LaJolla Auto Tech, Inc. v. Am. Express Travel Related Servs. Co. (In re Am. Express Anti-Steering Rules Antitrust Litig.)

19 F.4th 127

IN RE AMERICAN EXPRESS ANTI-STEERING RULES ANTITRUST LITIGATION,

LaJolla Auto Tech, Inc., Qwik Lube LLC, Plaintiffs-Appellants,

Rite Aid Corporation, Walgreen Co., Firefly Air Solutions, LLC, Plymouth Oil Corporation, Rite Aid Headquarters Corp., Jasa, Inc., on behalf of themselves and all similarly situated persons, Animal Land, Inc., Rookies, Inc., Italian Colors Restaurant, Cohen Rese Gallery, Inc., Lopez-Dejonge, Inc., Bar Hama LLC, Meijer, Inc., Publix Super Market, Inc., Raley's, Supervalu Inc., CVS Pharmacy, Inc., Bi-Lo, LLC, H.E.B. Grocery Company, The Kroger Co., Safeway Inc., Ahold U.S.A. Inc., Albertson's LLC, Hy-Vee, Inc., The Great Atlantic & Pacific Tea Company Inc., Treehouse, Inc., Il Forno, Inc., National Supermarkets Association, Inc., on behalf of its membership, and all other similarly situated persons, Plaintiffs, All Class Plaintiffs, the Marcus Corporation, Bill McCauley, Read McCaffrey, Hillary Jaynes, Anthony Oliver, Bernadette Martin, Bryan Huey, James Eaton, Paul Kashishian, Gianna Valdes, Chad Tintrow, Matthew Moriarty, Andrew Amend, Igor Gelman, Zachary Draper, Shawn O'Keefe, Francisco Robleto, Jr., Michael Thomas Reid, Plymouth Oil Corp., Clam Lake Partners LLC, Plaintiffs,

v.American Express Travel Related Services Company, Inc., American Express Company, Defendants-Appellees,Susan Burdette, Defendant,Circuit City Liquidating Trust, The RSH Liquidating Trust, Holiday Companies, Gander Mountain Company, Commonwealth Hotels, Inc., Keila Ravelo, Intervenors.

No. 20-1766

August Term 2020

United States Court of Appeals, Second Circuit.

Argued: December 16, 2020

Decided: November 22, 2021

Scott Martin, Hausfeld LLP, New York, NY (Michael D. Hausfeld, Hausfeld LLP, Washington, DC, and Irving Scher, Jeanette Bayoumi, and Kimberly Fetsick, Hausfeld LLP, New York, NY, on the brief), for Plaintiffs-Appellants.

Evan R. Chesler (Peter T. Barbur, Kevin J. Orsini, and Rory A. Leraris, on the brief), Cravath, Swaine & Moore LLP, New York, NY, for Defendants-Appellees.

Eric F. Citron, Goldstein & Russell, P.C., Bethesda, MD, for Amici Curiae Eighteen Professors of Antitrust Law.

Before: Chin, Bianco, and Menashi, Circuit Judges.

Menashi, Circuit Judge:

The appellants, on behalf of a class of commercial merchants, allege that the Anti-Steering Rules promulgated by the appellees, the American Express Company and American Express Travel Related Services Company, Inc. (together, "Amex"), violate the antitrust laws.

The appellants do not accept American Express cards but claim to be harmed by Amex's policies nevertheless. These merchants "seek monetary and injunctive relief for overcharges paid to Visa, MasterCard, and Discover," not to Amex, "caused by Amex's imposition of ‘Anti-Steering Rules’ in its agreements with merchants who accept Amex cards." Appellants’ Br. 1-2. The appellants claim that "Amex's Anti-Steering Rules have stifled interbrand competition throughout the relevant market, causing the credit card transaction fees charged to Appellants by Visa, MasterCard, and Discover to prevail at supracompetitive levels under Amex's pricing umbrella." Id. at 2.

The U.S. District Court for the Eastern District of New York (Garaufis, J.) dismissed the appellants’ claims under Federal Rule of Civil Procedure 12(b)(6) and ruled that the class lacked antitrust standing because it did not include "efficient enforcers" of the antitrust laws relative to Amex's challenged anticompetitive conduct. In re Am. Express Anti-Steering Rules Antitrust Litig. , 433 F. Supp. 3d 395, 407-13 (E.D.N.Y. 2020). The appellants "seek reversal of the district court's dismissal of their claims because Amex's anticompetitive conduct has directly injured them, and recognizing their standing would ensure efficient enforcement of the antitrust laws." Appellants’ Br. 2. Amex contends that the district court was correct that the appellants "lack antitrust standing because they are not efficient enforcers" of the antitrust laws and the alleged damages are "too indirect" and "speculative." Appellees’ Br. 3-4.

