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US Appeals Court finds in favor of Amex, echoes Bates White analysis

November 17, 2016

September 26, 2016—The US Court of Appeals for the Second Circuit has reversed a 2015 decision against American Express (Amex) in which Amex was found to violate antitrust laws by entering into agreements with merchants that contained “nondiscriminatory provisions” (NDPs). These provisions prevented merchants from steering customers toward particular general-purpose credit and charge cards. Bates White provided analysis and expert testimony on behalf of Amex.

Bates White was retained by Amex in connection with Department of Justice’s (DOJ) investigation and subsequent lawsuit challenging Amex’s NDPs. Bates White also worked on behalf of Amex in related private litigation, including In re American Express Anti-Steering Rules Antitrust Litigation. DOJ sued Amex, Visa, and MasterCard in 2010, challenging rules that prevented merchants from both offering different prices or having different charges based on the type of general-purpose credit and charge card customers use and expressing preference for any card. DOJ announced a settlement with Visa and MasterCard at the same time it filed its suit. Bates White Partner Doug Bernheim, with support from Partners Paul Johnson and George Rozanski, served as Amex’s lead expert for both cases.

In the DOJ action, Dr. Bernheim submitted multiple reports and provided courtroom testimony focusing on the issues of liability and competitive effects. Dr. Bernheim stressed the importance of taking into account the fact that Amex operates a two-sided platform and that the demands of merchants and cardholders are highly interdependent. This has critical implications for the analysis of market definition, market power, and likely competitive effects—including possible procompetitive effects. In particular, the economic impact of firms’ strategies and market practices must be assessed by considering effects on both merchants and cardholders, including feedback effects from one side of the market on the other. Dr. Bernheim testified that Amex and other general-purpose credit and charge card networks compete to complete transactions between cardholders and merchants, and that the relevant price to consider is the two-sided price, which is the sum of the discount fee charged to merchants and the (possibly negative) price charged to cardholders. Dr. Bernheim also explained that the NDPs are non-price vertical restraints and that they are critical to Amex being able to differentiate its product and compete effectively against Visa and MasterCard, which are the leading firms in the payments card industry.

In February 2015, the US District Court for the Eastern District of New York found that Amex’s NDPs were a violation of § 1 of the Sherman Act and permanently enjoined Amex from enforcing its NDPs. Amex appealed the decision; the Bates White team contributed to the appeal brief.

The Second Circuit reversed the 2015 decision and remanded the case with instructions to enter judgment in favor of Amex. The Court found that the lower court had erred in several respects, including in its conclusions about market definition, its finding that Amex has market power, and its conclusion that the NDPs have anticompetitive effects. Central to the Second Circuit decision was the Court’s understanding that market definition, competitive effects, and market power need to be analyzed taking into account the two-sided nature of the market. This was the key theme of Dr. Bernheim’s analysis and testimony.

Bates White worked on the matter with attorneys from Boies, Schiller & Flexner, LLP, and Cravath, Swaine & Moore, LLP.