fierce” between the different credit cards.

“Amex offers consumers what they want, and transaction volume has, in fact, increased dramatically and accordingly,” Chesler said. “Amex requires merchants not to undermine its cardholder relationship and its investment, not to work against Amex if it's going to be Amex's representative to consumers.”

Justice Sonia Sotomayor interrupted, suggesting that what Chesler described as “working against Amex” might in fact describe competition.

“If I go to a cash register and the merchant says to me, ‘I'll give you a 1 percent discount today if you don't use Amex,’ I sit there and think to myself, 'do I need the airplane rewards or the train rewards, or do I want the 1 percent?'” she said. “This anti-steering removes that competition.”

Chesler responded that the anti-steering rules “enhance” competition between the credit card brands.

“I don’t care about the brands. I care about my price,” Sotomayor said. “This vertical restraint is stopping horizontal competition. ...You're making my choice for me. You're not giving me the choice. And that's what price competition is about: my choice, not your choice about what's more valuable to me.”

Justice Stephen Breyer suggested that Amex’s rules effectively prevent customers from knowing what the price is.

“You cannot get through to the customer, the fact that these different companies, some charge lower, some charge higher prices,” Breyer said. “That is a fairly key element, which this prevents you from getting through in terms of information to the person who's going to be buying.”

Chesler said that the credit card companies remain free to tell customers what their charges are.

“But the merchant is not,” Breyer noted.

Justice Elena Kagan made a similar point, noting testimony from the trial that Discover was unable to make headway in the market by offering a lower-fees, fewer-rewards card because merchants weren’t able to steer customers.

“The problem here is that the effect of these anti-steering provisions means a market where we will only have high cost/high service products,” she said. “Any competitor that wants to come in and says, ‘You know what, we want to compete in a different way, we want to compete in terms of cost,’ is going to find itself unable to do so.”

The justices took the case under advisement and are expected to issue a decision before the current term ends in June.

ABA 2019