We affirm the district court's judgment. To determine whether a party can sue under the antitrust laws—whether the party has "antitrust standing"—we apply the "efficient enforcer" test. The efficient-enforcer test is an elaboration on the proximate cause requirement of Associated General Contractors of California, Inc. v. California State Council of Carpenters (AGC ), 459 U.S. 519, 535-36, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983). In cases of economic harm, proximate cause is demarcated by the "first step" rule, which limits liability to parties injured at the first step of the causal chain of the defendants’ actions. See id. at 534, 103 S.Ct. 897. Here, at the first step, Amex restrained trade to raise its own prices; only later did its competitors follow suit. Because the appellants were harmed at that later step, the claims here fail the first-step test. After considering the four AGC factors, we conclude that—taking the allegations of the complaint as true—the appellants are not efficient enforcers of the antitrust laws and therefore lack antitrust standing.

BACKGROUND¹

The appellants challenge Amex's Anti-Steering Rules, or what Amex calls its non-discrimination provisions, contained in its Card Acceptance Agreement with merchants. The appellants allege that "Amex's Anti-Steering Rules unreasonably restrain interbrand price competition with the other major [credit card] networks because the Rules: (1) stifle interbrand competition among the networks; (2) impose supracompetitive merchant fees, without corresponding offsetting credit card user economic benefits; (3) cause the overall price of credit card transactions to rise above competitive levels marketwide, because the other credit card networks would not benefit competitively by reducing their merchant fees; and (4) raise consumer retail prices throughout the economy, thereby reducing output." Appellants’ Br. 4; see also Am. Express Anti-Steering , 433 F. Supp. 3d at 401.

I

The credit card industry is divided among four competing networks: Amex, Visa, MasterCard, and Discover. Ohio v. Am. Express Co. , ––– U.S. ––––, 138 S. Ct. 2274, 2282, 201 L.Ed.2d 678 (2018). The market is characterized by high barriers to entry. New entrants face a "chicken-and-egg" problem because "merchants value a payment system only if a sufficient number of cardholders use it and cardholders value a payment card only if a sufficient number of merchants accept it."²

Credit card networks such as Amex "operate what economists call a ‘two-sided platform,’ " which "offers different products or services to two different groups who both depend on the platform to intermediate between them." Ohio , 138 S. Ct. at 2280.³ Amex provides credit-card services to both "merchants," who accept Amex as payment, "and cardholders," who use Amex to make payments. Ohio , 138 S. Ct. at 2279-80. Both parties are necessary; "no credit-card transaction can occur unless both the merchant and the cardholder simultaneously agree to use the same credit-card network." Id. at 2280.

While credit card companies often charge cardholders an annual fee, all credit card companies charge merchants a fee for every transaction processed.⁴ According to the appellants, Amex charges higher merchant fees than its competitors. To avoid the higher fees, merchants—in the absence of any restraint prohibiting the practice—might "steer" their customers toward using another form of payment. "Steering" could be done in different ways, such as simply by asking, offering benefits for using other payment methods, or imposing a surcharge on the use of Amex cards.⁵

Steering allows for price signals between merchant and customer. Without steering, "consumers do not internalize the full costs of their choice of payment system."⁶ Steering also may prevent Amex from charging higher fees because merchants will steer customers toward cards with lower fees. In sum, "American Express dislikes steering; the merchants like it; and the shoppers may benefit from it, whether because merchants will offer them incentives to use less expensive cards or in the form of lower retail prices overall." Ohio , 138 S. Ct. at 2292 (Breyer, J., dissenting).

Amex has discouraged steering by inserting anti-steering provisions into its contracts with merchants. Pursuant to Amex's Anti-Steering Rules, merchants may not:

• indicate or imply that they prefer, directly or indirectly, any Other Payment Products over Amex Cards;

• try to dissuade cardholders from using their Amex Card;

• criticize or mischaracterize the Amex Card or any of Amex's services or programs;

• try to persuade or prompt cardholders to use any Other Payment Products or any other method of payment (e.g., payment by check);

• impose any restriction, conditions, or disadvantages when the Card is accepted that are not imposed equally on all Other Payment Products, except for ACH funds transfer, cash, and checks;

• engage in activities that harm Amex's business or the American Express Brand (or both);

• or promote any Other Payment Products (except the Merchant's own private label card that they issue for use solely at their Establishments) more actively than the Merchant promotes Amex.

Am. Express Anti-Steering , 433 F. Supp. 3d at 404 (alterations omitted).

The appellants allege that these Anti-Steering Rules, when combined with Amex's higher merchant fees, have raised fees throughout the industry. Competing networks "have no economic incentive to compete in the market by offering lower merchant fees [because] merchants cannot educate cardholders and [steer] transactions to the cards with lower fees." Appellants’ Br. 7. Because "lower-fee competitor[s] cannot gain market share" by competing on price, all competing networks raise prices. Id . This effect is widespread because "most large merchants, according to Plaintiffs, do accept Amex, meaning that the credit card companies would have little incentive to tailor contracts...